Monday, November 01, 2021

P3 PUBLIC PENSIONS FUND PRIVATE CAPITAL
A Huge Pension Sold Netflix, Bank of America, and Intel Stock. Here’s What It Bought.

By Ed Lin
Oct. 31, 2021 

A large U.S. public pension recently made significant changes in its stock portfolio.

State Teachers Retirement System of Ohio increased its investment in Alibaba Group Holding (ticker: BABA) CHINA, and cut positions in Netflix (NFLX), Bank of America (BAC), and Intel (INTC) in the third quarter. STRS Ohio, as the pension is known, disclosed the trades, among others, in a form it filed with the Securities and Exchange Commission.


Pension Funds Wade Gingerly Into Crypto Investments

Brandy Betz
Mon, November 1, 2021


The Houston Firefighters’ Relief and Retirement Fund (HFRRF) made news recently when it announced it was investing $25 million in bitcoin and ether, marking what was believed to be the first time a U.S. pension fund had put cryptocurrencies directly on its balance sheet.

Of course, $25 million is only a drop in the bucket compared to the $5.5 billion in total assets held by the fund – more precisely, it represents just 0.5% of its portfolio. But it still was a notable first step by the historically conservative investment fund. And if other pension and retirement funds follow suit, it could open up a huge source of additional demand for cryptocurrencies, with the funds collectively controlling trillions of dollars in global assets.

To be sure, the HFRRF was not the first U.S. pension fund to invest in crypto more broadly. That distinction appears to belong to the Fairfax County Police Officers Retirement System and Fairfax County Employees’ Retirement System, which in 2018 began investing in funds managed by Morgan Creek Digital that would eventually add up to a combined $73 million. The Morgan Creek funds leaned more toward blockchain technology than bitcoin, however, so the pension funds considered the moves venture capital investments.

In September, news broke that the pension funds, which manage a combined $7.2 billion in assets, were planning to make a $50 million investment in Parataxis Capital Management’s main fund, which buys digital tokens and cryptocurrency derivatives. The investment has since been approved by the funds’ board.

Asked if the funds are considering further crypto investments and whether direct investments were on the table, Katherine Molnar, chief investment officer for the police officers retirement fund, said her organization is “considering further investments in the crypto/digital assets space.”

“We have not made a final decision as to what form that might take. We remain constructive on the expected growth of this area,” Molnar told CoinDesk in an email.
Growing investment trend?

Last week, Bank of America weighed in on pension investments in cryptocurrencies in a digital assets-focused research note.

“Our discussions suggest that many pension funds are still in the exploratory stage. State pension funds in the U.S. are significantly underfunded with ~$1.25 [trillion] in unfunded liabilities as of the end of FY19, which has led many to attempt to make up the shortfall between plan assets and obligations through investments. Pension funds globally held $35 [trillion] in AUM [assets under management] at the end of 2020, illustrating the potential tailwinds for digital assets if more pension funds begin to add exposure,” wrote analysts Alkesh Shah and Andrew Moss.

BofA referenced the HFRRF and Fairfax pension fund investments and noted that Queensland Investment Corporation, Australia’s fifth-largest pension fund, has expressed interest in cryptocurrency investments.

On the other hand, pension funds in South Africa could be prohibited from investing in cryptocurrencies under a rule change proposal published last week. Other overseas pension investments also face potential limitations on their ability to invest in crypto.

In the U.K., for example, pension funds hire specialized investment managers to invest on their behalf, with fund trustees unable to participate in the day-to-day management of the fund, Kerrin Rosenberg, CEO of U.K.-based pension management firm Cardano Investment, which is unrelated to the blockchain, told CoinDesk.

“I am not aware of any U.K. pensions actually considering a strategic allocation to cryptocurrency as an asset class. I would expect that most of the asset allocation models used by consultants don’t cover cryptocurrency, and, if asked, the consultants would probably argue,” Rosenberg wrote in an email.

“However, cryptocurrency investment could be made on a more tactical basis by investment managers as part of a wider mandate,” Rosenberg added.

James Stickland, CEO of London-based digital asset trading infrastructure developer Elwood Technologies, was also skeptical that the U.S. pension investment trend would make it to the U.K.

“In the U.K., we’re seeing rising institutional demand from banks, hedge funds, private companies and even family offices. Yet, it is unprecedented to see pension funds weighting even a small percentage of their portfolios to risk assets like bitcoin. I don’t think we will see them following the lead of pension funds in the U.S. anytime soon, but it’s certainly possible if inflation continues to be a concern,” Strickland said via email.

Connecticut City Asks Residents to Take $145 Million Pension Bet

Martin Z. Braun
Mon, November 1, 2021



(Bloomberg) -- Residents of Norwich, Connecticut, will vote Tuesday on whether to gamble with their tax dollars by issuing bonds to cover swelling pension obligations, amid a record year for sales of such debt.
Voters are being asked to approve issuing $145 million of securities to cover Norwich’s pension obligation, after retirement costs almost tripled in the past decade. With interest rates in the municipal market near historic lows, officials expect the earnings from investing that sum will exceed the borrowing cost.

“In my 63 years of existence, 32 years of which was in the banking industry, I have never seen interest rates this low,” said Michael Gualtieri, treasurer of the city of about 40,000 in southeastern Connecticut. “I don’t know if we will ever see them this low again or perhaps in my lifetime.”

Ninety-three municipalities have sold debt in 2021 to finance their unfunded pension obligations to retirees, the highest number year-to-date in records starting in 1999, data compiled by Bloomberg show. The combined amount of $11.4 billion is the most since a peak in 2003, which included a $10 billion Illinois sale.

The push comes amid expectations that the Federal Reserve will announce a taper of its bond purchases this week and raise its benchmark rate from near zero next year.

Norwich expects it can borrow at 3%, and earn 6.25% on its pension investments over the long term. The difference would net $43 million in savings in today’s dollars over 30 years. Norwich would break even if it earns 3% to 3.25% on its investments, said city Comptroller Josh Pothier.

“Pension-obligation bonds amount to gambling with future taxpayer funds,” said Lisa Washburn, a managing director at research firm Municipal Market Analytics. “If investment returns beat what the pension plan assumed, then the taxpayer has a lower obligation, and if not, the taxpayer owes more.”

$3.8 Trillion Gap

States and local-government pension funds have about $3.8 trillion less than needed to cover benefits promised to retirees, about the same as their bond debt, according to Fed data. The gap is a result of decades of underfunding, sub-par investment returns and record low bond yields that inflate liabilities.

Norwich’s annual pension costs have increased to $12.8 million this year from $4.7 million in 2012, forcing the city to cut other spending. The city’s pension lost 24% during the recession caused by the financial crisis of 2008, compounding years of contribution shortfalls.

“Councils kicked the can down the road,” said Gualtieri, the treasurer, who was elected in 2015.

The city council started increasing pension contributions in 2014 by as much as 15% a year, reaching the full actuarially required contribution last year.

Norwich also reduced its assumed rate of return on pension assets to 7.25% from 8.25% from 2013 to 2019, and will lower it further to 6.25% if voters approve the pension bond. It’s returned an annualized 6.98% over the past 20 years, according to data from Pothier.

Lowering the discount rate increases the value of a pension’s future liabilities. Wall Street and pension-fund managers have reduced expectations for future investment returns because of a long decline in interest rates and slow economic growth. Norwich’s $225 million pension is 59% funded, according to the city’s 2020 financial statement. That compares with about 73% for 200 major state and local government pension plans, according to the Center for Retirement Research at Boston College.

Backfire Scenario

Pension-bond deals can backfire if municipalities borrow and invest a lump sum right before stock-market declines, swelling their deficits. With stocks at record highs, the risk is acute.

To guard against that pitfall, Norwich will invest bond proceeds gradually into stocks, bonds and real estate over 18 to 36 months. It plans to sell the debt in February, according to Pothier.

The city is also putting $13.7 million, its budgeted pension payment next year, into a reserve fund to provide a buffer against big pension-cost increases if the market slumps. The city will tap the reserve if the annual pension cost increases more than 3%. In years where the pension contribution falls because investment returns beat targets, the savings will be used to shore up the reserve fund.

Milliman Inc., Norwich’s actuary, modeled 10,000 random investment-return scenarios over the next 30 years and found the city would exhaust the pension reserve in just 14% of them and would save money by issuing the pension bonds in 70%.

In addition to the risk of making an ill-timed investment, pension-obligation bonds reduce a municipality’s capacity to borrow and create a fixed cost that could reduce its ability to manage a budget crunch, S&P Global Ratings said in an October report. Cities with overfunded pensions could also face calls by public-employee unions to raise benefits that might now be perceived as affordable, according to the report.

Pothier said he he wasn’t concerned about a push to increase benefits. Since 2018, the city has lifted the employee contribution, eliminated or reduced survivorship benefits and cut the benefit multiplier, a factor that determines retirees’ annuity.

“The bargaining units understand the importance and seriousness of having a sustainable retirement plan,” Pothier said.

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