1. PUBLIC PENSION FUNDING TOPPED KEY THRESHOLD ON STOCK-MARKET GAINS:
Public pension-plan funding topped a key benchmark for the first time in tracking history during the second quarter, buoyed by surging financial markets, according to a report released in July.
The funded ratio -- a metric that describes the amount of assets on hand to pay all expected liabilities for the coming 30 years -- rose to 82.6% at the end of June for the 100 largest plans in the country, according to the Public Pension Funding Index from actuarial group Milliman. That’s the highest since Milliman began tracking in 2016, and suggests that the largest public pensions, in aggregate, are in better shape than in the past.
An 80% funded ratio is often loosely considered a satisfactory level for pensions sponsored by state and local governments and other municipal entities, even as most employers formally aim for full funding -- that is, enough money on hand to cover all existing workers and retirees for the next 30 years.
It’s worth noting that more recent scholarship suggests that full funding for public pensions isn’t necessary, and that they would do fine with a pay-as-you-go approach, as Social Security does. Still, there are plenty of larger pension plans that remain dangerously underfunded.
Milliman estimates aggregate returns for the plans tracked to be 4.26% for the quarter, while the overall annualized return for the year ending June 30 was 19.95%. As the group points out, that kind of return “significantly exceeds the expected long-term earnings assumptions” for plans it covers.
The S&P 500 SPX, -0.02% is up over 17% in the year to date and up more than 36% in the past year. The S&P 500 on Friday rose 2% to finish at its 40th record close of 2021.
As previously reported, many public pension plan administrators have been reducing their assumptions for returns, believing that lower, more conservative assumptions are safer. Among state pensions, the median assumed return in 2021 is 7.20%, down about 1 percentage point since 2000.
Market returns account for roughly two-thirds of a pension’s asset growth (or decline), so when they fall short, governments, school districts and other plan sponsors must kick in more money.
As Milliman’s release notes, “In the coming months, plan sponsors will start seeing the results of actuarial valuations that will reveal the extent to which the [COVID-19] pandemic has impacted plan liabilities, including higher death rates and the impact of furloughs on benefit accruals, pay levels and contributions from active members.”
That’s already evident, according to an earlier report from the Center for Retirement Research at Boston College, which found that layoffs during the COVID recession meant fewer workers paying into the system. Andrea Riquier, MarketWatch, www.marketwatch.com, July 27, 2021.
2. PLAN TO BOOST PENSION PAYOUTS FOR CORONAVIRUS WORKERS COULD COST MASSACHUSETTS ‘BILLIONS’:
A plan to serve up bonuses to public employees who worked throughout the pandemic will wind up costing taxpayers billions and further strain the state’s already overburdened pension system, watchdogs warn.
The bill would allow workers to cash in on three extra years of service for their pensions when they retire if they worked -- or volunteered to work -- outside their home anytime between March 10 and Dec. 31 of last year, according to the legislation filed by state Rep. Jonathan Zlotnik, D-Gardner, and Sen. John Velis, D-Westfield. Sen. Nick Collins, D-Boston, filed a companion bill in the Senate.
“Sponsors have openly stated that they do not know how much it will cost. In my view is is outrageously irresponsible to even consider bill like this without knowing how much it will cost,” said Greg Sullivan, research director for the Pioneer Institute and a former state inspector general.
The bill is sponsored by more than 100 state representatives and senators.
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“By my estimate, it will cost the state billions,” Sullivan continued, explaining it’s nearly impossible to pin down the true numbers.
The bill directs the secretary of administration and finance to identify all public employees who volunteered or were required to work at job sites or outside of their homes during the pandemic state of emergency. Sullivan said that’s only one key factor in determining the actual cost.
During a hearing last week, Zlotnik characterized the bonus as recognition for police and corrections officers, public works employees and others who kept going to work as many stayed home.
“This was the time when these essential services were most important, the people being asked to perform them were most at risk coming into contact with members of the public and with co-workers,” Zlotnik said during the hearing. “They continued to do their jobs, often exhibiting flexibility and creativity and an effort to ensure that those needs were met. It is in recognition of that effort that we offer this bill.”
Sullivan said he has “no objection” to rewarding those who continued reporting for duty amid the pandemic but said the bill could mean payouts well into the six figures -- and includes lawmakers themselves.
UMass President Marty Meehan, for example, would earn another $750,000 through retirement, he said.
“This super expensive giveaway will be paid for on the backs of regular working people,” Sullivan said.
Massachusetts has $43 billion in unfunded pension obligations. State data show the system is 63% funded, while the Massachusetts teachers fund was 51.7% funded as of two years ago.
“This will lead to some outrageous bitter feelings from people who work in retail stores, health-care workers in the private industry who are all going to be paying literally billions of dollars to give bonuses to public employees,” Sullivan said. Erin Tiernan, Boston Herald, July 26, 2021.
3. YOUR FINANCIAL WELLNESS PROGRAM MAY NOT BE ENOUGH:
Your employees may be experiencing financial difficulties that create anxiety, guilt, and even fear in the workplace regardless of income level or financial education. These feelings often fly under the radar but manifest themselves via workplace distractions, decreased engagement, employee burnout, or even impacts to their mental and physical health. An examination of the financial wellness programs you offer might be worth it in making the difference between a financially educated and a financially empowered staff. This is important because the difference often rests in their willness or confidence in execution. The stats on financial literacy are alarming and include but aren’t limited to:
- Roughly 85 percent of Americans are anxious about their finances and that anxiety directly impacts their work.
- Financial stress contributes to productivity losses, increased absences and healthcare claims, higher turnover, and the increasing costs associated with workers who cannot afford to retire on time.
- Employee financial health and retirement readiness solutions create opportunities for employers to build a healthier and more productive workforce while building a solid foundation for a healthier and more profitable business.
While business leaders don’t have an obligation to address the issues of a financially illiterate or financially disenfranchised staff, they do stand to benefit by taking the problem head on. Here are four ways investing in the financial empowerment of your employees can make a difference in your business.
Engagement – Employees who worry about their financial well being may have a hard time being fully present at work. By addressing that area of focus you in turn create a more engaged staff. It’s the difference between having an employee show up and do the bare minimum to collect a paycheck, and having an employee show up with a desire to stretch, grow, and participate in unpaid initiatives that further the progress of the organization. More than that, one employee’s engagement can be contagious. Without the distractions that come with financial trauma you can be assured your employees will be their best selves, and encourage others to as well.
Employee Retention – Three things motivate employees to leave a job; leadership, pay, and growth opportunities tied to both. Although your hands might be tied in how much more pay you can provide an employee given the scope and function of their role, you can certainly help an employee feel more confident with their current salary by addressing issues that may make them think it’s just not enough. When issues like mounting debt, life events such as marriage, childbirth, and retirement, or the abuse of income on hopeful expenses like lottery tickets or gambling are at the forefront of employee focus, you can rest assured that they will jump at the opportunity to leave for greener pastures ill prepared to handle the adjustment that comes with lifestyle inflation due to greater take home pay. This can add costly recruiting and onboarding efforts while disrupting the flow of production that may impact general employee morale.
Diversity & Inclusion – Diversity, equity, and inclusion has a heightened strategic focus across many organizations. With efforts aligned to support, highlight, and uplift historically disenfranchised populations, a focus on financial empowerment should complement those efforts as many in the target demographic don’t have a background that models what financial wellness should or could look like. Often they assume the role of trailblazer in their families and communities with regard to education, income, and career. It can be both exciting and burdensome to be the first of anything, and with that burden there can also be guilt, anxiety, and fear around making the right decisions at the right time for themselves and for their families. As a leader you would be doing your company and employees a disservice by embracing the principles of diversity, equity and inclusion without embracing the very real need for financial empowerment and financial wellness programming to improve the financial positions of those you seek to elevate. Not only does this have an incredible impact on the population of employees you serve, but it also has a huge impact on your brand as an organization in fully embracing a diversity, equity, and inclusion strategy that includes financial empowerment.
Pay It Forward – Financial literacy is at the forefront of many discussions across both professional and educational industries with programs designed to teach their audiences what they should be doing instead of addressing why they aren’t doing it. You offer the retirement benefits, the employee stock purchase plan, the HSA or FSA, and maybe even some equity sharing program but you still have employees who don’t take advantage. Financial literacy may solve the how but doesn’t solve the why. Your employees may have experienced financial trauma that they just can’t seem to get past in order to make the right decisions with their money and because it’s a taboo topic they never discuss it. Financial empowerment addresses the underlying issues that impact mindset and follow through behaviors at all levels of the business. That means that senior leaders and executives can not only address their own financial hang ups, but can partner with those less senior and provide mentorship that helps prepare them to succeed as future leaders creating an internal ecosystem that promotes holistic growth extending beyond political power and title, and into the factors that impact production, engagement, retention, and representation aimed for through DE&I. Money management is mindset management and a financial empowerment program can make a difference in your company’s and your employees bottom line. Rahkim Sabree, CEO World Magazine, https://ceoworld.biz, July 24, 2021.
4. LARGE PUBLIC PENSION PLANS ‘MOVE AGGRESSIVELY’ TOWARD ESG INTEGRATION, EVEN AS SMALLER PLANS FALL SHORT:
Environmental, social, and corporate governance investing might dominate the public conversation around institutional portfolios, but only the largest public pension funds in the U.S. have made significant headway in adopting impact investments. For smaller- and mid-sized defined benefit plans, a fully-integrated ESG portfolio remains a distant dream.
According to a survey from Cerulli Associates, 20 U.S. public pension plans are listed as members of Climate Action 100+, an initiative to fight climate change through corporate governance. Ninety percent of respondents believed public pensions will have a moderate-to-high demand for ESG strategies in the next two to three years. When compared to other allocators, public defined benefit plans’ demand for impact investment strategies fell in the middle of the pack. The survey showed that family offices, high net-worth individuals, and foundations had even higher demand for ESG strategies in 2020.
Large public pension plans, including New York State Common Retirement Fund, the New Jersey Division of Investments, the Washington State Investment Board, the California State Teachers’ Retirement System, the Seattle City Employees’ Retirement System Board of Administration, and the San Francisco City & County Employees’ Retirement System, are among the institutions making notable allocations to impact investing, the report said.
“For those really large plans, they are moving pretty aggressively with ESG. They are right at the forefront of integration,” Robert Nelson, Cerulli’s institutional director, told Institutional Investor. “But my sense is that the smaller and medium-sized plans are not nearly as far along.”
Nelson attributed the gap between small and mid-sized pension plans and large pension plans to factors like struggles with ESG benchmarks and third-party scoring systems, budgetary constraints, and personnel shortages.
“Midsized plans are challenged enough to just uphold their fiduciary duty to pensioners,” Nelson said.
At smaller plans, Nelson said there also may be a bit of “conservatism” at play due to the volatile ESG regulatory environment in the U.S. The survey places some responsibility for the lag on the “murky” regulatory environment, noting that the back-and-forth may have had a disproportionate impact on ERISA-regulated corporate pension plans.
Still, public pension plans are ahead of the demand curve when compared to corporate pension plans. Twenty-nine percent of respondents said public DB plans had “low demand” for impact investing; 53 percent of respondents said corporate pensions had “low demand” for these investments.
In general, U.S. investors are more reluctant to incorporate ESG than investors in other parts of the world, but the U.S. is beginning to catch up. For instance, a Bloomberg Intelligence report released Wednesday said the U.S. saw 40 percent growth in ESG assets under management in the past two years, accounting for almost half of global ESG assets. According to the report, U.S. investors, who were once largely reluctant to adopt ESG, are jumping aboard the ESG train and sparking a mass “rebranding” of companies to ESG-centric investment entities.
“There’s more pressure on companies to respond to shareholder engagement to ramp up ESG engagements, and we’re seeing more company actions on things like reduction goals,” Shaheen Contractor, Bloomberg Intelligence analyst, told II.
But this trend could result in increased greenwashing. According to the report, anti-greenwashing regulations inflicted over the past two years in Europe have resulted in a $2 trillion reduction in the region’s ESG assets.
“The rebranding trend may be a double-edged sword,” the report said. “Regulation will play an important role as scrutiny and requirements increasingly seek to tackle the risk of greenwashing.”
Looking ahead at the next two to three years, Cerulli survey respondents expect the greatest opportunities to lie in foundations, endowments, and public DB plans. Corporate DB plans fall short of expectations. What's more, as larger public pension plans increasingly incorporate ESG into their portfolios, smaller- and mid-sized plans will follow suit.
“The environment that we have today is one that reflects the long-term trend toward greater interest and greater implementation of ESG throughout institutional channels,” Nelson said. “And I think that will affect defined benefit plans.” Jessica Hamlin, Institutional Investor, www.institutionalinvestor.com, July 22, 2021.
5. NJ ENDS SALARY CAP FOR JOB RUNNING ITS $93 BILLION PENSION FUND:
With little fanfare, Gov. Phil Murphy and lawmakers have abolished a long-standing cap on how much the state can pay a key employee -- the director of investments for the public-worker pension fund.
A bill that was fast-tracked by lawmakers last month and then signed into law by Murphy about a week later, lifted a limit on the annual salary for the director of the state’s Division of Investment.
The move to abolish the cap -- which had been in place for more than two decades -- comes as Murphy and fellow Democrats who control both houses of the Legislature have fully funded the pension system for the first time in a quarter century. That infusion of tax dollars improved the fiscal outlook for a fund historically among the nation’s worst-funded state retirement plans.
And removing that legal salary cap also comes as the New Jersey State Investment Council is searching for someone to run the nearly $93-billion fund that covers the retirements of roughly 800,000 government workers and retirees.
Third departure in a decade
Corey Amon left early last month, the third time in less than a decade the person charged with directing investments quit state government for a private-sector job.
Treasury officials and lawmakers pointed to the importance of filling the director’s position and the need to attract top talent when asked about the adoption of the new salary policy by NJ Spotlight News.
“The simple reality is that with Wall Street close by, we need to offer a competitive salary to attract and retain a director of Division of Investment with the talent and acumen to manage one of the largest public pension funds in the United States,” said Senate President Steve Sweeney (D-Gloucester), one of the lawmakers who backed the legislation that lifted the salary cap.
“We worked collaboratively with the Legislature to address the issue of the cap in a timely manner,” said Treasury spokeswoman Jennifer Sciortino.
At $200,000, that old salary cap for the state’s top pension-investment official meant that individual could make well above what most government employees earn in New Jersey. That includes the state treasurer and the governor whose $175,000 annual salaries are set by law.
Modest by industry standards
But the investment director’s salary has, in more recent years, been considered modest by financial industry standards. It also fell well short of what other high-dollar government-paid officials with arguably less responsibility now are paid, such as the president of the New Jersey Sports & Exposition Authority, who earns $280,000 annually, according to public records.
The Division of Investment, working under the supervision of the New Jersey State Investment Council, is one of the nation’s largest pension-fund managers.
Responsibilities include handling investments for seven worker pension funds, as well as the state’s cash-management fund, which is an account where any surplus funds are deposited, according to Treasury.
Amon stepped down from the director’s position on June 4 to become the chief investment officer for the Virginia-based National Rural Electric Cooperative Association.
He left New Jersey on a high note. At nearly 25%, preliminary returns for the pension fund through the first 11 months of the 2021 fiscal year were flirting with record highs, according to figures reviewed at an investment council meeting last week.
Trying to attract talent in shadow of Wall Street
Amon was the division’s director since March 2019. He was initially named acting director after serving as deputy director for several months following the departure of the former director, Christopher McDonough, who also left state government for the private sector the year before. And McDonough had landed the director’s position after his predecessor, Timothy Walsh, left state government in 2013.
The division’s deputy director Shoaib Khan was elevated to acting director following Amon’s departure last month, according to Treasury officials.
Khan previously served as senior portfolio manager at the Florida State Board of Administration before coming to New Jersey earlier this year. He drew praise from state Treasurer Elizabeth Maher Muoio during the recent investment council meeting as the vacancy created by Amon’s departure was briefly discussed.
“He’s a consummate professional and has really been a pleasure to work with,” Muoio said of Khan.
Citing the high stakes of protecting retiree pensions, investment council leaders have long questioned whether the salaries for New Jersey’s top investment professionals should be increased to help attract and retain top talent.
Still, the salary cap for the director of the Division of Investment had remained in place since it was established in a 1998 state law, according to legislative records.
Treasurer will make final selection
Instead of setting a new limit, the new law now leaves it up to the treasurer to “determine the salary for the Director of the Division of Investment.”
The investment council is taking the lead in the search to find a permanent replacement for Amon and will eventually present a list of candidates to the treasurer for her to make a final selection, Sciortino said.
“The pressing need to launch a thorough search to attract a highly qualified Director, upon the departure of Corey Amon, in an extremely competitive field made the issue of lifting the cap more urgent,” she said.
The legislation proposing the new salary policy was drafted just days before it won final approval in both full houses of the Legislature on June 24, according to legislative records. Murphy announced his signing of the legislation in a news release issued on June 30.
The fast-tracking of the legislation coincided with last month’s speedy introduction and adoption of a record-high $46.4 billion spending bill for the new fiscal year that began on July 1. That budget-approval timeline was widely criticized by Republicans, progressive activists and others, who faulted majority Democrats for putting openness and transparency on the back burner.
To be sure, the $200,000 that Amon earned while working for the division was not the highest salary in state government -- or even the Department of Treasury.
That honor falls to Russell Niemie, who was hired last year with an annual salary of $350,000 to serve as chief investment officer for the New Jersey Police and Firemen’s Retirement System, or PFRS.
The PFRS gained more control over of its own assets under a law enacted in 2018, after which its board hired Niemie and other professionals to beef up operations.
“The Board believes deeply that investing in talent will benefit PFRS members in the short- and long-term,” PFRS board spokesman Dan Bank said in a statement.
“In consultation with a nationally renowned executive staffing firm, the Board made a competitive offer to our Chief Investment Officer and we are very grateful that he accepted and is leading our investment strategy,” Bank said. John Reitmeyer, NJ Spotlight News, www.njspotlight.com, July 26, 2021.
6. OREGON PUBLIC FUND TO PRELIMINARY LOWER ITS ASSUMED RATE OF RETURN TO 6.9%:
The Oregon Investment Council oversees the Oregon Public Employees’ Retirement System. The pension board agreed to preliminarily lower its assumed rate of return to 6.9% from 7.2%. Reports by the Oregon Investment Council, investment consultants, and other parties demonstrated a future of lower expected returns in many asset classes as a result of relatively high asset prices and price-to-earnings ratios. The pension plan board is expected to formally adopt the new assumed rate of return at its October 1, 2021 meeting, after providing public notice of the action as required by state law on August 2, 2021. SWFI, www.swfinstitute.org, July 23, 2021.
7. FACING A RETIREMENT SHORTFALL? WHAT TO KNOW BEFORE ADDING CRYPTOCURRENCY TO YOUR PORTFOLIO:
As older Americans worry about the size of their nest eggs, some may eye riskier assets, such as cryptocurrency, to cover their shortfall with the possibility of higher returns.
“It’s a tough predicament, and I think a lot of people will find themselves in that space,” said certified financial planner Ivory Johnson, founder of Delancey Wealth Management in Washington.
About 75% of non-retired U.S. adults have some retirement savings, according to the Federal Reserve’s 2020 Report on the Economic Well-Being of U.S. Households. However, only 36% of non-retired adults said their nest egg is “on track,” the report said.
With low interest rates and climbing inflation, some older Americans are feeling pressure to boost returns by increasing portfolio risk, Johnson said.
However, some advisors say assets like cryptocurrency may not match a retiree’s risk tolerance and investing timeline.
“I’m never a fan of cranking up the risk on a portfolio to try and make back lost time,” said financial planner Zechariah Schaefer, founder of Ascent Personal Finance in Lynchburg, Virginia.
I’m never a fan of cranking up the risk on a portfolio to try and make back lost time.
Cryptocurrency has been particularly volatile, performing in exaggerated boom and bust cycles, in relatively small periods of time, compared to the traditional stock market, he added.
Instead, older Americans may explore other ways to bring in more income and boost savings.
A couple of options may be working longer or semi-retirement. If someone is healthy enough to work part-time through their 60s and 70s, the extra income may make a difference, Johnson said.
Roughly one-third of Americans planning to retire have postponed leaving the workforce due to Covid, according to a study from Age Wave and Edward Jones.
When to add cryptocurrency to a retirement portfolio
If a client lacks sufficient retirement savings, advisors aren’t likely to suggest cryptocurrency as the solution. However, guidance may change if retirees have a sizable nest egg and more than enough income, said Johnson.
For example, let’s say a retired couple easily covers their living expenses with a pension and Social Security income. If they don’t need the funds from their individual retirement account, and they plan to give it to their children, there may be more wiggle room, he said.
“We’re going to manage it as if it’s your children’s money,” Johnson said.
With a longer investing timeline, those retirees may consider small amounts of cryptocurrency, assuming it aligns with their risk tolerance.
“If you have money lying around, and it’s not going to detract from the lifestyle you want to live in retirement, I say go for it if they want to,” said Schaefer.
Be proactive with security
Someone eager to invest in cryptocurrency also needs to consider the possibility of security issues.
For example, digital currency exchanges may be susceptible to hackers, or investors may lose their hard wallets, which store private keys to access their funds, said Schaefer.
Those who want to keep currency on an exchange may opt for U.S.-based companies with a longer history, such as Coinbase or Gemini.
However, investors still need to guard their accounts with strong passwords and two-factor authentication, preferably with an app vs. text message, Schaefer said.
“If you use an authenticator app, it adds another layer of protection,” he said. Kate Dore, CNBC, www.cnbc.com, July 26, 2021.
8. FOR THOSE WHO LOVE WORDS- MIXED UP MEANINGS:
“Commonwealth” vs. “State”: Which One Do You Reside In? Find out more here.
9. QUOTE OF THE WEEK:
"Nobody made a greater mistake than he who did nothing because he could do only a little." -Edmund Burke
10. TODAY IN HISTORY:
On this day in 1715, ten Spanish treasure galleons sunk off Florida coast by a hurricane.
11. REMEMBER, YOU CAN NEVER OUTLIVE YOUR DEFINED RETIREMENT BENEFIT.