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Brexit, Trump victory cap unexpected year

The U.K. vote to exit the European Union in June was one of the year’s big surprises.

Brexit and the result of the U.S. election, two global seismic shifts that have created a level of political and financial uncertainty that most observers would never have anticipated at the beginning of the year lead off the list of Pensions & Investments' top stories of 2016.

These populist movements, which will have ramifications well beyond the institutional investing industry, were the stories the editors of P&I voted as the most important of the year.

No. 1: Brexit

Brexit, a mashed-up word in the lexicon that never even appeared in P&I until Feb. 1 of this year, resulted from a 52% majority of U.K. voters electing to leave the European Union. Its significant impact on financial markets in the short and the long term gave it the No. 1 spot.

Immediately following the announcement of the election results, early on June 24, the FTSE 250 dropped more than 7%, the DAX fell 6.8%, Euro STOXX 50 was down almost 9% and the Nikkei 225 dropped 7.9%. But the most alarming drop that day was the pound sterling, which fell by more than 10% to $1.35. As of Dec. 19, the pound sterling was at $1.24.

Executives of the largest global pension funds, the most influential investors in the world, quickly realized their long-term thinking needed to change.

In a June 27 interview, Christopher Ailman, chief investment officer at the $192.9 billion California State Teachers' Retirement System, West Sacramento, said: “We had seen the euro trading bloc as an improving area long term that we could invest in.”

Regarding “the momentum we had toward the U.K. and Europe, this definitely causes it to wane,” Mr. Ailman continued. “Where we thought we were seeing a future of opportunity long term ... vs. Asia and the U.S., we will reassess that very much so.”

No. 2: Trump's election win

The second top story of the year, the election of Donald Trump to the U.S. presidency, resulted from a similar kind of populism that likely will be linked to Brexit in the minds of many for a long time to come.

In the short term, however, the immediate impact of Mr. Trump's policy priorities of interest to P&I's readership are the dismantling of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the expected overhauling of the U.S. tax code and the undoing of other regulations that Mr. Trump has said burdened businesses, such as the Department of Labor fiduciary rule. He also has proposed an ambitious plan to invest heavily in infrastructure.

Investors in general are waiting for Mr. Trump's inauguration to see how the policies of a real estate tycoon who has never held public office evolve. Most agree deregulation is a likely result. Some believe active investment management might come back into fashion.

In an interview for P&I's Nov. 14 issue, Mark Burgess, CIO of Europe, Middle East and Africa and global head of equities at Columbia Threadneedle Investments in London, said the rejection of globalization seen in both Brexit and the election of Mr. Trump could make global equity markets more volatile. “For money managers, it's probably a chance to show how active management can add value because markets will be pretty volatile,” he said.

No. 3: Multiemployer reform

Ranking third in P&I's top stories of 2016 is the vexing issue of multiemployer pension plan reform, highlighted by the rejected proposal of the $17.8 billion Teamsters Central States, Southeast & Southwest Areas Pension Fund, Rosemont, Ill., to reduce benefits in the face of impending insolvency.

The Teamsters effort — the most high-profile attempt to use the Kline-Miller Multiemployer Pension Reform Act of 2014 to cut benefits in the face of a funding crisis — was rejected by the U.S. Treasury Department on May 6.

The pension fund had applied in September 2015 for permission to reduce benefits to avoid insolvency that it projected would happen by 2026. At the time of its application, it was 53% funded, with $35 billion in liabilities.

The $92 million Iron Workers Local 17 Pension Fund, Cleveland, on Dec. 16 became the first multiemployer plan to receive approval under MPRA to reduce its benefits.

Additionally, the Pension Benefit Guaranty Corp.'s multiemployer insurance program is headed toward insolvency. That program's deficit rose to $58.8 billion as of Sept. 30, up from $52.3 billion the year before.

John Kline, R-Minn., chairman of the House Education and the Workforce Committee, said in a November statement that reforming the multiemployer program will require more bipartisan solutions from Congress. “There is no escaping the fact that tough decisions must be made to shore up the fiscal health of the PBGC, modernize the multiemployer pension system and provide workers more retirement options,” he said in the statement.

No. 4: Low-return environment

The continuing low-return/low-interest-rate environment that has challenged asset owners to meet their assumed rates of returns was the editors' pick for the fourth most-important story of the year.

In the U.S., following the Federal Reserve hiking rates in December 2015 for the first time since 2006, strategists in P&I's Outlook 2016 foresaw the year-end federal fund rate of 50 to 150 basis points. The Fed took until Dec. 14 to raise the rate to a range of 0.5% to 0.75%.

The Federal Reserve ultimately raised rates only once in 2016 — and in December. Other central banks around the world moved rates to the negative territory as they tried to stimulate economies.

A key example of the latter move occurred in January when the Bank of Japan announced on its website a “quantitative and qualitative monetary easing with a negative interest rate,” cutting interest rates by 20 basis points, to -0.1%. It also kept the door open for more cutting “if necessary.”

Regarding low returns, endowments were hit hardest, with more than 80% of the 31 endowments tracked by P&I returning in the red for the year ended June 30.

No. 5: New fiduciary standard

No. 5 on the list was the release in April of the final fiduciary standard by the Department of Labor, which broadened the definition of fiduciary advice. The DOL's efforts to create that standard throughout 2015 was the top story last year from P&I's editors.

The release in April of the final “conflict of interest” standard as defined by Labor Secretary Thomas Perez broadened the definition of fiduciary duties but did say plan sponsors can continue to provide investment advice without triggering those duties.

Mr. Perez said in an April briefing that the standard is a “fundamental principle of consumer protection” because it requires anyone giving retirement investment advice to act in their client's best interests. “It's no longer a marketing slogan; it's the law,” he said at the time.

The future of the standard is now in doubt as President-elect Trump has announced his intention to eliminate it.

The rest

The rest of P&I's top 10 stories were:

No. 6: The growing momentum of state-based private-sector retirement plans, led by California, where Gov. Edmund G. Brown Jr. signed legislation in September to implement a state-run Secure Choice retirement savings program for 7 million private-sector employees who lack access to a workplace plan.

No. 7: The continuing emphasis on private equity fees, resulting in the $303.6 billion California Public Employees' Retirement System, Sacramento, now exploring options to change its private equity program.

No. 8: Volatility's comeback, first at the beginning of the year due to concerns with China and again at the end of the second quarter following the Brexit vote.

No. 9: An increase in highly visible fiduciary-breach lawsuits by participants against plan sponsors, including lawsuits against FMC Corp. and Walt Disney Co. for their investments in Sequoia Corp., Target Corp. and Wells Fargo & Co. regarding their company stock funds, and lawsuits against nearly a dozen universities regarding a variety of high-fee allegations in 403(b) plans.

No. 10: Turmoil for hedge fund managers created by significant redemptions by plans like the $73 billion New Jersey Pension Fund, managed by the New Jersey Division of Investment, Trenton, which is culling $1.8 billion, and the $7.7 billion Rhode Island Employees' Retirement System, Providence, managed by the Rhode Island State Investment Commission, redeeming $585 million. n

This article originally appeared in the December 26, 2016 print issue as, "Brexit, Trump victory cap unexpected year".