Public Pensions Remain Active in Adapting Allocations

U.S. public pension managers are confident their plans are well-hedged against inflation, as they plan to increase allocations to commodities and boost infrastructure investing.




U.S. public pension funds are looking to the future by planning for the possible impact of further economic and market shocks, according to a report from Ortec Finance.

Although public pension funds have been bruised, many are preparing for the future viability of the retirement funds, Ortec found in research published this month.  

“The degree of uncertainty is extremely high for U.S. public sector pension plan sponsors, but there is genuine optimism that lower inflation will become well-established, with very few managers expecting it to be as high as it currently is within a year or two,” states Marnix Engels, managing director for pension strategy at Ortec Finance, based in Rotterdam, Netherlands.

Analysts at the nonprofit Equable Institute say that despite the investing and economic challenges of 2022, U.S. public pension funds are currently in better shape than before the COVID-19 pandemic, according to data cited by Ortec in the report.

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The Ortec study examined a range of issues to grasp the attitudes of public pension managers on risk management, inflation hedging and stress testing and what U.S. public pension managers believe will happen to inflation.

US Pension Plan Takeaways

Public sector pension plan managers are generally feeling confident that they have addressed inflation with hedging strategies, but not complacent that the risk has passed entirely, Ortec found. Of those interviewed, most relied on commodities to help hedge against inflation over the past year.

“Some 70% of those interviewed said their plans had increased their allocation to commodities to help with hedging compared with 52% who had increased allocations to infrastructure and 40% who put more into gold,” the report stated. “Just 42% said they had increased allocations to inflation-linked bonds.”  

U.S. pension fund managers remain “active in changing asset allocations to hedge against inflation.”

Some 66% told researchers they “think they will increase allocations to commodities to help with [inflation], while 50% will boost allocation to infrastructure investing. Some 32% will increase allocations to inflation-linked bonds and 38% will increase allocations to gold to hedge against inflation.”

In addition to concerns about inflation, some of the managers interviewed said they still fear stagflation. Ortec reported that all those surveyed “expect to see a change in actuarial assumptions on the expected inflation or discount rate.”

The current economic climate and investment uncertainty remains high for U.S. public sector pension plan sponsors, meaning that, “on a basic level this has decreased the likelihood of U.S. public pension plans meeting their liabilities and being able to pay pensioners,” the report stated. “It is undoubtedly the case that the sector is facing a tough period, and the past three years have increased uncertainty and the pressure on pension plan managers.”

The recent fall in U.S. inflation to 4.9% from 6% was unsurprising to pension plan managers, because U.S. public sector pension plan managers are “largely convinced that inflation as a major issue is fading away, with the U.S. economy firmly on the path to inflation moderation,” Ortec researchers wrote.

Ninety percent of managers surveyed say they are confident inflation is declining: 52% expect inflation could be 3.3% or lower within a year, while only 10% of public sector pension professionals interviewed said the rate will be more than 6% within a year, the report finds.

Changing risk profiles

U.S. public pension fund managers continue to address market, economic and political stresses on their funded ratios  by making changes to their risk profiles, as 94% of public pension plan respondents said the risk profile of their plan increased last year, and 16% said it increased significantly, Ortec research found.

Of pension fund managers surveyed, 81% expected the increase in their risk profiles to continue in the next year, and nearly 32% expected a dramatic increase, the report finds.

“The biggest driver of pension fund risk identified by the study is interest rate movements, with managers questioned saying this is the biggest concern for their fund followed by cash flow requirements and liquidity,” Ortec researchers wrote. “The volatility of investment markets was rated as the third most concerning risk, ahead of inflation, which was rated fourth. Cybersecurity was rated as the fifth most concerning risk.”

U.S. public pension funds weathered a “torrid year of investment volatility and increasing interest rates,” according to the Ortec report, U.S. Public Pensions Are Building for the Long Term.

Ortec is a technology solutions provider of tools for measuring risk and return. The firm’s principal business is to model and map uncertainties to help pension funds monitor their goals and decisions.

Ortec commissioned independent research company Pureprofile to interview 50 U.S. public sector pension fund managers responsible for a collective $1.315 trillion assets under management. The survey was conducted in April 2023.

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Allocators Targeted Amazon Policies in Failed May Proxy Vote

One in three shareholders, including pension funds like CalPERS, opposed the online retail giant at its annual meeting on such issues as executive pay.



Amazon, the target of a unionization drive at its warehouses and of a host of employee complaints regarding safety and other issues, turned back a large number of proposals from outside investor resolutions knocking the company’s policies at its May 24 annual meeting, held virtually.

But an important group of asset allocators voted against the e-commerce giant’s pay practices, including the California Public Employees’ Retirement System, the California State Teachers’ Retirement System and the New York State Common Retirement Fund, according to a Morningstar research report.

Almost one-third of the company’s stockholders voted against the company’s executive compensation plan. This issue is “a key area of dissent for Amazon shareholders—as it often is at many companies,” wrote Lindsey Stewart, director of investment stewardship research on Morningstar’s global manager research team. A similar vote opposed Judith McGrath, chair of Amazon’s leadership and compensation team.

One of the biggest gripes from allocators, the Morningstar report said, was what they saw as “insufficient demonstrable links between pay and company performance over the past year.” CalPERS and New York Common confirmed they were among the votes against the executive pay packages. CalSTRS would not comment.

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Amazon’s sales slumped last year after a pandemic surge and only began re-accelerating in this year’s first quarter. CEO Andrew Jassy took a huge pay cut last year, to $1.3 million from $212 million in 2021. Another defeated shareholder proposal, which attracted just 6.5% of the vote, aimed to link worker pay to executive compensation. Amazon last September raised the starting pay of its warehouse and delivery workers by $1 to $19 an hour.

Amazon dismissed the shareholder resolutions, saying in a point-by-point response that it respected collective bargaining and that its executive pay was in line with its goal of attracting and keeping talent. A spokesman added, in reference to the shareholder resolutions in general: “These proposals did not pass with a majority of the vote at this year’s shareholder meeting, and they secured lower votes in favor than last year.”

This is true, a perusal of this year’s regulatory filing on proxies showed, compared to the regulatory filing for last year’s vote. For instance, a bid to increase unionization garnered 34.6% this year, off from the 2022 tally of 38.6%.

The anti-Amazon resolutions were brought by a batch of different organizations, from the AFL-CIO to the American Baptist Home Mission Society.

“When over one-third of shareholders call for changes to the way Amazon treats its workers, we believe management and the board have an obligation to respond,” wrote Nadira Narine, senior program director at the Interfaith Center on Corporate Responsibility, which helped coordinate the proxy campaign against Amazon.

Institutional Shareholder Services Inc., which owns CIO, backed several of the outside shareholder resolutions.

 

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Shareholders File More ESG Proposals Than Ever Ahead of This Proxy Season

 

 

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