Pension360

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

The CBC reports, Joe Oliver to consult on ‘voluntary’ Canada Pension Plan boost:

Finance Minister Joe Oliver says his government is ready to start consulting Canadians on allowing larger, “voluntary,” contributions to the Canada Pension Plan.

“We are open to giving Canadians the option to voluntarily contribute more to the Canada Pension Plan to supplement their current retirement savings,” he told the House of Commons on Tuesday.

Oliver said the move would build on the Harper government’s record of creating more options for retirement savings, including the pooled pension plans and tax-free savings account alternatives championed by the Conservatives. A statement released by his office said that “by providing voluntary, flexible savings tools, Canada’s retirement system is, in fact, now among the best in the world.”

No more details were provided in his brief answer to a planted question from a Conservative caucus colleague. It’s unclear how the voluntary contributions would work, or what limits would apply.

But Oliver reiterated his government’s position on hiking basic premiums, something federal government talking points have called a “mandatory, job-killing, economy-destabilizing, pension-tax hike on employees and employers.”

“What we will not do is reach into the pockets of Canadians with a mandatory payroll tax, like the Liberals and the NDP would do,” Oliver said in question period.

“A one-size fits all pension tax hike is not what Canadians want, nor what they need,” Oliver’s release said.

Policy reversal?

This is the second time in two years the government has seemingly done an about-face on the CPP issue.

In 2010, then-finance minister Jim Flaherty announced consultations had begun to expand CPP, calling the program “the envy of the world.”

He said the expansion should be “modest and phased in,” and that provinces were on board.

Then, in 2013, he abruptly backtracked and started referring to the CPP as a “payroll tax” that the country couldn’t afford until there was more economic growth.

Employees and employers are each required to contribute up to almost $2,480 annually on income up to $53,600.

This year, the CPP pays out a maximum benefit of $12,780.

Past proposals have suggested doubling both the contribution cap and the maximum payout. Although Flaherty had made it clear he wasn’t in favour of going that high, he never publicly outlined what numbers he had in mind.

Oliver now intends to spend the summer months ahead of a coming election consulting with “experts and stakeholders,” on what voluntary contributions to the CPP might look like.

Finance critic NDP MP Nathan Cullen questioned what he called the Conservatives’ “death-bed conversion” to CPP enhancement.

“It’s incredibly vague. It’s a non-announcement today. This is at the very last minute. If they were serious about this, we would have seen something a lot sooner,” he said.

Ontario Liberal MPP Mitzie Hunter, the associate minister of finance, dismissed the announcement, saying the federal government “has made it clear they have no real interest in enhancing CPP.”

“It’s disappointing that the federal government is only concerned with their short-term election prospects instead of providing a secure retirement for millions of Canadians.”

Canada’s most populous province recently passed a bill approving the creation of a provincial pension plan that would start in 2017. Ontario’s plan, which would be phased in over a two-year period, would be for those who don’t have a workplace plan.

Bill Curry and Steven Chase of the Globe and Mail also report, Tories propose voluntary expansion of Canada Pension Plan:

The federal Conservative government is proposing a voluntary expansion of the Canada Pension Plan, adding a pre-election twist to the politically charged debate over how best to boost Canadian savings.

Finance Minister Joe Oliver made the announcement Tuesday in the House of Commons, promising that consultations will take place over the summer on the details.

The general premise is that Canadians who choose to pay higher CPP premiums would receive higher guaranteed payments in retirement.

The announcement marks a significant shift for the Conservatives, who have long resisted changes to the CPP on the grounds that higher premiums would represent job-killing payroll taxes.

It also amounts to a key campaign promise because this measure will not be in place before an expected Oct. 19 federal election.

“Our Conservative government believes all Canadians should have options when saving for their future. That is why we intend to consult on giving Canadians the voluntary option to contribute more to the Canada Pension Plan to supplement their retirement savings,” Mr. Oliver said.

Though the announcement represents a significant policy shift, the Finance Minister did not take questions from the media and few details were provided.

This expansion of the CPP on a voluntary, instead of compulsory, basis is an attempt by the Conservatives to offer voters another way to save for retirement without obliging them to do so.

The Tories have been at loggerheads with the opposition parties – and most provinces – over the issue for years.

Labour groups and the seniors advocacy group CARP have long argued that voluntary savings vehicles do not work and that a mandatory CPP expansion is needed to ensure that all Canadians are saving enough for retirement.

The Conservatives have sided with business groups, such as the Canadian Federation of Independent Business, that argue that increasing mandatory contributions to the CPP by employees and employers would be damaging to the economy.

The CFIB said Tuesday that it was “delighted” by Mr. Oliver’s proposal, provided that it would also be a voluntary decision as to whether or not employers make larger contributions for employees.

Susan Eng, the vice-president of CARP, also responded positively, although she stressed that mandatory increases are still likely to be needed.

Mr. Oliver said the voluntary plan would build on other government initiatives, including tax-free savings accounts and pooled registered pension plans.

He suggested that the Tories give Canadians more choice than the Liberals and the NDP.

However, Liberal finance critic Scott Brison noted it was his party that advocated both a mandatory and a voluntary expansion of the CPP in the 2011 election campaign.

NDP finance critic Nathan Cullen called the move a “deathbed conversion” by the Conservatives.

“You can tell when the government’s serious about something: They ram it through an omnibus bill. When they’re not serious about it, they launch a series of consultations over the summer on the eve of an election as if somehow they were going to be converted at the very last minute,” he said. “This is about polls. It’s about the Conservatives realizing they’re in trouble.”

At one point during the past several years of debate over CPP reform, the Conservatives spoke out against the idea they now propose.

In 2010, Jim Flaherty, then the finance minister, took the view that further voluntary savings vehicles were not enough.

The government later changed course. While Mr. Flaherty briefly advocated for expanded mandatory CPP contributions, Prime Minister Stephen Harper has long opposed the idea in his public comments.

The Ontario government has been among the most vocal advocates urging the federal government to support an expanded CPP. When Ottawa decided against the idea, Ontario proposed its own supplemental pension plan, which would begin in 2017 and would apply only to workers who do not have a company pension plan.

Ontario has suggested that if Ottawa changes its position and decides to support an expanded CPP, it would not go ahead with its own pension plan.

Ontario’s associate finance minister, Mitzie Hunter, described the federal proposal as “disappointing.”

“Two things are clear – people are not saving enough for retirement, and we don’t have a federal partner willing to tackle this problem,” she said in a statement.

Say it ain’t so? Have the Harper Conservatives who continuously pander to the financial services industry finally seen the light on why now is the time to enhance the CPP? Do they finally realize the benefits of defined-benefit plans and how enhancing the CPP is not only a good pension policy but good economic policy for a country teetering on disaster?

The federal government is also looking at relaxing the 30 percent rule to allow federal pensions to invest more in infrastructure in Canada, which makes a lot of sense if they allow all our public pensions to do so and open infrastructure investments to global pensions and sovereign wealth funds.

Unfortunately, this latest about-face on enhanced CPP is nothing more than a farce. Harper’s government doesn’t have a clue of what they’re doing on enhanced CPP and I can’t say the Liberals or NDP are any better (a bit better but far from perfect).

As an ultra cynical Greek-Canadian who is tired of seeing politicians in Greece and Canada talk from both sides of their mouth, let me give it to you straight up. This latest proposal is going nowhere and even if it’s implemented, the “voluntary” nature of it means it will only benefit the richest Canadians much like increasing the tax-free savings account limit to $10,000 a year (the few who  need it the least will wisely sign on but the majority who really need it will opt out).

By the way, a new survey shows a third of Canadians won’t take advantage of new TFSA limits:

A new survey suggests about a third of Canadians don’t have the money to take advantage of new rules under which Ottawa almost doubled the amount that can be contributed each year to tax-free savings accounts.

The poll done for CIBC found that roughly 34 per cent of respondents said they either didn’t have the money to take advantage of the new $10,000 limit or had other investment plans.

Breaking the figure down, 18 per cent of those surveyed said they would probably contribute less than the old limit of $5,500, while 12 per cent said they would not have enough savings this year to make a contribution. Four per cent said they would contribute to other saving plans.

The survey found just 10 per cent said they typically contribute the maximum and would now invest $10,000, while an additional 17 per cent said they would try to increase their contributions above $5,500.

Twenty per cent of those responding did not have a TFSA account and had no plans to open one.

The online survey was conducted between April 30 and May 4, less two weeks after the federal budget announcement.

Shocking eh? Not really. Most Canadians are in debt up to their eyeballs, paying off multiple credit cards and trying to make their mortgage payment every month on their insanely overvalued homes (when you see official denial from the finance minister and our central banker, you know they’re worried about Canada’s housing bubble but don’t worry, according to some, Canada is the new Switzerland. Sigh!!).

I use my old Greek indicator to gauge economic activity. I talk to a few Greek taxi drivers and restauranteurs in Montreal to get the real scoop. They all tell me business is down across the board. Restauranteurs and cab drivers are praying the good weather holds up for the Grand Prix next weekend so they can make up for a devastating winter, but they tell me the economy is terrible and “people just aren’t spending like they used to” which is why many retail stores are closing in Montreal. Hopefully, the lower loonie and some tourism will help but that is only temporary relief.

Anyways, back to the Tories and their latest proposal. Why am I so skeptical? Easy. Enhanced CPP shouldn’t be voluntary, it should be mandatory for almost all Canadians (minus the poor and working poor). This is why behind the scenes, I’ve argued with some Liberals on their proposal because they too want to make enhanced CPP optional.

It doesn’t work that way folks. Yes, higher CPP premiums means less money to spend on the economy and housing but it in the long-run, it also means more Canadians will be able to retire in dignity and security. And people who receive defined-benefit pensions are able to spend more in their golden years, allowing the government to collect more in sales and income taxes.

More importantly, RRSPs and TFSAs are savings vehicles, not defined-benefit pensions, and they place the retirement onus entirely on individuals to make the right investment decisions to be able to retire comfortably. When it comes to their retirement, most Canadians need a reality check because they’re getting raped on fees investing in mediocre mutual funds which underperform the market over the long-run.

There is a much better option. Make enhanced CPP mandatory and have the money managed managed by the Canada Pension Plan Investment Board which just recorded a record 18.3% gain in fiscal 2015.

“But Leo, you just finished crucifying these guys for lacking a truly diverse workforce at all levels representing Canada’s multiculturalism and you still want to enhance the CPP for all Canadians?!?”

Absolutely! I’m very hard on the CPPIB because I hold them to a much higher standard than any other large Canadian public pension because they represent all Canadians and even though I like their governance and operations, I think there can be significant improvements (see my discussion here).

In particular, I’m a stickler for diversity in the workplace and give a failing grade in this department to all of Canada’s coveted top ten, not just CPPIB.  And don’t kid yourselves, things are getting worse not better when it comes to diversity at Crown corporations, government organizations and private sector federally regulated businesses.

How do I know this? Because of my struggles to find full-time employment after I was wrongfully dismissed at PSP but also through my conversations with people with disabilities — much more disabled than me — who are frustrated with the lack of opportunities for them to find full-time work.

But aren’t federally regulated employers suppose to hire people regardless of their age, sex, ethnic background, sexual orientation or disability? That all sounds great on paper but the brutal reality is the unemployment rate for minorities, especially people with disabilities is sky-high, and the hiring decisions at these places are often done in a covert manner to circumvent our laws.

When Michael Sabia, Mark Wiseman, Gordon Fyfe, Andre Bourbonnais or Ron Mock want someone in, there in. And when they want them out, they’re out. It’s that simple (this goes on everywhere but these are public pensions).

I remember a conversation I had with Mark Wiseman where he told me he contributes to the Multiple Sclerosis Society of Canada. I felt like saying “that’s great but what are your doing as the leader of Canada’s biggest Crown corporation to hire people with disabilities?”

The only big federally regulated Canadian bank that actually has a diversity blueprint is the Royal Bank but I can tell you from experience this is a bogus program that doesn’t actively go out to search and hire minorities or people with disabilities and the jobs they offer are low level jobs that pay peanuts. But at least the Royal Bank has a diversity blueprint which is more than I can say for many other large private and public sector employers.

But my diversity qualms aside, I’m a huge believer in mandatory enhanced CPP for most Canadians and think the time has come that we do away with company pensions altogether and have pensions managed by our large well-governed public pensions that pool investment and longevity risks, lower costs by investing directly across public and private investments where they can and with top global funds where they can’t.

Imagine for a second if we didn’t have Air Canada, Bombardier, Bell pensions or AIMCo, OTPP, HOOPP, Caisse, OMERS, bcIMC, etc but several large, well-governed public pensions that operate at arms-length from the government and manage the pensions of all Canadians across the public and private sector. It wouldn’t be one CPPIB juggernaut but several CPPIBs and there wouldn’t be an issue of pension portability.

I’m telling you we have the people and resources to do this. All we lack is political will in Ottawa which is why Ontario is right to go it alone despite all the criticism Premier Wynne has faced. Some think the Conservative pension promise sets up showdown with Ontario but I don’t think so.

The sad reality is that our politicians have ignored the pension crisis in this country for far too long and that will impact our debt and deficit in the future as social welfare costs climb. Enhancing the CPP on a voluntary basis isn’t a good pension policy; it’s a dead giveaway to rich Canadians with high disposable income just like increasing TFSA and RRSP limits are a dead giveaway to the rich and the financial services industry. These aren’t the people that need help to retire in dignity and security.

If you have any questions or concerns on this comment and my views, feel free to reach me at LKolivakis@gmail.com. You don’t have to agree with me and I know I can be very blunt and “controversial” (euphemism for someone who highlights uncomfortable truths) but that is my style and I make no apologies whatsoever for it (ask Tom Mulcair, Gordon Fyfe, Mark Wiseman, etc.).

Bernard Dussault, Canada’s former Chief Actuary, shared this with me:

I will give an interview to CPAC on this matter at 1:30 this afternoon where my main two comments will be that:

• The federal government should first consult the provinces rather than the public because the CPP can be amended only with the approval of at least 7 provinces covering at least 2/3 of the Canadian population.
• Because participation in the CPP is mandatory, no voluntary contributions can be made to it. Voluntary contributions could only be made to a new plan (i.e. other than CPP), which would still require provincial approval because pensions are under provincial jurisdiction control.

I thank Bernard for his timely and wise insights. He is someone who understands what’s at stake when it comes to molding the right retirement policy.

 

Photo credit: “Canada blank map” by Lokal_Profil image cut to remove USA by Paul Robinson – Vector map BlankMap-USA-states-Canada-provinces.svg.Modified by Lokal_Profil. Licensed under CC BY-SA 2.5 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Canada_blank_map.svg#mediaviewer/File:Canada_blank_map.svg

Carol Buckmann is an attorney who has practiced in the employee benefits field for over 30 years. This post was originally published at Pensions & Benefits Law.

Are there time limits on a participant’s ability to challenge imprudent 401(k) investment fund offerings?  Can participants challenge an investment fund selected ten or even twenty years ago? If so, will fiduciaries be subject to potential liability for losses going back decades?

The U.S. Supreme Court has just released its long-awaited decision in Tibble v. Edison, holding that participants are not prevented from challenging a plan fiduciary’s imprudent 401(k) investment choices if the investment was selected more than six years ago. This means that there is not a one-time six year window for challenging imprudent investment offerings.

Since we use these decisions as guides to help our clients avoid being sued, I’ll skip the procedural issues of interest to litigators and focus on what this means for plan committees.

The rules set out by the Supreme Court are fairly simple, though their application may not be.  The Court said that the duty to prudently select investments and the duty to monitor them are separate. Under traditional trust law and ERISA, a trustee/fiduciary has an ongoing duty to monitor investments and remove imprudent ones.  Fiduciary breach claims may be based on positive action  or omissions, and suit may be brought within six years of the last act that constitutes a breach or violation, or the last date the fiduciary could have cured an  omission, clearly extending the period for challenging failure to remove an imprudent fund from the lineup.

The Supreme Court didn’t give us guidance about how to fulfill the duty to monitor, sending the case back to the appellate court for further proceedings.  However, some best practices and some limits on the claims that may be brought can be deduced from the decision and the facts.

What was the alleged violation in Tibble?  The lower courts had found that the Tibble Committee was imprudent in offering three retail class mutual funds when lower cost institutional funds with virtually the same investments were available.  These same claims were raised and erroneously dismissed in connection with three older funds.  The Committee met quarterly to review plan investments and to review reports and recommendations from investment staff, but comparing the  costs of different share classes was apparently not part of the quarterly review.

Obviously, fund costs should have been part of this review, but if committees prepare and use  a review checklist in consultation with ERISA counsel, or have a comprehensive investment policy drafted with the help of ERISA counsel, the likelihood of missing major review items is minimized. Even today, we often see investment policy statements drafted by people who are not lawyers that focus on performance and fail to even mention the importance of reviewing costs and fees.  Having regular meetings won’t help fiduciaries if they don’t focus on the right issues when they meet. And offering the best available investment choices to participants, and not merely avoiding imprudent ones, should be the goal of every committee. That is the best way to avoid investment challenges.

Although not discussed in the Supreme Court decision, in my view it is clear that breaching fiduciaries should not have an open-ended exposure to restore plan losses under the Tibble rules.  The Department of Labor in its amicus brief sets forth its position that fiduciaries don’t have continuous exposure to restore losses because the losses must have occurred within the six years preceding suit.  Further, the plaintiffs in the Tibble case did not try to claim losses for the entire period that the retail funds were in the plan.

At the end of the day, fiduciaries who follow good practices minimize the likelihood that they will ever have to argue that there are specific time limits on restoring plan losses.

 

Photo by Joe Gratz via Flickr CC License

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Benefits Canada reports, CPPIB posts record 18.3% return:

The Canada Pension Plan Investment Board (CPPIB) delivered a net investment return of 18.3% for fiscal 2015—the biggest one-year return since it was created.

The CPP fund ended the year with net assets of $264.6 billion, compared to $219.1 billion at the end of fiscal 2014. The $45.5 billion increase in assets for the year consisted of $40.6 billion in net investment income after all CPPIB costs and $4.9 billion in net CPP contributions.

Multiple factors contributed to fiscal 2015 growth, including all major public equity markets, bonds, private assets and real estate holdings.

Combined, all three of CPPIB’s investment departments delivered substantial investment income to the Fund. International markets, both emerging and developed markets, advanced significantly, boosting returns further as CPPIB continues to diversify the fund. The benefit of the fund’s diversification across currencies also played a role in its returns, as the Canadian dollar fell against certain currencies, including the U.S. dollar.

In the 10-year period up to and including fiscal 2015, CPPIB has contributed $129.5 billion in cumulative net investment income to the fund after all CPPIB costs, and more than $151.5 billion since inception in 1999, meaning that over 57% of the fund’s cumulative assets are the result of investment income.

The Canadian Press also reports, CPP Investment Board has record year, targets U.S. for near term growth:

The Canada Pension Plan Investment Board sees the United States as a key destination for investments in the near term, but expects to shift a bigger share of its assets to faster-growing emerging economies over time.

Emerging markets equities account for about 5.9 per cent of the assets managed by the CPP Investment Board, but chief executive Mark Wiseman said Thursday the fund is building its capabilities in markets like India, China and Latin America in a “slow and prudent progression.”

“We believe they will undoubtedly have ups and downs, but in the long run those economies will produce disproportionately higher growth than the developed economies of Europe and North America,” Wiseman said.

The CPP Fund reported Thursday a return of 18.3 per cent for its latest financial year, its best showing ever.

Compared with the end of fiscal 2014, the fund’s assets were up $45.5 billion from the end of fiscal 2014 — the biggest one-year gain since the fund received its first money for investments in March 1999.

In the medium term, Wiseman said there are “excellent prospects” in the United States, which is home to about $100.7 billion or 38 per cent of the fund’s assets — the largest of any country.

“We see more investment opportunities there than in other developed world markets,” Wiseman said.

As for Canada, which represented about 24.1 per cent of the fund’s assets as of March 31, Wiseman said the CPPIB continues to have a positive view despite the impact of the recent oil price shock.

He said lower energy prices, the decline in the loonie’s value against the U.S. dollar, and “solid growth” in the United States — Canada’s biggest market — should help the overall economy.

“So, by and large, we remain optimistic about Canada as well as the U.S,” Wiseman said.

The CPP Investment Board says there were multiple reasons for the strong investment performance last year, including growth at all major stock markets, bonds, private assets and real estate holdings.

Only $4.9 billion of last year’s increase came from employer and employee contributions while $40.6 billion came from investments. None of the fund’s assets were required to pay benefits to current retirees, with contributions expected to carry the load until the end of 2022.

The value of its investments also got a $7.8-billion boost in fiscal 2015 from a decline in the Canadian dollar against certain currencies, including the U.S. dollar and U.K. pound.

The fund’s 10-year inflation-adjusted rate of return was 6.2 per cent — well above the 4.0 per cent that Canada’s chief actuary estimates is necessary.

Finally, take the time to read CPPIB’s press release, CPP Fund Totals $264.6 Billion at 2015 Fiscal Year-End:

The CPP Fund ended its fiscal year on March 31, 2015, with net assets of $264.6 billion, compared to $219.1 billion at the end of fiscal 2014. The $45.5 billion increase in assets for the year consisted of $40.6 billion in net investment income after all CPPIB costs and $4.9 billion in net CPP contributions. The portfolio delivered a gross investment return of 18.7% for fiscal 2015, or 18.3% on a net basis.

“The CPP Fund generated exceptional returns this year, achieving both the highest one-year return and annual investment income since our inception,” said Mark Wiseman, President & Chief Executive Officer, CPP Investment Board (CPPIB). “More importantly, our 10-year return, a measure that better indicates how we seek to serve contributors and beneficiaries, reached 8.0% on a net basis.”

In the 10-year period up to and including fiscal 2015, CPPIB has contributed $129.5 billion in cumulative net investment income to the Fund after all CPPIB costs, and over $151.5 billion since inception in 1999, meaning that over 57% of the Fund’s cumulative assets are the result of investment income.

“First, let me cite the hard work, dedication and capabilities of the CPPIB team across all of our offices, as well as close collaboration with our key partners worldwide,” added Mr. Wiseman. “Many factors helped lift the year’s results but the impact of decisions made over several years – and patience – is evident.”

Multiple factors contributed to fiscal 2015 growth, including all major public equity markets, bonds, private assets and real estate holdings. Combined, all three of CPPIB’s investment departments delivered substantial investment income to the Fund. International markets, both emerging and developed markets, advanced significantly, boosting returns further as CPPIB continues to diversify the Fund. The benefit of the Fund’s diversification across currencies also played a role in its returns, as the Canadian dollar fell against certain currencies, including the U.S. dollar.

“While any large increase helps foster public confidence in the sustainability of the Fund, results can and will fluctuate in any given year,” said Mr. Wiseman. “The Fund’s horizon, size and funding allow us to accept more risk and invest differently than almost all other investors, including having a high tolerance for potential future negative shocks. In the same way that we temper our enthusiasm for this year’s exceptional performance, we will also stay on course even through negative returns in any given short-term period. As a result of our unique position, we focus on long-term results of 10-plus years.”

The Canada Pension Plan’s multi-generational funding and liabilities give rise to an exceptionally long investment horizon. To meet long-term investment objectives, CPPIB is building a portfolio and investing in assets designed to generate and maximize long-term returns. Long-term investment returns are a more appropriate measure of CPPIB’s performance than returns in any given quarter or single fiscal year.

Long-Term Sustainability

In the most recent triennial review released in December 2013, the Chief Actuary of Canada reaffirmed that, as at December 31, 2012, the CPP remains sustainable at the current contribution rate of 9.9% throughout the 75-year period of his report. The Chief Actuary’s projections are based on the assumption that the Fund will attain a prospective 4.0% real rate of return, which takes into account the impact of inflation. CPPIB’s 10-year annualized nominal rate of return of 8.0%, or 6.2% on a real rate of return basis, was comfortably above the Chief Actuary’s assumption over this same period. These figures are reported net of all CPPIB costs to be consistent with the Chief Actuary’s approach.

The Chief Actuary’s report also indicates that CPP contributions are expected to exceed annual benefits paid until the end of 2022, after which a portion of the investment income from CPPIB will be needed to help pay pensions.

Performance Against Benchmarks

CPPIB measures its performance against a market-based benchmark, the Reference Portfolio, representing a passive portfolio of public market investments that can reasonably be expected to generate the long-term returns needed to help sustain the CPP at the current contribution rate.

In fiscal 2015, the CPP Fund’s gross return of 18.7% outperformed the Reference Portfolio delivering $3.6 billion in gross dollar value-added (DVA) above the Reference Portfolio’s return, after external management fees and transaction costs. Net of all CPPIB costs, the investment portfolio exceeded the benchmark’s return by 1.3%, producing $2.8 billion in net DVA.

“Dollar value-added is an important measure as it shows the difference between active investments made relative to their benchmarks in dollar terms. We will maintain a greater focus on total Fund – absolute as well as relative – returns, by continuing to develop and apply our capabilities more widely to portfolio management,” said Mr. Wiseman. “Our attention to both measures helps maximize returns, CPPIB’s objective, in the best interests of current and future beneficiaries, since the source of pension benefits is the total Fund. To reduce volatility, DVA is particularly valuable when it is generated as loss reduction in negative market conditions. Both total returns and DVA can vary widely from year-to-year depending on market conditions. Accordingly, both measures must be looked at over longer periods of at least one market cycle, such as five years or more.”

Given our long-term view and risk-return accountability framework, we track cumulative value-added returns since the April 1, 2006, inception of the Reference Portfolio. Cumulative value-added over the past nine years totals $5.8 billion, after all costs.

Total Costs

CPPIB total costs for fiscal 2015 consisted of $803 million or 33.9 basis points of operating expenses, $1,254 million of external management fees and $273 million of transaction costs. CPPIB reports on these distinct cost categories as each is materially different in purpose, substance and variability. We report the external management fees and transaction costs we incur by asset class and report the investment income our programs generate net of these fees. We then report on total Fund performance net of CPPIB’s overall operating expenses.

Fiscal 2015 CPPIB operating expenses reflect increased incentive compensation due to strong total Fund and DVA performance over the past four years, and the continued expansion of CPPIB’s operations and further development of our capabilities to support 17 distinct investment programs. International operations accounted for approximately 30% of operating expenses, including the impact of a weaker Canadian dollar relative to countries we have operations in.

Fiscal 2015 external management fees and transaction costs reflect the continued growth in the volume and sophistication of our investing activities. With external management fees also reflecting performance-based fees, the year-over-year increase was in part driven by higher performance fees for exceptional financial performance. The increase in transaction costs in fiscal 2015 was due to a large private market transaction.

Portfolio Performance by Asset Class

Portfolio performance by asset class is included in the table below. A more detailed breakdown of performance by investment department is included in the CPPIB Annual Report for fiscal 2015, which is available at www.cppib.com.

Asset Mix

We continued to diversify the portfolio by return-risk characteristics of various assets and geographies during fiscal 2015. Canadian assets represented 24.1% of the portfolio, and totalled $63.8 billion. International assets represented 75.9% of the portfolio, and totalled $201.0 billion.

Investment Highlights

During fiscal 2015, CPPIB completed 40 transactions of over $200 million each, in 15 countries around the world. Highlights for the year include:

Private Investments

• Signed an agreement to invest approximately £1.6 billion to acquire a 33% stake in Associated British Ports (ABP) with Hermes Infrastructure, an existing U.K.-based partner. ABP is the U.K.’s leading ports group, owning and operating 21 ports with a diverse cargo base, long-term contracts with a broad mix of blue chip customers and experienced management.

• Expanded our Australian infrastructure portfolio with a A$525 million commitment to build and operate a new tunnelled motorway in Sydney, called NorthConnex. This transaction was completed with Transurban Group and Queensland Investment Corporation, our existing partners in the Westlink M7 toll road. CPPIB will own a 25% stake in the nine-kilometre motorway that will connect Sydney’s northern suburbs with the orbital road network and will be the longest road tunnel project in Australia.

• Completed our first investment in India’s infrastructure sector with the country’s largest engineering and construction company. We committed US$332 million in the Larsen & Toubro Limited (L&T) subsidiary, L&T Infrastructure Development Projects Limited (L&T IDPL), which has a portfolio of 20 infrastructure assets, including India’s largest private toll road concession portfolio spanning over 2,000 kilometres.

• Completed a US$596 million secondary private equity investment in two JW Childs funds. As the lead investor, CPPIB invested US$477 million in a secondary transaction related to the JW Childs Equity Partners III fund, which provided an attractive liquidity solution to existing limited partners. We also committed US$119 million to a new fund, JW Childs Equity Partners IV. JW Childs focuses primarily on mid-market investments in the consumer products, specialty retail and healthcare services sectors across North America.

Public Market Investments

• Acquired 172,382,000 ordinary shares of Hong Kong Broadband Network Limited (HKBN) as the sole cornerstone investor in HKBN’s initial public offering. CPPIB invested HK$1,551 million for an approximate 17% ownership interest, becoming the largest shareholder. HKBN is Hong Kong’s second largest residential broadband service provider by number of subscriptions, reaching more than 2.1 million residential homes and 1,900 commercial buildings.

• Received an additional Qualified Foreign Institutional Investor (QFII) quota of US$600 million to invest in China A-shares that are traded on the Shanghai and Shenzhen Stock Exchanges. Since 2011, when CPPIB obtained its QFII licence, a total allocation of US$1.2 billion has been granted to CPPIB, thereby making it among the top 10 largest QFII holders.

• Invested US$250 million in the initial public offering of Markit Ltd., representing an approximate 6% ownership interest. Founded in 2003, Markit is a globally diversified provider of financial information services that enhance transparency, reduce risk and improve operational efficiency.

Real Estate Investments

• Entered into a new real estate sector with the 100% acquisition of a U.K. student accommodation portfolio and management platform operating under the Liberty Living brand, at an enterprise value of £1.1 billion. Liberty Living is one of the U.K.’s largest student accommodation providers with more than 40 high-quality residences located in 17 of the largest university towns and cities across the U.K.

• Committed RMB 1,250 million to jointly develop the Times Paradise Walk project, a major mixed-use development in Suzhou, the fifth most affluent city in China, with Longfor Properties Company Ltd. The mixed-use development comprises residential, office, retail and hotel space for a total gross floor area of 7.9 million square feet. It is designed to be a top-quality, one-stop commercial destination in Suzhou with completion scheduled in multiple phases between 2016 and 2019.

• Significantly expanded CPPIB’s real estate portfolio in Brazil during the year. We committed approximately R$1.3 billion to Brazilian retail, logistics and residential assets this year, bringing our total equity commitment to date to R$5.5 billion. This included a R$507 million commitment for a 30% ownership stake in a new joint venture with Global Logistic Properties comprising a high-quality portfolio of logistics properties located primarily in São Paulo and Rio de Janeiro.

• Invested approximately €236 million in Citycon Oyj to hold 15% of the shares and voting rights, expanding CPPIB’s retail platform in the Nordic region. Citycon is a leading owner and developer of grocery-anchored shopping centres in the region. The investment helped to support Citycon’s acquisition and development opportunities.

Investment highlights following the year end include:

• Entered into a joint venture partnership with GIC to acquire the D-Cube Retail Mall in Seoul, South Korea from Daesung Industries for a total consideration of US$263 million. Following the transaction, GIC and CPPIB will each own a 50% stake in the mall. Completed in 2011, D-Cube is an income-generating, high-quality retail mall in a prime location.

• Entered into an agreement to form a strategic joint venture with Unibail-Rodamco, the second largest retail REIT in the world and the largest in Europe, to grow CPPIB’s German retail real estate platform. The joint venture will be formed through CPPIB’s indirect acquisition of a 46.1% interest in Unibail-Rodamco’s German retail platform, mfi management fur immobilien AG (mfi), for €394 million. In addition, CPPIB will invest a further €366 million in support of mfi’s financing strategies.

• Signed an agreement to acquire an approximate 12% stake, by investing £1.1 billion alongside Hutchison Whampoa, in the telecommunications entity that will be created by merging O2 U.K. and Three U.K.

• Signed a definitive agreement to acquire Informatica Corporation for US$5.3 billion, or US$48.75 in cash per common share, alongside our partner, the Permira funds. Informatica is the world’s number one independent provider of enterprise data integration software. The transaction is expected to be completed in the second or third quarter of calendar 2015.

• Invested US$335 million in the senior secured notes of Global Cash Access, Inc. (GCA) through our Principal Credit Investments group. GCA is the leading provider of cash access solutions and related gaming and lottery products to the gaming sector.

Asset Dispositions

• Signed an agreement, together with BC European Capital IX (BCEC IX), a fund advised by BC Partners, management and other co-investors, to sell a 70% stake in Cequel Communications Holdings, LLC (together with its subsidiaries, Suddenlink) to Altice S.A. Upon closing of the proposed sale, it is expected that BCEC IX and CPPIB will each receive proceeds of approximately US$960 million and a vendor note of approximately US$200 million. CPPIB and BCEC IX will each retain a 12% stake in the company.

• Announced that AWAS, a leading Dublin-based aircraft lessor, signed an agreement to sell a portfolio of 90 aircraft to Macquarie Group Limited for a total consideration of US$4 billion. CPPIB owns a 25% stake in AWAS alongside Terra Firma, which owns the remaining 75% stake.

• Sold our 50% interest in 151 Yonge Street to GWL Realty Advisors. Proceeds from the sale to CPPIB were approximately $76 million. Located in downtown Toronto, 151 Yonge Street was acquired in 2005 as part of a larger Canadian office portfolio acquisition.

• Sold our 39.4% interest in a Denver office properties joint venture to Ivanhoé Cambridge. Proceeds from the sale to CPPIB were approximately US$132 million.

Corporate Highlights

• In May 2015, we continued to expand our global presence with the official opening of a CPPIB office in Luxembourg, representing our sixth international office. We have a significant and growing asset base in Europe today. Establishing an office in Luxembourg supports our global strategy of building out our internal capabilities to support our long-term investment goals. Through our Luxembourg office, we will conduct asset management activities such as investment monitoring, cash management, finance and operations, including transaction support, legal and regulatory compliance.‎ Looking ahead, we expect to complete our previously announced plans to open an office in Mumbai later in calendar 2015.

• Welcomed the appointment of Dr. Heather Munroe-Blum as the new Chair of CPPIB’s Board of Directors. Dr. Munroe-Blum succeeded Robert Astley, CPPIB’s Chair since 2008, upon the expiry of his term on October 26, 2014.

• Welcomed the appointment of Tahira Hassan to CPPIB’s Board of Directors in February 2015 for a three-year term. Ms. Hassan also serves as a non-executive Director on the Boards of Brambles Limited and Recall Holdings Limited and held various executive leadership roles with Nestlé for more than 26 years.

• Announced senior executive appointments:

• Mark Jenkins was promoted to Senior Managing Director & Global Head of Private Investments responsible for leading the direct private equity, infrastructure, principal credit investments, natural resources and portfolio value creation functions. Mr. Jenkins joined CPPIB in 2008 and most recently held the role of Managing Director, Head of Principal Investments.

Not exactly the epitome of diversification and Canadian multiculturalism, eh? Having said this, I trust Mark Wiseman and his senior managers are doing an outstanding job managing this juggernaut.

One thing I won’t hide from you is that I’ve applied to jobs at CPPIB and even got an email from Mark nicely explaining “why I don’t fit” in their organization and that they tried to find me ” a suitable position.” This is all rubbish to me because when David Denison was in charge of the place, I went as far as an interview for a job before the folks at PSP cut me off with one phone call (I know a lot more than people give me credit for which is why I find these excuses downright insulting).

Also, I know far too many talented folks who haven’t been hired at CPPIB and all of them have received lame, if not laughable excuses. The same with other large Canadian pensions. Something is seriously wrong in the HR departments at CPPIB, the Caisse, PSP, Ontario Teachers and elsewhere if they’re not hiring these talented individuals (and I include myself in that group). And I have no qualms stating this publicly.

Getting hired at these places is all about politics. I also noticed they don’t like hiring people who are smarter than them or who can challenge them in any way, shape or form. Too bad, this is why the culture at these places reeks of politics, and why I just don’t buy that “the best and brightest” are working at these places (again, I’m entitled to my opinion and the folks working at these places are entitled to theirs but I can give you my A-list of amazing individuals that were not hired for flimsy reasons at any of these coveted organizations).

I’m starting to get cynical in my old age. I’ll end on a positive note, however. These results are only one year but the long-term results, the ones that count, are equally impressive. CPPIB is doing something right to manage the hundred of billions they’re responsible for. And again, in spite of my criticism, I still maintain that we need to enhance the CPP for all Canadians. Period.

Take the time to read all the recent articles on CPPIB here. They have been very busy lately on all sorts of deals, some with partners and some with their peers like the Caisse.

 

Photo credit: “Canada blank map” by Lokal_Profil image cut to remove USA by Paul Robinson – Vector map BlankMap-USA-states-Canada-provinces.svg.Modified by Lokal_Profil. Licensed under CC BY-SA 2.5 via Wikimedia Commons

New Jersey’s treasurer is making the case to lawmakers that the state needs a 10-year timeline to ramp up to making its full actuarial contribution to the state’s pension system.

Senate Democrats who studied the plan say such a schedule would bring $17.25 billion in additional costs to taxpayers over the next 30+ years.

Other critics are skeptical that the state could keep to a schedule at all; in 2011 it made a similar promise with a 7-year ramp-up, but the schedule was scrapped soon after.

More from NJ Spotlight:

Treasurer Andrew Sidamon-Eristoff told lawmakers last week that the 10-year ramp-up is more manageable and would still leave the pension system — which is deep in debt after two decades of underfunding — more than 70 percent funded at the end of a payment schedule that will stretch over the better part of the next three decades.

[…]

“The actual difference between the seven-year phase-in required by law and the 3/10 payment schedule proposed by the governor is $17.25 billion. Every $1 we pay into the pension system over the next five budget years saves $3 in future payments for us and our children,” according to Mark Magyar, policy director for the NJ Senate Democratic Majority Office and a former reporter for NJ Spotlight.

Treasury Department figures provided to OLS for both the 5/7 and the 3/10 payment schedules show a $14.35 billion difference through FY 2045, but payments under the pension reform law actually continue through FY 2048, which makes the final differential between the two payment schedules $17.25 billion, Magyar added.

With most Democrats strongly opposing the plan, and an upcoming court ruling that could make the discussion moot, it’s unlikely the schedule ever gets put into effect.

 

Photo credit: “New Jersey State House” by Marion Touvel – http://en.wikipedia.org/wiki/Image:New_Jersey_State_House.jpg. Licensed under Public domain via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:New_Jersey_State_House.jpg#mediaviewer/File:New_Jersey_State_House.jpg

The CEOs of the two largest public pension funds in the U.S. are urging G7 finance ministers to support a firm, long-term goal for reducing global greenhouse gas emissions.

The pension chiefs join over 100 other institutional investors in calling for G7 to deal with climate change.

From the Financial Times:

Anne Stausboll of Calpers, which has a portfolio of investments worth nearly $300bn, and Calstrs’ Jack Ehnes, are among more than 100 institutional investor heads who have signed a joint letter to the finance ministers ahead of a G7 preparatory meeting in Germany this week, saying climate change is “one of the biggest systemic risks” investors face.

It is the first time a global coalition of investors has called for such action, according to representatives of the group, which also includes the Ontario Teachers’ Pension Plan in Canada and ERAFP, the pension fund for French civil servants.

[…]

Ms Stausboll said that a long-term, emissions-cutting goal and a price on carbon dioxide pollution were “critical” for sending the market signals needed to encourage greener investments.

“A global agreement in Paris will provide clarity for investors and advance the shift to a low carbon economy,” she said in a statement.

The institutional investors calling for a firm emission reduction target collectively manage over $12 trillion.

 

Photo by  Paul Falardeau via Flickr CC License

A bill calling for pension changes passed the Texas Senate on Friday just weeks after clearing the House. The slightly-modified bill will now go back to the House for likely approval, which means it could be on the governor’s desk sooner than later.

The bill aims to shore up the funding of Texas’ Employees Retirement System by forcing workers to pay a higher contribution rate during their working lives.

More from the Texas Tribune:

The Texas Senate on Friday voted to beef up the state’s underfunded retirement system for state employees by adding about $440 million to the program.

The Employees Retirement System pension fund is about $7 billion short — it holds 76 cents for every dollar it promises to state retirees. The Senate approved House Bill 9 by Dan Flynn, chairman of the House Pensions Committee, which targets the shortfall by raising state employee contributions to the fund to 9.5 percent of their payroll by 2017 — a 2 percent increase. The measure was sponsored in the Senate by Joan Huffman, R-Houston.

HB 9 passed the House last month. If the lower chamber approves minor changes added in the Senate, the measure will head to Gov. Greg Abbott’s desk.

“It’s not nearly enough,” Seth Hutchinson, vice president of the Texas State Employees Union, told The Texas Tribune in March. “State employees can’t afford to work for the state anymore.”

Read the text of House Bill 9 here.

 

Photo credit: “Flag-map of Texas” by Darwinek – self-made using Image:Flag of Texas.svg and Image:USA Texas location map.svg. Licensed under CC BY-SA 3.0 via Wikimedia Commons

A months-long search has ended as the San Diego County Employee Retirement Association (SDCERA) has hired a new chief investment officer, according to a report from Pensions & Investments.

This time around, the CIO is a single person, as opposed to a firm.

In November, SDCERA voted to terminate its-then CIO, Salient Partners. (The firm still has a role in the fund, but this new hire will likely erode Salient’s responsibilities.)

More from Pensions & Investments:

Stephen Sexauer will join San Diego County Employees Retirement Association as chief investment officer on May 29, said Dan Flores, spokesman for [SDCERA].

[…]

SDCERA’s board and David Wescoe, SDCERA’s interim CEO, announced the hiring at Thursday’s board meeting following a closed session, Mr. Flores wrote.

Mr. Sexauer will oversee SDCERA’s investment strategy and day-to-day operation of the investments division. He will also help the board with the pension fund’s investment policies, investment strategy and asset allocation as well as coordinate the transition of Salient’s duties as portfolio strategist.

Mr. Sexauer was chief investment officer of Allianz Global Investors’ multiasset U.S. business until he retired in December and then became an adviser to the company.

Sexauer will manage around $10 billion in assets in his role.