Pension360

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

Janet McFarland of the Globe and Mail reports, Volatile markets, stronger loonie hurt solvency of pension plans:

Canadian pension plans faced a sharp drop in solvency in the first quarter of 2016 as a result of roller-coaster equity markets and a stronger Canadian dollar.

A review of 449 client pension plans by consulting firm Aon Hewitt shows the median solvency of Canadian plans hit 83.1 per cent as of March 29, down 4.5 percentage points from 87.6 per cent at the end of December. Pension plans are 100-per-cent funded when they have investment assets equal to the estimated long-term cost of providing pensions for plan members.

The median funding level for pension plans was almost 91 per cent at the start of 2015, but slid throughout 2015 as interest rates declined, and faced even sharper declines in the early part of 2016. Aon Hewitt said the median funding level dipped below 80 per cent in mid-February, but recovered ground over the past month as a result of a rally in stocks and improving bond yields.

Nonetheless, the review found only 8 per cent of pension plans were fully funded by the end of the first quarter, down from 11.8 per cent at the end of December.

Will Da Silva, Aon’s national retirement practice leader, said companies need to “use all the levers they have in their risk-management toolkit” to deal with the volatility.

“For many plan sponsors, this volatility could translate into unwanted surprises in organizations’ cash positions, as well as their financial statements,” he said in a statement.

Companies do not have to immediately fund shortfalls in their pension plans, but must record the costs in their financial statements and must contribute cash to make up the gaps if they persist over time.

Aon Hewitt said many pension plans benefited last year from the drop in the Canadian dollar because they have large holdings of U.S. and foreign investments, which were worth more in Canadian-dollar terms. But the dollar has staged a comeback in 2016 from 69 cents (U.S.) in mid-January to 77 cents by late March. The result has lowered returns on non-Canadian investments.

Ian Struthers, a partner in Aon’s investment consulting practice, said companies have to take a long view on investing and manage their exposures. While gains on foreign holdings last year were erased by the stronger loonie in the first quarter of 2016, for example, he said companies that use smart hedging and other “derisking” strategies were able to mitigate that volatility.

Smart hedging and “derisking” strategies might help but I have good and bad news for all these Canadian companies worried about their pension plans.

The good news is the loonie is headed much lower. That little countertrend rally we saw in the first quarter in oil prices will fizzle as the U.S. dollar strengthens for the rest of the year, driving down commodity prices.

Let me take a little detour here and explain macro trends because it’s important you all get it right. While the media is reporting, Strong U.S. jobs report unlikely to sway cautious Fed, and everyone is bearish on the U.S. dollar thinking the Fed won’t raise rates this year, they’re missing a bigger problem.

The bigger problem is this, as the U.S. dollar weakens and other currencies strengthen, it disproportionately hurts economies that are heavily reliant on exports. And many of these economies in Asia and Europe are stuck in deflation, so they can’t afford tighter financial conditions  that come with a strengthening currency.

The exact same thing goes for Canada. As the loonie climbs relative to the U.S. dollar, financial conditions get tighter placing more pressure on a very fragile economy that is reeling from the sharp decline in energy prices. A rise in the currency acts like a interest rate hike and lowers inflation expectations (via lower import prices), bringing the threat of global deflation closer to home.

This is why in a recent comment on Canadian banks being in big trouble, I stated this:

I’ve long been short Canada and despite the recent pop in oil prices and the loonie, I haven’t changed my mind on that macro call. I fundamentally believe the worst is yet to come for Canada because my big picture outlook for global deflation hasn’t changed.

And global deflation spells big trouble for all banks, not just Canadian ones. In fact, have a look at the U.S. Financial Sector ETF (XLF) and you will notice it’s rising from its low in mid February but basically going nowhere as it’s still below its 200-day and 400 day moving average (click on image):

Speaking at the Economic Club of New York on Tuesday, Federal Reserve Chairwoman Janet Yellen said that while the U.S. economy remains on track, the Fed still intends to pursue only a gradual increase in interest rates, stating global uncertainty justifies a slower path of rate increases.

I’ve already written about the sea change going on at the Fed, so none of this surprises me. Moreover,  Jeffrey Gundlach, the widely followed bond king who runs DoubleLine Capital, said on Monday that an interest-rate increase by the Federal Reserve in April is “inconceivable,” given lower forecasts for first-quarter GDP growth.

What’s worrying Janet Yellen? In my opinion, global deflation coming to America. The Fed is desperately trying to talk down the U.S. dollar, especially now that a profits recession has already hit the U.S. economy, threatening future employment gains (click on image): 

The latest strategic analysis from the Levy Economics Institute, Destabilizing and Unstable Economy, reveals that the US economy remains fragile because of three persistent structural issues: weak demand for US exports, fiscal conservatism, and a four-decade trend in rising income inequality. It also faces risks from stagnation in the economies of the United States’ trading partners, appreciation of the dollar, and a contraction in asset prices.

So here you have the U.S. economy slowing at a time when China, Japan and Europe remain mired in deflation, and we think little old Canada is going to do well in this environment? Sure, the lower loonie can help manufacturing exports, but if you ask me, many Canadian economists, especially bank economists, are way too optimistic on Canada’s growth prospects going forward.

As far as Canadian banks, if you look at the BMO S&P/TSX Equal Weight Banks Index ETF (ZEB.TO), they too have performed better than their U.S. counterparts recently, basically bouncing up as oil prices rallied from their lows (click on image):

And when Canadian banks do well, the entire Canadian stock market does well (click on image):

But this countertrend rally won’t be sustained as global deflation becomes more entrenched and as I’ve repeatedly warned you, use any spike in oil prices to short the loonie and lighten your position in energy and commodity shares.

I think what happened in Canada at the start of the year was a classic rotation into energy and commodity shares by global asset allocators who thought the loonie was cheap and these shares will bounce, which they did.

Now, if you’re betting on a global recovery, you should continue buying Canadian banks, energy and commodity shares. If you think it’s going to fizzle out in the second half of the year, stay away or sell these shares. This is all part of a global RISK ON/ RISK OFF trade that dominates markets.

When it comes to shorting Canada, however, I prefer shorting the loonie than Canadian banks. If global deflation sets in, the new negative normal will hit all countries, including Canada and the United States, placing huge pressure on all banks to deliver the return on equity (ROE) targets of the past.

And in my comment on shifting the focus on enhancing the CPP, I stated this:

[…] once Canada’s real estate market implodes, I guarantee you Bank of Canada Governor Stephen Poloz will be going negative and not waiting to see what happens with federal spending on infrastructure. He might even move rates to negative a lot sooner if oil prices keep declining or crash.

I’ve said it before and I’ll say it again, the loonie is a petro currency. Period. If global deflation becomes more entrenched, which remains my primary macro call, then oil prices are headed lower and will stay low for a very long time. And the lower oil prices will drag down the loonie, maybe not to 59 cents as some Australian economist claimed earlier this year, but easily to 66, 68 or 70 cents.

So, the good news for Canadian corporate pension plans is that the loonie won’t keep rising and it will likely fall significantly from these levels over the rest of the year (it will likely retest its lows).

What else? The U.S. dollar will likely rise during the rest of the year. In a recent comment of mine on markets defying central bankers, I stated the following:

If you think the recent plunge in Valeant’s shares was bad, wait till you see the plunge in many energy and commodity names after this countertrend rally fizzles (many of these stocks will retest their lows; just look at the recent action of Peabody Energy). It will be brutal and many institutional and retail investors will get slaughtered.

And the same goes for all these commodity and emerging market stocks and currencies. Their appreciation relative to the USD, just like that of the euro and yen, won’t last for long.

In fact, have a look at this chart of the EUR/USD (click on image):

Euro bulls will tell you it’s getting ready for a major breakout but I doubt it will go over its 400-day moving average and I think it’s a screaming short at these levels.

This morning after the U.S. jobs report, I updated that chart on the EUR/USD and asked a buddy of mine who trades currencies if he thinks it’s a screaming short (click on image):

He said this:

“I think the market is caught short the euro and they will have stops at 1.1525 so wait for those to get triggered, maybe get it as high as 1.17 and then short it. Fundamentally it’s a short but I think market positioning is the problem.”

It helps to have friends who trade currencies for a living because they provide you with insights above and beyond fundamentals.

But regardless of where the euro heads over the next few weeks, as it keeps rising above it’s 400-day moving average, I would be piling on short positions, waiting for a sharp decline. The fact remains Euroland is mired in deflation and it can’t sustain a rise in the euro.

And here is the bad news for Canadian corporate pensions and all global pensions. As the mighty greenback starts surging again, it will ease financial conditions in the rest of the world but it will mean lower commodity prices and more importantly, it will lower U.S. import prices and bring the prospect of deflation coming to America that much closer. This at a a time when the rest of the world is mired in deflation.

And the bad news for pensions? I’ve already stated it. Ultra low rates are here for years and the prospect of global deflation is why central banks are adopting the new negative normal. And low or negative rates mean more market volatility and higher pension deficits. If deflation sets in, it will decimate pensions.

Just look at U.S. 10-year Treasury yields declining after Friday’s supposedly great jobs report. The bond market is worried about something and isn’t buying the Koolaid story on the U.S. economy.

So there you have it, my thoughts on the big macro picture and how it’s going to impact Canadian corporate and public pensions.

Of course, if you ask me, we need real change to Canada’s retirement system. We should chuck corporate pensions altogether and enhance the CPP once and for all so companies can worry about their core business (not pensions) and Canadians can stop worrying about whether they’ll have enough money to retire on, especially if their company goes bust (remember what happened to Nortel’s pensioners and worse still, its disabled?).

On that note, I remind all you that I work hard to provide you with unbelievable insights on pensions and investments, bringing it all together with insights from top pension fund managers like Ron Mock or Jim Keohane, but also from any others including yours truly.

Please take the time to subscribe and donate to Pension Pulse on the right-hand side of the blog (at this link: http://pensionpulse.blogspot.ca/). I thank those of you who support my efforts and remind you that I am willing to discuss contract work and/or full time employment opportunities (send me an email at LKolivakis@gmail.com if you want to discuss employment opportunities).

 

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

On May 7^th, retired members of the Central States Pension Fund will find out whether their previously ironclad pension benefits will be cut or preserved.

The cuts were proposed by the plan itself. A 2014 federal law allows multiemployer plans to propose pension cuts in order to stave off insolvency; the cuts must be approved by the Treasury Department via mediator Kenneth Feinburg.

More details from the Columbus Dispatch:

A federal mediator will decide by May 7 whether to accept a proposal from the Central States Pension Fund to slash benefits for thousands of retirees to keep the fund from going broke, according to Bloomberg.

Kenneth Feinberg, appointed by the Treasury Department to review the plan, has held town-hall style meeting with retirees in eight states to get their input into the plan, including one in Columbus in last December.

A law passed by Congress in 2014 gives struggling pension funds that serve multiple employers like Central States a way to cut benefits to help them survive. The pension fund provides benefits to retired Teamsters members, many of whom were truck drivers for several companies.

How Feinberg rules figures to be significant. Central States is the first fund to ask to cut benefits and other struggling multi-employer plans will be watching closely to see what Feinberg will do and whether they should take similar actions.

This case is interesting because it’s the first of its kind.

Feinburg previously mediated victim compensation during the BP oil spill disaster.

 

Photo by  Bob Jagendorf via FLickr CC License

The Pension Benefit Guaranty Corp. risks becoming insolvent within a decade – or sooner – if premiums paid by multiemployer plans aren’t raised, according to the agency’s latest Five-Year report.

The PBGC is required to file the report to Congress every five years.

Premiums were recently raised by a significant margin; but they will need to be raised again to keep the PBGC solvent, according to the report.

More details from BenefitsPro:

In 2016, enrollees pay a $27 per-participant premium. The Multiemployer Pension Reform Act of 2014 doubled premiums to $26 for 2015.

PBGC’s 2014 projections report estimated that the agency’s premium levels and returns on assets will be enough to sustain the multiemployer program for the next five to nine years.

As of September 2014, the program held $1.8 billion in assets, and had $44.2 billion in expected liabilities. PBGC projects that the program has a greater than 50 percent chance of going insolvent by 2026.

In 2015, PBGC reported the multiemployer plan deficit had widened to $52.3 billion.

The report does not recommend how much premiums need to be increased.

The White House’s 2017 budget proposes giving PBGC authority to increase premiums, and set a variable rate premium that would assess higher rates on financially troubled plans. It estimates that would raise $15 billion for the program.

The budget also proposes a new “exit” premium for sponsors that leave plans.

Under existing law, Congress sets premiums.

Read the full report here.

 

Photo by Tom Woodward 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.

Jacqueline Nelson of the Globe and Mail reports, Ontario Teachers’ Pension Plan posts 13% return in 2015:

Ontario Teachers’ Pension Plan’s 13-per-cent rate of return in 2015 was buoyed by growth in its private market assets, where investing conditions have grown increasingly challenging.

The pension plan, which supports 316,000 of the province’s teachers and retirees, earned $19.6-billion through all of its investments in a year peppered with deals – from toll roads to seniors’ housing.

“This was the year of the privates, whether it’s real estate, private equity or infrastructure,” Ron Mock, chief executive officer of Teachers, told a media briefing on Wednesday. He noted that just a few years ago, fixed income had been a similar bright spot for the portfolio.

Teachers’ private capital group posted a soaring 32.3-per-cent investment return in the 2015 calendar year. And infrastructure and real estate returned a collective 16 per cent in 2015. Each category exceeded the benchmark Teachers had set by a wide margin.

But the pension plan’s executives are now approaching these same sorts of assets with heightened vigilance.

“A lot of assets have seen unprecedented global competition for the time being. … We think prices are high, and there’s a risk the fund will not get compensated taking that risk going forward,” said chief investment officer Bjarne Graven Larsen, who joined the pension plan in February.

This attitude doesn’t mean the fund thinks asset prices are set to fall in the near future, Mr. Graven Larsen added, but indicates caution is required to ensure Teachers can add enough value to anything it buys to make up for the high prices those businesses and structures command.

Last year, Teachers completed a re-evaluation of its investment strategy with a special focus on how best to grow internationally. The review highlighted a need not only for outperforming benchmarks in different asset classes, but also for bringing those specialties together under a more unified strategy to boost total returns overall.

Teachers has created a new group called “portfolio construction” under Mr. Graven Larsen to look at possible risks across the global portfolio – from the implications of a British exit, or “Brexit,” from the European Union, to investment areas that should potentially be developed or receive more funding.

This effort to unify its asset classes comes as Teachers manages more capital than ever. The pension fund had $171.4-billion in assets under management, up from $154.5-billion in 2014.

The pension plan has steadily moved to oversee more of its investments, with 80 per cent of assets now managed internally by teams in Toronto, London and Hong Kong. Mr. Mock said these offices all performed well in 2015, and the pension plan was considering adding another base in South America.

The 2015 financial results included a 17.7-per-cent return in equities, with non-Canadian investments significantly outperforming those made in the country. The fund’s fixed-income portfolio, including bonds, had a one-year return of 5.9 per cent. Meanwhile, natural-resource investments were a dark spot, down by 1.3 per cent last year amid the commodity downturn.

Teachers ended last year 107-per-cent funded, with a surplus of $13.2-billion. That positions the plan to meet future pension liabilities over time, with money to spare.

With the ratio of active teachers to pensioners currently hovering at around 1.4 to one, the pension plan is paying out more in benefits than members are contributing. At the end of 2015, paid benefits reached $5.5-billion and new contributions stood at $3.3-billion.

Teachers has posted an annualized 10.3-per-cent rate of return since its founding as an independent organization in 1990. Since that time, pensions have been funded primarily through investment income. Only 21 per cent of assets have come from contributions from the province’s educators and government employer contributions in that time.

The Ontario Teachers’ Pension Plan put out a press release, Ontario Teachers’ earns 13.0% return for 2015:

Ontario Teachers’ Pension Plan (Ontario Teachers’) today announced a rate of return on investments of 13.0% for the year ended December 31, 2015, resulting in an increase in net assets to a record $171.4 billion from $154.5 billion at the end of 2014.

Investment earnings for the year were $19.6 billion, up from $16.3 billion in 2014. Measured against a consolidated investment benchmark of 10.1%, the plan’s excess return of 2.9 percentage points resulted in $4.2 billion in value added. Since the plan’s inception in 1990, total investment income has accounted for 79% of the funding of members’ pensions, with the other 21% coming from member and government contributions.

“We are pleased with our Toronto, London and Hong Kong teams’ performance this year,” said Ron Mock, President and Chief Executive Officer. “This, in combination with the plan sponsors’ 2008 adoption of condition inflation protection, which improved our investment risk tolerance, resulted in a successful year,” he said.

Bjarne Graven Larsen, who assumed the Chief Investment Officer role on February 1, credits the plan’s ongoing success to an evolving investment strategy with a global outlook. He noted: “Despite volatile market conditions, Ontario Teachers’ global, diversified portfolio produced strong investment returns.”

Ontario Teachers’ continues to show strong performance in pension services, according to two independent, annual studies. The plan’s Quality Service Index (QSI), which measures members’ service satisfaction, was 9.1 out of 10 in 2015, and the plan was ranked second for pension service in its peer group and internationally.

Funding position

The plan had a preliminary funding surplus of $13.2 billion at January 1, 2016, the third surplus in as many years. It was 107% funded at the start of the year, based on current contribution and benefit levels.

2015 investment return highlights by asset class

The value of the plan’s public and private equity investments totaled $77.5 billion at year-end, up from $68.9 billion at December 31, 2014. The investment return in the equities portfolio of 17.7% was ahead of the 14.7% benchmark.

Private Capital investments rose to $28.4 billion at year-end from $21.0 billion a year earlier. Private Capital’s investment return was 32.3%, compared to the 18.1% benchmark.

Fixed Income had $69.1 billion in assets at year-end, compared to $65.6 billion at December 31, 2014. The one-year return of 5.9% was in line with the benchmark return of 6.0%.

Natural Resources investments were $10.2 billion at year-end, compared to $11.9 billion at December 31, 2014. The one-year return of -1.3% was ahead of the benchmark return of – 6.1%.

Real assets, a group that consists of real estate and infrastructure, had total assets of $40.6 billion at year-end, compared to $34.7 billion a year earlier. The real estate portfolio, managed by the plan’s subsidiary Cadillac Fairview, totaled $24.9 billion in assets at year-end and returned 12.9%, exceeding the 8.0% benchmark. The infrastructure portfolio had $15.7 billion in assets at year-end, up from $12.6 billion a year earlier. Infrastructure’s investment return of 21.4%, compared to the 14.3% benchmark.

You should download and read OTPP’s 2015 Annual Report to gain better insights on the performance and operations at Teachers.

I had a chance to talk with Ontario Teachers’ CEO Ron Mock late Wednesday afternoon to go over the 2015 results. Ron had a very busy day but was gracious enough to call me back and I thank him for doing so.

Below, I summarize some of the points from our discussion:

• I began by congratulating him on these stellar results. Teachers outperformed all its large Canadian peers, including the Caisse, OMERS, AIMCo, and HOOPP. It also outperformed the average Canadian pension which returned 5.4% in 2015 (keep in mind, a big part of Teachers’ relative outperformance comes from the clever use of leverage which others can’t use).
• More importantly and more crucially, Teachers’ funded status improved to 107%, placing it just below HOOPP’s 122% super-funded status. This is why I keep referring to HOOPP and OTPP as the two best pension plans in Canada and the world.
• The first thing that struck me from Teachers’ 2015 results was the unbelievable performance of Teachers’ Private Capital led by Jane Rowe. That group delivered 32.3% in 2015, trouncing its benchmark which gained 18.1% last year.
• Ron called it the “year of the privates” as Private Equity, Real Estate and Infrastructure all performed well, handily beating their respective benchmarks (which aren’t that easy to beat). But he added: “We take a total portfolio approach. This year it was privates, three years ago, bonds kicked in for us.”
• On Private Equity, Ron told me they’re focusing on “long-term value creation” which means good old fashion rolling-up-your sleeves PE, none of the financial engineering of the past where funds leveraged companies up to wazoo to bleed them dry as they pay themselves dividends. Teachers Private Capital has a long-term focus and a longer investment horizon than PE funds, giving it an advantage over its fund competitors.
• In terms of currency hedging, Ron told me that Teachers doesn’t hedge currency risk, which helped with some investments, “but we had other investments in currencies that got hit” (probably in Brazil). So yes, FX gains added to our overall return but it wasn’t the primary factor.”
• In terms of funds, I noted on my blog that Teachers sold stakes in global private equity funds in the secondary market. As I thought, this was to rejig the total portfolio to fund other investments like infrastructure. Ron confirmed this: “You got it, it’s about looking at the total portfolio and investing in the best opportunities.”
• On the recent London City Airport consortium deal which I questioned on my blog, Ron had this to say: “We have deep expertise in airports. We can place a board quickly to monitor these investments and focus on value creation over a very long investment horizon. And our investment horizon for an asset like this isn’t ten years, it’s more like 20 to 30 years.”
• On the Maple Financial scandal which I also covered on my blog, Ron shared this: “I can’t get into details as the investigation is still ongoing but we have pledged to repay dividends if the allegations are proven.” But he added: “It’s not a traditional operational screw-up like a hedge fund blowing up, it’s more complex, an interpretation of [German] tax law.” As far as whether Teachers took a writedown on this asset, Ron didn’t say yes or no but he said “it’s fully reflected in 2015’s results.”
•  On Teachers’ massive external hedge fund portfolio, Ron said 2015 was a “scratch year” for external hedge funds and internal absolute return trading activities. “In a volatile market like 2015, you wouldn’t expect outperformance in these activities but they didn’t dent the total portfolio either.”
• On Teachers’ 107% funded status, Ron shared a few interesting tidbits with me. First, the discount rate set by the Board currently stands at 4.7%, one of the lowest in the world for any public pension, reflecting the fact that Teachers’ is a mature plan paying out more in benefits than it receives in contributions and its members live a lot longer (bigger longevity risk attached to the plan).
• Ron told me the decision of what to do with the surplus (like fully restore inflation protection) lies entirely with the stakeholders of the plan, ie. the Ontario Teachers’ Federation and the Ontario government. But he added: “They are very sophisticated and in the past, they didn’t spend all of it but saved some for a rainy day, understanding these are very difficult markets and the focus must always be on the plan’s sustainability.”
• On that last point, Ron added this: “Our focus in on the long-term but we don’t lose sight on short-term trends either because we are very path dependent. Our short-term is ten years and we always gauge the risks of a serious drawdown to the total portfolio. The last thing you want is to be piling on risk when you have a big drawdown.” (this is why most US public pension funds are doomed).
• I also commended Ron for taking leadership role in implementing gender diversification at Teachers. I noted that Jane Rowe and Barbara Zvan were two of the highest paid officers at Teachers in 2015 (see compensation table below). Ron told me this: “It’s important and I made a point to place Jennifer Brown, Rosemarie McClean and others in key positions. But beyond their gender, they are wickedly smart and highly ethical professionals who add value to our organization.“
• Lastly, a more philosophical question to a man who has experienced some harsh hedge fund lessons in the past and is now running one of the world’s best pension plans. I asked Ron if he’s happy and if he could have ever imagined being in the position he is right now. He told me: “I’m very happy, work with a great group of professionals, meet interesting people all over the world and I feel like there’s a social purpose to what we’re doing. I worry about aging demographics and people retiring with no pension. We do our part in ensuring a small subset of the population has their retirement needs addressed for the future.“

That was a great way to end our conversation, one that should give many of you working at public pensions some food for thought in terms of why what you’re doing is a part of something much bigger and much more important than your paycheck and bonus.

Once again, please take the time to carefully read Ontario Teachers’ entire 2015 Annual Report. It is very well written and explains investments, operations, funded status and a lot more in great detail.

One thing I will bring up is executive compensation of senior officers (from page 30, click on image):

As you can see, Teachers’ senior officers enjoy some generous payouts, a bit higher than what other large Canadian pensions pay their senior officers.

But I caution you to keep two things in mind: Teachers’ four-year results are better than their large peers and people like Ron Mock, Barbara Zvan, Wayne Kozun and Jane Rowe have been there for a long time and they’re delivering outstanding results. This compensation is explained in great detail in the Annual Report and it’s in line with the results they produced.

Sure, Ontario’s hard working teachers might be looking at these hefty payouts and questioning whether they’re fair and need to be so excessive. I myself have done so on my blog on a few occasions but in the end, attractive compensation which is based primarily on long-term performance is part of good governance, and that’s why Ontario Teachers sets the bar and has delivered outstanding results, ensuring the sustainability of the plan for years to come.

We should be openly discussing compensation at Canada’s large pensions. I have no problem with an open, transparent discussion on compensation, but keep in mind the long-term results that come with this compensation. This money isn’t given to them for free, they have to beat tough benchmarks to earn that compensation, so don’t just look at compensation in a vacuum. Try to understand how it’s determined and why these individuals are being paid top dollar. It’s because they’re producing stellar long-term results, ensuring the long-term sustainability of the plan and lowering its cost for all stakeholders.

On that last point, there is one chart I really like in the Annual Report, one that exemplifies Teachers’ long-term performance (click on image):

When people ask me why I’m such a stickler for large, well-governed defined-benefit plans, I point out charts like the one above to make my case. If you’re looking for a solution to the global retirement crisis, this is it, right there in that chart.

 

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

The new President of Japan’s Government Pension Investment Fund pledged this week to take a long-term view on investing; he also dropped several other tidbits, including his intention to not push to manage stocks internally.

Norihiro Takahashi took the reins of the pension fund on Friday.

More from Bloomberg:

Japan’s $1.2 trillion Government Pension Investment Fund is willing to ride out market turbulence, said its new head, who pledged to maintain the asset manager’s long-term strategy.

Norihiro Takahashi, 58, takes over as president of the world’s biggest pension fund from Friday. Being a responsible steward of the nation’s retirement savings is a top priority, Takahashi said at a press conference in Tokyo. GPIF should diversify across asset classes including non-traditional ones, he said.

“For an organization to achieve long-term returns, they need to approach their portfolio management the same way,” said Takahashi, speaking after the health ministry appointed him to the top job on Friday.

[…]

Takahashi won’t push to manage stock investments internally after a proposal to do so was deferred, he said. He joins GPIF with a pedigree including managing a debt portfolio at Norinchukin Bank, an agricultural cooperative lender. He was most recently president of closely held JA Mitsui Leasing Ltd.

GPIF oversees $1.2 trillion in assets.

 

Photo by Ville Miettinen via Flickr CC License

A recent study examined how the composition of 210 public pension boards affected private equity investment performance.

It found that boards with the most state-appointed and/or elected members performed the worst, either because of poor manager selection or category allocation.

Ai-Cio.com summarized the results:

From a study of 210 US public pension funds with more than 13,000 private equity investments from 1990 to 2011, the authors found funds with boards heavily made up of elected officials or members appointed by state representatives underperformed the worst.

Specifically, state-appointed board members were linked to the lowest performance, with a 10-percentage point increase in the proportion of such members resulting in about a 0.9 percentage point drop in annual net internal rate of return (IRR).

And ex officio board members followed suit, with a 10-percentage point rise in their representation leading to a drop in annual net IRR of between 0.53 and 0.67 percentage points.

“This underperformance is related both to investment category allocation and to selection of managers within category,” Antonov, Hochberg, and Rauh continued.

The research revealed funds whose boards housed more state officials and elected plan participants invested more in real estate and fund-of-funds.

These poorly governed funds were also “strongly correlated” with poor investment decisions in private equity including overweighting in small and in-state funds, as well as allocating to inexperienced general partners.

Read the study here.

 

Photo by jypsygen via Flickr CC License

Japan’s Government Pension Investment Fund (GPIF) has never disclosed its specific stock holdings, for fear that it would affect the country’s market too much.

But that will soon change. The pension fund said on Thursday it would disclose its stock holdings over next summer.

From the Financial Times:

Japan’s Government Pension Investment Fund (GPIF), the largest pension fund in the world, will disclose the stocks it holds for the first time later this summer.

GPIF said in a statement today that it will review the way it discloses information about the assets being held, “paying attention to the impact on the market, enhance its information disclosure.”

A spokesperson said that specific methods of disclosure were still to be decided.

The fund will disclose the assets it holds, including individual stocks, on July 29, when it will report the investment results for fiscal 2015.

GPIF oversees $1.2 trillion in assets.

 

Photo by Ville Miettinen via Flickr CC License

In the last quarter of 2015, institutional investors pulled more money out of hedge funds than they put in.

That’s the first time that’s happened in four years, and it encapsulates a growing trend of institutions and pension funds wondering aloud whether their hedge funds portfolios are working.

From the Wall Street Journal:

Marc Levine, chairman of the $16 billion Illinois State Board of Investment, had a provocative question this month during a board meeting about hedge funds.

“Why do I need you?” Mr. Levine asked. A lot of big investors are asking the same question.

Investors globally asked for more money back from hedge funds than they contributed in the fourth quarter of 2015, according to HFR Inc.—the first net quarterly withdrawal in four years. They pulled an additional $15.3 billion in this year’s first two months, according to eVestment.

[…]

Overall, big investors pulled an additional $19.75 billion out of hedge funds in January, according to eVestment. That was the largest outflow for the year’s first month since 2009.

[…]

Hedge-fund commitments as a percentage of U.S. public pension-plan portfolios have dropped from a peak of 2.31% in 2012 to 1.37% at the end of 2015, according to Wilshire.

[…]

The proliferation of lower-price alternatives is one reason the Illinois Municipal Retirement Fund decided last month to end its $500 million hedge-fund program.

The commitment was expensive, said Dhvani Shah, the plan’s chief investment officer.

“So do I really want to scale up?” she said. “The answer is no.”

The article notes that some investors are happy with their hedge funds portfolios – including the Florida State Board of Administration, which has nearly $4 billion in hedge funds commitments and has no plans to reduce that number.

 

Photo by  Dirk Knight via Flickr CC License

The Ontario Teachers’ Pension Plan owns a 39 percent stake in the Brussels Airport that was the location of a recent terrorist attack.

The pension fund owns large stakes in a handful of airports around Europe, and is one of the largest infrastructure investors in the world.

But the recent Brussels attack, and the specter of terror in general, isn’t going to deter the pension fund from continuing to invest in infrastructure.

From the Financial Post:

“It’s not changed our view on infractructure, it’s not changed our view on the role, the important role, that infrastructure plays in satsfiying our liabilities,” Teachers’ CEO Ron Mock said during a media briefing Thursday to discuss the plan’s performance in 2015.

“We remain completely firm on infrastructure as an investment and we continue to scour the world for the right opportunities and will continue to do that,” he said, adding that the pension plan remains “100 per cent” committed to owning airports within the pension plan’s portfolio.

Mock said the threat of a terrorist attack is “one of many risks” taken into consideration when Teachers’ makes an investment, whether it is in an infrastructure asset like an airport, or a large real estate asset such as a shopping centre.

[…]

“There is a whole human side of this that has to be thought through carefully, just in terms of people and personnel adjusting to what took place, as you can imagine,” he said. “So they’re pretty much focused on that and we’ve been in touch with the prime minister’s office, offering our support and our sympathies, and of course we’ve told the board and the CEO that we are behind them.”

Ontario Teachers’ infrastructure portfolio totals $15.7 billion, and returned 21.4 percent in 2015.

 

Photo by Christian Junker via Flickr CC License