Pension360

https://youtu.be/D0cXkMjObG8

CalPERS released a video this week of Chief Investment Officer Ted Eliopoulos briefly discussing Britain’s vote to leave the EU – and what it means for the pension fund’s portfolio.

Credit: CalPERS Youtube

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

Rachael Levy of Business Insider reports, A select group of hedge funds made some serious money on Brexit:

The UK has voted to leave the European Union, a shock decision that sent markets crashing on Friday.

For a small band of hedge funds, the decision, and its impact on the market, led to outsize returns.

The gains are especially noteworthy, as many funds went in to the vote having reduced risk.

“An unusually low number of client incoming calls and modest trading volumes away from the Russell rebalancing may speak to the already light positioning ahead of the UK referendum,” Credit Suisse said in a note Friday.

In addition, betting on a binary outcome such as Leave-Remain is a brave bet. Four out of five European hedge funds polled expected Britain to stay in the EU, according to a Preqin poll earlier this month, and most polling immediately before the vote suggested Remain would carry the day.

Still, several funds posted impressive returns. The NuWave Matrix Fund was up 12% on Friday, putting it up around 10% for the year, according to chief operating officer Craig Weynand.

The fund, which manages about $60 million, runs a CTA/systematic macro strategy, meaning it makes trading decisions based on historical patterns rather than gut decisions.

“It’s true that Brexit was a binary outcome, but by the same token, history has a number examples of binary outcomes,” Weynand said, citing the Federal Reserve decisions and shock events like tsunamis. “History doesn’t repeat itself, but it usually rhymes.”

Another macro manager, Quadratic Capital Management, posted its best ever returns since it launched in May 2015, according to a person with knowledge of the matter.

Quadratic didn’t make money betting on a Leave vote, but rather by deploying options strategies that make money during risk-off events like the one Friday, the person said.

Quadratic manages about $428 million and is run by one of the industry’s few female hedge fund managers, Nancy Davis.

Schonfeld Strategic Advisors, which manages two funds alongside billionaire Steve Schonfeld’s money, also did well. The firm is performing in the low double digits this year and was in positive territory early Friday, according to CIO Ryan Tolkin.

He declined to share exact performance figures or assets under management, but said Schonfeld manages about $12.5 billion, including leverage.

Schonfeld, like many hedge funds, didn’t take a concentrated bet on the outcome of the Brexit vote.

“We try not to take binary views on things like this,” Tolkin told Business Insider.

Rather, the firm, which uses market-neutral equity and quant strategies, reduced its overall market exposure in hopes of capitalizing on post-vote volatility, Tolkin said.

“Now we’re in a good position to try to take advantage of some price points that we’ve now got,” he added.

Other managers seem to have taken advantage, too. Winton Capital’s systematic trading strategy gained 3.1% Friday, according to Reuters.

And ISAM Systematic Master fund, launched by ex-Man Group manager Stanley Fink, gained 4% early Friday, according to a person who had seen the figures. ISAM didn’t immediately respond to a request for comment.

Crispin Odey, who manages about $10.2 billion at his macro-focused firm, told Reuters Friday that his fund would gain 15% from the Brexit outcome, regaining some of its losses this year.

George Soros and Stanley Druckenmiller, both legendary investors, also profited from the market drop, according to CNBC. Spokespeople for Soros and Druckenmiller declined to comment.

Soros says Brexit has made the disintegration of the EU practically irreversible and has called for a thorough reconstruction of the European Union in order to save it. He has been very bearish this year and even returned to trading his views.

However, a Soros spokesperson said this in a statement following Brexit: “George Soros did not speculate against sterling while he was arguing for Britain to remain in the European Union. In fact, he was long the British Pound leading up to the vote.”

Of the hedge fund managers named in the article above, the one lady that caught my attention was Nancy Davis (pictured above), a rising quant star who described her fund’s approach as such:

We have a very differentiated approach to portfolio construction. I’d argue it’s quite innovative, as the whole portfolio is implemented with optionality. We primarily use options in our portfolio construction, which is a risk-based support approach to portfolio construction. We are a discretionary macro strategy that seeks to have a defined downside along with asymmetric risk-reward. The strategy is also typically long volatility. We aim to deliver uncorrelated returns in normal environments and also in risk-off environments.

Obviously being long vol (VXX) is a great strategy when event risk strikes but it’s the way they construct their portfolio using options to limit downside risk which I find interesting. Also, unlike other big macro funds, I like the fact that Quadratic manages just under $500 million, which shows me they are managing their growth properly and focusing first and foremost on performance, not asset gathering (note: do your own due diligence but these are the types of funds I like when looking at hedge funds).

As far as other hedge fund managers named in the article, yes, Crispin Odey made 15% from the Brexit outcome but his fund was down over 30% in the first four months of the year, so he needs all the bearish news he can get to keep his fund afloat.

Who else gained following the Brexit vote? CNBC’s Kate Kelly reports that Saba Capital, the credit hedge fund in New York run by Boaz Weinstein, was up primarily on positions that benefited from volatility:

[…] a combination of holdings that included equity put options in Europe and Asia and credit-default swaps, or insurance policies on debtors unable to pay off their debts, one of these people said.

With nearly 13 percent upside through the end of May, Saba is one of the better performing hedge funds this year, according to an industry poll conducted weekly by HSBC.

You’ll recall Saba was embroiled in a legal dispute with PSP Investments over how it marked down its investments when PSP redeemed from that fund after a few years of heavy losses. Since then, it’s been loading up on closed-end funds and performing exceptionally well.

Speaking of PSP Investments and other large Canadian pension funds, they were right to worry about Brexit as they took a huge haircut on their UK investments when the British pound fell to a 31-year low.

But Matt Scuffham of Reuters reports, Canada’s largest pension funds eye post-Brexit bargains:

Canada’s largest pension funds see opportunities to invest in UK real estate and infrastructure at discounted prices following Britain’s decision to leave the European Union, fund executives said on Friday.

The funds, which manage over C$1 trillion ($768 billion) of assets and are among the biggest investors in U.K. real estate and infrastructure, anticipate valuations falling as a result of Britain’s decision to leave the bloc, presenting opportunities for investors willing to take a long-term view.

“The Canadian plans are great investors and I think, as opportunities present themselves, they will take advantage of them. It’s at times of dislocation that people often get a really good deal,” said Hugh O’Reilly, chief executive at OP Trust, one of Canada’s 10 biggest public pension funds.

Canada’s large pension funds have differentiated themselves from international rivals by investing directly in infrastructure and real estate as an alternative to choppy equity markets and low-yielding government bonds.

In the U.K., Canadian funds own or have a stake in assets including London City Airport, the High Speed One rail link connecting London to the Channel Tunnel, the country’s National Lottery operator Camelot, Scotland’s biggest gas network and the ports of Southampton and Grimsby.

Their long-term investment perspective means they can look beyond short-term volatility to invest in assets they believe will deliver strong returns in future years, executives say.

The Canada Pension Plan Investment Board, one of the world’s biggest dealmakers and Canada’s biggest public pension plan, said the fallout from the vote could provide compelling opportunities and the U.K. remained an attractive market.

“The U.K. and Europe continue to be very important and attractive markets for us. As any investor, we have a bias to stability over uncertainty, yet periods of dislocation can present compelling opportunities that short-term investors are unable to pursue,” a spokesman for the fund said.

The funds continue to view Britain as a good investment over the longer term despite concerns over the impact that the decision will have on London’s standing as a financial center.

“The economic fundamentals in the U.K. are very solid. We think there are, and may continue to be, great opportunities from an investment point of view. In terms of the position of the City (of London), I think what matters there is access to capital plus its talented people,” O’Reilly said.

Lisa Lafave, senior portfolio manager at the Healthcare of Ontario Pension Plan, another of Canada’s 10 largest funds and a big investor in U.K. real estate, also said she anticipated the vote to leave would present buying opportunities.

“There may be some positive opportunities in the short-term. Timing will be important to protect from any downside,” she said.

A spokeswoman for the Ontario Teachers’ Pension Plan, Canada’s third-biggest public pension plan, said the fund was continuing to work on new opportunities in the U.K.

Earlier this year, a consortium of Canadian pension funds purchased London’ City airport, effectively a vote of confidence in London’s future as a financial center regardless of the outcome of the vote.

I thought that consortium went nuts over that London City Airport deal but in the end, they are very long-term investors who are going to work that asset to turn in a profit (in the short run, they’re going to lose big money there and with other UK investments).

As far as opportunities in the UK go post Brexit, no doubt, public and private assets are much cheaper now and unless you think this is the beginning of the end of the EU, many interesting opportunities will present themselves in the months ahead.

But it’s a very tough environment right now to make any long-term or short-term decisions. As I discussed on Friday, Brexit represents Europe’s Minsky Moment and what happens next is anyone’s best guess.

Some think Brexit could take ten years or that Brexit may not happen after all. Others are warning the Euro is gone within three to five years.

There’s a tremendous amount of uncertainty which is why we’re witnessing a massive flight to safety into US bonds and the Japanese yen. At this writing, global stocks are getting slammed and the yield on the ten-year US Treasury note hit 1.46%, which is the low reached back in July 2012 (click on image):

All this to say there is a lot of fear of contagion out there and I don’t blame global asset allocators one bit. Brexit means a UK recession and more deflation in Europe, which will mean more deflation in Asia, which means the US runs the risk of importing more deflation in the years ahead.

So, you really think the Fed is going to hike rates in this deflationary environment? No chance, and if things get really bad, the Fed will be forced to cut rates or go negative. No wonder Financials (XLF), Metal and Mining (XME) and Energy (XLE) shares are getting clobbered on Monday but they’re not alone (click on image to view various ETFs I track):

All I can say is be very careful buying the dips here. It’s best to avoid some sectors altogether in this deflationary environment and focus on scaling into others which have pricing power and long-term growth.

Where do I see opportunities ahead? High beta biotech shares (XBI and IBB) and lower beta healthcare (XLV) but I’m in no rush to buy anything right now, just buying more of  the biotech stocks I already own and sitting tight as this Brexit mess works itself out. There is no rush to buy anything, stocks aren’t going to melt up in this deflationary environment.

One thing Brexit has taught us is bonds are the ultimate diversifier when event risk strikes. If you look at the list above, all the bond ETFs (BND, TLT and ZROZ) are up on Monday while stocks are all getting slammed hard.

What will be the next major event risk? Frexit, Nexit or President Donald J. Trump? Who knows? All I know is it will be a hot and volatile summer and you’d better be prepared for anything going into the fall. A lot of experts (including me) got Brexit wrong, so we simply don’t know what lies ahead.

Paint and coating maker PPG Industries this week made a deal to transfer $1.6 billion worth of “pension risk” to MetLife and MassMutual.

The deal comes despite past comments from the MetLife CEO about the worrisome nature of pricing these deals.

From the Chicago Tribune:

The deal accounts for about 13,400 of PPG’s salaried and non-union hourly retirees or their survivors who began receiving benefit payments before April 2, Pittsburgh-based PPG said Monday in a statement that didn’t disclose terms. The insurers will assume the obligation to make all future annuity payments and administer the arrangements. Other participants will remain in PPG’s pension plan.

PPG joins companies including General Motors and Verizon Communications, which have been seeking to offload pension risks that are pressured by low interest rates and a growing possibility that beneficiaries may live longer than expected. Insurance companies, which are already focused on overseeing risks tied to life expectancies and huge bond portfolios, have been snapping up the deals, which give them more assets to manage in exchange for taking on liabilities.

“The agreement will transfer the payment administration and obligations to these high-rated insurance companies with a long history of efficiently providing group annuity benefits,” PPG said in the statement. “This transfer is consistent with previous PPG actions to better manage the company’s pension process.”

[…]

Prudential Financial Inc. has won some of the largest agreements, reaching multi-billion dollar risk transfers with GM and Verizon. MetLife Chief Executive Officer Steve Kandarian has been wary of some of those massive deals, since the long-dated liabilities cannot be repriced, leaving little room for error on price negotiations.

Japan’s pension funds are turning to alternatives like hedge funds in the wake of market volatility, according to a new JP Morgan survey.

(The survey was conducted months before the Brexit vote.)

One in four pensions funds said they’d increase their allocation to alternative assets to avoid market volatility, according to the survey.

More from Bloomberg:

Average allocations to alternative assets increased to a record 14 per cent in the 12 months ended March, from 13 per cent a year earlier, based on the responses from 127 domestic pension funds surveyed by the unit of JPMorgan Chase & Co. For pensions that have invested in alternatives, such assets are now their second-biggest allocation, accounting for 19 per cent of the total, following a 27 per cent holding in Japanese bonds, the survey showed.

[…]

Now, with the UK’s decision to leave the European Union rattling markets, sending global equities lower and triggering large swings of major currencies, pensions’ appetite for alternative assets is likely to continue. About one in four pension funds surveyed said they will boost allocations to alternatives, while one in five said they will reduce allocations to Japanese equities amid a surge in volatility.

Within alternative assets, hedge funds accounted for 8.3 per cent, while real estate investment trusts and property each represented about 1 per cent to 2 per cent, according to the survey.

Investments in Japanese stocks and bonds have declined steadily in the past five years, with equities falling to 8.4 per cent from 14 per cent in 2012, and bond holdings declining to 30 per cent from 38 per cent in the period, the survey showed.

Many companies in the U.S. are boycotting Israel as part of the “boycott, divestment, and sanctions” campaign. Now, state lawmakers are looking to boycott that boycott.

New Jersey House lawmakers are expected to pass legislation that would ban pension investment in companies currently boycotting Israel. If those investments have already been made, the pension fund will have to divest.

The bill passed the Senate unanimously last month. But certain groups, like the ACLU, are questioning the 1^st amendment implications of such a measure.

From the Philadelphia Inquirer:

Lawmakers on Monday are expected to pass legislation that would prohibit the state Treasury Department from investing public employee pension funds in companies that boycott Israel as part of the so-called “boycott, divestment, and sanctions” movement.

It would join about a dozen other states that have taken similar action, most recently New York, where Gov. Andrew Cuomo this month signed an executive order requiring divestment of public funds from companies that have engaged in the BDS campaign against Israel.

The legislation would give the director of the state Division of Investment four months to identify investments that violate the act. Following implementation of the law, the division would have two years to divest, sell, redeem, or withdraw such investments.

Under current law, Treasury is similarly banned from investing pension funds in companies with ties to Iran or Sudan.

The bill would not apply to companies providing humanitarian aid to the Palestinian people.

[…]

The ACLU of New Jersey contends that the legislation advancing in Trenton “punishes speech, political and otherwise” and builds “government blacklists targeting people who hold certain political viewpoints.”

————————

Alarm bells – BBC Europe editor, Katya Adler

The EU worries Brexit could reverse 70 years of European integration.

In all my years watching European politics, I have never seen such a widespread sense of Euroscepticism.

Plenty of Europeans looked on with envy as Britain cast its In/Out vote. Many of the complaints about the EU raised by the Leave campaign resonated with voters across the continent.

Across Europe leading Eurosceptic politicians queued up this morning to crow about the UK referendum result.

But the mood in Brussels is deeply gloomy. The Brexit vote sends screaming alarm bells, warning that the EU in its current form isn’t working.

————————

Last Friday, Ms Le Pen had told a gathering of far-right parties in Vienna: “France has possibly 1,000 more reasons to want to leave the EU than the English.”

She said the EU was responsible for high unemployment and failing to keep out “smugglers, terrorists and economic migrants”.

Mr Wilders, leader of the Party for Freedom in the Netherlands, said in a statement: “We want to be in charge of our own country, our own money, our own borders, and our own immigration policy.

“As quickly as possible the Dutch need to get the opportunity to have their say about Dutch membership of the European Union.”

The Netherlands faces a general election in March and some opinion polls suggest Mr Wilders is leading. A recent Dutch survey suggested 54% of the people wanted a referendum.

Mateo Salvini, the leader of Italy’s anti-immigration Northern League, tweeted: “Hurrah for the courage of free citizens! Heart, brain and pride defeated lies, threats and blackmail.

“THANK YOU UK, now it’s our turn.”

The anti-immigration Sweden Democrats wrote on Twitter that “now we wait for swexit!”

Kristian Thulesen Dahl, leader of the populist Danish People’s Party, said a referendum would be “a good democratic custom”.

European Parliament President Martin Schulz denied Brexit would trigger a domino effect, saying the EU was “well-prepared”.

But Beatrix von Storch, of Germany’s Eurosceptic AfD party, praising “Independence Day for Great Britain”, demanded that Mr Schulz and European Commission head Jean-Claude Juncker resign.

“The European Union has failed as a political union,” she said.If you ask me, heads should roll in Brussels, starting with Juncker.

The EU is in a crisis and whether you like it or not, this uncertainty and wave of populism across Europe is going to threaten the global economy and financial markets for a very long time.

After Brexit, we will have to contend with Nexit, Frexit, Italexit, Swexit and one referendum after another, including another one in Scotland. And who knows, maybe Germany will just say enough is enough, we’re out of here!

I sent an email to my close friends asking for their opinion. One of them, a cardiologist, replied: “This is really unbelievable.  The worst possible result…. not a clear majority overall with big regional differences between England and Scotland and Ireland. Horrible. It will tear the UK apart and probably destroy the EU.  I don’t know why they make these votes 50+1.”

His brother who works in finance stated this: “The problem with the Euro is not Greece or any of the other PIIGS. It is actually Germany who is the 800 pound gorilla in the room. So, in my mind, there are two outcomes: the Euro falls apart or Germany leaves the Euro. Brexit is just the first symptom.”

And my younger brother, a psychiatrist, stated this: “It’s a binary outcome: either the Euro falls apart, or they tighten up and move towards a true fiscal , monetary, and political union. Status quo is now untenable. I’m betting it falls apart.”

In these crazy markets, we need to listen more to psychiatrists and cardiologists and less to financial analysts. I remain short the euro and I’m keeping my eye on the surging yen. So far, despite the volatility, the reaction is one of relative calm (or complacency), but don’t kid yourselves, this is the worst possible outcome for the UK, the EU, and the global economy.

One thing is for sure, the Fed is out of the picture for the remainder of the year and possibly all of next year depending on the global fallout of Brexit. Central banks are going to be pumping massive liquidity into the global financial system to limit the shockwaves but they are only doing damage control.

And that global deflation tsunami I warned of at the beginning of the year is now headed our way faster than I even imagined. If you don’t believe me, listen to Bill Gross discuss the fallout of Brexit below where he rightly notes populist policies are deflationary.

Gross also discusses the ECB’s policy following Brexit and the limits of negative interest rates but as I’ve stated bonds have entered the Twilight Zone and it could a very long time before rates normalize.

Also, a handful of other European countries say they want a referendum on the European Union. No doubt, Brexit will likely trigger a domino effect in the EU, one that could spell the end of the union.

Three years ago, Michael Sabia, the Caisse’s CEO warned: “There’s a dark night going on in Europe, a dark and foggy night where bad things come out of trees and bite you. It’s a pretty scary place.”

He was right. Welcome to Europe’s Minsky Moment and be prepared for a long and volatile road ahead.

In an attempt to ebb future liabilities, the Philadelphia Board of Pensions is considering offering a cash buyout to certain retirees, and then transferring them into a less costly, less lucrative retirement plan.

The name of the new plan is Plan 87, and more than 30,000 retirees will be eligible.

From the Philadelphia Inquirer:

Officials have said that the city’s oldest pension program, known as Plan 67, is too costly and one of the reasons the program is in such dire shape.

If everyone in Plan 67 were to convert to the city’s less costly plan, Plan 87, the city could reduce its unfunded liability by $1 billion, according to an actuary report presented to the Pensions Board on Thursday.

Controller Alan Butkovitz is suggesting that a onetime cash incentive be offered to any Plan 67 member who switches to Plan 87.

“In order to move forward with this proposal, I am requesting that the Pension Board conduct a survey of active and inactive members of the Plan 67 to gauge interest of how many would opt for the [Employee Pension Income Conversion] Plan,” Butkovitz said in a letter Wednesday to Fran Bielli, the Pensions Board’s executive director.

The actuary’s report gives numbers for various scenarios depending on percentage of participants and payout percentages ranging from 25 percent to 70 percent. Butkovitz’s office focused on giving retirees an up-front cash payment of 50 percent of the difference between what a retiree would get in Plan 67 and Plan 87.

For example, a city accountant with a final salary of $50,000 and 20 years of service could receive a $20,007 cash payment in exchange for reducing his or her lifetime pension from an annual $25,000 to $21,000.

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

Don Pittis of CBC News reports, Now that Bill Morneau conquered the CPP it’s time to move on to a harder pension problem:

Who would ever have guessed that hammering out a Canada Pension Plan solution would have been so easy?

With such widespread support for Finance Minister Bill Morneau’s latest pension reforms, perhaps the government will finally have the confidence and wisdom to solve the other giant pension problem: the case of the missing money.

Only a year ago, calls for CPP reform seemed to be falling on deaf ears. Opponents labelled contributions to our own retirement a “payroll tax” and talked about the danger of big government.

Job losses

Small business hollered that their share of the contribution would slash profits and lead to job losses, something the government denies. Some of those objections have not gone away.

“Finance ministers are putting … jobs in jeopardy and willfully moving to make an already shaky economy even worse,” said Canadian Federation of Independent Business president Dan Kelly in a scathing release just after the federal-provincial accord.

According to the CFIB, the only good thing about the reform was that it superseded the Ontario government’s pension plan, which Kelly called “the CPP’s far uglier cousin.”

Surprising support

The surprise was not the CFIB’s intransigence. Unexpected was the amount of support from some business owners and from commentators often considered right-of-centre and pro-business, despite the fact that some details have yet to be worked out.

As the C.D. Howe pension panel adviser Tammy Schirle commented in the Report on Business, among many advantages of the plan, when employers and employees contribute to the CPP they effectively save the future taxpayer the cost of paying the way of people who failed to save.

That sounds like an argument I made in 2013 that at the time was a voice in the wilderness in the face of a tidal wave of opposition to CPP reform.

Politics have changed with the arrival of the Liberal government. But maybe the public mood has changed, too. If so, it is time for the government to solve the other great problem of Canada’s pension system.

Several flaws with objections

There are several flaws with business objections to contributing to CPP. One is the idea that the true cost of contributing to the retirement costs of low wage and temporary employees should not come out of profits, but instead be borne by future taxpayers.

And this is exactly the next problem that Morneau, with his sophisticated understanding of the pension system from his career in that business, must now address.

There is no question that it is good to solve the problem of wage earners who fail to contribute enough to their own retirement, as the CPP reform goes part way to doing.

Far more unjust is the problem of people who dutifully contribute to a pension throughout their lives and don’t see the benefit, once again leaving taxpayers on the hook. It is the problem of ghost pensions, and it is something that in the wake of the CPP success, should not be impossible for Morneau to address.

Fantasy fiction statements

The essential problem is that while employees watch their pension payments come off their periodic cheque and while benefit statements show their pension amounts growing toward a comfortable retirement, that money being set aside is imaginary.

Government employees are not exempt from the travesty, as we saw in the Quebec municipal pension cuts and the collapse of Detroit. In both cases, governments claimed to be tucking away the pension funds but suddenly employees discovered those pension statements were fantasy fiction.

In some ways, I suppose, when governments default on their responsibility, taxpayers are on the hook in any event, but the case of private companies that default on pensions is more egregious.

When companies go broke, money owed to pensioners is classified as part of the company’s assets, so in the case of a large contribution shortfall, pensioners who gave up years of wages to cover their pensions, only get a fraction of the money they are owed. Secured creditors, those who lent money against a specific asset, get paid first, and theoretically are able to take all the money before pensioners get a dime.

Whether for public or private pensions, the solutions are surprisingly simple.

One easy fix is to make it a law that money set aside as indicated in pension statements is actually set aside. Instead of being kept in imaginary accounts, the funds are managed by bonded professionals whose only responsibility is to current and future pensioners.

Phased in changes

In that way, employers who strike a bargain with their workers immediately see how much it is costing them instead of running up deficits in their pension accounts that only get more and more impossible to repay when the employer gets into financial trouble.

In the case of companies that feel they cannot make a profit without the capital owed to pension funds, the simple solution would be to make it a law that any borrowing is treated as a secured creditor of the highest order.

Studies in the past have indicated that such rules, put in place when a company is healthy, are no impediment to companies raising money from other sources. Lenders do not expect healthy companies to fail or they would not lend them money in any case.

As with the CPP changes, there will be objections from business, but everyone else knows it should be done. The difficulty is making an abrupt change.

That is the brilliance of the CPP plan that Morneau could repeat here. By phasing the changes in over a number of years, employers would be able to adjust to the new reality, but future pensioners — and taxpayers — would be saved from unexpected losses.

I appreciate what Don Pittis is writing about in this article but I have an even  better idea: get companies out of running pensions altogether.

I wrote about this in my comment on real change to Canada’s retirement system when the Liberals swept into power:

In my ideal world, we wouldn’t have company pension plans. That’s right, no more Bell, Bombardier, CN or other company defined-benefit plans which are disappearing fast as companies look to offload retirement risk. The CPP would cover all Canadians regardless of where they work, we would enhance it and bolster its governance. The pension contributions can be managed by the CPPIB or we can follow the Swedish model and create several large “CPPIBs”. We would save huge on administrative costs and make sure everyone has a safe, secure pension they can count on for life.

Companies should focus on their core business, not pensions. I know, there are some excellent company defined-benefit plans but they’re the few. The majority are struggling in a low rate, low return world.

Now that we got an agreement to expanding the CPP, maybe we can talk seriously about how best to deal with company DB and DC pensions. In my opinion, we can and should seriously think about having an entity like CPPIB manage all these pensions. If not CPPIB, then another public pension fund which specializes in managing pensions and is backed by the full faith and credit of the federal government.

Companies will sign on because they’re already looking to cut their pension costs. Why do I like the idea of CPPIB or several “CPPIBs” managing all pensions? Because it makes sense and it will be in the best interests of all stakeholders: companies, governments, and most importantly, beneficiaries.

Again, imagine a world where all pensions are managed by the Canada Pension Plan. Workers in the private and public sector have automatic pension portability and those in the private sector can rest assured that no matter what happens to their company, their pensions won’t be slashed and they can still retire in dignity knowing their pensions are safe and secure.

By the way, this is the future of pension policy. We’re not going to have company pensions or even municipal pensions. We are going to have one big entity called CPPIB or several “CPPIBs” managing the pension contributions of all Canadians.

No more Ontario Teachers, HOOPP, OMERS, Caisse, bcIMC or even PSPIB. They will still be around but they’re going to be covering the pensions of a lot more people.

You might think I’m dreaming but this is where we are heading or at least where we should be heading.

In related news, Andy Blatchford of the Canadian Press reports, CPP boost to cost feds $250M per year to offset fresh burden on low-wage earners:

The federal government estimates it will cost taxpayers $250 million per year to offset the additional financial burden that expansion of the Canada Pension Plan will eventually place on low-income earners.

Ottawa and the provinces reached an agreement-in-principle this week to gradually increase CPP premiums as a way to boost the program’s benefits for future generations of retirees.

The announcement also included a federal commitment to enhance its refundable “Working Income Tax Benefit” to help compensate eligible low-wage earners for the higher CPP contributions.

The Finance Department projects that change will cost about $250 million annually once the CPP premium increase has been fully phased in.

The federal government also says it will allow the provinces to make specific changes to the tax benefit so it’s more harmonized with their own programs.

Due to this, Ottawa says it will continue working with the provinces and territories before implementing the adjustments to the tax benefit.

The Canada Revenue Agency describes the tax benefit as a refundable tax credit that provides relief for low-income individuals and families who are already in the workforce. The agency also says the benefit encourages others to enter the workforce.

Earlier this week, every provinces except Quebec and Manitoba agreed to the deal to expand the CPP.

The agreement states that CPP premium increases on workers and employees will be phased in over seven years, starting on Jan. 1, 2019.

Under the deal, the federal government also said it would provide a tax deduction — instead of a tax credit — on the increased CPP contributions by employees.

The CPP changes will increase the maximum amount of income subject to CPP by 14 per cent, to $82,700.

The full enhancement of the CPP benefits will be available after about 40 years of contributions, the government said.

The income replacement rate will rise to one-third from one-quarter, meaning the maximum CPP benefit will be about $17,478 instead of about $13,000.

Also, Molly Ward of BNA reports, Canada to Extend Pension Plan Tax to Higher Incomes, Increase Rate:

Canada is to implement a new, separate tier for the Canadian Pension Plan (CPP) that would increase the existing upper earnings limit to C$82,700 ($64,580) from C$54,900 ($42,870) by 2025, according to an agreement reached by Canada’s Ministers of Finance and published by the government June 20.

The current CPP contribution rate also is expected to increase by 1 percent for employers and employees to 5.95 percent from 4.95 percent over five years beginning Jan. 1, 2019, for those already in the existing annual pension earnings range, Canada’s Finance Department spokesperson David Barnabe told Bloomberg BNA June 21. Actuarial assessments are to be used to determine final tax increase amounts.

Beginning implementation in 2024, earnings greater than the existing annual pension earnings range will be subject to a new tax for both employers and employees that is expected to be 4 percent, Barnabe said.

Under the two tier system effective 2025, the rates and ranges would be:

• 5.95 percent for those at or less than the earnings cap (currently C$54,900 in 2016 but is to increase incrementally each year according to a legislated formula) and
• 4 percent for those with earnings greater than the earnings cap to C$82,700 range that previously did not have coverage.
•  Earnings more than C$82,700 will not be subject to pension plan contributions.

“We believe this is a positive move by the federal government. The plan is to make incremental changes and we are very supportive,” said Steven Van Astine, Vice President of Education at the Canadian Payroll Association.

The agreement was signed by eight provinces. Quebec and Manitoba withheld their signatures.

The federal government has asked the provinces to finalize the agreement by July 15.

Impact on Ontario Pension Plan

Ontario Finance Minister Charles Sousa has told Canadian media that the proposed adjustments to the CPP would allow the province to not continue pursuing the implementation of its own provincial pension plan, which was scheduled to go into effect on certain companies beginning January 2018.

Indeed, the Toronto Star reports, Ontario halts pension work with CPP deal looming:

Staff at the soon-to-be-disbanded Ontario Retirement Pension Plan have hit the “pause” button on implementing the retirement scheme while critics fume they are “twiddling their thumbs” at taxpayers’ expense.

Finance Minister Charles Sousa said the halt comes as Ontario and most other provinces face a July 15 deadline to approve a provisional deal reached Monday to improve Canada Pension Plan payouts for retirees.

“We’re working now to put a pause on all activity,” Sousa told reporters Wednesday, noting the ORPP will not proceed with its most costly step — hiring a company to administer the plan.

Officials will be meeting “in short order” to decide how to close out the ORPP and staff will have to stay on to handle those duties, Sousa said.

“That’s what we’re working on,” he added, correcting earlier statements from his associate minister Indira Naidoo-Harris that implementation was proceeding in case the CPP deal falls through. Progressive Conservative MPP Julia Munro said a contingency plan should already be in place because the government had long hoped its Ontario pension plan push would prompt other provinces to back an enhanced CPP.

“Fifty employees, including (chief executive officer) Saad Rafi and his $525,000-a-year salary, will spend an undetermined amount of time twiddling their thumbs in their offices,” warned Munro (York-Simcoe).

“Ontario has already sunk at least $14 million into the ORPP. This does not include severance payments that may be awarded to employees.”

I didn’t even know they already hired a CEO and staff for the ORPP. What a total waste of money this is and I’m shocked that they didn’t wait to see how the CPP talks were going prior to making such commitments.

One final note, I’m having troubles with my Gmail account, so if you didn’t read my last comment on Brexit, you can do so by clicking here. By Friday morning, this will all be behind us.

The Pennsylvania Senate on Thursday voted down a pension overhaul proposal that had earlier cleared the House.

The bill was a bi-partisan pension reform bill and its scope was much smaller than past bills.

From the Philadelphia Inquirer:

Under the proposal the House approved this month, new hires would keep the traditional benefit plan for the first $50,000 of their annual salary, with a 401(k)-style plan targeted for anything above that.

Pension changes became a key sticking point during last year’s historic budget impasse between the legislature and Gov. Wolf. Corman and other Republicans have said the state cannot begin to address its fiscal problems without tackling rising pension costs.

[…]

The Democratic Wolf administration and the GOP-led legislature have been working to avoid another stalemate, but neither side has indicated that a deal will occur by next Friday’s deadline for a new state budget. Both have key differences to resolve, including how much to spend in the next fiscal year.

Lawmakers left the Capitol on Thursday and are not scheduled to reconvene until Monday – although the House Appropriations Committee is set to meet Sunday night, presumably to begin moving a budget bill.

 

New Jersey’s public pension system will go at least the first few months of the new fiscal year without an updated investment policy, as trustees are split over whether to cap hedge fund investments at 4 percent.

This doesn’t mean investments will stop being made and monitored; but it does mean that the fund will be using last year’s investment policy as guidance.

In-house investment staff recommended a 9 percent hedge fund allocation to the board, down from 12 percent last year.

But several union-affiliated trustees are pushing for a 4 percent cap.

From NJ Spotlight:

The disagreement over the hedge funds broke out in full force during the council’s public meeting in Trenton last month as the investment plan for the 2017 fiscal year came up for a discussion.

In-house managers from the state Division of Investment had recommended scaling back hedge-fund stakes from 12.5 percent to 9 percent of total investments. They said they were also readjusting the hedge-fund portfolio to favor those with far lower fees than the standard 2 percent charged for managing the investments and as much as 20 percent taken from all profits.

Adam Liebtag, an AFL-CIO labor-organization representative on the council, made a motion to instead cap hedge-fund investments at 4 percent during the next fiscal year. When his motion resulted in a tie vote among the 14 members in attendance, that stalled the overall advancement of the broader 2017 investment plan.

Although there was talk of setting up a special meeting to help resolve the differences before July 1, officials from the Department of Treasury confirmed yesterday that no meeting will occur and that the pension system will instead break from tradition and start the new fiscal year operating under the same asset-allocation plan that’s been in place for the 2016 fiscal year.

It’s unclear when the pension system last entered a new fiscal year without a new investment plan in effect, but Treasury spokesman Joseph Perone yesterday downplayed the impact it would have on the broader investment strategy. He said many other states set investment targets for more than just one year. “Therefore, whether we set the targets in June or August is not a big issue,” Perone said.