Month: August 2018

The virtuous circle of investment stewardship

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The word “sustainability” is often used to define something environmental. Colorado PERA’s investment professionals see sustainability as a component of investment stewardship, encompassing another important component used when investing nearly $49 billion on behalf of PERA’s membership.

In June 2018, PERA’s investment team released the Colorado PERA Stewardship Report, a comprehensive look at all the ways PERA incorporates the principles of ESG (environmental, social, and governance) stewardship to select, evaluate, and improve the PERA investment portfolio and strengthen the retirement fund.

In addition to environmental issues, the concept of global sustainability can encompass labor rights, executive oversight and corporate culture, and social impact, among many others. By examining how PERA’s investments may be exposed to these categories, PERA tries to identify which investments will provide the strongest long-term results for the fund, and thus for PERA’s members and retirees. “We don’t look one or two years down the road; we look 15 or 20 years, and concentrate on the long-term viability of a company’s business model” said Jared Goodman, a PERA senior equity portfolio manager. “We want to make sure our investments’ sustainability practices will drive strong long-term returns,” he added.

Making more sustainable and responsible investments has become a primary focus and concern for investors and investees alike in recent years. The number of sustainability-aligned investment strategies increased 14 times over between 1995 and 2016 as more consumers, corporate executives, and investors demanded them.

Organizations that deploy sustainability practices demonstrate considerable long-term productivity and resiliency. Consider the manufacturing firm that buys new equipment to meet its customers’ demand, produce lower carbon emissions, and provide a safer working environment for its employees. This firm is doing its part to protect air and water quality (and avoiding potential fines for environmental negligence) and increasing its workers’ safety and efficiency, all while enjoying the competitive edge the new equipment provides. Similarly, so-called “green” buildings have higher occupancy rates and lower energy costs, making them potentially strong long-term real estate investments.

Another way PERA’s investment stewardship focus helps improve performance is via corporate governance. The most direct way to do this is by influencing organizations, via engagement with their management and boards, to be more proactive in their ESG practices. Given that corporate fraud is estimated to cost the U.S. economy between $180 billion and $360 billion per year, there is ample need to ensure that corporate leadership is always acting in the best interests of its investors. By insisting on fair market practices, alignment between companies and their investors, and robust disclosure procedures, PERA can help promote changes and improve oversight in ways that can make these investments more successful in the long run. “We’ve always stressed corporate stewardship as part of our investment activities because it’s a sound strategy,” said Tara Stacy, a PERA investment compliance and performance analyst and a co-author of the Stewardship report. “This helps us get and stay ahead of the curve as these issues are increasingly highlighted,” she concluded.

For PERA, one more key piece of the stewardship puzzle is the contribution made to the state’s economy. In 2012, PERA introduced the Colorado Mile High Fund, which provides millions of dollars in investment opportunities for organizations that have a nexus to the Centennial State. (The entire PERA fund currently has more than $515 million invested in the state.) Colorado Mile High Fund investments are primarily private equity and venture capital investments, and they have produced encouraging results. As of December 31, 2017, PERA has sold three of six Colorado Mile High Fund investments since inception of the Fund, helping to achieve further gains for the total portfolio.

PERA will continue to evaluate opportunities for financial sustainability through the recognition of the importance investment stewardship makes to the goal of seeking the best risk-adjusted returns for the long-term sustainability of the Fund and the members PERA serves.

For further reading:

Colorado PERA Stewardship Report

Investment Stewardship Fact Sheet

Retirement Roundup: Why do health insurance premiums increase each year?

Posted on by planeteria

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

Why does my health insurance premium increase each year? | Verywell Health
Typically as fall approaches, you begin to hear from your employer’s human resources department or from the insurers and payers who oversee your health coverage about how much you’ll have to pay for coverage next year. And each year, it seems like those premiums increase, sometimes by double-digit percentages. Why is health insurance so expensive? And why do you have to pay more every year, even if you’re healthy? Simply put, health insurance premiums go up because medical costs increase.

Opinion: Don’t confuse public pension cost with generosity | MarketWatch
In a recent editorial, The Wall Street Journal reports on state and local pension liabilities as a percentage of state GDP and concludes that politicians have made excessive pension promises. In fact, pension costs are going up, but the question is whether the rising costs are a result of benefit generosity or of underfunding. The answer is underfunding.

Scammers are targeting retirement savings. Here’s how to fight them | Marketplace
As we age, one of the things that sometimes gets lost in the mix is how we’ve handled our money. Did we save enough? What will our retirement be like? And if that’s not enough, now add another worrisome element to the mix: retirement scammers. Con artists of all types are finding ways to sap the savings of aging retirees. Senior economics correspondent Chris Farrell addresses what the government, the financial industry and you can do about it.

Best and worst cities for retirement | CNBC
If you’re looking for an affordable retirement, the city in which you decide to live should be an important factor. Personal finance website WalletHub recently ranked 182 U.S. cities based on their affordability, activities, quality of life and health care. Each city was graded on a 100-point scale, with 100 representing the highest score.

Half of pre-retirees expect to return to work | PlanSponsor
Fifty-three percent of workers who expect to retire in the next five years think it is likely they will return to work, according to a survey by Home Instead, Inc. Earning additional income was their primary reason for returning to work, cited by 67 percent, followed by fighting boredom (44 percent) and keeping their minds sharp (22 percent). Sixty-eight percent of those approaching retirement say they plan to work in a different industry and 65 percent of retirees who have returned to work say the same.

This is how to have the “perfect” retirement | MarketWatch
Most people look forward to retirement as a time to forget their worries, live without a boss or a commute and to perhaps just kick back whenever and however the urge appears. But in real life, that fantasy isn’t very common — and it may not be all it’s cracked up to be. There’s no one-size-fits-all formula for a good retirement, because every situation is in some ways unique.

Social Security finances worsen as reliance on the program increases | Investment News
Two new reports from the University of Pennsylvania’s Wharton School of Business document an increase in American retirees’ reliance on Social Security income over the past 25 years as the program’s long-term finances deteriorate at a faster pace than officially projected by the Social Security Administration.

Retirement Roundup: 10 mistakes that can sabotage your retirement savings

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

10 mistakes that can sabotage your retirement savings | Fox Business
According to a Gallup poll, 51percent of non-retired Americans do not think they will have enough money to live comfortably in retirement. Retired Americans are more confident, with 78 percent saying that they have enough money to live comfortably. However, wherever you are on the spectrum, no matter if you are just starting to save for retirement or are already retired, there are mistakes that can sabotage your retirement nest egg.

Financial “stress test” of Colorado pension system spurs reform | Pew Charitable Trusts
The pension reforms recently enacted in Colorado demonstrate how states can benefit from a tool called stress testing to shore up financially troubled retirement systems. The legislation signed June 4 by Governor John Hickenlooper (D) includes steps similar to those taken by other states coping with significantly underfunded public pension systems, including raising the retirement age for new workers and increasing employee contributions. But Colorado’s approach also reflects the state’s leading role in using stress testing to more precisely assess the government’s ability to fulfill benefit promises made to workers.

5 European cities where you can retire for $35,000 per year | CNBC
Living well on less is a constant in retirement planning. If life in the U.S. seems as if it would overstretch your assets, you might want to consider moving abroad. Moving overseas takes planning and research. You’ll want to check visa and residency requirements as well as health-care access. Remember, you’ll still be taxed as a U.S. citizen by Uncle Sam.

Never retire: Why people are still working in their 70s and 80s | US News
It’s not uncommon these days for baby boomers to continue to work well into their 60s, 70s or even 80s. Some decide to continue working because they need the money. Others love what they do and can’t imagine not doing it anymore. Or, they just need to stay busy. With continued improvements in health care and life expectancy in the U.S. steadily increasing, people can spend as long in retirement as they spent working.

Retired Texas teachers face giant hurdle to pension boost | Austin American-Statesman
To give retired teachers a chance at a pension bump — something that hasn’t happened in more than a decade for some — the Legislature will have to approve at least an additional $786 million in funding annually, according to new data from the Teacher Retirement System of Texas. Teachers say the new figure points to the need for the state to step up its contributions to the $151 billion pension fund, but conservatives say state lawmakers should consider restructuring the pension fund to make it more akin to a 401(k), a move unpopular among teacher groups.

‘Too Little Too Late’: Bankruptcy Booms Among Older Americans | The New York Times
The rate of people 65 and older filing for bankruptcy is three times what it was in 1991, and the same group accounts for a far greater share of all filers. Signs of trouble — vanishing pensions, soaring medical expenses, inadequate savings — have been building for years. Now, new research sheds light on the scope of the problem, suggesting that the bankruptcy surge is driven by a three-decade shift of financial risk from government and employers to individuals, who are bearing an ever-greater responsibility for their own financial well-being as the social safety net shrinks.

A closer look at PERA’s investment expenses

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PERA operates a relatively low-cost investment program. In total, PERA manages about $48.9 billion in assets on behalf of 580,000 current and former public employees. In 2017, PERA spent approximately $173 million on internal and external investment management expenses, or less than one-half of one percent of the total fund. In other words, PERA spends about 0.35 percent of total assets to manage a multi-billion dollar portfolio that is responsible for generating returns used to provide retirement income to hundreds of thousands of PERA members. By way of comparison to this annual cost of $173 million in investment expenses, PERA pays out $1.2 billion each quarter in benefits to retirees.

In order to limit costs, PERA staff historically has managed a portion of PERA fund assets in-house. In 2017, about 55 percent of total assets were managed internally by PERA investment professionals. As a result, PERA saved more than $45 million last year alone in fees it would otherwise have paid to external managers.

For additional information, see the “Less Is More: How PERA Limits Investment Costs to Maximize Returns” fact sheet.

In addition to managing assets internally, PERA strives to negotiate favorable external management fees. As a result of internal management plus judicious external fee structures, PERA has kept investment expenses competitive with those of public pension plans of similar size. The PERA Board’s investment consultant Aon has determined that the range of investment expenses relative to assets under management is between 0.25 percent and 0.59 percent. The average expense amount is 0.37 percent. In other words, PERA’s investment expenses at 0.35 percent are well within an acceptable range of comparisons and lower than the average when measured against other public pension funds.

PERA’s investment program is guided by PERA’s overall philosophy to keep expenses low in order to maximize resources for the membership. Specifics about the investment program may be found in the Board-adopted Colorado PERA Statement of Investment Policy.

While it is important to focus on cost savings, it would not be worth conserving resources if investment returns were below expectations. PERA’s combined approach to internal and external management has not only led to low overhead, but it has also generated an overall investment return of 7.0 percent over the past 20 years and 8.7 percent over the last 15 years (net of all fees). This means that there is no choice between low cost and high performance, because PERA’s investment program has achieved both.

PERA’s signal light is now green. What does that mean?

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The Colorado PERA Board of Trustees is constantly monitoring the performance of the PERA fund and the long-term health and sustainability of each of PERA’s divisions (State, School, Local Government, Judicial, and DPS).

On August 14, 2018, PERA’s actuarial firm reported to the Colorado General Assembly’s Legislative Audit Committee that PERA’s divisions, after the effects of SB 200 are taken into account, now have green or dark green signal light indicators, meaning that all divisions are projected to be 100 percent funded by 2048.

One of the key aspects of performance that the Board considers is the risk profile for each division trust, essentially the likelihood that something negative could happen that would threaten any division’s sustainability and PERA’s ability to pay benefits over the long term.

To better communicate the fund’s risk profile in a straightforward way, the Colorado General Assembly’s Legislative Audit Committee in 2014 directed the Office of the State Auditor to contract with an actuarial firm to develop a methodology to simplify the understanding of PERA’s financial status. The result of this study was the creation of a signal light color framework to report on PERA’s financial status.

Using a signal light color framework, the tool indicates how long it will take each PERA division to reach full funding, where dark green status means that a division would be funded by 2041 (30 years from 2011) and dark red status means that a division would run out of money within 20 years, with additional categories in between to indicate a spectrum of risk.

Last year, most PERA divisions were in the orange category, meaning that the PERA Board should develop a corrective action plan to reduce the amount of time it will take PERA to be fully funded. The result was the Board’s recommendation to the Colorado General Assembly that ultimately became Senate Bill 18-200 (SB 200).

The two largest of PERA’s member divisions, State and School, are in the green category which means that these trusts are projected to be 100 percent funded by 2048 (30 years from 2018). The Local Government, Denver Public Schools, and Judicial Divisions are in the dark green signal light category and are projected to be fully funded by 2041 (less than 30 years from 2018).

Read the full Hybrid Defined Benefit Plan Signal Light Reporting Report as presented to the Legislative Audit Committee on August 14, 2018.

PERA staff comment on proposed actuarial standard changes

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Colorado PERA Interim Executive Director Ron Baker recently sent a letter to the Actuarial Standards Board (ASB) providing input on proposed revisions to standards for actuaries who measure pension obligations, Actuarial Standard of Practice (ASOP) No. 4, Measuring Pension Obligations and Determining Pension Plan Costs or Contributions.

Read more about what it means to be an actuary here.

The Actuarial Standards Board establishes and improves standards of actuarial practice. Like all professional actuaries, the actuaries retained by PERA are expected to adhere to the standards of the ASB, so any changes to those standards that impact public pensions would have a direct impact on results that PERA’s actuaries report.

Periodically, PERA staff offer comments on proposed regulatory changes as a part of monitoring the standards and related guidance that affect how public pension plans, or investments made by such plans, are governed and regulated.

By informing regulators of their perspective, PERA staff have a voice in decision making processes that can directly impact how public pension plans operate and how their investments perform. This in turn helps to protect the interests of PERA members and retirees.

The comment letter sent in July supported the bulk of the proposed revisions to actuarial standards, but PERA staff expressed concerns about confusion that would be created by requiring an additional liability measurement that is primarily used in non-governmental (corporate) pension plans. Public plans with governmental sponsors such as PERA have a uniquely long-term time horizon, making evaluations that could be suitable for private pensions inappropriate for those public plans.

Read more than 60 additional comment letters submitted to the ASB here and a response from the American Academy of Actuaries here.

The proposed changes to the standards include a recommendation to calculate an “investment risk defeasement measure” (IRDM). This technical-sounding concept is, essentially, one way to measure investment risk for pension plans.

PERA’s letter focuses primarily on concerns about how the IRDM would be calculated if the proposed revisions were implemented. The letter states that the proposed investment-risk measure is “basically flawed in concept, calculation, and application” and notes concern about the “risk of misinterpretation and misuse, inaccurate and inappropriate calculations and reputational risk for the actuarial profession” if the standards were adopted.

A few concerns PERA staff stated in the letter include:

  • The required actuarial cost method is inappropriate. The proposed changes would make standard a “unit credit cost method” for funding valuations, a method that is not appropriate for public pension plans and, in fact, is not allowed by the Governmental Accounting Standards Board, (GASB) for valuations that are made for “accounting and financial disclosure purposes.”
  • Demographic assumptions are inappropriate. Plan members who no longer earn pay increases or future service credits behave differently than members who still might, making assumptions intended for an “ongoing” plan inappropriate.
  • The discount rate is unrealistic. Unlike private sector plans, public pension plans like PERA serving large populations of public employees “are typically considered ongoing entities as are the governments they benefit.” Just as the State of Colorado isn’t going anywhere, neither are the public employees who make up the membership of its pension plan. PERA staff believe that the discount rates allowed under the proposed standards “are not representative of a discount rate that would accurately value funding liabilities of an ongoing plan.”
  • The results of calculations would not be useful. The proposed calculations to determine an investment-risk measure would not add value for the users of PERA’s funding valuation and would not contribute pertinent information for making long-term funding decisions. This metric, therefore, “would simply be an expensive requirement with no real value to the users.”
  • A new pension liability would be confusing. Issuing an additional new pension liability would create confusion, and likely would be misinterpreted as a recommendation of PERA’s actuary, even if there were a disclosure stating otherwise. PERA staff believe the proposed approach would “unnecessarily cause confusion and misunderstanding among the memberships, employers, legislators, and taxpayers who embody the stakeholders of all public pension plans.”
  • The proposed approach is narrow minded. “Investment risk defeasement measure” suggests that this is a measure of investment risk. However, it would not test or reflect other aspects of risk, such as investment return volatility. Furthermore, a more broad-based approach has been reflected in other proposed actuarial standards (ASOP No. 51).

The comment letter concluded by explaining that public pension plan boards and staff are “constantly working toward the defined goals of ensuring transparency and accountability while promoting contribution rate stability and intergenerational equity.”

PERA staff will continue to monitor the Actuarial Standards Board proposal on and update readers of PERA on the Issues if there are further developments.

Review PERA’s Comments to ASOP No. 4 Exposure Draft Letter here.