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.

The latest financial statements of California’s fifth largest school district, Elk Grove Unified, list a pension debt of $414.6 million, up from no pension debt in the statement for the previous year.

How did the debt go from zero to hundreds of millions in a year?

As you might guess, it didn’t. The change is how the pension debt is reported under a new rule of the Governmental Accounting Standards board that took effect last fiscal year.

School districts are required to begin reporting their share of a pension debt that previously had been reported only by the two big statewide retirement systems for teachers and non-teaching employees.

Elk Grove reported $335.7 million as its share of the “net pension liability” of the California State Teachers Retirement System and $78.8 million for the California Public Employees Retirement System.

Most employees in the 65 schools of the district in Elk Grove, a city of 160,000 near Sacramento incorporated in 2000 during rapid growth, are teachers eligible for CalSTRS. Non-teaching employees are in CalPERS.

The potential impact of the new accounting rule, GASB 68, may have played a role in the endgame for legislation that gave CalSTRS a long-delayed major rate increase signed by Gov. Brown in June 2014, only a week before the last fiscal year began.

Without a rate increase, actuaries said, the new accounting rule could require CalSTRS to report the nation’s largest pension debt, $167 billion, an amount so large some feared it might increase the cost of issuing school bonds.

Jack Ehnes, CalSTRS chief executive officer, told the board in September 2014 that while talking to school officials he found a mixed view about the impact of reporting a huge pension debt.

“Some arguing it would have no effect if people understood the basis for this,” he said, “others arguing that it would have a significant effect on the bond market for schools. So, the question was out there.”

After the rate increase was passed in the nick of time, the debt or net pension liability CalSTRS reported for the first year under the new accounting rule dropped to $58.4 billion.

But the new GASB reports (different from the way actuaries will continue to calculate funding requirements) are intended to not only put a spotlight on pension debt with a more prominent display, but also to more quickly show changes.

That’s already happened for CalSTRS. The first reports required under the new accounting rule were for fiscal 2014-15, when the CalSTRS net pension liability, $58.4 billion, was based on the fiscal year that ended June 30, 2014.

The next annual reports will be based on the CalSTRS net pension liability for the fiscal year that ended June 30 2015, which jumped to $67.3 billion mainly because pension fund earnings dropped from 18.7 percent in 2013-14 to 4.8 percent in 2014-15.

The new accounting rule was adopted during a time when estimates of state and local government pension debt nationwide ballooned to alarming levels, notably $2.2 trillion by Moody’s, a Wall Street credit rating firm.

Pension fund investments had huge losses during the financial crisis. The CalPERS portfolio plunged from $260 billion in 2007 to $160 billion in 2009 and now, nearly a decade later, is $280 billion as some see warnings of a new recession.

Moody’s and others contended that public pension funds have overly optimistic earnings forecasts (7.5 percent a year for CalPERS and CalSTRS) that conceal massive debt and the need for higher employer-employee contributions, benefit cuts or both.

The new GASB rule is a compromise between the status quo and lower earnings forecasts used by Moody’s, 5.5 percent, or an even lower risk-free bond rate that some economists think should be used for risk-free guaranteed payments like pensions.

Under the new rule adopted by GASB in 2012 after a lengthy process that began in 2006, pension systems are allowed to continue to use their own earnings forecasts to offset or discount the cost of pensions promised in the future.

But if their projected assets fall short, the rule requires pension systems to “crossover” to a lower bond-based earnings forecast to discount the remainder of their future pension costs.

“I’m seeing a lot of media basically saying there is going to be sticker shock when these things come out,” Alan Milligan, CalPERS chief actuary, said in 2011 of financial reports under the new GASB rule. “I’m not so sure about that.”

One reason for new CalPERS actuarial methods adopted in 2013 was better alignment with the new GASB rule. More importantly, like most California pension systems, CalPERS can raise employer rates and stay on the path to full funding.

The great exception, CalSTRS, lacks the power to raise most employer rates. But as noted, the Legislature, after years of urging, approved a large CalSTRS rate increase (AB 1469 in 2014) shortly before the new GASB rule took effect.

So, the Elk Grove Unified financial statement for last fiscal year said that its CalPERS and CalSTRS debt were both calculated without a crossover to the lower bond-based earnings forecast.

CalSTRS has a single plan and does not provide a net pension liability for school districts and other employers. Guidance on a website shows them how to calculate their share of the CalSTRS debt under the new rule.

CalPERS has more than 2,000 state and local government plans and has calculated a net pension liability for each, charging $2,500 per plan. The big system passed its first test to avoid a crossover to a lower bond rate and expects that to continue.

A look at two CalPERS plans shows little difference between the old “unfunded liability” debt, reported under the actuarial rules used to set annual employer contribution rates, and the new “net pension liability” debt reported under the GASB rule.

As of June 30, 2014, the San Bernardino police and firefighter unfunded liability was $162 million and the net pension liability $167.7 million; the Sacramento police and firefighter unfunded liability $375.2 million and the net pension liability $373.9 million.

A GASB rule adopted in 2004 told state and local governments to begin reporting the cost of retiree health care promised workers, a major long-term debt that often had not been calculated.

The new focus under the accounting rule was followed by a trend toward pension-like “prefunding” of retiree health care, making annual payments to an investment fund to help pay for benefits promised in the future.

A CalPERS retiree health care fund established in 2007 had investments from 471 local governments valued at $4.6 billion at the end of last year. The Brown administration is negotiating retiree health care prefunding with state worker unions.

Last year, GASB followed up by directing government employers to begin reporting their retiree health care debt in 2018 much like pension debt is reported under the new accounting rule.

 

Photo by www.SeniorLiving.Org

U.S. institutions are at the “vanguard” of ESG investment strategies, but their Asian peers are behind the curve, according to a report from Asia Asset Management.

But that could change soon, as many Asian institutions and businesses are already exploring ESG strategies.

From Asia Asset Management:

“Comparatively, the US market is at the vanguard of ESG investment, which is predominately due to its government placing clear regulatory guidance on matters relating to national security, resource allocations and population migration,” he notes. As an example, he singles out the California Public Employees’ Retirement System (CalPERS), which was one of the first pension funds to employ ESG strategies.

According to the USSIF – the Forum for Sustainable and Responsible Investment, sustainable and responsible investment (SRI) in the US amounted to US$6.57 trillion in 2014, up from around $3 trillion in 2010. Of this, 74% of the SRI was sourced from ESG-related investments.

“To facilitate the adoption of ESG solutions, Asian regulators [will] have to press ahead with educational and regulatory reforms,” Mr. Drum points out. According to him, some Asian institutions are “dipping their toes in the water”.

[…]

For instance, the Stock Exchange of Hong Kong, a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited (HKEx), decided to strengthen its ESG guide for listing rules in December 2015 by upgrading the disclosure obligations for ESG investments, which was met with strong support from a broad range of market practitioners.

[…]

“Over 75% of the S&P Index constituents in the US provide reporting on carbon emissions and other environmental factors whereas most Asian companies don’t have such disclosures. It’s just not part of their corporate DNA,” he explains.

In terms of investment mentality, Mr. Drum opines that Asian pension funds should take ESG factors into consideration more when they come to structuring their portfolios, particularly because of their long-term investment horizons.

Zero Hong Kong institutions have issued ESG mandates – yet.

 

Photo credit: “Asia Globe NASA”. Licensed under Public domain via Wikimedia Commons 

The Department of Labor on Thursday sent the White House its final version of a proposed fiduciary rule that would raise standards for investment advice related to retirement accounts.

The rule, which is expected to be OK’d, poses new costs and complexities to broker-dealers as it raises the bar for industry transparency.

Details of the rule, from InvestmentNews:

The measure includes a legally binding requirement for brokers to act in the best interests of their clients and mandates a long list of fee disclosures. Right now, brokers need only make sure the investments they recommend are suitable for their clients.

[…]

Under the measure, advisers must sign a so-called best-interest-contract exemption, a legally binding document that requires them to act in their clients’ best interests, in order to accept commissions or third-party payments for investment products.

Instead of dealing with the contract, some independent advisers are abandoning products with varying adviser payments, such as variable annuities, and embracing products with level compensation.

According to Financial Advisor magazine, the approval of the rule is nearly certain:

The OMB has 90 days to accept or reject the rule. But considering that the proposal is viewed as a legacy accomplishment for President Obama, its approval is almost certain.

Department of Labor spokesperson Mike Trupo said he could not estimate when the final version of the extensive conflict of interest regulations for pension plan advisors would be made public and official by the agency.

The action by the DOL makes it inevitable that a final rule will be out by the end of the year, said Investment Adviser Association lobbyist Neil Simon.

The final text of the rule isn’t yet available.

 

Photo by Tom Woodward via Flickr CC License

The Institutional Limited Partners Association (ILPA), a group that includes CalPERS, CalSTRS and a dozen other large pension funds, released a template on Friday designed to standardize and improve the reporting of fees associated with private equity investments.

The ILPA has no authority to force general partners to adopt the template. But it appears several firms, such as the Carlyle Group and others (see below) have endorsed its use.

From Financial News:

The template would detail all capital collected from investors and portfolio companies, including fees charged, fund expenses, carried interest amounts and income received through related parties or parallel vehicles to the fund.

The fee reporting template was created after consulting nearly 50 global investor groups and 25 fund manager organisations.

[…]

Though the template is not legally binding, a spokesman for ILPA remained confident it would be adopted across the sector. He said: “We have received broad-based input, feedback and support from numerous private equity firms and we remain confident that it [the template] will be adopted as an industry standard.”

Industry expert Phalippou also welcomed the launch as a major step forward.

He said: “I think it will help a lot. When people see how much we are talking about, and it is right in front of them, they can no longer keep their head in the sand and pretend they do not know, cannot get the information, or that they wish they could but it is too costly.”

But he added a note of caution: “There are still things missing though – like expenses charged directly to the company – and I am unclear about unrealised carried interest. But it is a great start, even if it is not mandatory.”

The GPs that have said they support the use of the template:

Cambridge Associates

Carlyle Group

Capital Analytics

CEM Benchmarking

Conifer Financial Services

TorreyCove Capital Partners

Upwelling Capital

 

Photo by thinkpanama 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.

Francesco Guerrera of Politico reports, European pension schemes ‘vulnerable to big market downturn’(h/t, Suzanne Bishopric):

Many work pension schemes are vulnerable to a major market and economic shock, the first Europe-wide stress tests of the sector found.

The tests, carried out by the European Insurance and Occupational Pensions Authority (EIOPA), found that dramatic falls in equity prices and other adverse economic occurrences would dramatically reduce the amount of money held by pension funds to pay for the retirement of current and past workers.

Pension funds suffer when markets fall because they invest in equities, bonds and other asset classes. Any reduction in interest rates is also detrimental because it reduces pension funds’ returns.

The results, released Tuesday, showed that “defined benefit” schemes — ones where the pension payout is based on the number of years worked and the level of salary attained — would find themselves with a deficit of more than €750 billion almost overnight under two different adverse scenarios.

That equates to a funding ratio — the amount of money available to pay for pensions — of between 59 percent and 61 percent of future liabilities. Such a low level would put pressure on pension funds to find other ways to fund the gap, such as reducing benefits or forcing the financial groups or companies that run the schemes to inject capital into the funds.

“While pension plan liabilities have a very long-term nature, it is important that supervisory regimes are prepared to deal with these stresses in a transparent way, be it through appropriate recovery periods, the role of pension protection schemes, increased sponsors’ contributions and/or benefit adjustment mechanisms,” said Gabriel Bernardino, chairman of EIOPA.

You can read the entire IORPs Stress Test  Report 2015 to get a better understanding of the serious challenges many European pensions face.

I strongly recommend you read the report as it discusses various investment, interest rate and longevity risk stress tests that impact defined-contribution (DC) plans and defined-benefit (DB) plans.

The key points worth noting are the following (click on image):

Basically, historic low rates, record stock market volatility and the increase in lifespans are driving the costs of defined-benefit pensions up which explains the inexorable global shift to DC pensions.

And I’ve got some bad news for you. That deflation tsunami I’ve been warning you about is going to decimate all pensions, especially ones taking increasingly more risk to achieve their target rate-of-return.

But as I’ve repeatedly argued, the solution isn’t to shift out of defined-benefit plans into defined-contribution plans. The brutal truth on DC plans is they will exacerbate pension poverty. The more we understand the benefits of well-governed DB plans, the better off we’ll be over the long run.

I just finished writing a comment on Ontario’s new pension plan going over these points. My former colleague, Brian Romanchuk, just wrote a comment on the difficulty of extending universal state pension which you all need to read. I sent that comment to Bernard Dussault, Canada’s former Chief Actuary, to get his thoughts and will follow-up with a comment of my own in the near future.

My views are firmly entrenched in what I believe a well-functioning social democracy requires to thrive: free healthcare as a fundamental right for all, free education for all especially the poor and working poor, and a universal pension plan which covers the retirement needs of a huge subset of the population no matter what happens in the bloody stock market!

In short, I believe the entire world needs to go Dutch on pensions and even improve on its retirement system. But while the Dutch and Danes got it right on pensions, most European countries are struggling with chronic deficits that threaten their pension system.

Nowhere is this more acute than in Greece, the epicenter of Europe’s deflation crisis. The Greek economy cannot escape a deep debt deflation crisis and its pension system has been teetering on collapse for a long time.

Not surprisingly, protests over Greek pension reforms are escalating, the country is a mess, and the FT reports Alexis Tsipras and Kyriakos Mitsotakis are clashing over Greek pensions:

Alexis Tsipras has fended off attacks from Kyriakos Mitsotakis, Greece’s newly elected opposition leader, by insisting that his Syriza government can rescue the country’s underfunded pension system without cutting benefits to retirees.

The prime minister and his rival went head-to-head on Tuesday night in a heated parliamentary debate, their first confrontation since Mr Mitsotakis, a pro-European reformer, was voted in to lead the centre-right New Democracy party this month.

“There will be no reductions in main pensions,” a defiant Mr Tsipras said. “One pension is a whole household’s income in the present [recessionary] circumstances.”

Syriza has resisted pressure from creditors — the EU and IMF — to impose hefty pension cuts by March. The move, postponed from last year, has become an urgent priority with bailout monitors due to return to Athens next week to assessing progress on the reforms agreed in return for a €86bn third international bailout.

Taking aim at Mr Mitsotakis, the son of a former conservative premier, Mr Tsipras asserted that state pension funds were poised to collapse because of “sustained looting” over decades by previous governments.

Mr Mitsotakis responded that the social security system was a victim of the Syriza government’s “incompetence” during a political roller-coaster last year that ended with Greece agreeing to a third bailout after defaulting on a sovereign debt repayment.

“It was accepted that the pension system was viable until 2060 — until Syriza came to power,” he said.

The debate came as thousands of farmers across Greece used tractors to block border crossings and main roads in protest at plans by the government to increase pension contributions and income tax for farmers. The farmers on Tuesday rejected Mr Tsipras’s call for dialogue, demanding immediate cancellation of the increases.

The premier argues that cuts to cover a projected €1.8bn pension deficit in this year’s budget can be avoided through a 1 per cent increase in contributions already agreed with employers and another 0.5 per cent raised from workers.

Syriza has dismissed criticism by creditors that increasing contributions will slow a return to economic growth by dissuading businesses from hiring and will also encourage small companies to employ workers without paying social insurance.

Mr Mitsotakis, who launched an overhaul of the civil service while serving as administrative reform minister in 2013 and 2014, said there were resources available to fund social security without resorting to increased contributions “if the public sector undergoes a restructuring”.

Lawyers, engineers and doctors have staged protests against large projected increases in contributions to a pension fund for self-employed professionals running an annual deficit exceeding €500m

New Democracy has proposed the fragmented social security system be streamlined into three funds covering employees, self-employed professionals and farmers with a basic pension guaranteed at the age of 67 after at least 20 years of employment.

“As a new political leader, I have recognised the mistakes of the past and I am committed not to repeat them,” Mr Mitsotakis said.

Greek journalists have now joined the strike against the pension reforms. The country is a mess and I foresee another Greek crisis in the not too distant future.

And Kyriakos Mitsotakis is right, it’s high time Greeks wake up and stop the charade of public sector profligacy run amok. The Greek public sector is unsustainable and so are Greek pensions (I disagree with Mitsotakis’s assertion that they were ever sustainable).

But what is going on in Greece can easily happen in Italy, Spain and even France. The entire eurozone system is built on unsustainable promises and unlike Canada, you’d be hard pressed to find websites on many large European pensions plans to understand how they invest and what governance models they use to manage pensions (with a few exceptions).

In fact, in Greece, there is no accountability, no transparency, no governance whatsoever on pensions and pretty much anything the government is involved with. It makes me sick and until Mitsotakis wins the next elections by knocking some sense into stubbornly foolish Greeks who think they can have their cake and eat it too, the situation will only get worse.

Let me leave it there. Greek pensions are teetering on collapse but this comment demonstrates that Europe’s pensions aren’t that much better and there’s a very real risk that a prolonged deflation crisis will negatively impact them for years to come.

 

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

Officials at New Jersey’s pension system defended the performance of the system’s alternative investments at a board meeting on Wednesday.

But the same officials also indicated interested in driving fees lower in 2016, whether through renegotiating fees with external managers or bringing more investment management in-house.

The system paid $600 million in fees in 2014. Last year’s total is not yet calculated.

More from NJ Spotlight:

The stakes in private equity, hedge funds and other investment firms produced results that beat the pension system’s assumed rate of return over the last five years, even when fees paid to private fund managers that some have criticized as excessive were accounted for, a report compiled by Aon Hewitt showed.

[…]

Pension-system officials yesterday defended their overall alternative-investment strategy, pointing to the numbers compiled by Aon Hewitt that showed the investments have produced 9.2 percent net returns over the last five years. That beats the pension system’s assumed rate of return of 7.9 percent, and the overall 7.3 percent rate of return the system experienced during the same five-year period.

[…]

But Christopher McDonough, director of the Division of Investment, which oversees the management of the pension system on a daily basis, also outlined goals for the agency for 2016 that included a review of alternative-investment fees that could be renegotiated down. Exploring whether some asset management could be brought back within the 65-employee division is another goal, he said.

“We recognize the importance of minimizing fees and costs,” McDonough said. “We’re looking at lower-cost strategies.”

New Jersey’s public pension system manages $71 billion in assets.

 

Photo by jypsygen via Flickr CC License

A Kentucky Senate committee on Wednesday passed a bill that would give the chamber the power to confirm certain high-ranking pension officials.

More controversially, the bill would require full disclosure of all investment fees and contracts.

More from the Courier-State Journal:

The bill will require Senate confirmation of gubernatorial appointees on the KRS Board, Senate confirmation of the KRS executive director and that the system must disclose all fees and investment contracts associated with the funds it manages.

Furthermore, if the bill passes the House and is signed into law, open records exemptions shall “not prevent the disclosure of investment fees and contracts.”

[…]

Thielen spoke in opposition to the bill saying it would cause disruption in the retirement system board’s decision-making process, impose additional administrative cost to the system and create inefficiencies.

“The administrative costs in the grand scheme of things are not great. I have no idea how much it would be. I anticipate in excess of $100,000 because we would need to bring on another staff person or two depending on what it takes to meet the requirements,” Thielen said. “We haven’t budgeted for any increases (for this year)…so additional administrative costs could work a hardship.”

The bill would also usurp the authority of the KRS Board, Thielen said, and ultimately give the authority to the secretary of the Finance and Administration Cabinet could eliminate a KRS Board’s contract.

The bill comes days after Gov. Matt Bevin vowed in his budget proposal to conduct an independent audit of the state’s pension systems.

But Bevin also promised to give the systems a huge funding boost.

 

Photo credit: “Ky With HP Background” by Original uploader was HiB2Bornot2B at en.wikipedia – Transferred from en.wikipedia; transfer was stated to be made by User:Vini 175.. Licensed under CC BY-SA 2.5 via Wikimedia Commons

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, Ontario pushes ahead with new government pension plan:

Ontario, Canada’s most populous province, said on Tuesday it will push ahead with the launch of a new government pension plan rather than counting on an expansion of the country’s existing federal plan.The Ontario Retirement Pension Plan (ORPP) is set to be introduced in 2017 and is designed to benefit the two-thirds of workers in Ontario who do not have an employer pension plan, provincial officials said.

“Our government is unwavering in its focus on ensuring a financially secure retirement for every worker in our province through the Ontario Retirement Pension Plan,” province Premier Kathleen Wynne said.

Ontario has taken a two-track pension strategy since 2013, preparing to introduce the ORPP while also waiting for a possible expansion of the Canada Pension Plan (CPP), the federal plan that covers most working Canadians.

However, Ontario Finance Minister Charles Sousa said it had so far proven too difficult to get the necessary agreement required among Canada’s provinces to expand the CPP.

“We advocated strongly for a CPP enhancement, as did the federal government, but the consensus was not to be had,” Sousa told reporters.

Like other governments around the world, Canada faces a challenge to provide for its aging population. By 2024, more than 20 percent of Canadians are expected to be age 65 or older, the traditional retirement age, according to federal government data.

“Changes in the nature of work are compounding the problem. The working world is no longer dominated by single job careers and guaranteed workplace retirement plans,” Wynne told reporters.

Under the new Ontario plan, by 2020 every eligible worker in Ontario will be part of either the ORPP or a comparable workplace pension plan. The lowest-income earners will not be required to contribute.

The plan, which will start paying benefits in 2022, is designed to pay out up to 15 percent of individuals’ earnings over their career if they contribute to it for over 40 years.

It particularly targets younger workers at smaller companies who may be well paid but are not offered a pension as part of their benefits because it is too expensive for their employer to provide one. Wynne said it will only have a limited benefit for older workers.

Ashley Csanady of the National Post also reports, Ontario pension plan going full steam ahead toward 2017 launch — just don’t ask the cost to run it:

Deductions from the Ontario Retirement Pension Plan will start coming off paycheques in less than a year, but the province still can’t say how much it will cost to run.

Premier Kathleen Wynne was joined by two ministers Tuesday to announce more details of the pension plan, including the fact spouses or a designated beneficiary can reap its benefits after a contributors dies. And like the Canada Pension Plan, those benefits will be indexed to increases in wages and the cost of living.

An independent actuary will be able to approve 0.2 per cent contribution increases if the fund runs low on cash and anyone earning less than $3,500 a year will be exempt from enrolling.

Those tidbits and some technical details prompted Wynne and Associate Finance Minister Mitzie Hunter to proclaim the design of the ORPP is “now complete.”

That design, however, excludes one key point: how much the administration of the plan will cost. CPP, for example, costs about 1.2 per cent each year to run, and many private sector pension plans costs between two and three per cent, though it can be higher.

Hunter said the ORPP is “going to mirror the CPP as closely as possible” but couldn’t yet pin an exact number on its costs. She said large, public-service pension plans in Ontario are very successful and are helping to determine how the ORPP will be administered.

“We expect that it will be very much in the similar range as CPP and those very large plans,” she said.

Pension expert Ian Lee, an assistant professor at Carleton University’s Sprott School of Business, is one of many prominent economists to ring alarm bells about the ORPP. Like Kevin Milligan at the University of British Columbia and Jack Mintz at the Calgary School of Public Policy he questions the very assumption that a mandatory savings scheme is necessary. He also doubts the ORPP can be run as efficiently as the much larger CPP, as the government hopes.

“I do not think it’s possible (to) bring the cost anywhere near that of the Canada Pension Plan, simply because it won’t have the economies of scale,” Lee said, simply because there won’t be enough people — even with six million expected enrolees — for the ORPP to match its federal counterparts efficiencies.

A Conference Board of Canada report released in December found the ORPP would, over the long run, benefit the Ontario economy, and that for many workers it would prove a more cost-effective form of savings than private investment. The report found someone earning $60,000 a year and contributing to the ORPP for 40 years would, on average, see $188,000 more in pension benefits by retirement age than someone who invested privately.

“I have a great deal of respect for the Conference Board of Canada but until we see those numbers (from the province) I don’t think they can make such a statement,” Lee said.

The ORPP will start a phased roll out in 2017 and the province expects six million Ontarians to be enrolled by 2020. Benefits are expected to start flowing in 2022. Anyone without a comparable workplace and their employer will be required to contribute 3.8 per cent of their income for the first $90,000 earned annually. Someone making $45,000 would pay about $16 a week into the plan to be matched by his employer for a total of $1,710 a year, which after 40 years would make him eligible for $6.410 in annual benefits.

Business groups and the provincial Progressive Conservatives maintain the ORPP will amount to a “payroll tax” that will hurt employment.

I began this comment with articles from the Globe and Mail and the National Post so you can get a feel of how politicized the debate on Ontario’s new pension plan (ORPP) has become.

Where do I stand on this debate? My title pretty much says it all and let me tell you that Canadian newspapers are doing a lousy job explaining the advantages of this new pension plan as well as that of enhancing the CPP for all Canadians.

First, some of the pension experts quoted in the National Post article are completely clueless. In particular, when Ian Lee states “I do not think it’s possible (to) bring the cost anywhere near that of the Canada Pension Plan, simply because it won’t have the economies of scale,” he simply doesn’t know what he’s talking about.

Yes, the CPPIB is huge and can use its size to negotiate fees and costs down, but the ORPP is going to be a young plan which is just getting started. As such, it has the luxury to take a different approach from CPPIB and emulate Canada’s top pension plan, the Healthcare of Ontario Pension Plan (HOOPP) which does everything internally and has the lowest administrative costs of any large public or private defined-benefit pension plan.

As the ORPP gets much bigger and needs to start investing in external managers, it can then start taking the approach Ontario Teachers’ Pension Plan or CPPIB takes, but this debate on administrative costs is just plain silly until we get more details of who will be hired to run the pension plan and what approach they will take.

For me, it all boils down to governance. Ontario has some of the best pension talent in the world, and if they place the right board of directors in there and pay pension fund managers properly, they will have no problem attracting competent people who can manage assets internally and keep costs low.

In fact, the ORPP is in a great spot to use the same governance model that has helped Ontario Teachers, CPPIB  and most of Canada’s top ten pensions to succeed and it can go a step further and improve on the existing governance to get better alignment of interests over the long run.

Second, the reason why Ontario is going it alone on the ORPP is because Canadian politicians are petrified to expand the CPP once and for all, especially now that the economy is going through a crisis. In my opinion, this is the stupidest, most shortsighted decision that our politicians are making and they’re squandering a golden opportunity to enhance the CPP once and for all.

Importantly, and I can’t overemphasize this, good pension policy makes for good economic policy. Bolstering a country’s retirement system to provide more defined-benefits will end up bolstering economic activity over the long run, lower social welfare costs of pension poverty, and reduce the debt by increasing sales and other taxes. These are all advantages of well governed DB plans.

There is a more important political and philosophical argument to be made here. When Democratic candidate Bernie Sanders talks about “healthcare being a fundamental right,” Canadians from all political parties understand exactly what he’s talking about.

A well functioning social democracy should provide three basic pillars: free healthcare, free education and retirement benefits people can count on till they die no matter what happens in the volatile stock market dominated by big hedge funds, big banks and high-frequency traders.

Right now in Canada, we have the first two pillars but are lacking any initiative on tackling that third pillar. The debate has become so politicized to the point of absurdity. It’s high time Canadians realize the brutal truth on defined-contribution plans and accept the fact that the current path isn’t working and will only condemn more people to pension poverty.

As I’ve stated before, there shouldn’t be four or more views on defined-benefit plans, there should only be one view, we need to bolster public DB plans for all Canadians. And I emphasize public because apart from a few exceptions (HOOPP, CN, Air Canada and a few others), most private DB plans are crumbling and failing to deliver on their pension promise.

I think it’s high time we create a few more large public defined-benefit plans in Canada and get rid of private DB plans altogether. We can staff these new plans with existing talent pool across public and private DB plans and bolster the retirement security of all Canadians. 

I realize my views aren’t going to sit well with right-wing nuts who constantly fret over “big government” or small business groups that oppose “payroll taxes” (even if pension contributions aren’t taxes!). But I’ve thought long and hard about pensions, have worked at two of Canada’s largest public pension funds, and have dedicated eight years of my life writing a blog on pensions and investments to educate many clueless Canadians on what goes on in markets and at big pensions and why a sound pension policy is so important.

I’ll share something else with you. My brutally honest comments on pensions haven’t won me many friends at Canada’s top ten. Sure, a few subscribe to my blog, but nobody is hiring me even though they know I have MS and I’m the best damn senior pension analyst who produces more in a week than most of their senior analysts do in a year (I’m not saying this to sound arrogant, it’s the brutal truth!).

What else? Despite having progressive multiple sclerosis (and doing well) and defending the rights of the poor and disabled on my blog, I’m actually a fiscal conservative at heart, believe in free markets, competition and responsible and accountable governments that spend wisely. My views on expanding the CPP have nothing to do with my politics even if I can make a solid economic case for it over the very long run.

In fact, a friend of mine, a die hard Conservative, had this to share with me in a recent email exchange where I told him rising inequality is very deflationary (we were talking about 5 books billionaires don’t want you to read):

There is no doubt that it is. Extreme inequality also breeds civil unrest and, as much as the extremely wealthy think they are untouchable, it is difficult to stop a lynch mob.

The “win at all costs” mentality is really shortsighted.

Same concept goes for the debate between DC and DB pensions. In the long term, DC pensions transfer retirement risk to the government because if people do not save enough, social systems will need to step in and make up the difference.

Now, if my friend who is a die hard Conservative (who like me, thinks Harper bungled our economy up!) gets it, I’m shocked that many Liberal and NDP politicians still don’t get it.

As such, I applaud Premiere Kathleen Wynne and her team for going it alone and introducing a new pension plan that will bolster the retirement security of all Ontarians. The rest of Canada’s leaders should stop dragging their feet on enhancing the CPP and follow Ontario’s lead and introduce real change to Canada’s pension plan (thus far, Justin Trudeau’s Liberals have failed to impress me with their asinine, populist pension gaffes).

 

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There is growing interest among institutional investors in ESG strategies, and it will continue to grow in the coming years.

But institutions still have concerns, according to a recent report from Natixis Global Asset Management.

The report surveyed 660 institutional investors in 29 countries.

Here’s more on ESG, from the report:

Many are also beginning to see that ESG may also provide direct investment benefits. Half (50%) of those surveyed say these strategies could also be a source of potential alpha, but there is much more to be learned as only 26% have found that incorporating ESG into investment decision-making has had a positive impact on investment performance.

Managers identify some of the key challenges to seeing more broad-based adoption of ESG: the difficulty in measuring performance (52%) and a lack of transparency in reporting (38%). With a growing number of managers offering specialist capabilities within this realm, these concerns will likely dissipate.

These specialists are looking at ESG through a new lens, investing in key trends such as green energy, in which businesses will benefit from increased societal focus on sustainability. This kind of impact investing may be the opening for more managers to incorporate ESG into institutional strategy. It may be one critical reason why more than four in ten (44%) of those surveyed say ESG will be a standard practice for most managers within five years.

The report, which is full of insights ESG-related and otherwise, can be accessed here.

Newly elected Kentucky Governor Matt Bevin on Tuesday gave his budget address yesterday, and the speech – along with the accompanying budget – made pensions a top priority.

The proposed budget has the state making its full actuarially required contributions to the state pension systems, along with tens of millions of dollars in extra funding for the systems.

The budget also allocates money for an audit of the pension systems to look for reform possibilities.

More from the Courier-Journal:

With Kentucky facing a $30 billion pension shortfall, Gov. Matt Bevin’s budget proposal includes a substantial funding increase for public retirement plans along with money to audit all of the state’s pension systems for potential reforms next year.

Bevin said that Kentucky must send a message to the world that it is serious about tackling problems in government pensions. He said his budget will direct money to the issue like no administration before.

“We cannot afford to kick it down the road,” he said.

KTRS needs $520 million in additional allocations in the first year of the biennial budget and nearly $513 million more in the second year.

Bevin’s proposal would channel $300 million in additional funds to the system in the first year and $291 million in the second.

Meanwhile, Kentucky Retirement Systems would receive the full contribution – $60 million in the first year, and $70.5 million in the second. On top of that, the budget allocates an additional $44.7 million each year to improve the system’s finances, an approach commonly known as “ARC plus.”

Bevin’s budget also relies on a more conservative investment outlook, which assumes that investments in KERS non-hazardous will grow at 6.75 percent rather than 7.5 percent.

You can watch Bevin’s speech, specifically the part focused on pensions, in the above video.

 

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