Pension360

The 2015 NACUBO-Commonfund Study of Endowments report has been partially released, and it’s full of interesting charts and visuals outlining the size and investment returns of the largest endowment funds in the U.S. and Canada.

The full report will be available to purchase in March 2016; until then, NACUBO was kind enough to put many of the report’s graphics online for public viewing.

Here’s the current rankings of endowments by size; you can also see how the market value of their assets fared between 2014 and 2015.

More:

View the rest of the list here.

All charts are courtesy of the 2015 NACUBO-Commonfund Study of Endowments.

A new initiative from the Department of Labor hones in on the benefit payment practices of corporate defined-benefit pension plans.

The initiative originated in the DOL’s Philadelphia office, but may soon be expanded.

From the National Law Review:

The investigations are concentrated on plan procedures in three key areas: (i) locating missing participants, (ii) informing deferred vested participants that a retirement benefit is payable, and (iii) commencing benefit payments when the participant reaches age 70½. The initiative was launched out of the Philadelphia regional office, but the DOL has indicated that it intends to expand the investigation further.

[…]

According to the DOL, it has discovered, among other things, that (i) some plans under investigation have procedures for locating missing participants, but the procedures are not being followed in practice; and (ii) at least a few of the plans seemed to have significant recordkeeping problems and could not verify the age of their participants, with the obvious consequence that the plans could not pay participant benefits when required. A representative from the DOL has said that investigators have found numerous problems with plan records, such as individuals who appear to be over 100 years old with birthdays identified by what are clearly “plug” dates. So far, the DOL has identified more than $500 million in unpaid pension benefits that are owed to participants over the age of 70½.

Read the rest of the detailed analysis here.

Photo by TaxRebate.org.uk via Flickr CC License

Connecticut officials are mulling ways to ensure the state’s lawmakers keep up with pension funding requirements: making full annual contributions, and delivering them on time.

A constitutional amendment is one way to do that. But State Comptroller Kevin Lembo is weighing a different idea: a pension obligation bond with a twist.

From the Hartford Business Journal:

In a recent interview, State Comptroller Kevin Lembo said he wouldn’t necessarily support a constitutional amendment, but he’s not opposed to other tactics that could force legislators to keep up with annual pension payments, including borrowing money in the form of a pension-obligation bond (POB) with restrictive bond covenants.

The state teachers’ pension system used a similar strategy in 2008, issuing a $2 billion POB with covenants that require the state to pay its full ARC each year, which it has done.

The strategy could be replicated for the state employee pension system, known as SERS, which is currently underfunded by $14.9 billion, Lembo said. Such a borrowing would likely be in the range of several hundred million dollars.

“So in the years when the legislature needs $100 million, they would realize pretty quickly” that they couldn’t forgo the pension payment to create budget savings, Lembo said. “We can lock them out of that. I’m open to talking about it because of the value it has in locking in good behavior.”

Asked for her opinion, State Treasurer Denise Nappier said she is in favor of at least discussing a POB, but that it would require an analysis of whether the returns on invested bond funds would meet or exceed the cost of debt.

“We also must consider the impacts of such a transaction on the state’s credit rating and debt levels,” Nappier said. “That said, a modestly sized and prudently structured transaction could be a powerful tool if it includes a bond covenant to improve fiscal discipline going forward — as was done with the POBs issued for the Teachers’ Retirement Fund in 2008.”

When issuing a POB, the state is making a bet that investment returns exceed the interest paid on the debt over the life of the bonds.

Photo by thinkpanama via Flickr CC License

The International Monetary Fund on Thursday published a blog post, penned by the official handling Greece’s bailout, positing that the country needs to implement steeper pension reforms for its finances to be sustainable in the long-term.

Greece has already proposed some significant reforms; that package will soon be altered further after objections by creditors. The alterations will almost certainly lead to further benefit cuts.

More from the Greek Reporter:

Poul Thomsen, the Deputy Director of the Fund’s European Department who handles the Greek bailout, says that the Greek pension system is “unaffordably generous” and only pension cuts can make the security funds system sustainable.

In an article entitled “Greece: Toward a Workable Program” posted on the IMF official blog on Thursday, the Danish economist denies the criticism that the Fund is pushing for “socially draconian reforms”. He counter-argues that in Greece pensions cost about 10 percent of gross domestic product every year when the average in the Eurozone is 2.5 percent. Only deep pension reforms can make the pension system sustainable:

“Why the focus on pension reforms? Despite the pension reforms of 2010 and 2012, Greece’s pension system remains unaffordably generous. For instance, the standard pensions in nominal Euro terms are broadly similar in Greece and Germany, even though Germany—measured by the average wage—is twice as rich as Greece. Add to this that Greeks still retire much earlier than Germans and that Germany is much better at collecting social security contributions. The result is that the Greek budget needs to transfer some 10 percent of GDP to cover the gaping hole in the pension system, compared to a European average of some 2½ percent. Clearly, this is unsustainable,” he writes.

As a condition of its bailout, IMF instructed Greece to construct a pension reform package that generated savings equal to 1 percent of the country’s GDP.

Photo credit: “Flag-map of Greece” by en.wiki: Aivazovskycommons: Aivazovskybased on a map by User:Morwen – Own work. Licensed under Public Domain via Wikimedia Commons – https://commons.wikimedia.org/wiki/File:Flag-map_of_Greece.svg#/media/File:Flag-map_of_Greece.svg

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

David Ljunggren and Matt Scuffham of Reuters report, Canada opens talks with pension funds on infrastructure funding:

The federal government is talking to the country’s largest pension funds about investing in billions of dollars worth of infrastructure projects to help stimulate the economy, the Infrastructure department told Reuters on Wednesday.

Prime Minister Justin Trudeau’s Liberals won an election in October on the back of a promise to run three consecutive annual budget deficits of up to $10-billion to help fund investment in infrastructure and will seek to boost that with private funding, sources told Reuters.

The funds are fiercely protective of their independence from political interference and would not be compelled to invest, but their backing for the projects would be a major boost for Mr. Trudeau.

“We are engaging pension funds and other potential partners to find areas of alignment,” a spokeswoman for Infrastructure Minister Amarjeet Sohi said. She did not give further details.

Executives at Canada’s pension funds, which are among the world’s biggest infrastructure investors, say that the projects will need to be structured in a way that limits the risk they take if they are to be lured into backing them.

Traditionally, funds such as the Canada Pension Plan Investment Board (CPPIB) have been reluctant to back “greenfield” projects, which are built from scratch, because of the risk they carry.

Funds usually prefer investing in “brownfield” infrastructure, projects that have already been constructed, executives said.

Mark Wiseman, chief executive of CPPIB, which has $283-billion in assets under management and invests on behalf of the federal plan that covers most working Canadians, told Reuters projects would need to have sufficient scale to be interesting, be overseen by a predictable regulatory regime and carry limited risk.

“That means projects where we are not going to have to take the build-out, greenfield-type risk because we’re not good at being able to assess those. There’s ways to structurally de-risk these opportunities for institutional investors,” he said.

Mr. Trudeau needs to find ways to boost Canada’s flagging economy, which has deteriorated more than expected since the Liberals came to power with economic growth fading, the dollar weakening and oil prices in free fall.

Bankers say private funding for the projects could amount to several times more than that coming from the public purse, and Canadian pension funds, already among the world’s biggest infrastructure investors, would be an obvious source of capital.

The CPPIB, the Caisse de dépôt et placement du Québec (Caisse), the Ontario Teachers’ Pension Plan and OMERS, the Ontario Municipal Employees Retirement System, are already among the top 10 infrastructure investors in the world.

One government source familiar with the matter said officials had also had conversations with institutional investors such as Brookfield Asset Management, as well as the major Canadian pension funds.

“We’ve talked to Teachers’, we’ve talked to Caisse, we’ve talked to OP Trust, we’ve talked to OMERS, we’re talking to CPPIB, most of the Canadian ones. I think the conversations have gone well and there’s lots of interest on both sides to find a way to partner,” the source said.

The source said the talks were exploratory and specific projects had not yet been discussed. Officials have sought advice on setting up the Canada Infrastructure Bank, which Mr. Trudeau had talked about creating during the election campaign to provide low-cost financing for infrastructure projects.

“Our conversations with the federal government have centered around what pension plans, like ours, look for in an infrastructure investment,” OP Trust CEO Hugh O’Reilly said.

The other funds and Brookfield declined to comment.

It is not yet clear if the plans will be announced in next month’s budget and no decisions had yet been taken on how much money will be raised from private investors, sources say.

The Caisse said last year that it would finance, develop and operate major infrastructure projects for the cash-strapped province of Quebec and hoped to pursue other projects internationally.

Executives say the Liberal government is right to invest in infrastructure, believing that monetary policy has exhausted its ability to stimulate the economy.

“Infrastructure makes economies more productive, it gives you more opportunities to grow. Monetary policy is not going to get us out of this slope we’re on,” a senior executive at one of Canada’s biggest three pension funds said.

Last Friday, I wrote a long comment on how Canadian pensions are cooling on infrastructure, quoting senior executives at Canada’s large pensions bemoaning the pricing on many infrastructure investments around the world.

Now we find out that Ottawa has been in discussions (read: please help us!!) with Canada’s large pensions to help them with their plan to invest billions rebuilding Canada’s infrastructure.

This is a smart move on the part of the federal government, a very smart move. I’ll briefly share some of my thoughts below:

• Canada’s large pensions are indeed among the world’s biggest investors in infrastructure. They’ve been directly investing in infrastructure over many years.
• Infrastructure is increasingly becoming one of the most important asset classes for Canada’s Top Ten. Why? Just look at what’s going on around the world. Sweden’s central bank pushed rates further into negative territory and the yield on the U.S. 10-year Treasury bond hit a low of 1.57% on Thursday morning as stock markets around the world plunge. The rising prospect of the new negative normal and ultra low rates for years is going to make it that much more difficult for Canadian and global pensions to make their actuarial return objective. In light of this, Canadian pensions are investing in infrastructure as a substitute to bonds, offering them a relatively safe yield between bonds and stocks over a very long period (in finance parlance, the long duration of infrastructure assets is a better match to pensions’ long dated liabilities).
• Infrastructure assets, however, carry their own set of risks. Among these risks are illiquidity risk, currency risk, regulatory and political risks. All these risks (except of course illiquidity) can be mitigated by investing in domestic infrastructure projects.
• Now, the type of infrastructure projects the federal government is talking about are greenfield, not brownfield which are already operating and have known cash flows. These greenfield projects carry their own set of additional risks like wrong cash flow projections, economic cycle risks, corruption, fraud, etc., but if done correctly using PPPs or using the expertise of a Canadian pension fund team with deep operational experience, these type of greenfield infrastructure investments offer very attractive returns for taking such development risks.
• In Canada, OMERS Borealis is a world leader in developing infrastructure investing as an asset class for institutional investors. But there are others like Ontario Teachers’, the Caisse, CPPIB, PSP Investments, AIMCo which are huge direct investors in global infrastructure.
• The thing that’s striking, however, is that most of the people running or working at infrastructure groups at Canada’s Top Ten have no operational experience whatsoever in terms of setting up an infrastructure project or running an infrastructure asset. They typically have an investment banking background and are great deal makers but they know very little about what it takes to operate an infrastructure investment. That works great when things are going well but when they turn south, you need people who know how to operate an infrastructure asset. And with few exceptions, these people are very scarce at Canada’s Top Ten. Instead, you have a bunch of deal makers bidding up prices of global brownfield infrastructure investments (they talk about ‘being disciplined’ but that’s what they all do).
• I mention this because the article above cites CPPIB’s Mark Wiseman stating they avoid build-out, greenfield-type risk. No kidding, CPPIB is a prime example of what I’m talking about. I even sent a resume of a friend of mine to both Mark Wiseman and Ontario Teachers’ CEO Ron Mock, someone with actual operational experience and nothing came out of that. Instead, the Caisse had the brains to hire him and he’s very happy there working on greenfield infrastructure projects. When the shit hits the fan on infrastructure assets, you need people with actual operating experience to tell you how to manage those assets properly.
• The article above also discusses governance and how Canada’s public pensions are fiercely independent. True, Canada’s large public pensions operate at arm’s length from the federal government but make no mistake, they need the federal government as much as the federal government needs them. Also, in the case of CPPIB and PSP Investments, if they don’t play nice, the federal government can make their lives miserable even if it’s not directly involved in the day to day operations of their funds.
• But right now, there is no acrimony. I think everyone is on the same page. The federal government needs to get going on its massive infrastructure spending to mitigate the effects of a deep recession and Canada’s Top Ten need to invest in massive, scalable infrastructure projects to fight the scourge of ultra low bond yields for years to come. The discussions are taking place at a high level and I’m sure they’re constructive. If this is done right, it will be a major victory for everyone: the federal government, Canada’s Top Ten, Canadian pensioners, and most importantly Canadians looking for work to provide for their families.

Those are my thoughts in a nutshell. Are there other issues worth considering? Of course, like will the federal government use the expertise of private investors like Brookfield Asset Management and will it also court international pensions and sovereign wealth funds to invest in these greenfield projects?

That all remains to be seen. The good news is Canada has some of the best infrastructure investors in the world and they will be able to offer the federal government some very sound advice as it carries out its much needed spending on Canada’s infrastructure.

By the way, you should all read Canada’s infrastructure report card. Just like in the United States, there is a desperate need to fix our crumbling infrastructure and we need private and public partnerships to do this properly and at the most reasonable cost.

It’s also worth remembering that infrastructure jobs pay decent wages and have an important multiplier effect in the economy. More importantly, investing in infrastructure is a smart way of investing in the long-term prosperity of our country. And unlike the U.S., in Canada there’s a lot less political dysfunction when it comes to big spending projects, especially now that the Liberals swept into power (if only they got on to enhancing the CPP too!).

As always, if you have anything to add, feel free to reach out to me at LKolivakis@gmail.com. And if our Prime Minister has time, the next time he’s in Montreal, I’d be happy to meet up with him, my brother who he knows well from his high school years and my friend to discuss all this and much more, off the record, of course.

Photo by Kyle May via Flickr CC License

A New Jersey pension commission, assembled by Chris Christie last year, issued a report on Thursday outlining the savings that would be realized if the state froze its defined-benefit pension plan and cut worker health benefits.

The panel’s mandate is to study ways to lower the state’s pension-related costs.

New Jersey Gov. Chris Christie may include the measure in his budget proposal next week.

More from NJ.com:

The proposal calls for freezing the pension system and moving active public employees onto a cash balance retirement plan, but it hinges largely on reducing health care costs to free up cash.

[…]

While the proposed changes are quite involved, broadly, active employees would be moved onto health care plans equivalent to gold plans under the Affordable Care Act, and retirees would be given retiree reimbursement accounts to cover the cost of purchasing coverage through a private exchange.

In total, the state would save $2.23 billion, including $1.42 billion through lower-cost benefits and $810 million by shifting the cost of retired teachers’ benefits to their employers (the commission assumes that will be offset by benefit changes at the local level).

While the report stressed that the plan reduces the total cost of the system, rather than just shifting those costs to members, active and retired workers would still have to pick up an additional $190 million.

The commission estimated premiums will fall 30 percent, and the state will save $510 million.

Christie submits his budget proposal next Tuesday. If it includes the panel’s recommendations, the package will likely face stark opposition in the Senate.

Photo by Bob Jagendorf from Manalapan, NJ, USA (NJ Governor Chris Christie) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

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

Barbara Shecter of the National Post reports, National Bank to write off $165-million investment after Germany shuts down Maple Bank:

National Bank of Canada will take a writedown of $165 million, which represents the full carrying value of its investment in Canadian trading and securities lending firm Maple Financial Group, after authorities in Germany shut down Maple’s business activities there over the weekend.

On Monday, a spokesperson for the Ontario Teachers’ Pension Plan, another minority investor in Maple, said the pension manager is “assessing the current situation,” which stems from an investigation launched last fall into alleged trading-related tax fraud at Maple’s German subsidiary.

Both Teachers’ and National Bank have pledged to repay dividends they received if the allegations are proven.

Montreal-based National Bank has a 24.9 per cent equity interest in Maple Financial Group, a private firm.

“National Bank has advised the German authorities that if it is determined portions of dividends received from Maple Financial Group Inc. could be reasonably attributable to tax fraud by Maple Bank, arrangements will be made to repay those amounts to the relevant authority,” National Bank said in a statement.

Deborah Allen, vice-president of communications at Teachers, said the pension manager “entered into a dialogue with the relevant authorities and gave assurances” about potential dividend repayments “immediately upon becoming aware of the allegations against employees of Maple Bank last fall.”

According to National Bank, which raised $300 million through an equity issue in October and signaled it would be taking action regarding the value of its holding in Maple, the investigation involves “selected trading activities by Maple Bank, and some of its current and former employees” during the 2006 to 2010 tax years.

“The German authorities have alleged that these trading activities violated German tax laws,” National Bank said in a statement, adding that neither National Bank nor its employees were involved in the trading activities, nor are they understood to be the subjects of the investigation.

Rob Sedran, an analyst at CIBC World Markets Inc., said National Bank’s equity raise last fall suggested the write down of its Maple holding “would be required at some point.”

In a note to clients Monday, Sedran said the impact on National Bank after the first-quarter charge should be “immaterial as Maple Financial was contributing less than one per cent to the bank’s earnings.”

According to Sedran, Maple’s businesses include collateralized asset-based lending, credit derivatives, and proprietary trading.

Maple Financial Group is unrelated to Maple Acquisition Group, which bought the TMX in 2012.

Doug Alexander of Bloomberg also reports, National Bank Takes $119 Million Writedown on Maple Bank:

National Bank of Canada said it will write off the full C$165 million ($119 million) carrying value of its stake in Maple Financial Group Inc. after that company’s operations in Germany were limited by regulators amid a tax probe.

The writedown will be included in fiscal first-quarter results reported on Feb. 23, cutting National Bank’s common equity Tier 1 ratio by about 13 basis points, the Montreal-based lender said Sunday in a statement. National Bank, which signaled in October that such a reduction was possible, owns 24.9 percent of Maple Financial, parent of Maple Bank GmbH.

“Beyond the charge this quarter, the earnings impact should be immaterial as Maple Financial was contributing less than 1 percent to the bank’s earnings,” Robert Sedran, an analyst with CIBC World Markets, said in a note to clients. “With no lasting earnings impact, there should be no lasting valuation impact either.”

Shares of National Bank fell 2.5 percent to C$38.83 at 9:54 a.m. in Toronto, the worst performance in the eight-company Standard & Poor’s/TSX Banks Index. The shares have slid 3.7 percent this year.

Tax Probe

Germany’s BaFin financial-services regulator said earlier Sunday that it’s limiting Maple Bank GmbH’s activities on concern the business faces over-indebtedness in the midst of the tax probe. Barbara Fuchs, a spokeswoman for Maple Bank in Frankfurt, said the company can’t comment on investigations.

“These events result from ongoing investigations launched by German authorities in September 2015 focusing on selected trading activities by Maple Bank, and certain of its current and former employees,” National Bank said Sunday. “None of National Bank of Canada and its employees were involved in these trading activities, nor to our knowledge is National Bank of Canada or any of our employees the subject of these investigations.”

Maple Financial is a closely held company based in Canada, whose shareholders also include Ontario Teachers’ Pension Plan, with a 28 percent stake, according to its website. The firm, which was formed in 1986, has more than 260 employees in Toronto, Frankfurt, London and Jersey City, New Jersey, among other locations. Its units include a German bank with branches in Canada and the Netherlands, and broker-dealers in Canada, the U.S. and U.K.

Deborah Allan, a spokeswoman for Toronto-based Ontario Teachers’, said the pension fund has discussed the allegations against Maple Financial with officials, and is “continuing to assess the current situation.”

Maple Bank GmbH has been in business since 1994 and deals in equity and fixed-income trading, repos and securities lending, as well as structured products and institutional sales, according to its website.

Arno Schuetze and Alexander Hübner of Reuters also report, Financial watchdog closes German unit of Canada’s Maple Financial:

German financial watchdog Bafin on Sunday closed the German operations of Canada’s Maple Financial on impending financial over-indebtedness related to tax evasion investigations.

In September, German prosecutors searched offices and residences linked to Maple Bank in a probe of serious tax evasion and money laundering connected to so called dividend stripping trades.

The trades involve buying a stock just before losing rights to a dividend, then selling it, taking advantage of a now-closed legal loophole that allowed both buyer and seller to reclaim capital gains tax.

Bafin said in a statement that once Maple Bank made some necessary tax provisions, over-indebtedness loomed.

Maple Bank said in a separate statement that the requested tax provisions are connected to the ongoing investigations into dividend stripping trades carried out between in 2006 to 2010.

A Maple Bank spokeswoman declined to comment on the amount of the necessary provisions.

German daily Sueddeutsche Zeitung reported on Sunday that Frankfurt prosecutors allege that Maple Bank and its business partners have bilked the taxpayer of some 450 million euros.

The bank has an equity capital of just 300 million euros.

Bafin said in a statement that the lender with 5 billion euros ($5.58 billion) in assets posed no threat to the financial stability of the country.

Despite its small size, Maple Bank shot to fame in Germany in 2008, when the lender helped Porsche in its takeover attempt of Volkswagen, which eventually led to the acquisition of the sports car maker by Europe’s leading car manufacturer.

Maple Bank specialises in equities and derivatives trading and as of Feb. 4 had 2.6 billion euros in liabilities mainly with institutional clients.

Bafin said it has barred Maple Bank from continuing its business to safeguard its assets.

While deposits of up to 100,000 euros are safeguarded by Germany’s deposits protection scheme, up to 60 million euros per client will be covered by Germany’s banking association’s guarantee fund if Bafin declares the bank an indemnification case, a spokesman for the bank lobby group said on Sunday.

Maple Bank is owned among others by the National Bank of Canada and the Ontario Teachers’ Pension Plan.

There were warnings that something was brewing with Maple Financial’s German subsidiary in October last year when Ross Marowits of the Canadian Press reported, Teachers’ Pension Plan, National Bank watching legal problems facing Maple investment:

Legal problems facing the European subsidiary of Maple Financial Group is creating uncertainty for two of its largest investors — the Ontario Teachers’ Pension Plan and the National Bank of Canada.

National Bank (TSX:NA) says its investment — which had a carrying value of $165 million as of Aug. 31 — was at risk for big losses because of allegations of tax irregularities between 2006 and 2010 in Germany against Maple Bank GmbH.

“Given the seriousness of the reported allegations and the actions which may be taken by German regulatory authorities . . . National Bank considers its investment at risk of substantial loss,” Canada’s sixth-largest bank said in a news release.

The bank holds a 24.9 per cent interest in Toronto-based Maple, just behind the 28 per cent state held by Teachers’, the country’s third-largest pension fund manager.

Vancouver’s Chan family owns 29 per cent, while Maple management and employees hold 13 per cent, with the remaining five per cent scattered among a number of investors, according to Maple’s financial report.

Teachers spokeswoman Deborah Allan said the fund manager was “closely monitoring any developments, but (we) are not commenting on the investment.”

Maple Financial Group is unrelated to Maple Acquisition Group, which bought the TMX in 2012.

Founded in 1986, Maple Financial changed its name in 1997 from Financial Products Group of First Marathon Inc. It had 3.75 billion euro of net assets as of Sept. 30, 2014.

The Office of the Superintendent of Financial Institutions (OSFI), which regulates federally registered banks, trusts and private pension plans, said it was aware of Maple’s situation but was not permitted by legislation to say if it was investigating.

National added Maple in 1999 as part of its $712-million acquisition of brokerage firm First Marathon. It was merged with National subsidiary Levesque Beaubien Geoffrion Inc. to form National Bank Financial.

The bank issued the warning about its Maple investment Thursday afternoon as it announced a restructuring that will see the elimination of several hundred jobs, mainly in Quebec.

It also announced that it expects to raise $300 million in gross proceeds after issuing 7.16 million shares to a syndicate of underwriters led by National Bank Financial.

“In an environment of low economic growth and high technological transformation, we feel that additional efforts to improve efficiency and processes, as well as adding to our excess capital cushion, are the right steps to take,” said CEO Louis Vachon.

The bank said Maple contributed less than one per cent to its annual profits in each of the last two years. A full writedown would reduce its Tier 1 capital ratio by about 13 basis points.

What are my thoughts on all this? First, this isn’t something that looks good for the National Bank or Ontario Teachers’ Pension Plan. Both these organizations pride themselves on “cutting edge due diligence” on external hedge funds but they obviously weren’t monitoring the operations at this German subsidiary very closely.

Second, the National Bank says none of their Canadian employees were involved with these trading activities but if they had any knowledge of what was going on, there could be legal ramifications (ie., heavy fines) in the future. Right now, it’s an $165 million write down and 13 basis points off its Tier 1 capital, which is a hit but nothing the bank can’t handle. However, if Bafin proves that the National Bank was aware of these trading activities and turned a blind eye to these trades, it could impose additional fines.

Third, this is the type of stuff that keeps the board of Ontario Teachers’ up at night. OTPP’s chairman of the board, Jean Turmel, was previously  president of Financial Markets, Treasury and Investment Bank at the National Bank and he knows its CEO Louis Vachon extremely well (they’re friends). I can guarantee you there are a lot of tough questions being asked at Teachers’ and the National Bank in regards to this screw-up.

Fourth, Ontario Teachers’ CEO Ron Mock knows all about harsh hedge fund lessons due to operational blowups. The last thing he needed was to find out news of shady tax evasion going on at the German subsidiary of a company Ontario Teachers’ owns a 28% stake in. That $185 million write down is going to hurt Teachers’ value added in 2016 and that is a huge sum to lose in a brutal environment where every basis point counts.

Now, it’s entirely possible and very likely that Louis Vachon, Ron Mock, Jean Turmel and the rest of the employees at the National Bank and Ontario Teachers’ had no idea of what was going on at Maple Financial’s German subsidiary. This beckons the question: What did Maple Financial’s senior managers in Toronto know and how did they not discover this illegal trading earlier? This is a huge operational screw-up on their part.

I met with representatives of Maple Financial a long time ago in Toronto. I thought very highly of them but it goes to show you even the most sophisticated shops drop the ball at times and this certainly doesn’t look good for them, the National Bank or Ontario Teachers.

And just to be clear, every major bank in Canada has had issues in the past. Some of them we hear about, others are brushed under the carpet. It took me less than 30 minutes to figure out Norshield Financial was a Ponzi scheme back in 2002 and yet the Royal Bank was allowing brokers to invest in this laughable “fund of funds” back then. What a joke!

This case should serve as a wake-up call to all the banks and Canadian pension funds investing in businesses. When you invest in businesses, you invest in people and you better make sure their operations are kosher because if they’re not, you’re in for a nasty surprise down the road.

Another thing that crossed my mind as I was writing this comment was whether German tax authorities wanted to stick it to Canadian banks and pension funds following PSP’s skirting of foreign taxes which embarrassed the Canadian federal government and German tax authorities. Trust me, I’m sure that had something to do with all this even though Germany’s Bafin will deny it.

Lastly, please note apart from naming Graven Larsen as its new CIO, Ontario Teachers’ recently made some important changes to its senior managers. You can read about these changes here.

Also, Ron Mock appointed Barbara Zvan to Senior Vice-President, Strategy & Risk and Chief Investment Risk Officer. Ms. Zvan reports to the CEO and leads the Strategy & Risk team in supporting the Plan Sponsors in plan design decisions and the Board in determining appropriate benchmarks and risk appetite. In addition, Ms. Zvan drives the responsible investing and climate change risk management and strategy for the Plan.

Teachers’ even posted a nice picture of Barbara Zvan, all smiles:

I’ve never met her (just spoke to her once) but have heard nothing but good things about her and Wayne Kozun from Leo de Bever. This also shows that just like CPPIB, OTPP is taking gender diversity seriously, but it too needs to do a lot more in terms of workplace diversity at all levels of the organization, and start hiring disadvantaged groups like people with disabilities.

Trust me, despite what Jean Turmel told me once, people with disabilities work just as hard, if not harder to overcome prejudices, and they can handle the stress of trading these crazy schizoid markets! (Still, Turmel was right about one thing, always manage your downside risk!!).

Was Barbara Zvan responsible for knowing what was going on at Maple Bank in Germany? Of course not but somebody somewhere dropped the ball and I’m blaming Maple’s Toronto office more than anyone else.

But one thing is for sure, this is the last thing Ontario Teachers’ or the National Bank needed to deal with at a time when markets are brutal and every gain or loss has an impact on the bottom line.

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

After breezing through the state Senate, a proposed overhaul of Arizona’s public safety pension system will face a tougher crowd in the House.

The bill passed the Senate unanimously last Thursday by a 28-0 vote.

But a top House lawmaker has come out in opposition to the legislation. From the Arizona Daily Star:

The No. 3 Republican in the state House lashed out Wednesday at a plan to revamp the pension funds for police and firefighters, saying it’s a bad deal and should be scrapped.

Majority Whip David Livingston, R-Peoria, said there’s no need to ask voters to alter the system that determines what benefits are available to current and retired public safety employees.

[…]

Despite the objections, the House Insurance Committee approved the plan on a 7-1 vote. That sends the package to the full House, where there are likely more than enough votes for it.

But even if Livingston and Harris cannot kill the legislation, they have another remedy.

They could persuade voters to reject the required constitutional amendment to make the change. And that defeat would change the dynamics of the package — and the savings to the system.

A brief recap of the measure from the Arizona Republic:

Besides changes to cost-of-living adjustments, major provisions include a new tier for newly hired police and firefighters that limits maximum pension payments and requires employers and employees to share equally in payments to retirement accounts. New hires also would be given a choice of opting for a 401(k) style retirement plan rather than a plan with a guaranteed pension.

Current employees pay about 11 percent of their pay into the retirement plan, but employer contributions aren’t capped.

If the bill clears the House, it will have to be approved by voters at the ballot box.

Photo credit: “Entering Arizona on I-10 Westbound” by Wing-Chi Poon – Own work. Licensed under CC BY-SA 2.5 via Wikimedia Commons

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

Photo by  Simon Greig via Flickr CC License