Pension360

Reporter Ed Mendel covered the California Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

Social Security recipients get no raise this year because inflation last year was near zero. But more than half of CalPERS pensions will get a raise in May of 1.5 to 4 percent.

How does this happen, when both Social Security and the California Public Employees Retirement System have annual cost-of-living adjustments based on the rate of inflation?

“The law does not permit an increase in benefits when there is no increase in the cost of living,” Social Security recipients were told of the federal program‘s rules. “So your benefit will stay the same in 2016.”

That seems simple and straight forward. In contrast, the CalPERS method for a cost-of-living adjustment, even though its inflation index shows little or no inflation this year, seems almost comically convoluted.

A CalPERS report last week said its cost-of-living index (CPI-U for all urban consumers) increased only 0.12 percent last year, far below the one percent threshold needed to trigger a cost-of-living adjustment for the year.

CalPERS plans also have a cap on the amount of the annual cost-of-living adjustment, 2 percent for about 95 percent of retirees. When inflation is below the threshold or above the cap, the inflation not used for an adjustment can be “banked” and applied in future years.

The report gave an example of what happens when inflation is below the threshold: “In the future, when the inflation rate exceeds one percent, the 0.12 percent increase retirees did not receive in 2016 will be factored in to that year’s adjustment.”

When asked to clarify the cost-of-living adjustment policy at a board meeting last week, Anthony Suine of the CalPERS staff gave an example of what happens when inflation is above the cap.

“In the early 2000s when inflation was much higher than the 2 percent, for instance, that banked up,” Suine said. “So when it has been lower, the retirees who have been retired for longer were still seeing the benefits of that banked up cost-of-living adjustment.”

Now after several years of low inflation, he said, anyone that retired after 2005 does not have enough in the bank to reach the 1 percent threshold needed for a cost-of-living adjustment.

As a result, about 45 percent of CalPERS retirees will not receive a cost-of-living adjustment this year. But 55 percent of the retirees will begin to receive a cost-of-living adjustment in their monthly payment in May, most getting a 2 percent increase. (see chart)

State and school workers are among the 95 percent of retirees in plans with a 2 percent cap on the annual cost-of-living adjustment. The rest are local governments: 67 plans with a 3 percent cap, 12 plans with a 4 percent cap, and 38 with a 5 percent cap.

To get a cost-of-living adjustment in one year that is as high as the plan’s cap, inflation in the previous year would have to be as high as the cap.

“The cost-of-living adjustment is limited to the lesser of two compounded numbers — the rate of inflation or the cost-of-living adjustment contracted by the employer,” said the report.

Using a different method, the cost-of-living adjustments received this year by members of most large independent county retirement systems, which operate under a 1937 act, will include recent retirees.

The Los Angeles County Employees Retirement Association approved a 2 percent cost-of-living adjustment beginning April 1, citing a 2.03 percent increase last year in the federal urban consumer index for the Los Angeles-Orange-Riverside County area.

The San Diego County Employees Retirement Association approved a 1.5 percent cost-of-living adjustment beginning March 31, citing a 1.62 percent increase in the consumer price index for the San Diego area.

The San Mateo County Employees Retirement Association approved a 2 percent or 2.5 percent cost-of-living adjustment (depending on the plan) beginning April 1, citing a 2.61 percent increase in the index for the San Francisco-Oakland-San Jose area.

The San Mateo system website has a reminder for members considering retirement this year: “If you want to take advantage of this year’s COLA rate, you must retire on or before April 1.”

The Sacramento County Employees Retirement System, in what some might consider a stretch, bases its cost-of-living adjust on the Sacramento-Oakland-San Jose consumer price index.

The Sacramento County system, citing the 2.61 percent increase in the Bay Area, approved cost-of-living adjustments (depending on the plan) of zero, 2 percent, 2.5 percent or 4 percent beginning April 1.

At the CalPERS Pension and Health Benefits Committee meeting last week, board member Henry Jones and the staff member, Suine, had a brief exchange about the inflation index.

“Some questions have been raised about why we don’t use some inflation factor from California as opposed to the U.S.,” Jones said. “Can you comment on that?”

Suine said the national CPI-U used by CalPERS is required by state law. He said the federal government uses a “clerical wage earner” index that produced a similar near zero result last year.

“We could consider other ones through legislation,” Suine said. “Not that I’m advocating,” Jones said. “I just wanted to get an explanation.”

If over time CalPERS pensions lag far behind inflation, a Purchasing Power Protection Allowance keeps them from falling below 75 percent of original purchasing power for state and school retirees and 80 percent for local government retirees.

The California State Teachers Retirement System has similar purchasing power protection for its pensions that get an annual cost-of-living adjustment of 2 percent, a fixed amount based on the original pension.

But the CalSTRS purchasing protection program, called the Supplemental Benefit Maintenance Account, keeps pensions from falling below 85 percent of original purchasing power and has an unusual and very costly funding source.

The state annually contributes 2.5 percent of the teacher payroll to the CalSTRS supplemental program, $607 million this fiscal year. Last year, the program had a giant reserve, $11.5 billion, and paid only $193 million to 52,474 retirees.

CalSTRS apparently has done no analysis to determine whether funding purchasing protection through the regular employer-employee contribution rate, like CalPERS, would be more cost-efficient than creating a giant reserve that has grown from $5.3 billion in 2008.

Meanwhile, finding a fair and rational method for cost-of-living adjustments is not a problem for most of the pensions remaining in the private sector, which has been switching to 401(k) individual investment plans.

A federal Bureau of Labor Statistics survey in 2000 found that only 9 percent of blue collar and service industry employees who are in traditional pension plans received an automatic cost-of-living adjustment.

The Department of Labor’s proposed fiduciary rule would make a fiduciary out of any advisor giving 401(k) investment advice.

But many advisors are likely to outsource that risk, explains InvestmentNews:

Outsourced investment advisory services for 401(k) plans stand to reap the benefits of the Labor Department’s proposed rule to raise investment advice standards in retirement accounts.

Here’s how the outsourced services generally work: The providers contract with record-keeping firms, which then offer the services to all defined contribution plans on their platform. Under the 3(21) service, outsourced providers screen the funds available over a record keeper’s platform, and narrow those down to a handful of funds in certain asset categories that advisers and plan sponsors can then use to build a final 401(k) lineup. In the 3(38) offering, the providers — not the plan adviser or employer — choose the ultimate combination of funds.

[…]

Industry watchers expect even more uptake if the DOL rule becomes final, in part because these outsourced services tend to be used mostly in the small and micro 401(k) market.

“There’s definitely going to be heightened liability in serving [401(k)] plans, especially smaller plans,” said Scott Cooley, Morningstar’s director of policy research. (Of course, he added, this depends on the text of the final rule, which is likely to come out this month or early April.)

Click here for a fact sheet on the proposed rule.

 

Photo by thinkpanama via Flickr CC License

Pension funds will have trouble closing their funding gaps in the remainder of 2016 fiscal year due to lackluster returns, according to a Moody’s report.

The report, which analyzed 56 US public pension funds, projects a 5 percent return as the best-case scenario for the rest of the fiscal year.

More from Financial Times:

Moody’s, the rating agency, said lacklustre returns in 2015 and 2016 will put severe pressure on the health of US public pension plans and force states and cities to act in order to plug their pension funding gaps.

Tom Aaron, an analyst at Moody’s, said the funding deficit — the difference between the assets a pension fund has and what it has to pay out to current and future pensioners — will grow substantially this year….

In the most optimistic scenario, where average returns totalled 5 per cent, the collective funding gap [for the 56 plans in its study] would still widen by more than $200bn.

Moody’s estimates the scale of the unfunded liabilities is greater than officially reported because of the generous discount rate public pension plans use to value retirement benefits. The rating agency said the schemes collectively have a deficit of $1.7tn, which could rise to $2.2tn this year if the pension plans suffered negative returns.

[…]

Olivia Mitchell, a professor at the Wharton School at the University of Pennsylvania, said public pension plans face “grave difficulties”.

“I do believe that US cities and towns will continue to suffer, and there will be additional bankruptcies following the examples of Detroit and the cities of Vallejo, Stockton and San Bernardino,” she said.

If you’re a Moody’s subscriber, you can view the report here.

 

Photo by www.SeniorLiving.Org via Flickr CC License

A bill that would require greater transparency from Kentucky’s pension systems was approved by a House panel on Thursday.

The measure would completely overhaul the oversight of several of the pension systems’ actions, including the hiring of outside money managers.

Kentucky Retirement System officials have spoken out against the “drastic” changes.

More from the Courier-Journal:

Senate Bill 2 would require the pension systems to use open, competitive bidding procedures when hiring investment managers and to accurately disclose the millions of dollars in fees they pay those managers. Unlike most state agencies, the pension systems are presently free to hire investment managers based on their own discretion, withholding those contracts from outside review.

The bill also sets new standards for the boards overseeing the Kentucky Retirement Systems and the Kentucky Teachers’ Retirement System. For example, the Senate would have to confirm the governor’s six appointees to the KRS board, as well as the KRS executive director. Several lawmakers were upset last year when the KRS board awarded a 25 percent pay raise to its executive director, Bill Thielen, taking him to $215,000 a year.

Finally, the bill would force the Kentucky Judicial Form Retirement System — which provides pensions to legislators and judges — to create a website that provides the same financial and management information about itself that KRS and KTRS long have offered online, such as audits, investment returns and board meeting reports.

[…]

Thielen, the KRS executive director, spoke against what he called “drastic changes to the oversight of our system.” He said the KRS board currently approves the hiring of all investment managers following vetting by KRS staff. Forcing KRS to accept competitive bids for investment management would yield a large number of unqualified applications, making the process more cumbersome, he said.

The text of the bill can be read here.

 

Photo by TaxRebate.org.uk 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.

Matt Scuffham of Reuters reports, Canada pension funds hold back on U.K. deals ahead of Brexit vote:

Some of Canada’s top pension funds, among the world’s biggest investors in British real estate and infrastructure, are holding back on U.K. deals until after Britons vote on whether to leave the European Union, according to senior executives.

These funds, which together manage more than $700-billion in assets, fear valuations could drop if Britain chooses to leave the bloc and have particular concerns about the impact on London’s financial district, the executives said.

There is no precedent for an economy as big as Britain’s leaving a trade bloc, and the rival campaigns paint contrasting pictures of what quitting the EU might mean for its trade.

Pro-Europe campaigners say banks and other financial institutions could pull operations out of the City of London if they cannot access critical EU markets.

An executive at one of Canada’s biggest public pension funds, who spoke off the record due to the sensitivity of the issue, said the risks posed by the June 23 vote were part of the reason it passed on a recent deal for an office property in London’s financial district.

“London is the financial centre of Europe, but if that changes, the whole trajectory is different. That’s become a factor in our thinking,” he said.

The retreat by Canadian investors could be harmful to the British economy and raises questions about whether other international investors will also lose their appetite for U.K. assets.

Canadian institutions have been the second biggest international investors in U.K. real estate over the past three years, with direct investments peaking in 2015. They are also prominent infrastructure investors.

The Canada Pension Plan Investment Board (CPPIB), which manages money for the country’s main government pension fund, had $15.2-billion invested in Britain at the end of March 2015, almost 6 per cent of its assets at that time.

Fund executives say they will still pursue exceptional one-off opportunities, pointing to the recent purchase of London City Airport by a group including three Canadian funds. But they note a stringent criteria would be applied to take into account the so-called Brexit risk, which would affect pricing.

“We’d want to go through what the different potential scenarios are – how the situations might evolve from a political, regulatory and economic perspective,” an executive at one of Canada’s top three pension funds said.

London City Airport was bought by a consortium including the Ontario Teachers’ Pension Plan (OTPP), the Ontario Municipal Employees Retirement System (OMERS) and the Alberta Investment Management Corporation (AIMCo) for more than 2 billion pounds ($2.82-billion).

AIMCo Chief Executive Kevin Uebelein, speaking to Reuters after the deal was announced, said that Brexit concerns were taken into account when negotiating.

“The prospect of Brexit was not unknown to us as we crunched those numbers. You factor those things into your investments,” he said.

Jonathan Simmons, chief financial officer at OMERS, which owns the high-speed rail link between London and the Channel Tunnel in partnership with (OTPP), said last month his fund was looking at how it can offset the risk to its U.K. holdings.

“We’re focused on what’s going on right now around Brexit, and of course we are monitoring that and we’re thinking about how we hedge our positions,” Simmons told a media briefing.

Brexit is not the only factor weighing on the market for London real estate.

Real estate agents say Chinese, Russian and Middle Eastern investors are cooling on London’s luxury property market as a result of factors including the low price of oil, the Russian ruble’s collapse, slowing Chinese economic growth and higher taxes for foreign buyers.

London’s high end real estate bubble is already bursting for all sorts of reasons (Vancouver is next), and it’s not just that rich Chinese, Russian, and Middle Eastern investors are a lot poorer.

When you read that bond hedge funds are facing their worst ‘quarter in history’ or that the mighty Goldman Sachs is having a terrible quarter too, you have to ask yourself: who is going to bid up London and Manhattan real estate in this environment? 

There’s a reason why U.S. commercial real estate is getting hit and if you ask me, the weak CMBS market was a big factor in the Fed’s decision to stay put on Wednesday (of course, the Fed will point to “global risks” but there are domestic risks too).

Is Brexit a big concern for Canadian pension funds? Of course it is but I don’t think it’s the only concern. And it certainly didn’t deter Ontario Teachers’, AIMCo, OMERS and Kuwait’s sovereign wealth fund from snapping up London City Airport at a hefty premium (for the multiple they paid, they better have a great long-term strategic plan for this asset).

Moreover, while Canada’s large pensions are on the global prowl, they’re also focusing on domestic opportunities. Scott Deveau of Bloomberg reports, Canadian pension funds urge Trudeau to think big on infrastructure:

Canada’s largest pension funds have advice for Justin Trudeau’s government as it prepares to double its infrastructure investments over the next decade: follow the Australian model and think big.

The funds, which manage more than $760 billion in combined assets, say they need large projects like airports, toll roads and ports to justify their time and investment with so many global assets competing for their cash.

“What are we looking for? We’re looking for projects of scale,” said Mark Wiseman, chief executive officer of Canada Pension Plan Investment Board, the country’s largest pension fund with $283 billion in assets.

The Canadian government isn’t expected to provide extensive details of its infrastructure plan in the March 22 budget because it’s still developing a long-term strategy. Federal officials have said an extra $10 billion will be made available over the next two years while it crafts a broader strategy to deploy an additional $20 billion to each of three silos over the next decade: public transit, green infrastructure, and social infrastructure.

The country’s largest pension funds, including Canada Pension Plan, Caisse de Depot et Placement du Quebec, and Ontario Teachers’ Pension Plan, are encouraging the federal government to be ambitious for the longer-term strategy.

Canadian pension funds and money managers have become global leaders by investing in ports, toll roads, power plants and other infrastructure, deploying billions annually as they reduce risk in their portfolio through geographic diversification.

Home Grown

They’ve become so big, many have outgrown the opportunities at home, presenting a challenge for the Trudeau government as it seeks outside investment. The Canadian government estimates the infrastructure funding gap in the country is more than $150 billion, said Minister of Infrastructure and Communities Amarjeet Sohi.

Sohi is meeting various stakeholders, including mayors, premiers and pension funds, on how to bridge that gap.

“A key piece of engaging private investors is a significant long-term strategy,” he said in an e-mail interview last week. “We committed to doubling federal investment in infrastructure over the next decade, which will help ensure we have needed funding in place for critical infrastructure.”

Places like Canada are particularly attractive for infrastructure assets, with its strong rule of law, a progressive and predictable regulatory regime, and a talented managerial class, Wiseman said.

Mature Assets

“We’re very interested in investing in Canadian infrastructure under the right conditions,” he said “There’s no better place to invest than close to home.”

Canada Pension, like many other large global investors, would rather acquire mature infrastructure assets than finance new projects because they’re safer, Wiseman said. He encouraged the federal government to look to places like Australia or the U.K. as examples of how Ottawa could utilize the capital of these global funds to meet its own infrastructure needs.

In 2014, the Australian government established its Asset Recycling Initiative, in which the federal government grants 15 per cent of the sale price of privatized infrastructure assets to states and territories. The federal funds and proceeds from the sales are used to develop new projects.

The Australian government estimates the initiative could spark as much as A$32 billion (US$24 billion) in new infrastructure investment, and global investors have taken notice.

Last year, US$52 billion was invested in Australian companies from foreign buyers, including a record US$16.4 billion from Canadian investors, according to data compiled by Bloomberg. Canada Pension was part of a group that agreed to buy Asciano Ltd. in a deal announced Tuesday valuing the Australian port and rail operator at A$9.05 billion.
Quebec Model

Montreal-based Caisse, Canada’s second-largest pension fund, led a consortium last November to acquire Transgrid, a network of high-voltage power lines, from the State of New South Wales for US$7.4 billion.

The challenge for larger funds to invest in traditional public-private-partnerships is that the equity stake — and in turn the reward — is often too small for them to pursue, said Andrew Claerhout, head of the infrastructure group for Ontario Teachers’.

Projects like the Gordie Howe International Bridge in Windsor, Ontario may cost billions to build but only require an equity investment of $150 million or less because the private partners can load their investments up with debt with the government’s support, he said.

“If we were going to do that to deploy $150 million that means we wouldn’t be able to do a bunch of other things. So you have to think about returns on effort and on capital,” he said.

Ring Road

Canadian projects that might attract interest include a possible ring road around Toronto, he said. Another example would be the Metro Toronto Convention Centre, according to Michael Latimer, chief executive of the Ontario Municipal Employees Retirement System.

Michael Sabia, CEO of the Caisse, said he’d like to see the government follow his lead. Last year, the Caisse struck a deal to build and run infrastructure projects that Quebec is ill- equipped to fund itself.

The Caisse is working on two projects in Montreal, including a light-rail corridor on the new Champlain Bridge and a public transit system linking downtown to Trudeau International Airport and West Island. The combined value of those projects is estimated to be about $5 billion.

“We think that’s a creative way for the government to invest in infrastructure and in a way that makes it fiscally manageable,” Sabia told reporters earlier this month.

The federal government has outlined some broad strokes of its plan, including developing an Infrastructure Bank that would give out loans using its government credit rating.

Sohi said it’s too early to say whether he would eventually adopt a broader strategy, like the Australia model, to attract global pension and sovereign-wealth funds.

“We are in a consultation phase and are not ruling out any option,” he said.

My advice to our Minister of Infrastructure and Communities Amarjeet Sohi is to listen very carefully to Mark Wiseman, Michael Sabia, Michael Latimer and other leaders at Canada’s Top Ten pensions and adopt the Australian model for developing infrastructure and THINK BIG!!!

The problem in Canada is we think small and spend way too much time studying proposals which is fine when the economy is doing well, but now that the economic crisis is spreading (never mind what the media is reporting), the Trudeau Liberals better get a move on and start delivering on infrastructure.

Once again, take the time to listen to a presentation Michael Sabia, CEO of the Caisse, delivered back in November at the the 23rd Annual CCPPP National Conference on Public-Private Partnerships. You can view his entire presentation by clicking here. It’s a little long but it’s well worth listening to.

 

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

Earlier this year, an independent report commissioned by New York City Comptroller Scott Stringer found that “operational failure is likely” in the investment office of New York City’s pension funds due to lack of resources and under-staffing, among other things.

[Read the report here.]

At the investment meeting for the city’s pension funds on Wednesday, CIO Scott Evans – who manages the pension funds’ pooled portfolios – outlined the reforms he’s implementing to address the issues revealed in the report.

From ai-cio.com:

Miles Draycott has been brought on as the bureau’s first chief risk officer to tackle operational risks, while new Strategic Initiatives Director Cara Schnaper is focusing on areas including technological needs and reporting processes.

“Right now, our fund accounting processes are clunky to say the least,” Schnaper said during a presentation of the bureau’s roadmap for reforms. “If we don’t get out of all the noise we’ll never be able to look at what’s really on the table.”

Evans estimated that the technology alone needed to improve the bureau’s operations and reporting will cost more than $2 million—more than quadruple the $463,845 grant currently awarded to the bureau for non-personnel expenses.

“We were built to support a stocks and bonds portfolio,” Evans said. “You can’t manage a modern portfolio with an infrastructure that is not robust and that is not suited for the task.”

As for personnel expenses, Evans is requesting an additional $1.3 million to bring the total staff count up to 71. Currently, the bureau employs 48 staffers, with the authorization to hire 13 more.

The CIO is also seeking funding for training programs for bureau employees.

“We want to develop our people,” he said. “Right now we’re not spending any money on training.”

The report contained 240 recommendations in all.

 

Photo by Thomas Hawk via Flickr CC License

Former Canadian Prime Minister Stephen Harper had planned to raise the country’s retirement age to 67.

But current PM Justin Trudeau said this week that was a “simplistic solution […] to a complex problem”, and indicated the retirement age would stay at 65.

More from the Toronto Star:

Canada will keep its retirement age at 65, Prime Minister Justin Trudeau says.

The Stephen Harper Conservative government had planned to raise the retirement age to 67, but Trudeau said that this won’t be happening in next week’s budget.

“Tweaking the age like that is a very simplistic solution — that won’t work — to a complex problem,” Trudeau said on Thursday morning in a question and answer interview with Bloomberg News in New York.

Trudeau said he prefers a “nuanced and responsible discussion” about retirement, arguing that investment bankers and lawyers don’t put their bodies through the same physical strains as manual labourers.

He defended his plans to invest in the middle class and said he’s not worried about driving the wealthy out of the country.

“We have nothing against success in Canada,” Trudeau said.

He acknowledged that Canada is on the other side of the fiscal debate than Germany and the United Kingdom, and said that Canada is in a strong position to take advantage of low interest rates through investment.

 

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

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

Katy Barnato of CNBC reports, Rich countries have a $78 trillion pension problem:

Dreams of lengthy cruises and beach life may be just that, with 20 of the world’s biggest countries facing a pension shortfall worth $78 trillion, Citi said in a report sent on Wednesday.

“Social security systems, national pension plans, private sector pensions, and individual retirement accounts are unfunded or underfunded across the globe,” pensions and insurance analysts at the bank said in the report.

“Government services, corporate profits, or retirement benefits themselves will have to be reduced to make any part of the system work. This poses an enormous challenge to employers, employees, and policymakers all over the world.”

The total value of unfunded or underfunded government pension liabilities for 20 countries belonging to the Organisation for Economic Co-operation and Development (OECD) — a group of largely wealthy countries — is $78 trillion, Citi said. (The countries studied include the U.K., France and Germany, plus several others in western and central Europe, the U.S., Japan, Canada, and Australia.)

The bank added that corporates also failed to consistently meet their pension obligations, with most U.S. and U.K. corporate pensions plans underfunded.

Countries with large public pension systems in Europe appear to have the greatest problem. Citi noted that Germany, France, Italy, the U.K., Portugal and Spain had estimated public sector pension liabilities that topped 300 percent of gross domestic product.

Improvements in health care mean retirees need to string out their income for longer. Meanwhile, the increase in the retirement-age population versus the working population is straining government pension schemes.

Several countries, including the U.K., France and Italy are gradually hiking retirement ages. Citi recommended that governments explicitly link the retirement age to expected longevity.

It also advised that government-funded pensions should serve merely as a “safety net,” rather than the prime pension provider, and that corporate pensions should be “opt out” rather than “opt in” to encourage greater enrollment.

No doubt, the world is facing a pension disaster. I’m with Citi until I read that last paragraph about government-funded pensions should serve merely as a “safety net” and that corporate pensions should be “opt out” rather than “opt in” to encourage greater enrollment.

Really? I think Citi needs to tone it down a bit and carefully examine what’s working and what’s not working around the world. For example, if you look at the 2015 global rankings of top pension systems, you will find Denmark and the Netherlands at the top spot.

I’ve long argued that countries need to go Dutch on pensions and bolster defined-benefit plans for their citizens. Moreover, I’m a big believer in large, well-governed public defined-benefit plans, much like we have in Canada. Our Top Ten pensions are scouring the globe for investment opportunities and they’re able to provide great investment results at a fraction of the cost of mutual funds or other “private sector providers” capitalizing on their size, liquidity and long investment horizon to lower fees by engaging in direct deals wherever they can.

Are Canada’s Top Ten perfect? Of course not, nobody is perfect. I’ve been very careful shining a light on their operations but also praising them for the direct and indirect benefits they provide our economy.

In short, I believe that large, well-governed public defined-benefit plans are a big part of the solution to the global pension crisis. So when Rob Carrick of the Globe and Mail asks, Just how good a deal is the Canada Pension Plan?, I agree with him and think it’s a great deal and every Canadian should be demanding enhanced CPP, ignoring the silly and flawed studies of right-wing think tanks questioning the costly CPP.

Of course the CPP is more costly than other large public DB plans, it manages the pensions of all Canadians, but that study from the Fraser Institute is completely flawed and biased. In fact, Keith Ambachtsheer, David Dupont, and Tom Scheibelhut of KPA Advisory put out a note correcting the Fraser’s Institute’s faulty analysis and conclusions and Jim Keohane, CEO of HOOPP, told me the study “double-counted” the costs of CPP.

The problem is that too many people turn pensions into a political debate between big government versus small government. But as I keep harping, good pension policy is good economic policy which is why I don’t have time for idiotic arguments which fail to see the long-term value of large, well-governed public defined-benefit plans.

Having said this, the world needs a reality check when it comes to state pensions.  In particular, in a recent comment of mine, Checkmate for Europe’s pensions, I highlighted the pension black hole threatening many European countries. It’s not just about raising the retirement age, there’s a lot more needed to completely overhaul many European public pensions that are living on borrowed time.

And the situation in the United States isn’t much better. Most Americans are ill-prepared for retirement and many underfunded U.S. public pensions are doomed, especially if deflation sets in. And if New Jersey’s COLA war spreads to other states, it will spell disaster for many state pension systems.

We need large well-governed public defined-benefit plans, but we also need to introduce risk-sharing at these plans, recognizing that markets aren’t always going to deliver the requisite return.

As far as the $78 trillion global pension disaster, I take this figure with a grain of salt. Politicians and corporations will use it to make the case for weakening defined-benefit plans, replacing them with defined-contribution plans, but that will only exacerbate pension poverty and global deflation.

Don’t get me wrong, the world has a huge pension problem. It also has a huge inequality problem fueled by an ongoing jobs and retirement crisis which will only get worse because of aging demographics. The question remains, how are we going to solve these problems?

 

Photo by  Horia Varlan via Flickr CC License

Canada’s largest pension funds are urging Prime Minister Justin Trudeau to think big when it comes to infrastructure – that is, if the country wants to attract private investors, like pension funds, to the projects.

Seven of Canada’s pension funds rank among the top 30 infrastructure investors globally.

More from Bloomberg:

Canada’s largest pension funds have advice for Justin Trudeau’s government as it prepares to double its infrastructure investments over the next decade: follow the Australian model and think big.

“What are we looking for? We’re looking for projects of scale,” said Mark Wiseman, chief executive officer of Canada Pension Plan Investment Board, the country’s largest pension fund with C$283 billion in assets.

The Canadian government isn’t expected to provide extensive details of its infrastructure plan in the March 22 budget because it’s still developing a long-term strategy. Federal officials have said an extra C$10 billion will be made available over the next two years while it crafts a broader strategy to deploy an additional C$20 billion to each of three silos over the next decade: public transit, green infrastructure, and social infrastructure.

[…]

The challenge for larger funds to invest in traditional public-private-partnerships is that the equity stake — and in turn the reward — is often too small for them to pursue, said Andrew Claerhout, head of the infrastructure group for Ontario Teachers’.

Canada’s largest pension funds collectively manage more than $560 billion in assets.

 

Photo by Kyle May via Flickr CC License

Numerous surveys in recent months have found that more than ever, pension funds are figuring environmental, social, and governance (ESG) risks into their investment analysis.

There’s good reason for that: as a new study commissioned by CalSTRS demonstrates, climate change will likely expose pension funds to equity losses.

Mercer studied the potential effect of climate change policies on CalSTRS portfolio. Details from ai-cio.com:

The California State Teachers’ Retirement System (CalSTRS) could lose as much as $123 billion by 2050 as a result of climate change policies necessitated by the Paris Agreement, according to Mercer.

In particular, Mercer said US and developed-market equities—which make up up nearly half of CalSTRS’ total exposures—would be negatively impacted by policies aimed at preventing a temperature increase above 2 degrees, as companies would have to significantly reduce their emissions in short time span. When private equity is also taken into account, exposures with significant negative impacts over 35- and 10-year horizons “would account for more than 60% of CalSTRS total fund,” Mercer said.

While the $179.4 billion pension fund is “reasonably well insulated” against scenarios in which temperatures rise above 2 degrees Celsius, a Mercer assessment found that the “strength and scale of response” required to keep global warming below that benchmark would expose CalSTRS to significant equity losses.

To address these risks, the consultant recommended that CalSTRS reallocate some passive exposures toward lower-carbon indexes, allocate a larger portion of active equities to managers focused on sustainability, and increase its exposures to emerging market equity.

Read the full study here.

 

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