Investing May 11, 2015

Audit Says Alternatives Hurt Utah Retirement System

An audit report notes the Utah Retirement System has shifted substantially to alternative investments, with mixed results.
Reported by

A report titled “A Performance Audit of URS’ Management and Investment Practices,” says the Utah Retirement System’s (URS) heavy allocation to alternative investments, including hedge funds, has diminished potential investment returns.

The report notes that URS’ alternative investments increased from 16% to 40% between 2005 and 2013 as URS reduced its allocation in equities and debt securities. URS states that the objectives of the current asset allocation are to protect investment capital in negative equity markets, reduce volatility, and increase investment diversification, according to the report.

Get more!  Sign up for PLANSPONSOR newsletters.

Office of the Utah Legislative Auditor General hired consultant Chris Tobe to analyze URS’ investment performance. Tobe found that URS’ allocation of funds to alternatives is higher than that of peer systems. In its 2014 Report on State Pension Asset Allocation and Performance, Cliffwater LLC showed that, since 2006, most state pension systems have been moving assets into alternative categories. The report stated that, among 95 state pension systems, the average percentage allocation to alternative assets grew from 10% in 2006 to 25% in 2013.

In addition, Tobe’s model showed that if URS had maintained its 2004 allocation with fewer alternative assets and no hedge funds, it would have theoretically gained $1.35 billion in additional assets by 2013. Tobe recommends that URS reduce its allocation of 40% to alternatives over time, primarily by reducing the allocation to hedge funds.

However, the audit report notes that a memo dated March 2015, from Callan Associates, which serves as the primary investment consultant for URS’ portfolio states that Callan is still of the opinion that the current asset allocation “represents a reasonable and well thought out investment program intended to meet the assumed rate of return…”

In September 2014, the California Public Employees’ Retirement System (CalPERS), the largest public pension system in the United States, announced it would eliminate its hedge fund portfolio worth more than $4 billion. According to the audit report, that led other systems to evaluate their hedge fund investments, and many remained committed to them.

Benefits May 11, 2015

Maine Bill Would Preserve Health Exchange Subsidies

A lawmaker in Maine has introduced a bill to address a potential U.S. Supreme Court decision about health exchange premium subsidies.
Reported by

Maine State Representative Linda Sanborn has introduced a bill to safeguard the tax credits that are used by 89% of Mainers who get their health care coverage through the health insurance marketplace.

The fate of premium subsidies for individuals who get their health care coverage through federally run exchanges in their states is being considered by the U.S. Supreme Court. The language of the Patient Protection and Affordable Care Act (ACA) says tax subsidies may be paid for insurance purchased on an exchange “established by the state.” Two different courts’ rules on the legality of subsidies for federally run exchanges—one says the clear language of the ACA provides that only those in state-run exchanges may receive premium subsidies, the other says the intent of Congress was that any exchange would allow for the federal government to provide subsidies. The Supreme Court has agreed to decide the issue.

Get more!  Sign up for PLANSPONSOR newsletters.

Sanborn’s bill establishes a state-run exchange for Maine if the federal government notifies the state that the tax credits will be unavailable through its federally facilitated marketplace. According to Sanborn, the Maine State Chamber of Commerce supports the bill.

“It’s likely that the Supreme Court case won’t be resolved before the legislature adjourns. It’s critical that we act now to prevent chaos and have a plan in place for consumers,” Sanborn said in a statement about her bill.

The Supreme Court case—and Sanborn’s bill—has implications for employers. For one thing, employer penalties for not offering affordable coverage to employees are triggered when one employee goes to an exchange for coverage and receives a subsidy. For the 36 states, including D.C., where the exchanges are federally run, federal tax subsidies would stop, and employers would not be subject to a penalty.

«