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Pay Czar Reviewing GM's Pension Advisers?
Submitted by Leo Kolivakis, publisher of Pension Pulse.
In November 2008, I asked What's Good for GM's Pension Fund? and wrote that:
While
I applaud GM's foresight to move aggressively into bonds, I wonder how
those alternative investments are doing following the latest hedge
fund, private equity and real estate debacles.
Much has been written on what's good for GM or more specifically, "What is good for General Motors is good for America".
As I watch GM and other automakers beg for a $25 billion no-strings attached loan while they slash more jobs,
I think about how they squandered the opportunity to introduce the
electric car on the market or just put more fuel efficient cars in
their brands.
I also wonder about the state of GM's pension
fund. In particular, as I recall that arrogant and pompous statement
uttered over 50 years ago, I wonder if what's good for GM's pension
fund is good for American pension funds?
Unfortunately,
I get this eerie feeling that GM's pension fund is not as solid as some
make it out to be and that it too may be running on fumes.
While I am still concerned about their alternative investments, especially commercial real estate which now faces a $1 trillion time bomb, it turns out that GM's U.S. pension fund is more solid than I originally thought (Unfortunately, GM Canada faces a pension shortfall of more than $7 billion).
But it has now garnered the attention of the federal government's pay czar. Geraldine Fabrikant of the NYT reports that Pension Advisers for G.M. Are Part of Pay Czar’s Review:
Four
years after she took over management of the General Motors pension
plans, Nancy Everett finds herself in an unexpected controversy.
Performance
is not her problem. The G.M. pension fund has withstood the unforgiving
financial markets of the last year or so better than many other funds,
using a conservative strategy that is intended to minimize risk.
But
the government is looking closely at the pay of all top G.M. employees
after bailing out the automaker. And that includes the unit that
manages the pension fund, whose name was changed to Promark Global
Advisors this year.
Ms. Everett,
chief executive of Promark, and 14 of her associates are among the 25
highest paid at the automaker. Their compensation has been submitted
for review to Kenneth Feinberg, the government’s pay czar.
Ms.
Everett appears to present a bit of a conundrum. Her laserlike focus
has been on managing risk. That would seem to be exactly what the
government wants to encourage. If successful, her team’s approach makes
it more likely the automaker will be able to pay all its retirees down
the road and reduces chances that the government and taxpayers will
have to make up the difference.
On the other hand, Ms.
Everett represents the high-paying New York money managers who have
engendered animosity among the public toward the American International
Group and other companies. Though she is a far cry from Citigroup’s
$100 million man who trades energy contracts, Ms. Everett is said to
have total compensation approaching $2 million.
“I
don’t think of myself as an investment manager,” Ms. Everett said in a
recent interview, in which she declined to discuss compensation. “I
think of myself as a risk manager.”
Julie Gibson, a
General Motors spokeswoman, said that the government would respond to
its submission on compensation by mid-October. A spokesman for Mr.
Feinberg did not return phone calls seeking comment.
People
close to Promark fret that any attempts to revamp the unit’s pay
formulas to reflect in part how the car company performs could make it
tougher to attract and keep talent. And they point out that the unit is
run quite independently of the core auto business.
“Yes, the
government is pouring all this money in, and it has a right, as the
principal shareholder, to have a stronger say,” said Graef Crystal, a
compensation consultant. “The government’s theory is that the rain
should fall on the just and the unjust alike.”
But perhaps “the
controls should just apply to those whose performance is measured by
overall results,” he continued. “Ms. Everett runs a part of General
Motors, but a part that has no correlation with the overall company.”
Ms.
Everett, 54, lives far away from the Wall Street contingent in a
historic house in Richmond, Va., where she relishes a slower-paced life
with her husband and the opportunity to ride horses. She commutes
during the week to Promark’s headquarters in Manhattan.
In
all, she oversees $120 billion: $84.5 billion in G.M.’s domestic
pension funds, $17.5 billion in other G.M. assets and the balance from
other companies like Xerox.Last
year, the G.M. pension fund lost 11 percent, while the average loss at
the 100 largest corporations was 19 percent, according to a study by
Milliman, the research company.
The
relative strength can be attributed largely to G.M.’s aggressive move
out of stocks and into the bond market at the end of 2006. By the end
of 2008, about 61 percent of its assets were in fixed income.
At
the time, the pension fund was flush, partly from the proceeds of a big
G.M. bond offering earlier in the decade, and was seeking to reduce
some portfolio risk, or the damage that could come from falling market
prices.
For years, pension investing had used a long lens to
view the world. “Based on that kind of horizon, you could afford to
take on the volatility in equities,” she said.
“That worked
well until 2001 when there was the first of two perfect storms. In the
pension fund world, that meant that interest rates went down, which
means that liabilities go up. At the same time, the stock markets
declined, so that the assets declined.”
Funds that had appeared overfunded were suddenly short.
One
of the first managers to embrace a more holistic view of the job,
seeing it as more than just asset investment, was Allen Reed, then
chief executive of General Motors Asset Management, now Promark.
He
identified the biggest risk for the fund as being a decline in interest
rates, since General Motors had been “whittling away at its active work
force,” and had an obligation to pay many people.
What he
started, Ms. Everett has continued. A soft-spoken woman described time
and again as likable, Ms. Everett began her career in 1979 — with an
accounting degree from Virginia Commonwealth University — by answering
a want add for the Virginia Retirement System.
There, she
progressed from computer programmer to money manager to chief
investment officer in 1999. “A woman in Virginia was allowed to work
herself up,” she recalled. “I just kept taking on more
responsibilities.”
Her departure for General Motors was
unexpected, she recalled. A friend, Alice Handy, had started a money
management company that pooled the endowment money of a number of
smaller universities that might not have otherwise been able to make
certain kinds of investments.
Ms. Everett wanted to explore
the same approach in the corporate pension world and called Mr. Reed at
G.M. to discuss the idea. He made a counteroffer. He was planning to
retire and suggested her as the next chief investment officer, a post
she assumed in 2005.
Ms. Handy, now president of Investure, a
company that manages money for a small number of endowments and
foundations, said Ms. Everett deserved much credit for her team’s
success, even though her predecessor set the approach in motion.
“There is no such thing as an investment guru,” Ms. Handy said. “Your
talent is in organizing the team so that they make the right decisions.
Nancy is good at attracting talented people and retaining them and
letting them make the right decisions.”
Since 2005, Ms. Everett
and Tony Kao, her chief investment officer, have kept their focus on
risk. When the market was rising in 2007, they sought to protect the
portfolio against the possibility that the equity markets and interest
rates could both decline.
They started buying bonds. “In 2006, we moved
20 percent of our equity investment into fixed income,” she recalled.
Today,
the G.M. portfolio consists of 28 percent equities, 45 percent fixed
income, 9 percent real estate and 18 percent alternatives.
For those types of judgments, Ms. Everett is amply paid, though not on
the level of top fund managers on Wall Street. Neither Promark nor G.M.
would divulge her compensation, but several people close to those
companies said it was under $2 million, making her one of the
highest-paid women at G.M.
Some experts say they believe that
Promark’s better-than-average returns are worth paying for. “If they
had lost that money, it would have cost the shareholders,” said Robert
Kemp, research professor at the University of Virginia School of
Commerce, “so the employees and investors benefit.”
Some comments on this article. First of all, I met Nancy Everett roughly five years ago when she was the CIO at the Virginia Retirement System. She struck me as one smart lady who understood the importance of minimizing downside risk.
Her
move into bonds in 2006 was gutsy and it paid off by minimizing the
overall losses at GM's pension fund. Think about it: last year, GM's
$85 billion pension fund lost 11% when the losses at the 100 largest
corporations were 19%. That is incredible and if you ask me, she earned
her compensation and deserves every penny of it.
In fact, I
think the board of directors at Canada's largest pension plans should
pay close attention to what Nancy Everett says, namely that she sees
herself as a risk manager, not as a money manager.
Do you hear
that Mr. and Mrs. Board of Directors? When you have a fiduciary duty to
oversee billions of dollars in pension assets, you do not let your
pension fund managers go out there and take stupid risks in structured
products, CDOs, or sell CDS. You focus on delivering the actuarial rate
of return, making sure that you minimize downside risks to the overall
fund in any given year. You ask tough questions about how all assets
classes become correlated when a severe liquidity event is triggered
and you prepare for the risks that lie ahead, not the ones that passed.
This
sounds fairly straightforward but in the pension world, everyone is way
too concerned about what their peers are doing and how their overall
performance measures up to that of their peers. Who cares about your
peers? If Ontario Teachers' jumps off a bridge, would you follow
them?!?
The other major problem in Canada is that pension fund
managers at the large public pension funds have compensation packages
that are based on four-year rolling returns, not maximizing four year risk-adjusted returns.
What this means is that pension fund managers are incentivized to go
take as much risk as possible in all asset classes as to maximize
returns, not minimize downside risk.
The nuance is important
because to understand the astronomical losses that occurred last year
at these large public pension plans, you have to understand how the
compensation system works. Importantly, you have to make sure you
understand the benchmarks governing all asset classes, making sure that
they reflect the risks of the underlying investments.
Back in February, I asked Why Can't We Properly Compare Pension Funds? and concluded that:
When
I see a pension fund manager killing his or her benchmark by double
digit returns - typically in alternative investments - then I know they
are pulling the wool over their stakeholders' eyes. Worse still, they
are pulling the wool over the eyes of their board of directors which is
entrusted to protect the best interests of stakeholders.In
my mind, it all amounts to sophisticated pension fraud - an
institutional scam that has been going on for years so pension fund
managers can reap huge bonuses by beating bogus benchmarks.Enough
is enough already. If we are going to demand transparency and
accountability from private banks, we should demand even more from our
public pension funds.Finally, if senior pension fund managers
want to get compensated for performing, then the onus is on them to
prove to stakeholders that the benchmarks they are using to evaluate
all internal and external investment activities accurately reflect the
risks and beta of those investments.
Unless we get clear
information on the benchmarks governing underlying investments, we will
never be able to properly compare the risk-adjusted returns of the
large pension funds. Having said this, when you see GM's $85 billion
pension fund with an asset allocation which consists of 28% equities,
45% fixed income, 9% real estate and 18% alternatives, you know they
are more conservative than other large funds that are heavily tilted in stocks.
Again, it's not
perfect because 9% real estate and 18% alternatives means that 27% of
the portfolio is invested in illiquid and highly levered investments.
But even here, I am sure Nancy Everett isn't taking stupid risks,
trying to shoot the lights out. And again, raising the fund's fixed
income allocation was a gutsy move on her part - one that paid off big
in 2008.
My advice to the U.S. pay czar is to leave Nancy
Everett and her team alone. Unlike the senior managers at most of
Canada's large public pension funds, the folks at Promark Global
Advisors earned their compensation by not following the herd, realizing
the beauty of bonds, and by focusing on preservation of capital.
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Leo, are you having sex with this woman?
Pay Czar: find someone who will work for a flat fee, with no bonus, and invest conservatively. There are some local bankers who do this just fine, couple hundred thousand a year is all. We have got to "roll back" financial services industry, to use a Walmartism.
Capitalists invest their own money -- and get the rewards. Bankers invest other peoples' money -- and should be salary paid. Their motivation to do a good job is that they will get to keep their job.
Why is this so tough to understand?
I don't get it. What's not to understand?
I will not be penetrated by garbage science, and will fight for the truth and consequences.
"Do you hear that Mr. and Mrs. Board of Directors? When you have a fiduciary duty to oversee billions of dollars in pension assets, you do not let your pension fund managers go out there and take stupid risks in structured products, CDOs, or sell CDS. You focus on delivering the actuarial rate of return, making sure that you minimize downside risks to the overall fund in any given year. You ask tough questions about how all assets classes become correlated when a severe liquidity event is triggered and you prepare for the risks that lie ahead, not the ones that passed."
A cup of coffee and an ear full of Leo gets me going in the morning. It's so good to still find clear thinking in this world every now and then.
Am sure she is nice and did a fine job, but sorry -- that's what you get with government and czars. They are in the business of paying for mediocrity and getting something less than mediocre. You see, we can not have disparate outcomes for individuals. It is not fair or just. Wake up - we have a new world view in office.
Enkidu,
When it comes to managing pensions, I would hold bonuses in escrow for a period of ten years and subject fund managers to clawbacks if they get whacked hard in any given year. This would reduce the appetite for speculation. As for Ms. Everett and her team, she can easily move to another corporation to make much more money, so I think her compensation is just and proportionate to the assets she oversees and the results she delivered.
Leo,
The escrow theme is a good idea too, but the downside for taking a flyer is just a salary - usually what most people are happy with anyway.
This idea that some people are so valuable is another American myth that has produced a myriad of distortions around the world. How many 'brilliant' guys in the last bubble turn out to be just ordinary chappies after all - even the great Alan Greenspan, once called maestro, is now generally rubbished around the world. We still have to see how Mr. Bernanke does with his trillions and trillions of balance sheet items. When someone leaves unexpectedly almost nothing of dread happens at all.
I too admire Ms. Everett - although I disagree that 'she is worth it' ($2 million, I mean). When she was paid $100K was she underperforming at that job. Why do all Americans think that people are only motivated by cash, and plenty of it? She likes to perform well, be admired, and not be a dumb ass crook (yes, she's a woman!). You don't have to load percentage rewards on to everyone. What's wrong with just a salary and bonus be damned. Look where these rewards have landed America - with idiot gamblers being embarrassingly rich and the majority of drones almost paupers in the 'world's richest country' - hmmm, or is it?
Kirby Hensley ordained me in 1969. It didn't beat the draft; stronger medicine was needed then, but what about now with this band of sloths and miscreants.
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
Why salary AND bonus?
Very simply that it doesn't make sense to pay her a 2.0 million (or pick the number) salary that would equate her pay with the total package of competitors.
This is because in down years (or years in which she underperformed her benchmark/peers) there would be no way to adjust her pay - short of firing her. And why would you necessarily fire someone for underperformance unless it wasn't slight and clearly indicated that they were incompetent (or you had a better option to replace them with)?
By paying her a base in the $250-$500 thousand range (just a guess) it allows her firm to ratchet the remainder up or down according to some blend of her performance and the performance of the firm.
This should address your question, unless it comes from the socialist angle that everyone is the same, performs the same, therefore everyone should be paid the same, and no one adds substantial value and makes the difference (although it appears at least in this case that she clearly might).
She clearly has been paid to some extend based on the value she has saved the pension RELATIVE to the AVERAGE money manager during the same period. Its called pay for performance.
Of course if Detroit was held to these rules, there would have been bread lines for the last 30 years. The benefit of unions.....
No, not the socialist everyone is the same - but, yes, we are much much closer than we would like to think. When Ms. Everett leaves another younger 'Ms. Everett' will show up at the door...
What's good for AMERICA is good for GM. What's good for GM may or may not be good for AMERICA. When people start distorting this truth is when you are in the most trouble.
In my experience, it seems that women 'get' this better than men: less testosterone makes them more risk averse.
Reminds me of a saying from the war: "There are old soldiers and there are bold soldiers, but there are no old, bold soldiers".
Morons taking crazy risk to keep up with the performance of their insane peers only leads to a wipeout. This is a message that I have tried and tried and tried to hammer into peoples' heads. You *must* assign an accurate value to your potential risk and offset that against potential gains. Ultimately, the most profitable path is the least risky. Maybe you will be the one lucky guy who leads a charmed life, odds are, you won't, so approaching trades from the primary perspective of risk before reward is the only way to go.
Unfortunately, the "high risk/high reward" ethos still dominates meaning that survival failure is brought forward significantly. Not helped by what the psychologists and neuroscientists show us, that people embrace more risk as the losses mount.
People who quietly do a good job without grandstanding are always under appreciated [perhaps by definition but stars are too volatile especially for pensions]. Maybe claw-backs are the right direction; steady performers should not have a problem with that.
And please let's stop talking about the electric car boondoggle. Electric cars are really coal fired. Not much chance of sustainability or clean air there. How about a hemp oil fueled diesel engine [no purple haze jokes please].
Never mind...
we're smarter than you and thats why we get the job, so back off bigot