As NJ Faces Pension Woes, Canadian Pensions Piles Into Risky Assets

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Canadian pension has made the stunning decision to begin investing more in alternative investments. “This funding rule change is a game-changer, It could change plan design, change investment strategies and should impact funding strategies” said Manuel Monteiro, partner and head of the financial strategy group at (Canada), Toronto.

This is due to last years approval of a law that would allow canadian pension funds to no longer base funding discisoins on both solvency, or immediate termination basis and going conern, and/or going operations. Now plans that are more than 85% funded will be able to operate on a going-concern basis.

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The Ontario Finance Minister is expected to implement the rules within this year. The change will make supposedly higher yielding investments available for investment by pension funds. "Any alternatives, infrastructure particularly," said Ian Struthers, partner and practice lead, Aon Hewitt Investment Consulting, Toronto. "We expect growth in those asset classes to continue, particularly among the large pension plans. It's easy for plans the size of Canada Pension Plan to do; they have long time horizons and huge asset inflows. But for small to midsize plans, they can take on more exposure to alternatives through diversified investments with external managers. But there's a lot of money looking for infrastructure and for real estate. There will be more interest in less vanilla kind of investments to add value, like brownfield projects."

Caution is expected with this startling turn since such alternative invesmtents are liable to increase risk for the pension fund by exposing funds to increased changs of greater market violiliy and return fluctautions. It is quite possible that further losses will ensue.

New Jersey penisons
On Monday, Jan 8, 2018, New Jersey Governor Chris Christie signed into law a new requirement that stress test must be conducted on the largest pension systems in the New Jersey Pension Fund. These test are to determine how well the funds are capable of weathering differing market conditions.

The law goes into affect for five of the seven pension systems. The aggregate funds under management by New Jersey Pension Fund system totals $77.5 billion. This includes the Public Employees’ Retirement System, the Teachers’ Pension and Annuity Fund, the Police and Firemen’s Retirement System, the Judicial Retirement System and the State Police Retirement System. 97.5% of the New Jersey pension system is comprised of the teachers, public employees and police/fire systems.

"The stress test analyses must provide a forward-looking projection, which considers the effects of long-term conditions and patterns of behavior of the investment market," said the legislation.

The goal of the stress test is to "assess how well the investments of each of the state-administered retirement systems are likely to perform in periods when market returns are significantly above or below baseline assumed returns," the legislation said.

In addition, the law requires new practices on transparency. The legislation requires the state investment council to provide data on fees charged by external managers for the New Jersey Pension Fund. The councils responsibility is to develop policies for the Treasury Department’s Division of Investment who then handles investment for the New Jersey pension fund

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