US public pension funds are slowly recovering from their worst years, 2008-09, when their assets fell to a low of $2.1trn (€1.6trn). In the latest fiscal year ending 30 June 2013, assets increased 8.4%
to $2.9trn, surpassing their pre-recession 2007 peak, according to a report by the US Census on the 100 largest public-employee pensions. But benefits and withdrawals are also skyrocketing. In the second quarter of 2013 they jumped 16.8% year-on-year, forcing governments to attempt to reform pension policies.
In the debate on public retirement reform, a very hot topic concerns political activism, which has historically been strong. An analysis of two opposing approaches – that of the Employees Retirement System of Texas (ERS) and of the New York City pension funds – is inconclusive.
Since 2006, pension funds for state and municipal workers have sponsored approximately a quarter of the proposals from institutional investors affiliated with organised labour, which play a leading role in political activism, according the Manhattan Institute’s ProxyMonitor.org database, which monitors shareholder proposals at America’s largest companies.
“Putting public funds in the activist arena in this way strikes me as seriously bad policy,” Susan Combs, Texas comptroller of public accounts with responsibility for the ERS, wrote in the Wall Street Journal. “There’s little or no credible evidence that activist investing improves shareholder financial return and some research suggests that an activist orientation reduces valuations for public pension funds.” Combs pointed out that the Employee Retirement Income Security Act (ERISA) specifically requires private pension funds to focus on the economic value of their investments, while there is no similar requirement for public pensions. “That may explain some of their problems,” stressed the Texas comptroller.
The $24.2bn ERS is 83% funded. It manages 75% of the assets in-house and returns are good at 13.03% in fiscal 2013 – better than the 12.4% median return of all state pension funds. The 30-year annualised return is 8.54%.
At the opposite end of the spectrum are the $137bn New York City pension funds and the City comptroller’s office, which pioneered shareholder activism in the 1980s. Since 2006 the NYC funds sponsored 119 shareholder proposals. Only six received majority shareholder support, among them a 2012 proposal asking Chesapeake Energy to adopt a bylaw granting proxy access to certain shareholders. The latter case was mentioned by John Liu, the NYC comptroller, in a rebuttal of Combs’s thesis: “As a fiduciary, I have a responsibility to be an active owner (pushing for) responsible environmental, social and governance practices that create and protect long-term shareowner value for municipal pension funds. Consider Chesapeake Energy: after our push to oust an entrenched leadership, it has a new board and CEO, and its share price is up 47%, more than its peers and the market.”
Liu’s mandate expires at the end of 2013, as will that of CIO Larry Schloss, after four years of good, yet uneven, results. In 2010, when Schloss left the private equity firm he founded to become CIO of the NYC funds, the 10-year annualised return was 2.3%. Today it is 7.5%, and the 30-year annualised return is at 9.3%.
This is better than the Texas state fund’s return, although the funded ratio is worse, at around 70%. The Manhattan Institute notes that under Comptroller Liu, the NYC funds have sponsored fewer shareholder proposals, although neither Liu nor the funds have backed away from a shareholder-activist posture.
In any case, the most important task for Liu’s successor will not be to pick the next political cause, but to reform the inefficient NYC pension system. This consists of five distinct funds, each with its own trustees, with all investments outsourced.