Investing March 9, 2018

CalPERS Commits to Higher Investment Performance Standard

The nation's largest public pension plan has adopted CFA Institute’s Global Investment Performance Standards (GIPS) and says while many asset owners require their investment managers to comply with the GIPS standards, it is less common for asset owners to apply the principles to their own performance reporting to oversight boards, governing bodies and plan beneficiaries.

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The California Public Employees’ Retirement System (CalPERS) has adopted CFA Institute’s Global Investment Performance Standards (GIPS). Introduced in 1999, the standards hold investment managers accountable for full disclosure and fair representation of investment performance. According to Cerulli Associates, the GIPS standards have been adopted by 1,653 firms in more than 40 markets around the world.

CalPERS said that while many asset owners require their investment managers to comply with the GIPS standards, it is less common for asset owners to apply the principles to their own performance reporting to oversight boards, governing bodies and plan beneficiaries.

“The GIPS standards allow firms to demonstrate that investment performance reporting meets globally accepted, ethical best practices,” says Robert Paterson, investment manager at CalPERS. “As an asset owner, adopting the GIPS standards indicates our commitment to use the highest rigorous performance calculation and presentation standards in our reporting. The GIPS standards are a critical part of our commitment to integrity, transparency and the interests of our beneficiaries.”

CalPERS said that GIPS compliance is the latest effort by it to join CFA Institute “in advancing its mission to raise professional standards in investment management.” CalPERS said that it has been an advocate of the CFA Institute Asset Manager code, a voluntary code of conduct whereby asset managers put client interests first. In fact, in 2016, CalPERS and seven other pension plan sponsors ran an open letter in media outlets, including The Wall Street Journal, expressing support for the code. In 2017, CalPERS and 15 other firms ran a similar letter in media outlets.

Currently, CalPERS is working with the CFA Institute to bring more diversity and inclusion in investment management.
Administration March 9, 2018

Increase in Discount Rates Tempered DB Funded Status Losses in February

Institutions that track defined benefit (DB) plans’ funded ratios measured increases or decreases in funded status as high as 1%, but noted it could have been worse if not offset by higher liability discount rates.

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Conning notes that over February, the average (Russell 3000) defined benefit (DB) plans’ funded status fell by 1% (87% to 86%). This was after January saw one of the largest increase in funded status in recent history (83% to 87%).

Owais Rana, Conning’s head of Pension LDI Solutions, explains that this was due to a fall in all global equity markets (approx. 4%). However, an increase in the liability discount rate of 23 bps from 3.65% up to 3.88% reduced the average plans’ liability value which negated most of the loss on assets.

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October Three also notes that February was a difficult month for investments, but a so-so month for pension finance due to higher interest rates. Both model pension plans it tracks were close to flat last month. Plan A is a traditional plan (duration 12 at 5.5%) with a 60/40 asset allocation, while Plan B is a cash balance plan (duration 9 at 5.5%) with a 20/80 allocation with a greater emphasis on corporate and long-duration bonds.

Legal and General Investment Management America (LGIMA) estimates that the average plan’s funding ratio increased 0.2% during the month.

Meanwhile, according to Mercer, the estimated aggregate funding status of pension plans sponsored by S&P 1500 companies increased by 1% in February to 88% at the end of the month, as a result of a significant increase in discount rates which more than offset losses in the equity markets. As of February 28, the estimated aggregate deficit of $262 billion decreased by $29 billion as compared to the $291 billion measured at the end of January.

The S&P 500 index decreased 3.9% and the MSCI EAFE index decreased 4.7% in February. Typical discount rates for pension plans as measured by the Mercer Yield Curve increased by 23 basis points to 3.97%.

 

“Volatility continued in February, and equities ended down by around 4% for the month—which marked the first significant month over month decrease in over a year.” says Scott Jarboe, a partner in Mercer’s wealth business. “Aggregate funded status still saw some improvement due to an increase in discount rates by over 20 basis points.  Clients are beginning to look carefully at plans in 2018, and we expect to see some evolution in the context of tax reform and market volatility.” 

 

S&P 500 aggregate pension funded status decreased in the month of February from 84.2% to 83.5%, according to Aon’s Pension Risk Tracker. Year-to-date, the aggregate funded ratio for U.S. pension plans in the S&P 500 improved from 81.8% to 83.5%,

 

According to Wilshire Consulting, the aggregate funded ratio for U.S. corporate pension plans decreased by 0.7 percentage points to end the month of February at 88.2%, and up 6.1 percentage points over the trailing twelve months.

 

The monthly change in funding resulted from a 3.3% decrease in liability values, which was more than offset by a 4.1% decrease in asset values.  Despite February’s decline, the aggregate funded ratio is up 3.6 and 6.1 percentage points year-to-date and over the trailing twelve months, respectively. 

 

“February’s month end funded ratio is the second highest in over four years despite the decline,” says Ned McGuire, managing director and a member of the Pension Risk Solutions Group of Wilshire Consulting. 

 

Northern Trust Asset Management says the average funded ratio for corporate pension plans decreased modestly from 86.3% to 85.7% for the month.

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