Increases the portion of public pension fund assets that may be invested according to the prudent investor standard.
TITLE OF BILL: An act to amend the retirement and social security law, in relation to investments by public pension funds
PURPOSE: This bill increases the portion of public pension fund assets that may be invested.
SUMMARY OF PROVISIONS:
Section 1 amends paragraph 1 of subdivision 9 of section 177 of the Retirement and Social Security Law to increase from 25% to 35% the portion of a public pension fund's assets that may be invested.
Section 2 provides for an immediate effective date.
DISCUSSION: In order to maximize risk-adjusted returns and meet its actuarial targets, the New York City Retirement Systems (NYCRS) has increased its exposure to alternative investment classes over time. This action was in keeping with the evolution of capital markets and in line with the actions of other large government pension funds. As the investment advisors and trustees look forward to the market challenges that lay ahead, they see the need to increase the basket clause limit from 25% to 35%. This limit will allow for a superior risk-adjusted portfolio and for additional flexibility to reduce portfolio volatility while maintaining superior returns. In addition, this change would better equip the funds' advisors and trustees to tactically manage the investments to take advantage of market trends, react to market shocks and avoid potentially costly rebalances or unwinds at inopportune times.
The basket clause has been increased multiple times. The original basket clause limit was established at 5% in 1982. The law was amended in 1987 to increase the limit to 7.5%, in 1997 to 15%, and in 2006 to 25%. With each increase, public pension funds have been in a better position to manage volatility. The current 25% limitation on basket clause investments provides a relatively small allocation to non-legal list investments through the 25% basket clause allocation.
RATIONALE FOR THE CHANGE: As discussed below, volatility and illiquidity prevent NYCRS from using the entire allocation. As a result, investments that could provide diversification - such as certain high yield bonds, bonds denominated in foreign currencies, various commodities, and other investments - are not available to NYCRS.
The current twenty five percent limitation on basket investments has become problematic given current low expected market returns.
Under the current 25% cap, most of the investments allocated to the basket are illiquid, long-term private equity partnerships. In addition, NYCRS' international investments, to the extent they exceed the 10% permitted by the legal list, must be counted against the basket cap. The private equity investments involve a long-term commitment for NYCRS to make additional investments, and the timing of these investments is subject to ever-changing market conditions and is difficult to forecast. NYCRS must account for both the actual value of
private equity investments as well as future contractual commitments to provide capital when measuring compliance with the 25% basket clause allocation.
The portion of the NYCRS portfolios allocated to public equities is much more volatile than the investments allocated to the basket. As a result, a swing in public markets can push NYCRS dangerously close to the investment cap with no new investments.
Expansion of the basket to 35% is critical in providing public pension advisors and trustees greater ability to mitigate market volatility and structure superior risk-adjusted portfolios. Increasing a fund's ability to invest according to the expanded standard will result in increased flexibility, thereby enabling trustees to monitor investments closely without restricting their ability to respond effectively to changing market conditions.
CONCLUSION: In sum, NYCRS is prevented from creating an optimal investment portfolio. The current 25% limitation on the basket clause investments prevents NYCRS from investing in a number of attractive asset classes and strategies.
STATE OF NEW YORK ________________________________________________________________________ 7331 IN SENATE May 13, 2014 ___________Introduced by Sen. DeFRANCISCO -- read twice and ordered printed, and when printed to be committed to the Committee on Civil Service and Pensions AN ACT to amend the retirement and social security law, in relation to investments by public pension funds THE PEOPLE OF THE STATE OF NEW YORK, REPRESENTED IN SENATE AND ASSEM- BLY, DO ENACT AS FOLLOWS: Section 1. Paragraph (a) of subdivision 9 of section 177 of the retirement and social security law, as amended by chapter 22 of the laws of 2006, is amended to read as follows: (a) the investments by a fund made pursuant to this subdivision shall not at any time exceed
[twenty-five]THIRTY-FIVE per centum of the assets of such fund; S 2. This act shall take effect immediately. FISCAL NOTE.--Pursuant to Legislative Law, Section 50: PROVISIONS OF PROPOSED LEGISLATION: With respect to the New York City Retirement Systems ("NYCRS"), this proposed legislation would amend Retirement and Social Security Law ("RSSL") Section 177.9(a) to permit an increase to 35% the percentage of assets that may be held in "Basket Clause" investments (i.e., investments not explicitly identified as permissible elsewhere in New York State law). This 35% limit compares with a limit of 25% under current law. FINANCIAL IMPACT - EMPLOYER CONTRIBUTIONS: With respect to the NYCRS, the enactment of this proposed legislation would not, in and of itself, result in any change in employer contributions. The ultimate cost of a Retirement Program is the benefits it pays. The financing of that ultimate cost is provided by contributions and invest- ment income. Investment income depends upon the amounts of assets of the Fund and the rate of return received on those assets. The rate of return depends primarily upon the asset allocation policy of the Fund. To the extent that the NYCRS increase their investments in the securi- ties authorized by this proposed legislation and those securities produce greater (lesser) rates of return than the rates of return thatEXPLANATION--Matter in ITALICS (underscored) is new; matter in brackets [ ] is old law to be omitted. LBD14954-03-4 S. 7331 2 the NYCRS would otherwise have achieved, then employer contributions will be lesser (greater). FISCAL NOTE IDENTIFICATION: This estimate is intended for use only during the 2014 Legislation Session. It is Fiscal Note 2014-16, dated April 18, 2014, prepared by the Chief Actuary for the New York City Retirement Systems. FISCAL NOTE.--Pursuant to Legislative Law, Section 50: This bill will amend the Retirement and Social Security Law to increase the limit on non-legal list investments for the eight (8) public retirement systems of New York State. It would replace the current 25% limit with a 35% limit. If this bill is enacted, insofar as this bill affects the New York State and Local Employees' Retirement System and the New York State and Local Police and Fire Retirement System, we assume that there would be small investment changes as a result of enactment. Any increases or decreases in investment earnings will result in decreases or increases, respectively, in employer contributions. Annual changes in assets will be shared by all employers and will be spread over the future working lifetimes of active members. Summary of relevant resources: The membership data used in measuring the impact of the proposed change was the same as that used in the March 31, 2013 actuarial valu- ation. Distributions and other statistics can be found in the 2013 Report of the Actuary and the 2013 Comprehensive Annual Financial Report. The actuarial assumptions and methods used are described in the 2010, 2011, 2012 and 2013 Annual Report to the Comptroller on Actuarial Assumptions, and the Codes Rules and Regulations of the State of New York: Audit and Control. The Market Assets and GASB Disclosures are found in the March 31, 2013 New York State and Local Retirement System Financial Statements and Supplementary Information. I am a member of the American Academy of Actuaries and meet the Quali- fication Standards to render the actuarial opinion contained herein. This estimate, dated May 7, 2014, and intended for use only during the 2014 Legislative Session, is Fiscal Note No. 2014-127, prepared by the Actuary for the New York State and Local Employees' Retirement System and the New York State and Local Police and Fire Retirement System. FISCAL NOTE. -- Pursuant to Legislative Law, Section 50: This bill would amend subdivision 9 of Section 177 of the Retirement and Social Security Law to increase to 35% the percentage of assets which may be invested by the New York State Teachers' Retirement System in those investments that aren't otherwise specifically permitted under the other subdivisions of this section. The current limit is 25%. If this bill is enacted, any cost or savings to the employers of members of the New York State Teachers' Retirement System would depend on the investment performance of any assets that are invested in a different manner due to this change in the investment restrictions. Additional investment income results in lower required employer contrib- utions, and vice-versa. Employee data is from the System's most recent actuarial valuation files, consisting of data provided by the employers to the Retirement System. Data distributions and statistics can be found in the System's Comprehensive Annual Financial Report (CAFR). System assets are as reported in the System's financial statements, and can also be found in S. 7331 3 the CAFR. Actuarial assumptions and methods are provided in the System's Actuarial Valuation Report. The source of this estimate is Fiscal Note 2014-31 dated May 8, 2014 prepared by the Actuary of the New York State Teachers' Retirement System and is intended for use only during the 2014 Legislative Session. I, Richard A. Young, am the Actuary for the New York State Teachers' Retirement System. I am a member of the American Academy of Actuaries and I meet the Qualification Standards of the American Academy of Actu- aries to render the actuarial opinion contained herein.