Month: February 2016

A Brief Look at PERA’s Opportunity Fund

Posted on by planeteria

Colorado PERA’s asset management focuses on maximizing risk-adjusted investment performance from the broad universe of investable assets. With about $44 billion in assets, this is a large and complicated task, and one that requires oversight from specialists with experience in various asset classes.

PERA differentiates its Investment Department by specific asset classes: equities, fixed income, private equity, and real estate (additional information on asset allocation can be found in a prior PERA on the Issues post, “Asset Liability Study Plots Course for Future”). However, there are some strategies that do not fit neatly into a specific category and some that are new and innovative and don’t fall into an existing category. PERA’s Opportunity Fund asset class includes these investments.

All PERA investment decisions are governed by a Board-adopted investment philosophy and set of beliefs, including the Opportunity Fund asset class. (See PERA’s Statement of Investment Policy for details.) Opportunities exist throughout a market cycle, and thoughtful research and analysis can uncover unexpected and promising ideas. PERA staff may seek opportunities created by market dislocations to generate strong absolute returns. However, staff is also mindful that costs, risks, and complexity must be considered.

Opportunity Fund staff seeks diversified investment returns from a variety of different categories of assets. These different categories may be overlooked or inaccessible to certain types of investors, such as individuals or investors with a short time horizon, or need for liquidity. Some of these investments may require more patience than the public capital markets allow, and some may employ public market instruments such as stocks and bonds. Some investments may have a short- or medium-term investment horizon. Some use esoteric instruments and strategies, but others simply invest directly in basic industries. The universe of investment opportunities may appear to be expansive; however, in reality it is more exacting.

In many ways it is easier to define the Opportunity Fund by what it does not invest in. It does not contain investments that generally fall under the jurisdiction of other asset classes. That means there won’t be investments composed entirely of stocks, bonds, real estate, or private equity vehicles that have a longer time horizon (10-15 years). It does not invest in non-U.S. country specific funds, so there won’t be a Brazil-only commodity fund included in the portfolio. It also does not invest in vehicles that are exposed to life-settlements.

Investments that meet the criteria to be considered for the Opportunity Fund provide some element of risk-reduction, investment outperformance (“alpha” in investment lexicon), or a combination of the two. Currently, the “risk reduction bucket” of the Opportunity Fund is composed of timber assets. The outperformance category (“alpha bucket”) is composed of opportunistic energy investments and opportunistic credit, among others. The distinction may become blurred, along with multi-asset investment vehicles, which do not fall neatly into either category. For example, PERA’s Opportunity Fund invests in risk parity strategies, which allocate risk rather than capital across multiple asset classifications in order to achieve portfolio diversification. Additionally, PERA’s Board recently approved the exploration of the global macro strategy and the relative value multiple-strategy, which are similarly a blend of both risk reduction and outperformance.

If the foregoing discussion made the Opportunity Fund sound complicated, then it has been accurately captured. Each investment must meet numerous criteria and must prove that it offers promising benefits as either a diversifier or alpha generator or a combination thereof. Depending on potential size, the investment may also require the approval of PERA’s Board. For an investment idea to pass such a stringent test, the proposal truly must be a strong opportunity…and a good fit for the Opportunity Fund portfolio.

Congress Delays “Cadillac Tax” on High-Cost Health Plans

Posted on by planeteria

Last year, PERA on the Issues received a number of questions from readers asking for additional information about the federal “Cadillac tax” that could impact retiree health care plans like PERACare. The following provides a basic explanation of the proposed tax, as well as some updates on the status of the tax following Congressional action late in 2015.

What is the Cadillac tax?

The Affordable Care Act (ACA) was passed by Congress in 2010 and included a provision imposing an excise tax of 40 percent on the cost of employer-provided insurance plans exceeding certain thresholds. This provision is commonly known as the “Cadillac tax” on high cost employer-sponsored health coverage.

Why would PERA be affected by the Cadillac tax?

Governmental plans and plans providing retiree coverage, such as PERACare, are specifically included in the Cadillac tax provision.

Plans with an aggregate cost of coverage (both employee and employer contributions) of more than $10,200 for individual coverage or $27,500 for family coverage would be required to pay a 40 percent tax on the portion of health coverage that exceeds these thresholds. The thresholds are slightly higher for retirees under age 65 and for employees in certain high-risk professions.

Because retirees tend to have more chronic conditions and prescriptions, their health care plans tend to cost more than plans designed for younger, employed populations.

PERA’s health care trust funds are only authorized to pay certain premium subsidies, in amounts set by state law, and certain program expenses. If the Cadillac tax were to be implemented as originally described, PERA retirees would absorb the entire impact of the 40 percent tax through higher health care costs.

Has PERA taken a position on the Cadillac tax?

Along with many other public pension funds around the country, PERA is a member of the Public Sector Healthcare Roundtable, a coalition of public sector health care purchasers that provides an avenue through which to influence national health care policy. PERA was one of at least six Roundtable members that submitted comments to congressional leaders and regulators about the tax, discussing the implication of the tax on retirees enrolled in health care programs such as PERACare and urging a delay in its implementation. (Several of those comment letters can be accessed at the Public Sector Healthcare Roundtable website.)

Specifically, PERA’s comment letter addressed:

  • The aggregation of various groups of covered individuals (such as pre- and post- age 65 retirees) when determining costs;
  • Dollar-limit adjustments to the allowable cost of coverage for retiree-only plans;
  • A proposed safe harbor from the excise tax for plans that meet particular actuarial values;
  • Indications that the excise tax should not apply to governmental retiree medical benefit plans; and
  • Concerns about the constitutionality of imposing such an excise tax on governmental retiree-only medical plans.

What does the current status of the Cadillac tax mean for 2018 and beyond?

On December 19 of last year, Congress passed legislation that will delay implementation of the “Cadillac tax” on high-value health insurance plans from January 1, 2018, until 2020. Lawmakers included a provision that will stop the tax from taking effect in a large omnibus spending bill. That postponement is expected to reduce anticipated government revenues by $16 billion.

PERA staff will continue to monitor developments around this or any other proposed taxes that could impact the cost of PERACare, and PERA on the Issues will provide updates if Congress takes additional action.

Retirement Roundup: Surgery Study Finds Costs Vary Greatly by Region in Colorado

Posted on by planeteria

A digest of timely information and insight about finance, investing, and retirement.

Surgery study finds costs vary greatly by region in Colorado | The Denver Post

The combined cost of two common surgeries – knee and hip replacement – is twice as high in northeast Colorado as in Denver and Colorado Springs, according to a new study from the Center for Improving Value in Health Care.

Data supplied by health insurance providers found stunning variations by region of the state for the two procedures. The cost of combined surgeries in the northeast and mountain regions averaged $39,000 and $30,000 more, respectively, than the cost in the Denver region. (Learn how PERACare Select offers high quality knee and hip replacement at an affordable cost for Pre-Medicare participants).

Why white label? | PlanSponsor

With white label funds, a plan sponsor creates a generic name for a retirement plan fund, identifying it by its asset classes rather than the brand of the investment firm that manages it. This can bring down costs of investment management, allocate administrative costs more equitably, speed up the changing of managers, provide participants with simpler and more efficient investment choices, or a combination of the above.

The experience of Colorado PERA illustrates the range of potential benefits from white labeling. In its defined benefit plan, PERA undertook one of the first benefit reforms among U.S. public systems after the global financial crisis. And in that process, as Executive Director Gregory Smith recalls, “we realized that people need another means for saving,” but the costs of the DC plans were too high, and the tools were inadequate for people trying to invest on their own behalf. The end result features six white label options in the core menu. (Learn more about white label funds in PERA DC plans.)

Some surprisingly good news about retirement — sort of | Forbes

The vast majority of workers who retire aren’t being pushed out of the workforce by ill health, bad bosses, or age discrimination. Instead, they are being pulled into retirement by the allure of spending more time with family and on other activities they enjoy, according to a new issue brief from the Center for Retirement Research at Boston College. It seems the amorphous financial benefits of working longer must compete against the beckoning non-financial rewards of retirement.

The week in public finance: Contradictory pension reports, brewing pension battles and recession worries | Governing

Two groups published studies looking at whether traditional pensions or 401(k) plans are better and came up with exactly opposite conclusions. A study from the University of California at Berkeley looked at the state’s teacher pension system (CalSTRS) and found that for the “vast majority” of California teachers, a defined-benefit pension provides more secure retirement income than a 401(k)-style plan. Separately, TeacherPensions.org analyzed teachers’ pensions in Illinois and found that traditional pensions disproportionately favor those who stick around for 30 or 35 years.

It’s worth pointing out that TeacherPensions.org produces lots of reports that spell out the shortcomings of traditional pensions, while CalSTRS funded the Berkeley study. But one lesson worth thinking about is that no two pension plans are alike. (Read how an independent study of Colorado PERA found that PERA is more efficient and uses dollars more effectively than other types of retirement plans in use today.)

More evidence that, yes, the retirement crisis is real | Time-Money

Late last year, the Congressional Budget Office issued a report on the outlook for Social Security that included a different measure of replacement rates. Instead of using average lifetime earnings, its report said it would be more accurate to look at the earnings of people in the last five years of their career. This yielded much higher replacement rates: 60 percent for a typical worker born in the 1940s. But earlier this month, the CBO said its calculations were flawed and that it was publishing revised estimates of replacement rates. When it did, that 60 percent replacement rate became only 43 percent – only a bit higher than Social Security’s number of just below 40 percent.

Leakage is a serious problem for 401(k) plans | Plan Sponsor

Roughly one fourth of Baby Boomers cashed out their retirement savings at least once when changing jobs, and this rises to one third of Millennials and Gen X, the Defined Contribution Institutional Investment Association (DCIIA) found in a survey of 5,000 retirement plan participants.

We Asked, You Answered

Posted on by planeteria

Earlier this year, we asked readers of PERA on the Issues to weigh in on the kind of content they would like to see.

Now the results are in!

Readers told us that they would like to see more coverage of legislation and politics (61 percent of respondents said this), health care (57 percent), and retirement security (57 percent).

When asked how they might describe PERA on the Issues, 61 percent of respondents said an “online resource about Colorado PERA” while 57 percent would tell a friend it provides “timely news on topics related to retirement and public employee benefits.” More readers said they heard about PERA on the Issues from other PERA publications than from any other source.

Survey respondents came from all five PERA divisions. While most respondents listed a Colorado ZIP code as their home address, a small minority lives in other states or even other countries, showing the wide reach of PERA on the Issues.

Finally, we asked readers how we could improve PERA on the Issues. Respondents offered a range of suggestions, from “it’s fine just like it is” to “help us to understand more about how these issues affect us” and “make issues at the Legislature easier to understand.”

We’ve read through each of the comments and we’re already finding ways to give readers more of what they want while making sure to keep elements we know are valuable.

To start, readers can now find a “Legislation” tab on the home page of PERA on the Issues. From there, information is available about the status of proposed bills and resources for contacting elected officials will be included when needed.

We are working to add more content about health care as it impacts and relates to PERA, too.

The reader survey provided valuable insight about what our readers need and want. But we’re always eager to get feedback. Comment on our articles, share them with friends, or send us your ideas directly.

PERA on the Issues is a resource for you, and we love to hear what you think.

Helping You Save for Retirement

Posted on by planeteria

Colorado PERA recently renewed the recordkeeper contract with Voya for the PERAPlus (401(k) and 457 Plan) and DC Plans. Administrative fees in the three plans were reduced to 11 basis points from 14 basis points – a 21 percent reduction, effective February 1. Fees in the PERAdvantage U.S. Large Cap Stock Fund were also reduced to 30 basis points from 35 basis points. “Our ongoing relationship with Voya ensures our ability to continue to benefit our membership and control cost — which means more dollars going to our participants’ bottom lines,” said Colorado PERA Executive Director Greg Smith.

Read the news release.

Consider increasing your deferral amount or signing up for PERAPlus to take advantage of these low-cost retirement savings options today!

Puerto Rico and Pensions?

Posted on by planeteria

Public retirement associations join elected officials, state and local governments to oppose pension requirements within Puerto Rico Assistance Act.

A broad coalition including public pension advocates, state and local government associations, employer groups, and elected officials has come out against proposed federal legislation, the Puerto Rico Assistance Act of 2015 (S. 2381), because of a heavy burden the Act would place on public pensions.

Though the Act is primarily focused on unique concerns affecting Puerto Rico, it contains provisions that would impose a federal mandate on state and local government retirement systems that is not warranted and has not been requested.

The provisions included within the Act that would impact retirement systems “are conflicting, administratively burdensome and costly,” the coalition wrote to Senate Majority Leader Mitch McConnell.

Further, the groups wrote, “the provisions are not germane to the underlying legislation, nor do they protect benefits, save costs or improve retirement system funding.”

As the letter from the coalition explains, state and local government pensions have taken significant steps to strengthen their pensions and be sustainable over a long-term time horizon.

“Since 2009, every state has made changes to pension benefit levels, contribution rate structures, or both,” the letter says.

Read the coalition’s letter and review a fiscal fact sheet about state and local governments.

See also Five Years After the Great Recession, PERA Continues Progress Toward Full Funding to learn more about changes implemented by Colorado PERA since 2010.

2016 Proposed Legislation Status

Posted on by planeteria

A summary of proposed legislation affecting Colorado PERA. Check back often for new bills and updated status reports. Last updated: March 21, 2016.

House Bill 16-1207

PERA Investments in Renewable Energy Companies

HB 16-1207 requires that PERA, beginning January 1, 2017, and in each calendar year thereafter, ensure that, of the moneys that are not already invested by PERA, at least one percent of such moneys are invested in renewable energy companies. If PERA is unable to invest one percent of such moneys in renewable energy companies in any calendar year, PERA would be required to explain why it was unable to satisfy the requirement in the Comprehensive Annual Financial Report.

Sponsor: Rep. Paul Rosenthal (D-Denver)

Status: The bill was defeated in the House Finance Committee (11-0) on February 24.

PERA Board position: Oppose

House Bill 16-1284

Concerning Divestment by PERA From Companies That Have Economic Prohibitions Against the State of Israel

HB 16-1284 would require PERA to make its best efforts to identify all companies that have economic prohibitions against Israel, assemble those identified companies into a list of restricted companies by January 1, 2017, and to review the list of companies on a bi-annual basis. This bill is structured similar to the statute regarding PERA’s Sudan Divestment requirements, and would require divestment of companies on the restricted list.

Sponsors: Representatives Dan Nordberg (R-Colorado Springs), Dominick Moreno (D-Commerce City), Lang Sias (R-Arvada), Lois Court (D-Denver), Brian DelGrosso (R-Loveland), Crisanta Duran (D-Denver), Justin Everett (R-Littleton), Alec Garnett (D-Denver), Daniel Kagan (D-Cherry Hills Village), Gordon Klingenschmitt (R-Colorado Springs), Tracy Kraft-Tharp (D-Arvada), Polly Lawrence (R-Littleton), Paul Lundeen (R-Monument), Dan Pabon (D-Denver), Brittany Pettersen (D-Lakewood), Angela Williams (D-Denver); and Senators Owen Hill (R-Colorado Springs), Leroy Garcia (D-Pueblo), Bill Cadman (R-Colorado Springs), Mark Scheffel (R-Parker), Larry Crowder (R-Alamosa), Kevin Grantham (R-Canon City), Chris Holbert (R-Parker), Michael Johnston (D-Denver), Jerry Sonnenberg (R-Sterling)

Status: Passed House Business Affairs and Labor Committee (13-0) on February 23, and Passed Third Reading in the House (54-10-1) on February 26. Passed Senate Finance Committee (5-0) on March 3, and passed Third Reading in the Senate (25-9-0) on March 9. Signed by the Governor on March 18.

PERA Board position: Oppose

Previous legislative session summaries:

2015 Legislative Session

2014 Legislative Session

Retirement Roundup: Panic is Passé

Posted on by planeteria

A digest of timely information and insight about finance, investing, and retirement.

Panic is passé: investors stay steady on retirement savings | Seattle Times

Investors are keeping their hands off of their retirement accounts, despite huge swings in the stock market that sent it careening to its worst start to a year ever. Retirement savers have come to understand that they need to think long term. Vanguard, which oversees $3 trillion in assets, says that while the S&P 500 sank 8 percent during the first 11 days of the year, there was no perceptible change in participant trading compared with the same period in the past two years. But this cool-headed confidence is coming as much from automation as from steely nerves or deep wisdom.

5 simple ways to catch up on your retirement savings | USA Today

While starting to save early may be the simplest way to ensure a comfortable retirement, if you get a late start or face financial troubles in middle age, catching up doesn’t have to be complicated. It requires cutting back on discretionary spending and staying disciplined as you build your retirement savings in a shortened period of time. For example, if you save and invest $15,000 annually for 15 years at 7 percent, you’ll wind up with more than $400,000.

Obama: Make retirement accounts more accessible, portable | The Wall Street Journal via Yahoo! Finance

The White House unveiled in January a number of proposals to make it easier for workers to save for their retirements, in part by pushing businesses and states to make benefits more portable. President Barack Obama has been trying to overhaul the nation’s retirement savings systems as one of his legacies, and plans to include a number of steps in his 2017 budget, due out Feb. 9. The administration’s goals include funding a pilot program to help states develop their own schemes to increase workers’ nest eggs.

20 tricks to retiring rich | GOBankingRates via The Huffington Post

More than half of Americans may be unable to cover essential living expenses in retirement because they’re not saving enough for their future. It’s easy to put off saving for a retirement that’s years away, but that could mean spending 20 to 30 years struggling to make ends meet. Even if your savings aren’t on track, you don’t have to resign yourself to a life of poverty in retirement. Twenty strategies for saving now can help you retire rich enough to have a comfortable lifestyle.

Where in the world should you retire? New report takes a look at 23 great possibilities | The Wall Street Journal

International Living has come out with its annual global retirement index for 2016, ranking 23 countries on things like affordability, internet access, health care, climate, and ease of traveling home to see the grandchildren. This year, Panama tops the list while an additional five Latin American countries make the top 10.

When not to save for retirement | Time-Money

Everyone should save for retirement. But for many people, saving for retirement should actually be fairly low on the financial priority list – well behind the more immediate goals of building a rainy day fund and reducing their consumer debt. A survey by The Pew Charitable Trusts examining causes and impacts of financial shocks that hit American households found that most have failed to build enough liquid savings outside retirement accounts to respond to emergency needs.