BOARD OF TRUSTEES TAKES ACTION ON HALL-PARKER PAYMENTS
The PSPRS Board of Trustees today voted to recommend that employers begin refunding employee contributions related to the Hall and Parker lawsuits. The decision impacts certain active and retired members of EORP and PSPRS, but does not settle what interest will be owed to members of either plan.
Per federal regulations, the refunds cannot be paid back by PSPRS to members, but instead must be done by the employers. However, PSPRS will allow for employer contribution credits in the amount to be paid back to help employers who need to use that method to free up funds. PSPRS will soon provide employers with the names of impacted employees and retirees, as well as itemized lists of contribution amounts owed to each individual. When determined, pre-judgment interest will be allowed in the employer contribution credits, but post-judgment interest will not.
In the interim until individual contribution amounts are provided, the PSPRS Board of Trustees also strongly recommended that employers work closely with their Local Boards to decide on the method and manner of repayment that is in the best interest of the employees and employers.
Additionally, all contributions being returned are considered wages and must be taxed as such. However, the forthcoming interest payments are not considered wages and do not need to be taxed by the employer, provided the employer receives a Form W-9 for each affected employee. Therefore, it is strongly recommended that employees be given the opportunity to adjust their tax withholdings and deferred compensation arrangements.
Furthermore, the Board directed staff to pay out the retroactive permanent benefit increases for those PSPRS, CORP and EORP retirees entitled to increased benefits before the end of June. Again, these retroactive increases will not include any interest at this time.
PSPRS will continue to provide pertinent updates to members, employers and local boards. Interest rates to be applied to Hall-Parker lawsuit contribution refunds and retroactive permanent benefit increase may or may not be settled through a June 6 Maricopa County Superior Court hearing.
PSPRS Plan Provisions
Click here for plan
Hall info as of 3/30/2017
I just wanted to forward all of you the latest update regarding the Hall/Parker lawsuit. I just spoke with the PSPRS Director, Jared Smout this morning to go into detail regarding how we move forward regarding the Boards decision yesterday afternoon. The PSPRS Board of Directors voted to apply the same rules to our lawsuit(Parker) as they did the Hall case. So this means starting April 1st, 2017 those employees hired on or before July 19th, 2011 will have their contribution rates lowered back to their original PSPRS contribution rate of 7.65%.
Employees hired after July 19th, 2011, in the Tier 2, will not be impacted by the decision.
"Excess contributions will be returned, but PSPRS is unable to provide an estimated time frame of when that will happen before the parties agree in Superior Court as to the rate of interest, the time period for which that interest applies and the methods for which the contributions may be returned."
As of today we still do not have a court date set.
This means for those members in Tier 1 you should see the first full 4% decrease in your PSPRS contributions on the April 21st paycheck.
***Disclaimer*** This is assuming that our payroll department has the mechanisms in place to implement these changes quickly. This decision was just made late yesterday afternoon and April 1st is this Saturday..
I'll provide any further updates as soon as they become available.
President-Glendale Law Enforcement Association
President_ Arizona Police Officer Association
Hall refund update: Please expect delays
PSPRS is aware that since the Arizona Supreme Court ruling in the Hall v. Elected Officials' Retirement Plan (Hall v. EORP) case, members have many questions, and everyone is anxious to begin taking action in compliance with the court's ruling.
PSPRS wishes to remind members who may be impacted that the legal process associated with the Hall lawsuit is far from complete. Members should consider avoiding personal financial decisions based on expectations associated with the Hall lawsuit and related litigation.
A few things to consider:
The Hall lawsuit impacts a select group of judges who are covered by the EORP retirement plan
There is a similar lawsuit for members of PSPRS (Parker v. PSPRS) that must be reconciled with the Hall decision
Court-ordered remedies for the Parker lawsuit could differ from those ordered in the Hall lawsuit
Hall lawsuit litigants, including EORP, the State of Arizona and the plaintiffs, have a short timeframe to ask the court to reconsider or provide further guidance on issues of the court's opinion that are unclear or were not addressed
Following the court's decision on reconsiderations, the lawsuit will be returned to the trial court, which will address unresolved issues including method of refunds, legal fees and applicable interest
The legal process associated with the Hall - and related Parker litigation - may not conclude quickly
Corrections officers covered by the CORP retirement plan are not impacted because their contribution rates were never changed in SB1609, which was challenged in Hall
Arizona Supreme Court strikes pension reforms
PSPRS still expected to save $475 million due to 2016 measures
ARIZONA - The Arizona Supreme Court overturned two provisions of state law designed to provide financial relief to underfunded retirement plans managed by PSPRS. The Hall v. EORP lawsuit follows a similar loss in 2014 and cements the practical and legal limits of pension reform efforts.
"The reforms struck down in recent years were the products of good faith efforts to put Arizona public safety retirement plans on a stable and sustainable path forward," PSPRS Board of Trustee Chairman Brian Tobin said. "The court's decision amplifies the importance and achievement of Proposition 124 passed into law this year. Without this key measure passed by lawmakers, Governor Ducey and the public, PSPRS-managed retirement plans, retirees, members and employers would be facing a far more uncertain future."
In Hall, the Arizona Supreme Court determined that 2011 legislative reforms that increased employee contribution rates and modest reductions to pension benefit increases were unconstitutional. The court's ruling impacts employees who were already hired or retired by the effective date of the 2011 law.
In response to the ruling, PSPRS must provide partial refunds to impacted members who under the contested law had their retirement contribution rates rise above the existing 7.65 percent level. Likewise, those who retired after the effective date of the 2011 legislation may be owed retroactive benefit increases calculated under the previous permanent benefit increase (PBI) formula.
Preliminary and unaudited estimates by PSPRS indicate that contribution refunds and retroactive pension increases could reach $220 million. The long-term adverse impacts of the Hall decision are offset by additional savings created by Senate Bill 1428 and Prop 124, both of which became law this year.
"While this ruling is unfortunate, the impacts would have been worse without the reform efforts of Prop 124 and SB1428," said PSPRS Administrator Jared Smout.
The 2016 pension reform efforts in SB1428 created a new employee benefit "tier" set for those hired after July 1, 2017, which effectively avoids the legal challenges associated with enacting laws that impact currently serving employees. In crafting Prop 124, which voters passed overwhelmingly in May, public safety stakeholders and lawmakers replaced the costly permanent benefit increase formula in the state constitution, as opposed to previous changes made in state law that were overturned in the Hall decision.
Despite the financial impact of the court's opinion in Hall, retirement plans managed by PSPRS are still expected to save an estimated $475 million in long-term costs due to changes to state law and the constitution in 2016. The combined assets of the PSPRS, Corrections Officer Retirement Plan (CORP) and the Elected Officials Retirement Plan (EORP) are currently valued at $8.7 billion.
The individual actuarial valuations for fiscal 2017-18 expected in the coming weeks will reflect pension reform efforts passed in 2011 and 2016 that mitigate the full effects of Hall but will not include the impact caused by the return of additional contributions and retroactive benefit increases. Due to the timing of the Hall ruling and the immediate lack of precise refund and benefit increase payment amounts, it is most likely that the smaller, incremental effects of the lawsuit will not be factored into individual employer funding levels and rates until the June 30, 2017, valuations are released next year.
A WORD TO OUR MEMBERS AND EMPLOYERS
The recent portrayal of PSPRS performance and investment fees in the Arizona Republic based on a recent study by the Pew Charitable Trusts was one-sided and deserving of a response.
My name is Allan Martin and I am the general consultant of PSPRS (and many other pension plans across the country) and I have a fiduciary duty to the trust and its members. That means I am professionally, ethically, and legally obligated to provide advice to the PSPRS Board of Trustees that I believe to help the trust perform and provide for members. I can speak to PSPRS performance while I will let PSPRS staff provide details (below) about investment fees.
With that said, it is true that the PSPRS portfolio has underperformed over the 10-year time period that ended with fiscal year 2015. In fact, PSPRS ranked in the bottom 2 percent of a peer group of public funds greater than $1 billion in value. The reasons for this are simple and have been addressed openly with members, employers and the media.
A Brief History of the PSPRS Portfolio
PSPRS, in the early 2000s, and before any of the current staff, board, or consultants were around, invested heavily in Arizona real estate, buying undeveloped land in the hope of building projects like golf-course anchored new communities and retail facilities. This left PSPRS especially vulnerable to the real-estate-triggered crash in the global financial markets in 2007 and 2008. Unfortunately, Arizona real estate values were hit especially hard while legal restrictions required PSPRS to invest heavily in stocks, which also fell dramatically in 2007 and 2008.
The real estate crash happened at about the same time PSPRS secured, after years of unsuccessful attempts, a change in law to allow PSPRS to invest in a broader assortment of investments to reduce the risk associated with pensions that have a large amount of equities (stocks) within their portfolio. This goal was a direct response to the crushing losses during the collapse of the so-called "Dot.Com" industry in 2001-2002 and the annual payments of the statutorily required permanent benefit increase (PBI) payments for retirees that prevented the recovery of investment losses from investment returns.
PSPRS adopted a more conservative, more widely diversified asset allocation during the 2008-2011 period but it took years to transform the pension into the efficient, low-risk plan that it is today.
A Brief Glimpse of the Present and Future
Incredibly, some of the full results of the PSPRS changes are visible if we move past the Pew report's ending time frame, June 30, 2015, by just one year. As of the end of 2016, the PSPRS 10-year return net of fees ranked above 25 percent of its peer group (remember performing at the bottom 2 percent?) that includes about 55 pension plans with portfolios valued at more than $1 billion.
Here are some other facts about PSPRS investments that are worth considering:
For the past three years as of Dec. 31, 2016, PSPRS net-of-fee returns place it within the top 16 percent of peer pensions
PSPRS performed within the top third of peer pension plans last fiscal year despite taking less risk than 96 percent of peers
The $1 billion PSPRS private credit portfolio places it among the top 4 percent of its peer pension plans over the 3-year period ending Dec. 31, 2016
The performance of the PSPRS $1.3 billion private equity portfolio places it among the top 5 percent of peers over the 3-year period ending Dec. 31, 2016
Without the legacy real estate allocation, PSPRS returns would have ranked in the top 15 percent of peers for the 10-year period ending Dec. 31, 2016
It is clear that legacy investments in Arizona real estate are the deficiency in the PSPRS portfolio. It is also true that it has taken years of hard work on the part of the current staff and advisors to sell these troubled assets responsibly. The write-offs and sales of properties below the acquisition costs have been accurately reflected in the performance of the plan.
On a personal note, I can say that I count the members of the PSPRS investment team among the most knowledgeable, capable and ethical experts I have had the pleasure of working alongside. PSPRS staff are also recognized among industry leaders, investment fund managers, financial media and even in academic circles for their skill and accomplishments.
Meetings of the PSPRS Board of Trustees are open to the public and PSPRS reports all expenses and fees as part of its commitment to transparency.
Allan C. Martin
NEPC, LLC, partner
- Forty-eight years' investment and consulting experience
- Ranked 2nd Most Influential Consultant in the World by aiCIO Magazine (2012)
- MML Public Fund Consultant of the Year (2008)
- Member: Executive Committee; Non-U.S. Equity Advisory Group
- Previous affiliations:
Bankers Trust - Managing Director Global Retirement Services
Dresdner/RCM - Partner, Head of Global Client Service & Marketing
- MBA and BS, Stanford University (Phi Beta Kappa)
PSPRS RESPONDS TO INVESTMENT FEE CLAIMS
We wanted to take a moment to respond to recent media insinuations that PSPRS has sought to avoid difficult questions regarding investment fees, fund performance and comparisons to other pensions. To the contrary, we feel that we have answered these or very similar questions - and many others - repeatedly for years. We feel that our responses have been abbreviated, taken out of context, or, in many cases, simply ignored. On Monday, the Arizona Republic presented six questions to PSPRS in a format that would leave the reader to believe they have never been answered. This recent coverage of our pension was initiated by the publication of a national report on investment fees by Pew Charitable Trusts. Below you will find our responses.
PSPRS Administrator Jared Smout
Q: Why PSPRS paid the highest percentage of its investments in fees for outside investment management among the 73 largest public retirement systems in the country?
A: PSPRS had the highest percentage of alternative asset investments within their portfolio of every pension identified by the Pew Charitable Trusts study. These investments, which include private equity deals like buying and reselling companies or properties, require fees because they are not simple transactions like buying stocks or bonds. However, unlike fees for traditional investments like mutual funds, management fees are often reimbursed. PSPRS invests heavily in alternative asset classes as part of a deliberate strategy to minimize the risk of our portfolio, which has grown to more than $9 billion.
Additionally, the Pew report concluded - and even warned - that pensions are not reporting their fees accurately, or, in many cases, not reporting them at all. We, on the other hand, take the time and effort to report all of our investment expenses. A lot of plans don't want to put in the work and they really don't want to report totals when it is politically easier to keep them hidden. The Pew report advised that this exact type of disparity made their numbers unreliable for direct comparisons among pensions.
Q: Why in 2016, PSPRS spent nearly $129 million on investment management fees, while earning less than 1 percent return ($49 million) on its investments?
A: This question confuses "investment management fees" for investment expenses. There are two types of fees for alternative investments: management fees and performance fees. Management fees are up-front costs that are often - at least with PSPRS, which bargains its fees down with investment funds. For example, last fiscal year the trust paid approximately $87 million in management fees but we estimate that about $57 million of these fees will be paid back with interest in future years.
PSPRS, like any institutional investor, must reward its investment managers for strong performance. The typical performance fee amounts to 20 percent of all profits above 8 percent. To be clear, achieving returns that trigger performance fees is a good thing. It means PSPRS is making money for the trust and selecting the right investments.
Right now, PSPRS has private credit and private equity investment portfolios that are performing on an elite level compared to other peer pensions. These investments are making the trust money and lowering risk levels by diversifying our investments. For these reasons, alternative asset investments are worth the money for PSPRS and its members.
Additionally, all public pension plans, not only PSPRS, had low investment returns last fiscal year ending June 30, 2016. Despite the tough environment characterized by struggling international markets, low interest rates, weak bond returns and geopolitical instability, PSPRS returns were among the top third of comparable pension funds. The PSPRS portfolio also assumed less risk than 96 percent of peer pension investments. Private equity investments generated a net of fee 11.3 percent return and outperformed all PSPRS asset classes.
Q: Why PSPRS paid fees of 2 percent to outside firms to manage its investments, while most state retirement funds paid less than one-half of 1 percent on management fees?
A: In 2015, PSPRS spent months conducting an in-depth fee analysis and shared the findings with the Republic. The examination of hundreds of funds revealed PSPRS paid about less than half the industry standard of 2 percent. Again, the Pew report warned that its data was unreliable and unfit for comparing pensions.
The findings of the fee review were not published by the Republic. Also in 2015, an independent report contracted by the Arizona Auditor General found that PSPRS saved roughly $40 million on its investment fees by hiring attorneys to negotiate with investment fund managers.
Using PSPRS as an example, the challenge associated with fee reporting is that a pension can have several hundred alternative investments that were made and will end at different times. Some investments can take as long as 10 years or more to mature. This can make fee totals appear disproportionately high in years when a plan makes a lot of investments or in low return years like fiscal year 2016. On the flip-side, if a high number of investments mature in a particular year or generate many fee reimbursements, PSPRS could appear to pay very low fees. It is impossible to look at a reported fee total for one year to determine if a pension is overpaying for its alternative investments.
Q: Why PSPRS, a $9 billion trust, has only about half the money required to pay all current and future pension obligations to its members?
A: There are several reasons for this, all of which PSPRS has openly addressed for several years. Two global financial disasters - the "Dot.Com" collapse and housing market crash - are a key factor, especially combined with the statutory formula for awarding pension increases to PSPRS retirees. The current PSPRS low-risk investment strategy that features greater reliance on alternative investments is a direct result of damages suffered when the pension was heavily invested in public equities (stocks). (NOTE: This formula, the Permanent Benefit Increase, or PBI, was discontinued with the passing of Prop 124 in 2016.)
To a lesser extent, asset losses in legacy Arizona real estate investments were also steep enough to push overall investment returns down to below average levels. PSPRS was also forced to reverse cost-saving pension reforms due to lawsuits and this had a negative effect on funding levels.
Q: Why the $36.2 billion Arizona State Retirement System for teachers and local and state employees ranks far better than PSPRS, settling among the top third when it comes to performance on investment returns?
ASRS has almost double the public equity exposure than PSPRS. Public equities are cheap but also volatile. If a fund can support short-term volatility then owning more public equities is a sensible strategy. An investor with a higher risk tolerance is able to seek higher investment returns. For many reasons, including the PBI and current funding levels, this level of volatility and risk are not acceptable for PSPRS. The explanation regarding our performance is simple; the trust was disproportionately harmed by legacy real estate investments. Even then, the Trust's portfolio outperforms 75 percent of its peers on a 10-year basis through the end of 2016, net of fees, which most wouldn't classify as "underperforming."
A: And why ASRS paid less than half (about four-tenths of 1 percent) of what PSPRS paid on investment management fees?
The fees ASRS pays for their alternative investments is in line with what PSPRS pays for alternative investments. The difference between our total fee levels is explained by the percentage of assets that we each have in equities and alternative assets. PSPRS has a higher percentage of its assets in alternative investments, while ASRS has a higher percentage of its assets in public equities, which are inexpensive to buy. Many pension funds are increasing their allocations to alternatives, which they wouldn't do if they thought it was an inefficient use of capital.
PSPRS Administrative Offices
(Also for CORP & EORP)
3010 E. Camelback Rd., Suite 200
Phoenix, AZ 85016
PSPRS wins investment strategy award
Accolade for portfolio construction, innovation and long-term capabilities
Arizona’s Public Safety Personnel Retirement System, PSPRS, was named “Allocator of the Year” from Institutional Investor Magazine for its use of highly diverse investments to tamp down portfolio risk.
PSPRS, which manages more than $9 billion in assets, was one of nine pensions in North America to receive an individual honor as part of the international finance magazine’s 2017 Public Funds Roundtable Awards. Winners were nominated by peer pension plans and selected by the publication’s executive staff.
The awards criteria included investment excellence and innovation, positioning a portfolio for long-term performance, successful construction and management of a complex portfolio, as well as internal investment leadership.
Institutional Investor Magazine also paid close attention to how PSPRS rotates investment team portfolio managers through different asset classes. This practice fosters critical and neutral analysis of investment opportunities and a collaborative approach to decision making.
“We’re thrilled with this recognition of our efforts to build a stable investment portfolio that can protect our members, local governments and taxpayers and still generate returns,” said PSPRS Deputy Chief Investment Officer Mark Steed, who accepted the award on behalf of PSPRS. “We’re also grateful that the value of this strategy is recognized by our peers and investment experts.”
Last fiscal year, PSPRS achieved a return of 0.6 percent net of fees. While low, the returns placed PSPRS among the top third of peer pension funds despite the fact that PSPRS took less risk than nearly all – 96 percent – of peers. No public pension funds met their assumed earnings rate last fiscal year and many even lost money.
PSPRS performance over the 1, 3 and 5-year periods has been particularly outstanding in private equity and private credit asset classes, although real estate investments made by prior PSPRS administrations have prevented overall returns from reaching elite status over the 10-year period.
The Who, When and How of carrying out the Hall decision
The Hall lawsuit decided last week impacts certain - but not all - members and retirees of all three plans managed by PSPRS. The court's decision requires payment by PSPRS-managed plans to thousands of currently contributing members and retirees.
The largest pool of those eligible to receive money back from PSPRS-managed plans are actively contributing EORP and PSPRS members who paid the increased contribution rates mandated by Senate Bill 1609 that were struck down by the courts. A far smaller section of retirees of all three plans are entitled to receive retroactive permanent benefit increases.
Please read the following information carefully in order to determine whether you are entitled to receive payment of excess employee retirement contributions or a permanent increase to retiree benefits:
I am an active member - will some of my contributions be refunded?
This depends upon members' hiring dates and whether they are a member of EORP (the defendant in the lawsuit) or PSPRS.
CORP members did not have their contribution rates changed by SB1609 and therefore are not impacted by the Hall lawsuit.
PSPRS and EORP employees hired prior to the July 1, 2011, effective date of the contribution rate increase will receive a refund of contributions in excess of the rate that was in effect when they were hired.
Those hired on or after July 1, 2011, are not affected by the Hall lawsuit as they began their employment with the understanding and agreement of employee contribution levels that were established by Senate Bill 1609 passed in 2011.
I am a retiree - will I receive a retroactive permanent benefit increase?
This depends entirely on when a person retired.
The Hall lawsuit impacts certain members of all three plans - PSPRS, CORP and EORP.
Employees who retired prior to Aug. 1, 2011, are not affected by the Hall lawsuit. This class already received retroactive permanent benefit increase (PBI) payments as a result of the Fields lawsuit in 2014.
Those who retired after July 2011 may be eligible to receive retroactive benefit increases depending on when they retired.
In order to receive a permanent benefit increase, the reinstated state law requires that a member be retired for at least two years or be retired for at least one year and be at least 55 years old by July 1 during years when investment returns are sufficient to trigger the distribution of PBIs. For the purposes of the Hall lawsuit, PSPRS-managed plans distributed PBIs in 2013 and 2014, meaning retirees must have met either the minimum retirement period and/or age criteria by July 1, 2013, or July 1, 2014, to qualify for a benefit increase under the Hall ruling.
Importantly, all PSPRS (excluding CORP and EORP) members and retirees will be impacted by Prop 124, which voters passed in May 2016. Prop 124 replaces the current permanent benefit increase (PBI) mechanism with a cost of living adjustment (COLA) for PSPRS retirees beginning July 1, 2018.
When can I expect to receive money?
The Arizona Supreme Court ruled against provisions of SB1609 and remanded the lawsuit to the trial court to determine how the payments will be made to members.
PSPRS will work with the litigants to determine how the Arizona Supreme Court's opinion will be carried out.
The process involves multiple lawsuits (Hall v. EORP and Parker v. PSPRS) and there are several outstanding issues. This includes interest determination and ultimately applying agreed upon remedies under Hall to the Parker case, which requires additional legal proceedings.
It is not likely that impacted members and retirees will receive excess contributions or retroactive PBI adjustments before the end of the calendar year.
PSPRS acknowledges and respects the court decision and all impacted members and retirees will receive all owed excess contributions and/or benefit increases.
I am an employer/payroll employee - Which contribution rate do I use?
Keep using the 11.65 percent employee contribution rate (or 13 percent for EORP) until notified otherwise by PSPRS.
The employee contribution rate for those impacted by the Hall decision will return to 7 percent for EORP members and 7.65 percent for PSPRS members upon notification by PSPRS.
Welcome Retirees and thank you for your service. The APA has added this new information feature so that we can provide information to our retired members and their families and remind them that they are still members of our family.
Arizona Police Association