Investing February 3, 2015

S&P Agrees to Compensate California Pension Funds

The nation’s largest public pension funds will receive damages for losses on investments improperly rated by Standard and Poor’s.
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Standard & Poor’s Financial Services (S&P) and its parent company, McGraw-Hill Financial Inc., agreed to resolve federal and state civil claims related to S&P’s conduct in inflating ratings of residential mortgage-backed securities and structured investment vehicle notes.   

Attorney General Kamala D. Harris, along with the U.S. Department of Justice and the attorneys general of 18 states and the District of Columbia, announced the settlement for which S&P will pay a total of $1.5 billion to federal and state government entities. The State of California, through Attorney General Harris’ office, will recover $210 million in damages, from which the California Public Employees Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) will receive allocations for their losses on investments of certain S&P-rated securities. Separately, S&P will also pay CalPERS $125 million to settle CalPERS’ specific lawsuit.

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An investigation conducted by Attorney General Harris showed that S&P systematically misrepresented to the public, and to CalPERS and CalSTRS, that its ratings of structured finance securities were based on an objective and reliable analysis and not influenced by S&P’s economic interests. As part of the settlement, S&P agreed to a statement of facts which indicate that, despite its claims of objectivity and independence, it overruled the recommendations of its ratings experts out of concern that S&P’s business would be harmed if the company did not rate its clients’ securities positively. The settlement does not absolve S&P or its employees from any possible criminal charges.

In its own lawsuit, CalPERS sued for losses it sustained from investments in three structured investment vehicles that collapsed during the financial crisis. The settlement with S&P does not resolve the same charges against Moody’s Investors Service in that case.

Last month, the Securities and Exchange Commission (SEC) announced a series of federal securities law violations by S&P involving fraudulent misconduct in its ratings of certain commercial mortgage-backed securities. S&P agreed to pay more than $58 million to settle the SEC’s charges, plus an additional $19 million to settle parallel cases announced by the New York Attorney General’s office ($12 million) and the Massachusetts Attorney General’s office ($7 million).

Investing February 3, 2015

Master Trusts Record Gains in 2014

All plan types in the Northern Trust Universe had annual gains of 5% or greater in 2014.
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Institutional asset owners had a sixth consecutive year of positive returns in 2014, gaining approximately 7% at the median for the year, according to Northern Trust Universe data.

For the 12 months ended December 31, 2014, Corporate Employee Retirement Income Security Act (ERISA) plans generally performed best among all plan types, with a median return of 8.5%. Public Funds had a median return of 6.8% for the year, and Foundation & Endowment plans had a 5.9% median return for the year.

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Following slightly negative returns in the third quarter, all plan types at the median had a positive fourth quarter. Corporate ERISA plans gained 2.4% at the median in the fourth quarter, while Public Funds gained 1.3%. Foundation & Endowment plans followed with a return closer to 1%. 

Asset allocation for Northern Trust Universe plans was a critical determinant of overall performance in the fourth quarter. Northern Trust’s findings showed:

  • Corporate ERISA plan returns were helped by allocating to domestic fixed income (39% at the median) and U.S. equity (29% at the median), which was the best returning asset class in the quarter with a median gain of just over 5%.
  • Public Funds were supported by a large allocation towards U.S. equity (34% at the median), but hurt by allocations to international equity (23% at the median), which had a -3% median return in the quarter.
  • Foundation & Endowment plan returns were dampened by a large allocation towards private equity (24% at the median), which returned only 1% at the median in the quarter, and further diminished by a significant allocation to international equity (12% at the median).

Looking at asset allocation over the last year, corporate pension plans generally continued to move on a path of de-risking, the process by which plan sponsors move from a risk-tolerant to a more risk-averse asset allocation as their plans mature. By the end of 2014, corporate pension plans tended to hold a larger allocation to fixed income than U.S. equity for the first time in years. Public Funds continued to move money into private equity and international equity. The median allocation to private equity, for public plans, went from 1.6% at the end of 2013 to just over 5% currently. Foundations & Endowment plans reduced their allocation to fixed income from 16% to 11%, while continuing to add to hedge funds and private equity.

The Northern Trust Universe tracks the performance of about 300 large U.S. institutional investment plans, with a combined asset value of approximately $899 billion, which subscribe to performance measurement services as part of Northern Trust’s asset servicing offerings.

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