State’s Switch From Traditional Pension to 401(k)? Not So Fast.

New Hampshire is looking at switching from a defined benefit retirement system to a defined contribution one, but a new study shows it might be a costly move.

(December 11, 2011) – New Hampshire is looking into switching its state employees from a defined benefit to a defined contribution retirement system—but a new report is raising surprising issues of cost.

While many Republican legislatures from across the country have indicated their willingness to move public employees into 401(k)-style retirement systems, the New Hampshire legislature is actively investigating the option for the New Hampshire Retirement System (NHRS) and employees hired after November 1, 2012. However, according to a report—produced by actuaries Gabriel, Roeder, Smith and Co., and reported by SeaCoastOnline—such an action would actually increase the plan’s $3.45 billion unfunded liability of the plan by $237 million, to $3.7 billion.

Whether or not the added and unexpected costs hinder any switching of plans has yet to be seen, but they do seem to throw a curveball at legislatures and commentators who view public employee defined contribution plans as a panacea for state funding problems. Arizona, Tennessee, Oklahoma, Kansas, and Kentucky are among those states considering a move similar to that of New Hampshire.

According to the news agency with access to the report, shortfall is “based on current language in the proposed legislation.” Lawmakers stressed that the eventual bill passed is likely to be substantially different, negating the accuracy of the actuarial report.

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A small number of states have, in fact, made the switch from defined benefit to defined contribution pension plans for their public employees. One—Michigan—did so in 1997, a move which has saved the state upwards of $4 billion, according to at least one study. Other states that have some form of 401(k)-style retirement plan for public employees include Alaska, Colorado, Georgia, Utah, and Ohio.

American corporations, in contrast, long ago abandoned retirement systems with set benefit levels, with few exceptions.

(December 11, 2011) — Blackstone Group, the world’s largest private-equity company, has won as much as $1.8 billion in pension-fund commitments from the New Jersey Division of Investment, the latest sign that the fundraising environment, at least for the largest private equity players, is improving.

The deal, according to a memorandum detailing the plans obtained by Bloomberg, will likely offer New Jersey “significant benefits,” including expanded investment opportunities and discounted fees. The New Jersey pension fund, which has about $66 billion in assets, is often considered a leader in investment in alternative assets, such as private equity, hedge funds, and real estate.

Pension funds are the largest clients of private equity firms, and as institutional investors continue to seek large private equity firms for their expertise in managing more complex investments such as alternatives, Thomas Lynch, managing director of consulting firm Cliffwater, a specialist in alternatives, told aiCIO: “It’s clearly a trend — we will see more of that with plan sponsors try to reduce costs, as well as reduce relationships,” adding that he foresees a major consolidation in the private equity landscape, with the largest private equity firms standing to gain.

According to Bloomberg, the state may invest up to $1.5 billion in four newly created separate accounts to be managed by Blackstone and $300 million in three of the firm’s existing funds. “This represents the largest single-year commitment by any investor in Blackstone’s history,” Peter Rose, a spokesman for the New York-based firm, said in an e-mailed statement.

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The private equity firm reportedly turned down a fundraising deal with the Teacher Retirement System of Texas (TRS). In November, private equity firms Kohlberg Kravis Roberts (KKR) and Apollo Global Management were selected to manage $6 billion for TRS. Each firm announced that it would receive $3 billion from TRS to manage in separate accounts devoted solely to the scheme. “…The Board of Trustees for the Teacher Retirement System of Texas (“TRS”) authorized the TRS executive director and chief investment officer to negotiate and execute a fund-of-funds master limited partnership agreement and commit up to $3 billion with Apollo Global Management, LLC (“Apollo”) and Kohlberg Kravis Robert & Co (“KKR”), each individually,” the public pension fund said, noting that the agreement follows the successful model for strategic relationships in the global public markets funded by TRS three years ago, which over its initial three years produced first quartile investment results.

The Blackstone deal also follows news from Dow Jones LP Source, which released findings in July showing that US and European private equity, venture capital, and buyout funds all enjoyed healthy fund-raising levels in the first half of 2011. “After three consecutive years of declining fund-raising, the industry has finally begun to dig its way out of the crater created by the US financial crisis in late 2008,” Laura Kreutzer, managing editor of Dow Jones Private Equity Analyst, said in a July release. “There’s an abundance of fund managers with strong track records that are back in marketing mode and investors appear to have regained some level of confidence in the asset class.”

Click here to watch an aiCIO video with Cliffwater’s Thomas Lynch speaking on the evolving relationship between institutional investors and large private equity firms as investors seek added expertise with more complex investments.