Tuesday, May 8, 2018

Pension Funds Still Making Promises They Probably Can’t Keep

I have been talking about potential unfunded pension liabilities for some time now. I have watched unsustainable acquisitions being made by many different entities over the last 5 years. Multiples of up to 20 times EBITDA are being paid with high multiples of debt, all at a time when a significant number of industries are under attack from new business models such as Amazon. When will these pension funds have to become liquid in order to pay their retirees and will that cause the next stock market crash?   ...Aivars

Public pension fund projections don’t always match actual experience

The value of investments by public pension funds declined last quarter, widening the gap between what these funds say they will earn and what they actually earn.
Pension funds across the U.S. must each year estimate how much they expect to earn on investments—a projection that determines the amount the government that is affiliated with the pension fund must pay into it. Robust returns reduce the need for government support.
But forecasts don’t always square with funds’ actual experience. Retirement plans across the country still project their investments will grow at a median rate of 7.25%, according to Wilshire Consulting, an adviser to pension funds. Yearly returns on public pension plans have returned a median 6.79% over the past decade and 6.49% over the past 20 years, according to Wilshire Trust Universe Comparison Service, a database.
Unlike corporations, public pensions have wide latitude in projecting investment returns.
In the first quarter, public plans lost a median 0.23%, according to Wilshire Trust Universe Comparison Service. Such a lackluster return will serve as a stark reminder to the public officials who manage billions of dollars in pensions for America’s firefighters, police and other public workers of the daunting shortfalls many funds face.
“With all of the major asset classes falling it was pretty tough for investors to have any positive returns. They didn’t have much of a chance to make money,” said Robert J. Waid, managing director at Wilshire Associates.
Public retirement systems had an average 72% of assets they need to pay for retirement promises in 2016, according to the latest data available in the Public Plans Database, which tracks about 170 pension funds. The figure a decade earlier was 85%.
Before the first quarter, pension plans had experienced nine quarters of positive returns. That rise had brightened the picture for public retirement systems and closed some of the gap between expectations and reality.

These pension funds have also steadily narrowed this gap on their own. Three quarters of the 129 state pension plans monitored by the National Association of State Retirement Administrators have reduced their investment return assumption since fiscal year 2014.
But government officials seeking to make their investment targets more conservative have a powerful disincentive: High returns assumptions appeal to elected leaders because they reduce the amount governments need to set aside to cover pension promises. For some, pensions have already caused budget pressure.
Companies don’t have the same flexibility to set return expectations on their pension plans. Pension plans sponsored by S&P 1500 companies have an average 87% of assets needed to cover their pensions promises, according to Mercer, a consultancy.
California and its school districts will have to pay a projected $15 billion or more into the state’s public worker pension plan over the next 20 years after the plan, known as Calpers, in 2016 decided to reduce its investment target to 7% from 7.5% over a three-year period.
Other governments—loathe to cut services or increase taxes—have made a riskier choice, putting more of their money into riskier investments with higher expected returns, such as real estate, commodities, hedge funds and private-equity holdings.
These so-called alternative investments rose to 26% of holdings at about 150 of the biggest U.S. funds in 2016, according to the Public Plans Database, compared with 7% more than a decade earlier.
“They’re taking a lot risk in their plans with high allocations to equity and other return seeking assets,” said Ed Bartholomew, a consultant. “Someone is bearing that risk and the question should always be ‘who is bearing that risk?’”
Birmingham, Alabama, even raised its target rate on one of its pension funds to 7.5% from 7% in 2016 after moving some of the money out of fixed-income investments and into equities. The move made the city’s annual contribution to the Retirement and Relief System less costly than it otherwise would have been.
“Why Birmingham changed the investment rate return…is a bit questionable,” said Richard Ciccarone, president and chief executive of Merritt Research Services LLC, a research firm.
A city finance official said in an email that the state had reduced the amount of fixed-income investments the fund was required to hold and now “allows greater flexibility for investment management.” He said the change was made with the advice of an actuary and an investment consultant.
But Tom Aaron, senior analyst, Moody’s Investors Service said the temporary budget relief comes at a price.
“You’re supplanting a budgetary contribution with increased risk taking. If those (investment) assumptions don’t pan out that’s going to result in higher than expected budgetary contributions down the road.”
By Heather Gillers - Wall Street Journal

Monday, May 7, 2018

Former HSBC Executive Sentenced to Two Years Following ‘Front-Running’ Conviction

So the trader gets the blame.  High frequency trading in effect does the same and yet that is legal.  That seems to me like hypocrisy.  Aivars

Mark Johnson was convicted of misusing confidential information about a client’s $3.5 billion currency trade to make millions for the bank

A former high-ranking HSBC Holdings PLC executive was sentenced Thursday to two years in federal prison, following his conviction last fall on charges that he misused confidential information about a client’s $3.5 billion currency trade to make millions of dollars for the bank.
Mark Johnson, HSBC’s former global head of foreign-exchange cash trading, was the first banker to face criminal charges stemming from a U.S. Justice Department probe into foreign exchange rate manipulations.
In October, a Brooklyn jury found Mr. Johnson guilty on one count of wire-fraud conspiracy and eight counts of wire fraud, He was acquitted on a ninth wire fraud count. The wire fraud counts each carried a maximum sentence of 20 years in prison.
Prosecutors had sought a seven-year prison term, saying the scheme led to financial loss for the client—an energy company—and undermined the integrity of foreign exchange markets.
Mr. Johnson’s lawyers had asked for no prison time, citing his “long and unblemished record of honest, law-abiding conduct,” in a court filing.
A lawyer for Mr. Johnson, who left HSBC in 2017, said they plan to appeal the verdict.
Mr. Johnson wasn’t accused of rigging exchange rates, the main focus of the broader Justice Department probe. Instead, he and a colleague were charged in connection with a practice known as front-running, in which someone with advance knowledge of a major market order buys for their own account and then earns a profit when the larger transaction drives up the price.
Mr. Johnson’s colleague, Stuart Scott, left HSBC in 2014. He is in the U.K. fighting extradition, and wasn’t tried alongside Mr. Johnson. A lawyer for Mr. Scott couldn’t immediately be reached for comment.
The charges stemmed from a 2011 deal to handle the conversion of $3.5 billion worth of dollars into British pounds on behalf of Cairn Energy PLC, a Scotland-based oil-and-gas company. In the days and hours leading up to the transaction, prosecutors said at trial, HSBC traders in London and New York—working at Mr. Johnson’s direction—stockpiled millions of pounds in HSBC accounts.
When the transaction went through, on Dec. 7, 2011, Messrs. Johnson and Scott executed it in a way that drove up the price of the pound, prosecutors alleged, allowing them to sell HSBC’s stockpiled currency at a higher price, while Cairn’s proceeds from the exchange shrunk. The scheme netted $3 million in trading profits and $5 million in fees for HSBC, prosecutors said.
During the four-week trial last fall, lawyers for Mr. Johnson argued that he had acted in the client’s best interest, saying prosecutors were trying to criminalize normal currency trading activity and had twisted Mr. Johnson’s words to suggest a conspiracy.
By Rebecca Davis O’Brien - Wall Street Journal