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Effects of the New UBTI Rules on Tax-Qualified Pension Investments Are Still Unclear (PDF)

"[Consider] a situation where a tax-qualified pension fund invests in 20 private equity partnerships, each of which then invests in 15 private equity investments. Is investing in private equity, generally, a separate trade or business? Or is investing in each private equity partnership a separate trade or business? Or, must a plan look through each private equity partnership to each separate investment? If the latter is the case, can a plan aggregate investments across investments that involve a similar trades or businesses? How should a plan handle investments in a fund of funds, a fund that invests in other funds, each of which in turn makes their own investments?"  MORE >>

Issues for Public Pension Trustees Navigating Regulatory Change and Alternative Investment Uncertainty

"Although public pension systems operate under state-law fiduciary rules rather than the federal regulation this rule would amend, the structure it establishes matters: it is the most detailed federal description to date of what a prudent investment selection process looks like, and state courts evaluating public trustee conduct will inevitably use it as a reference."  MORE >>

How Do Public Pensions Invest? A Primer (PDF)

"[1] Public pension funds have a clear division of labor for making investment-related decisions. Fiduciary standards apply to each key role in the investment process. [2] Public pension funds have rational and systematic processes for setting asset allocation in a diversified portfolio, estimating expected investment returns, and evaluating investment performance. [3] The board of trustees of each public DB pension fund determines the acceptable level of risk that is prudent for their plan given its particular circumstances. They then adopt an asset allocation that is designed to maximize returns within the established level of risk. [4] The level of risk assumed by public pension funds, as indicated by the percentage of assets invested in equities, is consistent with other institutional investors and with many prudent individual investors."  MORE >>

GAO Report: Guidance Needed to Better Inform Defined Benefit Pension Plans of the Challenges and Risks of Investing in Hedge Funds and Private Equity

71 pages. "[GAO was asked to examine [1] the extent to which defined benefit pension] plans invest in hedge funds and private equity; [2] the potential benefits and challenges of hedge fund investments; [3] the potential benefits and challenges of private equity investments; and [4] what mechanisms regulate and monitor pension plan investments in hedge funds and private equity. To answer these questions GAO interviewed relevant federal agencies, public and private pension plans, industry groups and investment professionals, and analyzed available survey data." [GAO-08-692, published Aug. 14, 2008, released Sept. 10, 2008]

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Cost Efficiency and Investment Governance for Public Pension Plans

"A disciplined approach to uncovering hidden costs in portfolios can be critical to understanding the Total Cost of Ownership (TCO), improving governance, and fulfilling fiduciary responsibilities.... TCO addresses cost drivers across the investment value chain, from management fees to trade execution, settlement, and custody costs. Plan sponsors can achieve this with a bottom-up analysis of all cost elements and operational processes that prioritize risk management, transparency, and contract compliance."  MORE >>

Bill Introduced to Ban Pension Investments in Adversarial Countries

"[T]he Protecting Americans' Retirement Savings Act [S 928] ... prohibits ERISA-covered retirement plans from investing in companies based in foreign adversary countries, including China, Russia, North Korea, and Iran.... ERISA plan fiduciaries [would be required to] report: [1] All assets invested in sanctioned entities, including their identities and reasons for sanctions. [2] The total value of investments in foreign adversary companies. [3] A detailed list of specific investments in these companies. [4] Justifications for retaining such investments in retirement plans."  MORE >>

Corporate Pension Plans and Investment Choices: Bargaining or Conforming?

"This paper investigates the impacts of defined-benefit (DB) pension plans on the corporate investment choices between diversifying and non-diversifying investments.... [A] firm's DB plan coverage is negatively associated with its propensity of making a major investment. Subject to a major investment decision, however, the firms with higher DB plan coverage [are] more likely to diversify, i.e. acquire firms abroad or in other industries, rather than invest in fixed assets or make non-diversifying (i.e. domestic horizontal) acquisitions. Moreover, in diversifying acquisitions, they are more likely to invest in countries or industries with strongly unionized workforce."

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ESG Investing and Public Pensions: An Update (PDF)

"Public pension plans have engaged in social investing since the 1970s in response to state mandates. More recently, the plans themselves have embraced a 'new' form of investing that incorporates environmental, social, and governance (ESG) factors. ESG investing is based on the notion that taking account of non-financial factors will lead to better investment outcomes. Some also believe ESG investing can further socially beneficial practices. The evidence suggests, however, that social investing: [1] yields lower returns; and [2] is not effective at achieving social goals. Hence, any form of social investing is not appropriate for public pension funds."

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New Developments in Social Investing by Public Pensions (PDF)

"Public pension funds continue to engage in social investing, most recently divesting from Iran and fossil fuels. However, social investing is often not effective, as other investors step in to buy divested stocks. Social investing can also produce lower investment returns, conflict with the views of beneficiaries and taxpayers, and interfere with federal policy. In short, public pension funds should not engage in social investing."  MORE >>

Public Pension Funds Should Avoid Local Economically Targeted Investments

"After some pension plans recently made decisions focused on leveraging investment behavior to achieve environmental goals or to pursue geopolitical ends in China, a few lawmakers are now pushing local economically targeted investments into the limelight. These proposed investments are another deviation from pension plans' fiduciary responsibilities to their members and taxpayers ... Economically targeted investments introduce unnecessary risks for public pension funds that should be avoided."

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Pension Plan's Assumed Investment Return Should be Determined by Asset Allocation, Not Other Way Around (PDF)

"The expected investment return for a pension plan's assets is used as the discount rate for public and multiemployer pension plan valuations ... This assumption often has a greater impact on the pension liability than any other assumption ... However, the investment return assumption is sometimes used as a return target for determining the plan's asset allocation. This issue brief discusses why the investment return assumption should be determined based on the asset allocation, not the other way around."  MORE >>

European Pension Authority Issues Opinion on ESG Pension Investing

"Those charged with global governance of pension plans and pension investment in multinational companies may wish to watch this development closely, as the EU may influence pension investing trends in other countries. The UK has already begun to require that Statements of Investment Principles for both DB and DC plans must address ESG considerations beginning in October, 2019."

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Pension Funds Face Challenges in Recruiting Investment Talent

"Competition is intensifying among corporate and public pension funds vying to attract the best investment talent they can afford. With assumed rates of return likely to remain low in the foreseeable future for all pension funds and scant chance of public pension plans receiving contributions from government sources to make up any shortfall, ... the capability of in-house investment teams to achieve the highest possible return is on the line."  MORE >>

ESG Investing for Public Pensions: Does It Add Financial Value? (PDF)

10 pages. "ESG investment measures have become increasingly politicized through institutional investors and pension funds' growing reliance on proxy advisory firms. These advisory firms have introduced political agendas for corporate governance decision-making, leaving corporations and pension funds to operate at the whims of advisory firms with serious conflicts of interest that disregard investor value.... ESG investments should be made when they add value to a fund. When such investments will not improve the financial performance of the fund, or the decision to invest in them is based on political motives, they should be forgone."  MORE >>

Skimming 'Excess' Pension Investment Earnings

"An issue in the San Jose pension reform trial, a '13th check' bonus for retirees when investment earnings exceed the annual forecast, reflects a widespread attitude that added to public pension debt. In its starkest outline: When pension fund earnings are above the target, it's a surplus or windfall that can be distributed to employees and employers. When earnings are below the target, it's a shortfall that must be paid by taxpayers.... [T]reating investment earnings as an excess or surplus, in ways large and small, has skimmed off money that could have been invested, adding to pension debt rather than lowering it."

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Japan's Government Pension Investment Fund Cutting Back on Japanese Bond Allocation

"The fund needs to raise about 8.87 trillion yen this fiscal year to pay pension benefits ... As part of its effort to diversify assets and generate higher returns, [the Government Pension Investment Fund (GPIF)] recently started investing in emerging markets stocks. GPIF is historically one of the biggest buyers of Japanese debt and held 71.9 trillion yen, or 63% of its assets, in domestic bonds as of March, according to the fund's financial statement for the 2011 fiscal year. That compares with 13% in domestic stocks, 8.7% in foreign bonds and 11% in overseas equities."  MORE >>

Should Public Pensions Be Invested in Infrastructure?

"A big-city labor leader, an investment expert and a long-time senior public start talking about public-employee pensions.... They agreed that the first objective in pension investments should be to assure that the money would be there to pay benefit obligations when they come due. But they also agreed that ... pensions should invest in a way to address the enormous infrastructure needs of state and local government and that doing so could, in fact, earn the funds a more than adequate return."  MORE >>

Investment Beliefs that Matter: New Insights into the Value Drivers of Pension Funds

Excerpt: A direct relationship between the observed investment beliefs held by pension funds and performance measures is tested using an international sample of pension funds. Investment beliefs address strategic choices in the investment philosophy and process that affect the future performance of the fund. Data from over 600 funds between 1992 and 2006 show that the debates in the pension fund industry address the relevant issues: active management, alternative and new, innovative strategies.

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Investment Regulations and Defined Contribution Pensions

Excerpt: This paper assesses the impact of different quantitative approaches to regulate investment risk on the retirement income stemming from defined contribution (DC) pension plans. It looks at how such regulations affect the spectrum of investment policies available and, through this channel, how they affect the retirement income that an individual may expect from a DC pension plan. The analysis shows that there is a trade-off between potential retirement income and protection from bad outcomes. Reducing the downside risk on retirement income from DC pension plans requires moving into relatively conservative investment policies where the share of assets allocated to bonds may be quite large. However, this comes at the cost of renouncing potentially higher replacement rates that are attainable but at a higher risk of unfavourable retirement income outcomes. Less risk adverse regulators and supervisors would aim at lower probability requirements as regard the downside risk, which will increase the range of investment policies available and thus the share of riskier assets.

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Municipal Workers Across Country Lost Money After Their Pensions Gave Funds to Advisers Who Invested with Madoff

"[Bloomberg] reports that losses at municipal pensions are spurring an investment warning: Municipal-pension managers shouldn't give money to advisers who invest it in funds run by others, a practice that sparked $14 million of losses tied to Bernard Madoff, labor union investment official Richard Ferlauto said."  MORE >>