PIMCO strife, CalPERS shift lead 2014's top stories

Updated with correction

Change was the keyword for 2014.

One of the world's most famous money managers left the firm he co-founded, the U.S.'s largest pension fund dropped hedge funds, and U.S. retirement plan assets moved further away from the defined benefit plan model as the pension funding crisis continued this past year.

The top story of 2014, according to Pensions & Investments' editors, was the yearlong turmoil surrounding Pacific Investment Management Co., the largest bond manager in the world, and the departures of its two top executives.

Ranking second was the year of change at CalPERS that culminated in the surprise September announcement that the nation's largest pension fund would shut down its hedge fund program.

The next three stories all dealt with changes that experts said could result in an accelerated movement by U.S. corporations away from defined benefit plans.

Ranking third was the continuing departure of U.S. corporations from defined benefit plans, as lump-sum offers and annuity buyout activity accelerated in 2014 due to improved funding ratios at the end of 2013; fourth was the movement of interest rates driven by global economics and the approaching end of quantitative easing; fifth was the new mortality tables published by the Society of Actuaries that increased life expectancies and therefore increased pension liabilities.

No money manager in 2014 experienced change quite like PIMCO, Newport Beach, Calif. The drama began in January with the resignation of Mohamed El-Erian, PIMCO's CEO and co-chief investment officer, the presumed successor to William H. Gross, co-CIO of the firm he co-founded in 1972.

Mr. Gross, who took on the sole CIO title and tweeted “Batteries 110% charged. I'm ready to go for another 40 years,” on the day Mr. El-Erian resigned, himself resigned a little more than eight months later.

Even before the exit of Mr. El-Erian, who joined PIMCO for the second time in 2007, the firm was on the kind of shaky ground not previously seen in its storied history. Lagging performance, as well as predictions that the firm could not sustain the kind of growth to which it has long been accustomed, dogged the firm in the months leading to Mr. El-Erian's resignation.

Reports that Mr. El-Erian left before he was pushed out because of a feud with Mr. Gross, as well as high-profile controversial appearances by Mr. Gross in the months following the break, eventually led to Mr. Gross' resignation on Sept. 26 to join Janus Capital Group.

In all, PIMCO's U.S. mutual funds had $150.2 billion in outflows in 2014, according to Morningstar Inc., Chicago.

That number includes $102.9 billion in outflows from the PIMCO Total Return Fund, which Mr. Gross had managed. In addition, numerous asset owners terminated PIMCO from a variety of separate account portfolios. The fallout continues.

In the second most significant story of the year, officials of the $295.6 billion California Public Employees' Retirement System, Sacramento, announced in September the fund would exit from 24 hedge funds and six funds of funds, becoming the first large institutional investor to shutter completely its hedge fund program.

Theodore “Ted” Eliopoulos, chief investment officer, cited the $4 billion program's complexity, cost and scale as the primary reasons for the move. He said in a Sept. 25 interview the portfolio would only be meaningful at $30 billion, which was seen as too risky and too expensive. Industry observers, however, also pointed to a muddled portfolio structure that reduced the program's effectiveness.

Mr. Eliopoulos, appointed interim CIO in June 2013, was named permanent CIO in September after the February death of Joe Dear. In Mr. Dear's tenure as CIO since 2009, the pension fund's assets had grown by almost $100 billion.

In the third most significant story of the year, U.S. corporate defined benefit plan lump-sum offers and group annuity buyouts accelerated in 2014. The move was expected by analysts because of the improved funded status of those plans overall. Several high-profile shifts were made, following a quiet 2013.

Pension risk transfer activity went into high gear as the end of the year approached, most notably in September when executives at Motorola Solutions Inc., Schaumburg, Ill., announced they had entered into a pension buyout agreement with Prudential Insurance Co. of America. The deal, which totaled $3.1 billion, was the third largest such buyout in U.S. history, behind the 2012 deals by General Motors Co. and Verizon Communications Inc. with Prudential.

Other companies such as NCR Corp., Norcross, Ga., and Archer Daniels Midland, Decatur, Ill., resumed multiyear risk transfer programs. Both those firms offered lump sums to retirees in 2014 after similar offers to terminated vested employees who had yet to retire in 2012.

NCR also purchased group annuities for portions of its U.S. and U.K. plans.

Well over a dozen other corporations took steps toward pension risk transfer in 2014, and more are likely if interest rates rise and improve the pension plans' funded status to the levels required to launch these kinds of transactions.

The fourth-ranked top story of 2014 was interest rates, which continued falling despite widespread belief among market participants that they could not go lower. Interest rates negatively affected pension funding ratios by increasing liabilities.

The Federal Reserve Federal Open Market Committee's announcement on Oct. 29 that it would end its bond-buying program provided at least a glimmer of hope that rates might actually rise.

However, the FOMC said it would keep the federal funds rate in the zero to 0.25% target range. A statement in December said the committee will take a balanced approach because economic conditions “may, for some time, warrant keeping the target federal funds rate below” normal levels.

Fed Chairwoman Janet Yellen said most committee members believe it will be late 2017 when the funds rate returns to normal.

Also affecting the funded status of U.S. defined benefit plans was the 2014 announcement of new morality tables, P&I's fifth top story of the year.

The updated tables, first released in draft form in February by the Society of Actuaries, reflected life expectancy increases. Those new tables increased defined benefit plan liability values as well as liability durations.

Jeff Leonard, managing director at Wilshire Associates Inc. and head of the actuarial services group of Wilshire Consulting, said in a P&I story in July that the assumption changes would be “another nail in the coffin” of defined benefit plans.

A recent report from Towers Watson supported that notion, attributing 40% of funding deficit increases in 2014 to the updated tables. That report said the average funding ratio of the largest U.S. corporate defined benefit plans fell to 80% from 89% the previous year.

Other top stories cited by P&I editors were:

The largest defined benefit plan in the world, Japan's Government Pension Investment Fund, Tokyo, announcing in October an overhaul of its ¥127.3 trillion ($1.07 trillion) portfolio, more than doubling its total equity target allocation and dropping its domestic fixed-income target to 35% from 60%;

Vanguard Group becoming the largest manager of U.S. defined contribution assets with $613.47 billion in DC assets as of Dec. 31, 2013, supplanting Fidelity Investments, which had held that honor since 1998 and reported $612.39 billion in DC assets as of year-end 2013.

The impact on markets, as well as institutional investors, of a bevy of geopolitical crises. The most visible of these was the conflict in Ukraine, but others involved Syria, Turkey and North Korea.

The growing interest in publicly sponsored private-sector retirement savings plans, with more states — most recently Illinois — moving toward using the Secure Choice model first signed into law in California in 2012, as well as the federal myRA program.

High-profile federal court cases, most notably a number of lawsuits dealing with the freedom of defined contribution plan participants to challenge their employers when their company stock struggles as well as the U.S. Supreme Court's June decision to allow companies before a class-action lawsuit is approved to show that alleged misrepresentations did not affect stock values. n