Author: Leo Kolivakis

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

Timothy W. Martin of the Wall Street Journal reports, Calpers Reports Lowest Investment Gain Since Financial Crisis:

The largest U.S. public pension posted its lowest annual gain since the last financial crisis due to heavy losses in stocks.

The California Public Employees’ Retirement System, or Calpers, said it earned 0.6% on its investments for the fiscal year ended June 30, according to a Monday news release.

It was the second straight year Calpers failed to hit its internal investment target of 7.5%. Workers or local governments often must contribute more when pension funds fail to generate expected returns. Calpers oversees retirement benefits for 1.7 million public-sector workers.

Calpers’ annual results are watched closely in the investment world. It is considered a bellwether for U.S. public pensions because of its size and investment approach. Many pensions currently are struggling because of a sustained period of low interest rates.

“This is a challenging time to invest,” Ted Eliopoulos, Calpers’ chief investment officer, said in the release.

The last time Calpers lost money was during fiscal 2009 when the fund’s holdings fell 24.8%.

The giant California plan ended 2016 with roughly $295 billion in assets, and more than half of those funds are invested with publicly traded stocks. Those investments declined 3.4%, though the performance beat internal targets.

Fixed income produced the largest returns at 9.3%, though the results under performed Calpers’ benchmark. The California retirement giant’s private-equity portfolio posted returns of 1.7%.

Real estate holdings returned 7.1%, but that was below Calpers’ internal target by more than 5.6 percentage points.

Rory Carroll of Reuters also reports, CalPERS reports worst year since 2009 amid market volatility:

California’s largest public pension fund posted a 0.61 percent return on investment in its most recent fiscal year, its worst showing since 2009, which it blamed on global market volatility.

The result marked the second straight year the California Public Employees’ Retirement System or CalPERS failed to meet its assumed investment return of 7.5 percent.

If the $302 billion public pension fund consistently misses the 7.5 percent target, state taxpayers could be forced to make up any shortfall in pension funding.

Last fiscal year, CalPERS returned 2.4 percent on its total portfolio, marking a significant decline from previous years when the fund earned double digit returns of more than 10 percent. The result for the year ending June 2016 was the worst since an investment loss of 23.6 percent in 2009.

The yearly rates of return, once audited, help determine contribution levels for state agency employers and for contracting cities, counties and special districts in fiscal year 2016-2017.

Speaking at a CalPERS meeting, Chief Investment Officer Ted Eliopoulos said performance for the year was driven primarily by global equity markets, which represent a little over half of the fund’s portfolio. Equities delivered a return of negative 3.4 percent.

“When 52 percent of your portfolio is achieving a negative 3.4 percent return, that certainly sets the main driver for the overall performance of the fund,” said Eliopoulos, who had projected flat returns for the year in June.

Inflation assets returned a negative 3.6 percent return, helping drag down the fund’s overall performance, Eliopoulos said.

Fixed income and real estate investments were bright spots in the portfolio, posting 9.3 percent and 7.1 percent returns respectively.

In response to the drop from previous years, Eliopoulos said CalPERS would reduce risk from its portfolio and have simpler investments that do not require paying fees to money managers.

Fund officials, recognizing that the wave of retiring baby boomers means it will pay out more in benefits than it takes in from contributions and investment income, have projected that the fund could have negative cash flow for at least the next 15 years.

You can read more articles on CalPERS’s fiscal 2015-2016 results here. CalPERS’s comprehensive annual report for the fiscal year ending June 30, 2015 is not yet available but you can view last year’s fiscal year annual report here.

I must admit I don’t track US public pension funds as closely as Canadian ones but let me provide you with my insights on CalPERS’s fiscal year results:

• First, the results aren’t that bad given that CalPERS’s fiscal year ends at the end of June and global equity markets have been very volatile and weak. Ted Eliopoulos, CalPERS’s CIO, is absolutely right: “When 52 percent of your portfolio is achieving a negative 3.4 percent return, that certainly sets the main driver for the overall performance of the fund.” In my last comment covering why bcIMC posted slightly negative returns during its fiscal 2016, I said the same thing, when 50% of the portfolio is in global equities which are getting clobbered during the fiscal year, it’s impossible to post solid gains (however, stocks did bounce back in Q2).
• Eliopoulos is also right, CalPERS and the entire pension community better prepare for lower returns and a lot more volatility ahead. I’ve been warning about deflation and how it will roil pensions for a very long time. 
• As far as investment assumptions, all US public pensions are delusional. Period. CalPERS and everyone else needs to lower them to a much more realistic level. Forget 8% or 7%, in a deflationary world, you’ll be lucky to deliver 5% or 6% annualized gains over the next ten years. CalPERS, the government of California and public sector unions need to all sit down and get real on investment assumptions or face the wrath of a brutal market which will force them to cut their investment assumptions or face insolvency. They should also introduce risk-sharing in their plans so that all stakeholders share the risks of the plan equally and spare California taxpayers the need to bail them out.
• What about hedge funds? Did CalPERS make a huge mistake nuking its hedge fund program two years ago? Absolutely not. That program wasn’t run properly and the fees they were doling out for mediocre returns were insane. Besides, the party in hedge funds is over. Most pensions are rightly shifting their attention to infrastructure in order to meet their long dated liabilities. 
• As far as portfolio returns, good old bonds and infrastructure saved them, both returning 9% during the fiscal year ending June 30, 2016. In a deflationary world, you better have enough bonds to absorb the shocks along the way. And I will tell you something else, I expect the Healthcare of Ontario Pension Plan and the Ontario Teachers’ Pension Plan to deliver solid returns this year because they both understand liability driven investments extremely well and allocate a good chunk into fixed income (HOOPP more than OTPP).
• I wasn’t impressed with the returns in CalPERS’s Real Estate portfolio or Private Equity portfolio (Note: Returns in these asset classes are as of end of March and will end up being a bit better as equities bounced back in Q2). The former generated a 7.06 percent return, underperforming its benchmark by 557 basis points and suffered relative underperformance in the non-core programs, including realized losses on the final disposition of legacy assets in the Opportunistic program. CalPERS Private Equity program bested its benchmark by 253 basis points, earning 1.70 percent, but that tells me returns in this asset class are very weak and the benchmark they use to evaluate their PE program isn’t good (they keep changing it to make it easier to beat it). So I’m a little surprised that CalPERS new CEO Marcie Frost is eyeing to boost private equity.

In a nutshell, those are my thoughts on CalPERS fiscal 2015-16 results. Is CalPERS smearing lipstick on a pig? No, the market gives them and everyone else what the market gives and unless they’re willing to take huge risks, they need to prepare for lower returns ahead.

But CalPERS and its stakeholders also need to get real in terms of investment projections going forward and they better have this conversation sooner rather than later or risk facing the wrath of the bond market (remember, CalPERS is a mature plan with negative cash flows and as interest rates decline, their liabilities skyrocket).

Hope you enjoyed reading this comment, please remember to kindly donate or subscribe to this blog on the right-hand side to show your support and appreciation for the insights I provide you.

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

Canada News Wire reports, bcIMC Reports Fiscal 2016 Annual Returns:

British Columbia Investment Management Corporation (bcIMC) today announced an annual combined pension return, net of costs, of -0.2 per cent for the fiscal year ended March 31, 2016, versus a combined market benchmark of -0.3 per cent.

Fiscal 2016 was a challenging year for investors. However, within a low return environment, our investment activities generated $133 million in additional value for our pension plan clients, driven by strong performance in private markets and real estate. Relative outperformance within the public equity markets, especially Canadian equities and emerging markets, as well as outperformance within our mortgages program, also contributed to investment returns.

“On behalf of our clients, bcIMC manages a diverse and quality portfolio of assets and we follow an investment discipline that focuses on the long term,” said Gordon J. Fyfe, bcIMC’s Chief Executive Officer and Chief Investment Officer. “Maintaining our discipline allows us to manage market risks during periods of volatility so our investments can provide stable cash flows and will appreciate in value over time.”

As a long-term investor, bcIMC’s mandate is to invest the funds not currently required by our clients to pay pensions and other benefits. On average, $75 of every $100 a pension plan member receives is due to our investment activities.

In fiscal 2016, we continued to build relationships globally, expanded our investment products and assessed investment opportunities that align with our clients’ long-term, risk and return objectives.

Fiscal 2016 Investment Highlights

• Committed $2.6 billion in new capital in our Private Equities program, of which $730 million was in direct investments.
• Deployed approximately $1.1 billion in direct investments in infrastructure.
• Committed $1.1 billion through the mortgage program to commercial real estate across Canada.
• Awarded an additional US$200 million China-A share quota from China regulators so we have the opportunity to invest in the region’s new service economy.
• Completed two Real Estate developments (745 Thurlow and Northwoods) and currently have 26 properties in various stages of progress across Canada

“Our investment professionals generated additional value for our clients in a low return environment. They are making the strategic investment decisions that enable us to continue to grow our clients’ long-term wealth, while also protecting the value of their funds,” added Fyfe.

For the year, bcIMC’s managed net assets were $121.9 billion. As at March 31, 2016, the asset mix was as follows: Public Equities (47.5% or $57.9 billion); Fixed Income (21.4% or $26.3 billion); Real Estate (14.4% or $17.5 billion); Infrastructure (5.9% or $7.1 billion); Private Equities (5.6% or $6.8 billion); Mortgages (2.3% or $2.8 billion); Other Strategies—All Weather (1.5% or $1.8 billion); Renewable Resources (1.4% or $1.7 billion). For more information, bcIMC’s 2015–2016 Annual Report is available on our website at www.bcimc.com.

About bcIMC

With $121.9 billion of managed net assets, the British Columbia Investment Management Corporation (bcIMC) is one of Canada’s largest institutional investors within the global capital markets. We offer our public sector clients responsible investment programs across a range of asset classes: fixed income; mortgages; public and private equity; real estate; infrastructure; renewable resources. Our investments provide the returns that secure our clients’ future payments and obligations.

The article above is bcIMC’s official press release available here. Those of you who want to delve deeper into fiscal 2016 results can do so by reading the Annual Report which is available here.

I didn’t find any press coverage of bcIMC’s fiscal 2016 results in major news outlets (either journalists are asleep or bcIMC isn’t reaching out to them) but someone in Ottawa sent me a short article from Richard Dettman of News1130, BC pension fund posts no gain for 2015-16:

BC’s giant public-sector pension fund manager is reporting its first decrease since the financial crisis. The BC Investment Management Corporation says its assets under management in the year to the end of March were down $1.7 billion to $123.6 billion. Its biggest losing bet was on emerging markets, followed by Canadian stocks.

The BC fund underperformed its peers, such as Quebec’s Caisse de depot which returned 9.1 per cent last year and the Ontario Teachers’ Pension Plan which made 13 per cent. The four-year average return by bcIMC is 9.4 per cent.

CEO and chief investment officer Gordon Fyfe says bcIMC “plans to increase client returns by bringing more asset management in-house,” specifically its “private markets and public equities,” rather than using outside firms.

Canada’s fifth-largest pension fund says it is “rebuilding its base,” hiring 76 new people and reviewing compensation “to attract and retain skilled professionals.”

When Gordon Fyfe left PSP to head bcIMC two years ago, I stated he was going to focus on private markets and hire some people away from PSP.

One major hire from PSP is Jim Pittman who joined bcIMC in April of this year to head bcIMC’s Private Equity group (scroll over “Private Equity” on bcIMC’s organization chart). This is an excellent hire and I have nothing but good things to say about Jim who I’m confident will do a great job building out direct and fund investments at bcIMC.

[Note: The former head of Private Equity at PSP, Derek Murphy, started a private equity firm based here in Montreal called Aquaforte which assists Limited Partners (LPs) to establish aligned, high-performing, private equity partnerships with General Partners (GPs). I’m pretty sure he’s helping Jim set up shop at bcIMC.]

The other major and recent change at bcIMC is the creation of a subsidiary to manage real estate assets in-house. Gary Marr of the Financial Post reports, B.C. pension fund creates giant, multi-billion-dollar real estate company:

The Canadian commercial real estate industry will soon face a new multi-billion-dollar competitor in the marketplace.

British Columbia Investment Management Corp. said Wednesday it will take its $18 billion in real estate assets under management and create a new private company, to be called QuadReal Property Group, which will look to expand in Canada and globally.

BcIMC, which provides investment management services to the province’s public sector and invests the funds not currently required to pay pensions and other benefits, will set QuadReal up with an independent board of directors to oversee its operation.

As part of the move to internalize management of its real estate operations, the new company has retained Remco Daal as its co-president to head up its Canadian operations. Daal was the president of Bentall Kennedy, one of the companies that was providing external management to the B.C. pension fund.

The majority of bcIMC’s Canadian real estate assets are currently managed externally by Bentall, GWL Realty Advisors and Realstar. Management of real estate assets from those companies will begin to transfer to QuadReal in 2017. Roughly 500 employees are coming over from Bentall Kennedy to join the new entity.

“They’ve had a great run under the existing model and they are moving to more of a Canadian model as to how they manage their real estate,” said Daal, referring to the internalization of real estate, which is common for other major domestic players like the Ontario Municipal Employees Retirement System and Caisse de dépôt et placement du Québec.

With assets of $123 billion, 14 per cent of which is allocated to real estate, QuadReal expects to be saving money on fees as it begins to expand its base. Real estate allocation is slated to rise 18 per cent and bcIMC total assets will rise to about $150 billion in the next four years.

“We expect there will be assets for which we compete and opportunities for tenants which we compete,” said Daal, referring to the asset managers they are now dropping. “It’s all fair game.”

Last year, bcIMC started studying the internalization and brought in Jonathan Dubois-Phillips to look at that possibility. He will act as co-president and run QuadReal’s international operations.

The new company has no specific type of asset class in real estate it is eyeing and says it will be market driven. There is clearly no appetite to sell Canadian assets, which include Bayview Village, the luxury mall in north Toronto.

“The domestic portfolio is of a quality that we can’t replicate. The income stream is solid, solid and that’s ultimately what what our clients want,” Daal said.

While there may be no appetite to sell Canadian assets, the truth is bcIMC’s Real Estate portfolio is almost entirely invested in domestic real estate, something which has hurt the fund’s overall returns relative to its larger peers which are more diversified across global real estate (in other words, bcIMC cannot benefit from capital appreciation and currency appreciation which comes from investing in foreign real estate assets, especially if it doesn’t hedge currency risk).

Now, this brings me to an important point, it’s not exactly fair to compare bcIMC’s fiscal year 2016 results to those of its other large Canadian peers because apart from the different fiscal year, bcIMC is expanding its investments in private markets and bringing these assets internally. It will take a few more years for bcIMC  to shift from a plain vanilla fund to one that is more diversified across global public and private asset classes.

Having said this, the fiscal year 2016 results and value-added are nothing to write home about but over a four-year period, which is what compensation is based on, the results are better (click on image):

And if you look at the returns by asset class for the combined pension plan clients (page 16 of Annual Report), they’re actually quite decent across public and private assets (click on image):

The big returns came from Private Equities, Infrastructure and Real Estate but Canadian and Emerging Market public equities outperformed their respective benchmarks even if they were negative returns. The Bridgewater All-Weather portfolio also added value (see my last comment).

Keep in mind, however, as of now, nearly 50% of bcIMC’s assets are in Public Equities, so no matter how well Private Markets perform, if global stocks get clobbered during the fiscal year, it will impact overall returns (click on image):

One thing I found odd in the fiscal 2016 Annual Report is that I couldn’t find a discussion on the benchmarks used for each asset class. I’m a stickler for benchmarks because that determines value-added, compensation and risk-taking behavior at Canada’s large pension funds.

The only mention of benchmarks I saw was on page 14 where they show index returns for the fiscal year (click on image):

But there is no discussion on private market benchmarks (if someone knows where I can find a discussion on bcIMC’s benchmarks, please let me know).

As far as compensation, the table below from page 37 of the Annual Report provides a summary of compensation of bcIMC’s senior managers (click on image):

Gordon Fyfe’s compensation increased the most on a percentage and absolute basis but is significantly below what he was making at PSP. As far as the other senior managers, their compensation increased marginally and is way below what their peers in the rest of Canada earn.

Again, when looking at compensation, keep in mind it’s four-year results that count and bcIMC’s asset mix is still heavily weighted in public equities, which partly explains the variation in the compensation of its senior managers relative to their peers at other large Canadian public pension funds (still, they are top earners in British Columbia’s public sector, so I don’t feel bad for them).

To summarize, bcIMC’s fiscal 2016 results aren’t great but they’re not that bad either given its asset mix is still heavily weighted in public equities. You can read all recent news pertaining to bcIMC here including their recent acquisition of a 10% stake in Glencore Agri (CPPIB owns a 40% stake).

 

These are the key points I want people to remember the next time they read about some biased study from the Fraser Institute claiming that expanding the CPP is a terrible idea which will jeopardize the Canadian economy.

This is total rubbish and if I had a chance to privately meet with the CEOs of major Canadian banks and insurance companies, I would tell them to stop funding such nonsense and support the expansion of the CPP. In the end, it’s in their best interests too but they’re failing to see this which is a real shame.

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

Brody Mullins of the Wall Street Journal reports, Teachers Union and Hedge Funds War Over Pension Billions:

Daniel Loeb, Paul Singer and dozens of other hedge-fund managers have poured millions of dollars into promoting charter schools in New York City and into groups that want to revamp pension plans for government workers, including teachers.

The leader of the American Federation of Teachers, Randi Weingarten, sees some of the proposals, in particular the pension issue, as an attack on teachers. She also has influence over more than $1 trillion in public-teacher pension plans, many of which traditionally invest in hedge funds.

It is a recipe for a battle for the ages.

Ms. Weingarten started by targeting hedge-fund managers she deemed a threat to teachers and urged unions to yank money from their funds. Then she moved to Wall Street as a whole.

Her union federation is funding a lobbying campaign to eliminate the “carried-interest” tax rate on investment income earned by many money managers. It is trying to defeat legislation that would increase the charitable deduction in New York state for donations to private schools. And it has filed a class-action lawsuit accusing 25 Wall Street firms of violating antitrust law and manipulating Treasury bond prices.

Some pension funds have withdrawn money from hedge-fund managers criticized by the teachers union. And some hedge-fund managers stopped making donations to advocacy groups targeted by Ms. Weingarten.

Hedge funds, reluctant to buckle to the pressure, say Ms. Weingarten is doing a disservice to the teachers she represents, because funds should aim solely to earn the highest possible return on their assets. The personal beliefs or donations of hedge-fund managers, they argue, shouldn’t be a factor in that decision. At least one manager, Mr. Loeb of Third Point LLC, has increased his donations to a charter-school group, citing Ms. Weingarten.

Sander Read, chief executive officer of Lyons Wealth Management, which hasn’t been targeted, likened what Ms. Weingarten is doing to “hiring a dentist because of their political beliefs. You may see eye to eye on politics, but you may not have great, straight teeth.” None of the hedge funds targeted by the teachers unions would discuss the matter publicly, a sign of how sensitive the battle has become.

Ms. Weingarten said in an interview: “Why would you put your money with someone who wants to destroy you?”

The battles are rooted in a political fight over how to improve public education. Republicans have long sought major changes, such as creating new competition for public schools, including charter schools. Democrats largely have supported solutions backed by the unions, particularly increased spending for existing schools.

About a decade ago, some liberals joined conservatives in pushing to expand charter schools. Those efforts received financial support from hedge-fund managers including Mr. Loeb, Mr. Singer of Elliott Management Corp. and Paul Tudor Jones of Tudor Investment Corp., who together kicked in millions of dollars.

Some of those involved in the effort cast public-school teachers and their unions as obstacles to improving education. The reputation of the teachers union took a beating.

When Ms. Weingarten was elected president of the American Federation of Teachers in 2008, she aimed to restore public trust in public-school teachers and their unions.

As she rose in the union, she got close to Bill and Hillary Clinton. Last summer, the federation became the first union group to endorse Mrs. Clinton’s presidential campaign. Ms. Weingarten sat on the board of the super PAC supporting her candidacy, and the American Federation of Teachers has donated $1.6 million to the Bill, Hillary and Chelsea Clinton Foundation.

Ms. Weingarten’s federation represents about two dozen teachers unions whose retirement funds have a total of $630 billion in assets, a big chunk of the more than $1 trillion controlled by all teachers unions. The federation doesn’t control where that money is invested; the unions themselves do. But Ms. Weingarten can make recommendations.

She instructed investment advisers at the federation’s Washington headquarters to sift through financial reports and examine the personal charitable donations of hedge-fund managers. She says she focuses on groups that want to end defined-benefit pensions. Many of the same entities also back charter schools and overhauling public schools.

In early 2013, the union federation published a list of roughly three-dozen Wall Street asset managers it says donated to organizations that support causes opposed by the union. It wanted union pension funds to use the list to decide where to invest their money.

The Manhattan Institute for Policy Research, a think tank that supports increasing school choice and replacing defined-benefit pension plans with 401(k)-type plans for future government employees, is one of the groups to which donations were viewed unfavorably.

Lawrence Mone, its president, says the tactics amount to intimidation. “I don’t think that it’s beneficial to the functioning of a democratic society,” he says.

After KKR & Co. President Henry Kravis made the list in 2013, Ms. Weingarten got a call from Ken Mehlman, an executive at the private-equity firm and former chairman of the Republican National Committee.

Mr. Mehlman said KKR had a record of supporting public pension plans, according to Ms. Weingarten.

Ms. Weingarten agreed, removed Mr. Kravis’s name from the list and invited Mr. Mehlman to talk about the firm’s commitment to public pensions at a meeting in Washington with 30 pension-fund trustees representing 20 plans that control $630 billion in teachers’ retirement money.

When Cliff Asness of hedge fund AQR Capital Management LLC found out Mr. Kravis had gotten off the list, he called Mr. Mehlman, a friend. Mr. Asness also hired a friend of Ms. Weingarten’s: Donna Brazile, a vice chairwoman of the Democratic National Committee who has been a paid consultant to the American Federation of Teachers.

Ms. Brazile arranged a lunch meeting between Mr. Asness and Ms. Weingarten, where they discussed ways to work together. Not long after, Mr. Asness’s firm paid $25,000 to be a founding member of a group that KKR’s Mr. Mehlman was starting with Ms. Weingarten to promote retirement security.

Mr. Asness was removed from the list. A year later, when Ms. Weingarten noticed he continued to serve on the Manhattan Institute board, she considered putting him back on.

In September of last year, when the California State Teachers’ Retirement System, or Calstrs, considered increasing its hedge-fund investments, Ms. Weingarten saw another chance to apply pressure.

Dan Pedrotty, an aide to Ms. Weingarten who runs the hedge-fund effort, spoke to a Calstrs official about Mr. Asness’s continued service on the Manhattan Institute’s board. The Calstrs official then called Mr. Asness.

In December, Mr. Asness said he would step down from the Manhattan Institute board. His spokesman says he already had made the decision at the time of the call, after reassessing time spent on the boards of several nonprofit groups.

“Randi is committed to helping hard working employees achieve the secure retirement they deserve,” Mr. Asness said in a written statement.

Mr. Loeb, founder of the $16-billion Third Point fund, has been more combative. He is a donor to the Manhattan Institute and chairman of the Success Academy, which operates a network of charter schools in New York City.

In a March 2013 letter to Mr. Loeb, Ms. Weingarten noted his support of a group “leading the attack on defined benefit pension funds” and said she was “surprised to learn of your interest in working with public pension plan investors.” Seeking business from union pension funds while donating to the group, she wrote, “seem to us perhaps inconsistent.”

The two agreed to meet.

Mr. Loeb emailed Ms. Weingarten, noting his fund’s average annual return of 21% over 18 years. “I completely respect the political considerations you may have and understand if other factors dictate how funds are allocated,” he wrote.

A week later, Ms. Weingarten wrote back to reiterate that unions were wary of investing with Mr. Loeb “given the political attack on defined benefit funds.”

In response, Mr. Loeb asserted that it must be “frustrating” for unions to invest with funds that “have different political views or party affiliations.” He added: “At least we can rejoice in knowing that as Americans we share fundamental values that elevate individual opportunity, accountability, freedom, fairness and prosperity.”

The meeting was called off, and Mr. Loeb was added to the list.

At a fundraising dinner that May for his charter-school group, Mr. Loeb stood up and said: “Some of you in this room have come under attack for supporting charter-school education reform and freedom in general.” He called Ms. Weingarten the “leader of the attack” and pledged an additional $1 million in her name.

“Both Randi and I believe America’s children deserve a 21st century education, and I hope the day comes when she embraces the positive change created by public charter schools,” Mr. Loeb said recently in a written statement.

In late 2013, state union officials pressed a Rhode Island pension fund to fire Third Point. The following January, the pension fund did just that, pulling about $75 million from Mr. Loeb’s fund. A spokeswoman for the state treasurer said at the time that Mr. Loeb’s fund was too risky.

Roger Boudreau, a member of the teachers union and an elected adviser of the Rhode Island fund at the time, says the donations played a role. “It’s fair to say that those kinds of donations are going to be looked at very critically,” he says.

Around that time, a giant billboard appeared above Times Square. “Randi Weingarten’s Union Protects Bad Teachers,” it read above a picture of her scowling face.

Ms. Weingarten immediately assumed the hedge-funders were behind the attack. The entity listed as the billboard’s sponsor is the Center for Union Facts, a Washington-based advocacy group. The group declines to disclose who paid for the billboard.

“We all guessed it had to be people like Dan Loeb,” Ms. Weingarten says. Mr. Loeb declined to comment.

The billboard kicked off a campaign against Ms. Weingarten by the Center for Union Facts, including radio and newspaper advertisements. “She’s the head of the snake, so it was appropriate to go after her personally,” says the group’s president, Richard Berman.

The ads directed people to a website that said she oversaw a “crusade to stymie school reforms and protect the jobs of incompetent teachers.” It listed her salary and called her a “member of the elite.”

In September 2014, Mr. Berman sent a 10-page letter to lawmakers, union officials and opinion leaders charging that Ms. Weingarten‘s “ineptitude is a threat against America, against hard-working teachers, and especially against our nation’s children.”

Lorretta Johnson, secretary-treasurer of the American Federation of Teachers, responded in a letter to union leaders that Mr. Berman represented a “front group whose mission is to vilify and destroy unions.”

After the billboards appeared, Ms. Weingarten opened several new lines of attack. Her union group helped launch an advocacy group, Hedge Clippers, that lobbied against proposed New York legislation to increase the charitable deduction for donations to public and private schools. The group publicized donations that it says several Wall Street executives made to the governor, who supported the legislation, and named the elite schools it says their children attended. The state senate hasn’t acted on the proposed legislation.

Last fall, Ms. Weingarten’s union group published a report criticizing hedge funds, called “All That Glitters Is Not Gold.” Among other things, the report claimed that the high fees charged by hedge funds made them unattractive investments.

The report said that 11 big pension funds it analyzed paid an average of $81 million each in annual fees to hedge funds. Those pension funds, it said, earned better returns on money that wasn’t invested in hedge funds.

AQR’s Mr. Asness, in a presentation to the Ohio pension board in March, acknowledged that some hedge funds charge high fees, but said that didn’t mean “the net deal for investors is a bad one, just that it could and should be better.”

Earlier this year, an Illinois public-pension fund cut its hedge-fund investments. In April, one of New York City’s public-pension funds voted to dump its investments in hedge funds. Ms. Weingarten tried to get a big Ohio fund to follow suit. It voted recently to remain invested in hedge funds, including in Mr. Loeb’s.

Wow, so much drama, where do I begin? Well, the first thing I would say is this article bolsters the point I made in the New York Times back in 2013 that US public pension funds need independent, qualified investment boards.

There is way too much political meddling from unions, governments and rich hedge fund and private equity fund managers into the way investments are managed at US public pensions. This is done deliberately so that they can maintain the status quo and milk US public pensions dry.

The second point I’d like to state publicly is I’m tired of arrogant hedge fund managers, many of which are nothing more than glorified asset gatherers charging alpha fees for leveraged beta, taking on teachers’ unions or any other public sector union. These idiots would have never made the Forbes list of rich and famous if it wasn’t for the blood, sweat and tears of teachers, police officers, firemen, and public sector workers contributing to their defined-benefit public pensions.

And yet they have the gall to fund right-wing think tanks like the Manhattan Institute which promote dumb ideas like replacing defined-benefit plans with defined-contribution plans, totally ignoring the brutal truth on the latter plans.

My message to hedge fund managers who fund such think tanks is to educate yourselves and learn the benefits of well-governed defined-benefit plans like the ones we have in Canada.

If all these “brilliant” hedge fund managers were really the smartest people that money can buy, they’d be fighting tooth and nail to promote large well-governed defined-benefit plans.

What else? I highly suggest billionaire hedge fund managers and private equity managers remain apolitical. If you have political views, keep them to yourself and don’t go public and donate millions to groups that want to destroy public sector unions. It’s mind-boggling how arrogant and dumb some hedge fund managers truly are.

Don’t get me wrong, public unions are just as much to blame for the pathetic state of US public pensions. They too are delusional if they think the status quo is acceptable. And they definitely need to stop meddling in investment decisions which are not in the best interests of their members.

Having said this, if I was part of a teachers’ union or any public sector union and my pension contributions were going to enrich some rich arrogant hedge fund manager who was funding organizations looking to weaken defined-benefit plans, I too would be irate.

And to add insult upon injury, it’s not like hedge funds are outperforming while they charge insane fees to their investors. The truth is hedge funds face their own day of reckoning and as I’ve been warning my readers, it’s only going to get worse in a deflationary world.

Let me be crystal clear. I don’t care if it’s Dan Loeb, Paul Singer, Bill Ackman, Ken Griffin, or whichever Republican or Democratic hedge fund manager, my advice is to shut up, stay apolitical, and focus on your fund’s performance. That’s it, that is the only thing you should be obsessing about.

But I also have some harsh advice for Ms. Weingarten and public sector unions. Stop meddling in public pension fund investments, more often than not, you’ll be doing your members a great disservice.

The problem in the United States is the lack of pension governance which separates public pensions from governments, public unions and elite asset managers. If they had the right governance model, like we do in Canada, they would be able to attract and retain qualified pension fund managers to bring most assets internally instead of farming them out to external managers which rake them on fees.

Still, even in Canada, public pensions do invest in external hedge fund and private equity funds when it serves their members’ needs. Ontario Teachers’ Pension Plan may have experienced some Brazilian blunders but there’s no denying it’s one of the best public pension plans in the world with a stellar long-term track record and it invests in top hedge funds and private equity funds.

In fact, if I was Ms. Weingarten, I would spend a lot less time waging public war against hedge funds and a lot more time studying the governance model at Ontario Teachers’ Pension Plan which is the key reason behind its success.

One former hedge funder shared these thoughts with me after reading my comment:

Public policy isn’t my thing but here are a couple rookie thoughts:

1) I think carried interest might be a bigger deal in PE than in Hedgefundistan.

2) Advocacy for charter schools is not really about the children. It is about how hedge fund guys think of themselves. They want power and attention. The children are secondary.

3) I don’t blame hedge fund guys for expressing political views. I blame US for listening. Who gives a damn what they think? Public policy is not their thing. But I would not demand their silence.

I agree but unlike him, I would demand their silence, especially if they are willfully ignorant on public policy.

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

Theresa Tedesco of the National Post reports, Buyer beware: How the Ontario Teachers’ Pension Plan got caught in the fallout of Brazil’s biggest scandal:

An investigation into money laundering at gas stations and laundromats that began two years ago in southern Brazil has since mushroomed into a wide sweeping corruption scandal, creating a national soap opera that has enthralled Brazilians as it reaches into the upper echelons of the country’s political and corporate elites.

Operation Lava Jato (Car Wash), launched by Brazil’s federal police, has ensnared top executives at Brazil’s powerful state-controlled oil giant Petroleo Brasileiro SA (Petrobras) who are alleged to have accepted bribes from a cartel of companies to enrich themselves while also channelling funds to politicians.

The fallout has included the recent impeachment of President Dilma Rousseff and the arrest of dozens of senior politicians and business leaders. But also caught up in the tumult are hundreds of millions of dollars managed by some of the world’s biggest investors, including Ontario Teachers’ Pension Plan, one of Canada’s biggest and most respected publicly funded pension funds.

Teachers’ is among a group of major global investors who own an 18.6-per-cent stake in Grupo BTG Pactual SA, the largest independent investment bank in Latin America, whose billionaire founder, chairman and chief executive, Andre Santos Esteves, was arrested last November for allegedly attempting to obstruct the corruption probe.

The charismatic 47-year-old, with an estimated net worth of US$2.2 billion according to Forbes Magazine, is the highest-profile business executive implicated in the widening corruption dragnet and was held under house arrest for almost four months until he was released in late April.

The current criminal charges against Esteves are still pending and he has vehemently and repeatedly denied any wrongdoing. Yet he was forced to resign from his executive roles at BTG Pactual, although he remains the controlling shareholder.

Shares of BTG Pactual, which are listed on the BM&F Bovespa and NYSE Euronext, have collapsed, losing more than 50 per cent of their value before recovering some ground although they are still down 42 per cent. The investment bank’s bonds have been downgraded to junk status by credit rating agencies Moody’s Investor Services Inc., Fitch Ratings and Standard & Poor’s.

BTG Pactual in May was also listed among nine financial institutions placed under “special surveillance” by Brazil’s central bank, which is closely monitoring the liquidity and stability of their operations, according to a report by Reuters.

The firm, which Esteves steered through an aggressive global expansion, has sold more than US$3.5 billion in assets, including loan books and its Swiss private-banking unit BSI, slashed dividend payments and cut costs at its operations in Brazil, Europe and Hong Kong.

Teachers’ original $206-million private-placement investment made in December 2010 is now worth less than $150 million.

Teachers’, which has a reputation for promoting good governance and principled investing, declined repeated requests to answer questions about its investment in the Brazilian investment bank and association with Esteves, who along with other business associates have a track record of being on the wrong side of securities laws.

“We very rarely discuss the mechanics of our decisions and rationale for specific investments in companies or assets,” Deborah Allan, vice-president of media relations, said in an email. “We’re a global and well diversified long term investor, and we operate with the principles of investment risk.”

There’s no doubt the pursuit of higher returns is increasingly propelling major Canadian pension funds to invest in emerging markets such as Brazil, said Malcolm Hamilton, an actuary and former partner at Mercer with 40 years’ experience in the pension industry.

“The pressure has just been getting worse and worse, especially as interest rates continue to decline, for public funds to try to get the returns they used to get,” he said. “They want to invest where they can achieve the best return for the risk they take, and this means looking beyond Canada and North America to opportunities elsewhere in the world.”

Those opportunities also bring heightened risk.

“Sometimes it’s hard to perform tough due diligence in developing countries, especially when people will always present you with the best possible picture,” said a senior pension expert who asked not to be named. “Sometimes you make mistakes and you’ve got to keep it even when it’s tricky.”

Added Keith Ambachtsheer, director emeritus at the Rotman International Centre for Pension Management at the University of Toronto: “When you’re in this type of situation, maybe the right way to go is to try to save the investment, clean up the situation and drive on.”

• • •

Andre Santos Esteves, also known as the golden boy of Brazilian banking, and his partners pulled off a major coup when they persuaded an impressive group of nine major global investors — mostly sovereign-wealth funds and rich families — to purchase an 18.65-per-cent interest in BTG Pactual for US$1.8 billion in December 2010.

But it seems Teachers’ held a special place in Esteves’ heart. During the annual Foreign Policy Association’s Financial Services Dinner at the Pierre hotel in midtown Manhattan for 400 well-heeled guests on Feb. 29, 2012, he introduced the evening’s guest of honour, James Leech, then the chief executive of Teachers’ as “one of the most sophisticated investors in the world.”

In his heavily accented English, the billionaire that Forbes ranked 13th richest in his country, declared that his bank has “a very special relationship with Ontario Teachers’,” adding that when BTG Pactual organized the largest private placement in Latin America, “Ontario Teachers’ was one of the cornerstone investors.”

Each of those investors — China Investment Corp., Singapore’s Government Investment Corp. Pte Ltd., Abu Dhabi Investment Council, J.C. Flowers & Co., RIT Capital Partners PLC, Colombia’s Santo Domingo Group, Exor, Inversiones Bahia and Teachers’ — invested anywhere from $25 million to $300 million.

In return, the investment consortium received three seats on the Sao Paulo-based bank’s board, one of which was given to Teachers’ (which has appointed people to the post, although it is been vacated since Esteves’ arrest). More importantly, the investors were guaranteed handsome returns down the line when BTG Pactual eventually went to the public markets.

A 2011 analyst report for Exor noted the investment company controlled by Italy’s Agnelli family was given “a guaranteed minimum IRR (internal rate of return) of 20 per cent for its commitment to the IPO.”

But two months before the private-placement deal was inked, central bank investigators and securities regulators in Brazil threatened to derail it.

In October 2010, a probe inside Brazil’s central bank recommended that Esteves be banned from banking in the South American country for six years due to “serious infractions” of banking rules between 2002 and 2004, according to a report by Reuters.

The investigation focused on US$3.8-billion worth of trades between Banco Pactual SA and a limited liability corporation known as Romanche Investment Corp. LLC in Delaware.

Brazil’s central bank director Sidnei Correa Marques ruled against the ban in early 2011, apparently because of the importance of BTG Pactual, the precursor to Banco Pactual, to the economy and the perception of disciplining the head of Brazil’s largest investment bank.

“When a bank is important systemically, important to the country, among the 10 largest, I have to be careful about getting rid of essential management at that financial institution,” the central bank director was quoted by Reuters.

However, Brazil’s securities market authority — the Comissao de Valores Mobilianos (CVM) — was less forgiving. In a separate case, the market watchdog concluded that Banco Pactual had illegally transferred profits to foreign funds to disguise gains and avoid taxes. In 2007, the CVM fined Pactual and Esteves about US$4 million although there was no admission of guilt or wrongdoing.

By the time the two decisions were rendered, Esteves had already persuaded Teachers’ and eight other well-heeled investors to give him the all-important credibility to eventually take his bank to market.

• • •

BTG Pactual’s initial public offering, the first for an investment bank in Brazil and the most high-profile and lucrative pubic offering that Brazilian capital markets had seen in almost a year, occurred April 26, 2012. The stock was priced at 31.25 reals and the IPO raised about US$1.96 billion.

That same year, Esteves was honoured as “Person of the Year” by the Brazilian-American Chamber of Commerce and one of the 10 most influential bankers in the world by Bloomberg Magazine, alongside Wall Street icons Jamie Dimon of JP Morgan Chase and Lloyd Blankfein of Goldman Sachs, as well as Gerald McCaughey, then chief executive of Canadian Imperial Bank of Commerce.

Behind the scenes, however, Esteves’s past brushes with securities regulators began to emerge.

A month before BTG Pactual’s private-placement deal was signed in December 2010, Italian market regulators had notified Esteves that he was the target of an insider trading probe dating back to 2007, when he was head of fixed income at UBS.

The Commissione Nazionale per le Societa e La Borsa alleged that Esteves used a private account to purchase shares in Italian meat producer Cremonini SpA after he heard about an upcoming joint venture with a Brazilian company.

Esteves denied and fought the allegations, but apparently did not inform his investors of the ongoing probe when they participated in the 2010 private placement. Nor was the probe disclosed to potential investors in BTG Pactual’s initial IPO prospectus in April 2012.

On April 4, 2012 — three weeks before BTG Pactual’s IPO — Italy’s capital markets authority fined Esteves 350,000 euros for alleged insider trading.

The findings and penalties against the Brazilian banking executive were “administrative,” however he was suspended nine months from serving as a director or executive officer of a company regulated by the Italian securities commission. As well, he was forced to return his alleged profits of US$5.4 million.

A day before the Italian regulator released its decision, BTG Pactual amended its IPO prospectus and issued a statement that read “our controlling shareholder is a subject of an ongoing civil, non-criminal investigation in Europe in connection with certain trades in the securities of a European market issuer made by him in his personal capacity in 2007.”

Notably absent is any mention of Esteves directly or that the controlling shareholder was also the chief executive and chairman of the board of BTG Pactual. (Esteves would file an “administrative appeal,” later withdrawn despite his protestations of innocence, citing costs and a loss of time as his reasons.)

Even so, Brazil’s securities regulator CVM issued a receipt blessing the IPO.

“Under those circumstances, why was the IPO even allowed to proceed?” asked a senior Canadian regulator who spoke on the condition of anonymity. “At a minimum, the Brazilian securities regulator should have demanded disclosure of Esteves’s role in the company. Any commission in Canada and the SEC [the U.S. Securities and Exchange Commission] certainly would have insisted.”

Sources say the private-placement shareholder group was broadsided by the revelations of Esteves’s track record of securities violations.

In the days following the Italian probe, principal investors were given the opportunity to back out of the deal and some took the opportunity.

For example, the Agnelli family, which invested US$25 million, sold 87 per cent of its 0.26-per-cent interest less than a month after learning of Esteves’ insider trading conviction, according to a 2011 filing. U.S. investment firm J.C. Flowers began slowly divesting some of its stake, as did RIT Capital Partners and China Investment Corp.

What they didn’t know at the time was that Charles Rosier, a partner at BTG Pactual in charge of client relations in Europe, had also been in the crosshairs of securities regulators while Esteves was gathering the consortium of investors back in 2010.

France’s market regulator was probing insider trading during the French state railway’s takeover of a logistics company called Geodis in March 2008, while Rosier was a managing director at UBS, which had advised on the deal.

The result was that the Autorite des Marches Financiers in October 2013 levied the largest fine in its history by penalizing Rosier 400,000 euros for tipping insider information to his cousin prior to the deal.

The investigation of Rosier and his subsequent conviction have not been disclosed in any of BTG Pactual’s corporate filings. Calls to a number of the consortium investors and BTG Pactual were not returned.

Since the revelations of Esteves’ insider trading convictions in 2012 and the bribery and corruption charges against him in 2015, sources familiar with the Brazilian investment bank say six of the nine principal investors have sold their interests.

The three remaining “cornerstone” investors are Singapore’s sovereign fund, Colombia’s Santo Domingo Group, which among other holdings held the second-largest stake in SABMiller PLC, the world’s second-largest beer company, and Teachers’.

At the end of 2012, Teachers’, which manages $171.4 billion in net assets, had $206 million invested and that exposure remained the same at end of 2013. The following year in 2014, it was down to $203.4 million and by Dec. 31, 2015, the value plunged below $150 million, mostly due to the fallout of Esteves’ arrest.

“We remain an investor,” Teachers’ spokesperson Allan confirmed in an email, adding, “it remains part of our relationship investing portfolio, in our public equities asset class.”

Ultimately, Teachers’ main function is to create value for plan participants and it has certainly done that. In the four years since BTG Pactual’s IPO, the pension fund has enjoyed annual returns of 13 per cent in 2012, 10.9 per cent in 2013, 11.8 per cent in 2014 and 13 per cent in 2015.

Teachers’ investment in BTG Pactual is relatively small, but it raises questions about its ability to properly vet investments far from home, and its troubles in Brazil are far from over. A multi-million-dollar lawsuit launched by a former executive against BTG Pactual in Hong Kong also threatens to drag the investment bank’s principal partners, including Teachers’, into another potentially unseemly mess.

So what is this all about? Basically André Santos Esteves, the golden boy of Brazilian banking, was able to schmooze Ontario Teachers and large sovereign wealth funds into buying a 19% stake of BTG Pactual through a private placement and now it turns out he might be another Brazilian con artist.

Remember Eike Batista, Brazil’s rags to riches (back to rags) billionaire boy wonder? He too burned Ontario Teachers but at least they invested early on with him and made money in those investments before Batista’s massive empire crumbled (a former colleague of mine who met Batista told me “he was an unbelievable salesman”).

I’m sure Teachers made some money off BTG Pactual too. When I was working at the Caisse, we had invested in BTG Pactual’s multi-strategy hedge fund and everything was kosher and it performed exceptionally well (don’t think the Caisse is invested in it any longer; its hedge fund program has been slashed). BTG Pactual is a Latin American powerhouse when it comes to banking.

More importantly, this deal represents a small investment in Teachers’ huge portfolio, so it will be able to absorb any losses and it won’t make a dent in the overall performance which has been stellar in the last ten years.

Having said this, even if it’s a small deal, the last thing Ontario Teachers or any big Canadian pension fund needs is headline risk.

Don’t forget, back in February, news broke out that Teachers stepped on a German land mine, so the last thing Teachers needs is more negative press highlighting its supposedly weak due diligence.

The truth is Ontario Teachers has a great due diligence team but my sources tell me it might be stretched thin, covering everything from hedge funds, to private equity funds, private placements and PIPE deals. If this is true, OTPP’s board and senior management need to rectify it.

I sent this article to Ron Mock, Ontario Teachers’ CEO, and Jim Leech, the former CEO. Not surprisingly, they didn’t reply but I already know what their reply would be: “Sometimes you find gems of deals and sometimes you get burned badly, it’s the nature of taking risks in emerging markets and elsewhere.”

That’s true but Ive been very skeptical about Brazil’s boom for a long time and think many Canadian pension funds were too quick to pull the trigger, even if these are long-term investments.

Investing in emerging markets isn’t easy. You need to find the right partners and make sure they’ve got the right alignment of interests and aren’t con artists. I don’t trust many fund managers in Brazil and think there are a lot of blowhards there selling snake oil. Then again, Brazil is home of 3G Capital, arguably the best private equity fund in the world (at least Warren Buffet thinks so).

And while there’s no denying Brazil has huge potential, it’s currently experiencing a lot of political and economic turmoil, highlighted by the fact that the 2016 Rio Olympic Games are in dire straits.

The lesson for Canada’s large pension funds? Choose your investment partners very carefully in emerging markets like Brazil, Russia, China and India but no matter how well you vet them, be prepared for headline risk if things go awfully wrong.

As for Ontario Teachers,  I have no doubt that Wayne Kozun and his team know what they’re doing and while the article above raises a lot of red flags, you need to take everything you read with a grain of salt. I’m sure it’s not all terrible or else Teachers would have dumped this investment a long time ago. Also, keep in mind, the media reports only bad news, not the investments that went well in Brazil.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

————————

Alarm bells – BBC Europe editor, Katya Adler

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

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

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

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

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

————————

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

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

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

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

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

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

“THANK YOU UK, now it’s our turn.”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Job losses

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

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

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

Surprising support

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

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

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

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

Several flaws with objections

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

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

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

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

Fantasy fiction statements

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

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

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

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

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

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

Phased in changes

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Impact on Ontario Pension Plan

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

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

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

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

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

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

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

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

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

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

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

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

Geordon Omand of the Canadian Press reports, Finance ministers reach agreement on expanding CPP:

Most of Canada’s finance ministers reached an agreement in principle Monday to revamp the Canada Pension Plan, although Quebec and Manitoba have not signed on to the deal.

Under the agreement, which would go into effect in 2019, an average Canadian worker earning about $55,000 will pay an additional $7 a month in 2019. That would increase to $34 a month by 2023.

Once the plan is fully implemented, the maximum annual benefits will increase by about one-third to $17,478.

Finance Minister Bill Morneau said the deal will improve the CPP in a way that will make a difference to working Canadians.

“We have come to a conclusion that we are going to improve the retirement security of Canadians, we’re going to improve the Canada Pension Plan that will make a real difference in future Canadians’ situations,” he said.

Morneau said Quebec, which has its own pension plan, and Manitoba continue to be part of the process, despite not signing on to the agreement.

“Quebec is in a different situation,” he added. “The Quebec pension plan is a different vehicle. The costs are different than the Canadian Pension Plan. The idea that more analysis is required is something that we completely understood around the table.”

For Manitoba, Morneau said the deal comes too soon for the province’s new Tory government.

“Manitoba is a brand-new government. They’ve been in power for four weeks, so they were a productive voice around the table, a voice of continued interest in working together, but of course this comes pretty fast and hard for them.”

Ontario Finance Minister Charles Sousa said young Canadians will reap the benefits from Monday’s decision.

“Today, this federal government has shown great leadership and great desire to do something of great benefit for our young people.”

Sousa said the plan would replace the one his government had been working on.

British Columbia Finance Minister Mike de Jong, who had reservations about expanding the CPP, said he came on board because the plan is affordable for employees.

“I think we have reached a balanced approach to setting the objectives that were set out.”

A change to the CPP needs the consent of Ottawa and a minimum of seven provinces representing at least two-thirds of the country’s population.

Heading into Monday’s federal-provincial meeting, it was still unclear whether Ottawa would piece together the minimum required provincial support for change. Saskatchewan, for example, did not support CPP enhancement.

Sources say Ottawa made a major 11th-hour push in hope of securing enough countrywide support to boost the CPP and suggest Prime Minister Justin Trudeau was involved in the extra effort.

There hasn’t been such a level of consensus on CPP reform at a national scale since the 1990s.

Morneau has argued that enhancing the CPP is critical to ensuring future generations will be able to retire in dignity, no matter the state of their finances.

However, critics have warned that expanding the CPP would squeeze workers and employers for additional contributions — and hurt the still-fragile Canadian economy.

The federal government intensified its lobbying efforts over the final days and hours of meetings in Vancouver as it tried to attract support from enough provinces to ensure a CPP upgrade, said sources with knowledge of the talks.

This is great news for future generations of Canadians. Read my last comment on chasing a CPP consensus to get my thoughts on why it’s critically important to enhance the CPP once and for all.

Bernard Dussault, Canada’s former Chief Actuary, was kind enough to share his thoughts with me:

• The increase in the 25% retirement pension rate (i.e. from 25% to 33.33%) is more modest than we ever heard before, still though a not negligible 8.33% increase.
• To my unexpected great satisfaction, the few details provided about the strengthening mean that lower income (e,g, $25,000) workers will not be excluded form coverage.
• Indeed, If the actual intent were to exclude them ($25,000), then Bill Morneau Statement’s “a Canadian with $50,000 in constant earnings throughout their working life would receive a yearly pension benefit of around $16,000 instead of the $12,000″ would be inaccurate because the strengthening with a $25,000 exclusion would provide a yearly pension of $14,000 instead of $16,000, as the first $25,000 of employment earnings would not benefit from the 8.33% increase.

Bernard also pointed out a few things which should be obvious:

1. Even if Manitoba did not vote for the now agreed CPP expansion, it shall join and be part of it.
2. Even if Quebec did not vote for the now agreed CPP expansion, it will have to expand the QPP in a manner similar to the CPP expansion. In this vein, QC may will do what it wants regarding the financing of their own expansion but shall not have a choice as to providing a design of benefits that shall be as beneficial as that of the CPP expansion. This relates to my point below, i.e. inclusion of low income earners.
3. Ontario Finance Minister indicated in the midst of yesterdays ’announcement that it will not implement the ORPP if the agreed CPP expansion is ultimately approved.

I thank Bernard for sharing his insights.

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

Geordan Omand of the Canadian Press reports, Revamp of Canada Pension Plan centre stage at finance ministers’ meeting:

The federal finance minister says revamping the Canada Pension Plan is critical to ensuring that future generations of Canadians can retire in dignity, no matter the state of their finances.

Bill Morneau joined his provincial and territorial counterparts in Vancouver on Monday to discuss reforming the national pension program over concerns that some Canadians will struggle financially come retirement.

“We’ve heard from Canadians (about) the importance of retirement security,” Morneau said before the meeting.

“I’m looking forward to working together with my colleagues across the country to improve the long-term future for Canadians.”

The pressure is on to reach a deal as Ontario’s plans to develop its own pension program are well on their way, though the province’s finance minister said his preference would be for a national strategy.

“We want consensus. We want everybody to participate. We want everybody involved,” said Charles Sousa, adding that he wants to reach a deal in Vancouver.

Quebec Finance Minister Carlos Leitao was not as optimistic about coming to an agreement on Monday, saying that any change would have to be targeted, modest and gradual to earn his province’s support. So far Ottawa’s plan is only two thirds of the way there, he said.

Leitao put forward a proposal during the meeting that more selectively targets those Canadians who are the least likely to save in order to avoid putting an additional financial burden on low-income earners.

Under the Quebec plan, increased pension premiums would only kick in for those who make more than about $27,000 per year, which is about half the yearly maximum pensionable earnings for 2017.

The proposal argues that supplementing the income of Canada’s lowest earners is better achieved through other government policies, such as old age security and the guaranteed income supplement.

Reforming the pension system needs the support of at least seven provinces representing two thirds of the country’s population, which gives Ontario an unofficial veto over any decision.

The legislation, as currently written, also states that any reforms can only be implemented three years after a federal-provincial agreement is reached.

Coming into the meeting, Saskatchewan and B.C. have suggested economic conditions aren’t right for a change that’s likely to lead to an increase in the premiums that come off workers’ paycheques.

That premium hike is why some critics of the expansion call it a payroll tax, a common refrain from the Opposition Conservatives who oppose an across-the-board expansion of the program.

Federal research has suggested that workers who are the least likely to save for retirement tend to be under the age of 30, earn between $55,000 and $75,000 (although some estimates are higher), and either don’t save enough or lack access to a workplace pension plan.

The federal and provincial governments are looking at a possible increase in the $55,000 cap on annual maximum pensionable earnings, which would result in both higher premiums and increased pension benefits.

Of course, critics abound. Kelly McParland of the National Post reports, Can Bill Morneau save Canada’s pension plan from Ontario?:

Canada’s finance ministers will meet in Vancouver today for a new round of talks on pensions, resolute in their determination to solve a crisis that doesn’t exist.

Federal Finance Minister Bill Morneau has pledged to seek agreement on “enhancing” the Canada Pension Plan by the end of the year. An initial meeting with provincial counterparts in December was considered a success in so far as no one stomped out of the room in outrage. But no actual money was on the table at the time; the ministers merely agreed to “enter into discussions to review next steps,” and to meet again. The Vancouver meeting may mark the beginning of the hard part.

The task is complicated by several uncomfortable realities. One is that there is no crisis. According to any number of reports by respected institutions, both in Canada and abroad, Canadian seniors are doing quite well. Four out of five have the income they need in retirement. The poverty rate among seniors has plummeted over the past four decades: although advocacy groups pick and choose the figures they use to best bolster their argument, even the starkest numbers suggest seven out of eight seniors are above the line. Compared to other developed countries, Canada ranks near the very top; Statistics Canada figures show the share of seniors living in low-income families fell from 29 per cent in 1976 to 5.2 per cent in 2011, four points lower than the overall population.

Despite the lack of a sweeping need, Morneau and Ontario Premier Kathleen Wynne have nonetheless signalled their intention to save the day. They fear the country’s aging population will mean an increased number of elderly who find themselves outliving their means. Indeed, after years of decline, poverty figures have been creeping higher, especially among older, widowed women. “Progressives” argue that Canadians aren’t saving enough, and thus need government action to protect them from the consequences.

Ontario wants Morneau to “fix” the CPP by increasing contributions. Former finance minister Jim Flaherty resisted similar pressure because it would mean higher premiums, and smaller paycheques, for working Canadians who can ill-afford it. That argument makes little headway in Ontario, where Wynne’s government is determined to press ahead with an Ontario-only scheme that will start siphoning money from contributors on Jan. 1, 2018. Only a broader reform of the CPP will stop the province from barreling ahead with its ill-conceived plan.

Ontario’s resolve is wrong-headed on several fronts. It will represent an additional cost of doing business in a province that has seen its manufacturing base erode and its finances sink deeper into debt. It will put a strain on those at lower income levels who can’t afford the additional deductions, and who are already adequately covered by the package of benefits that include the CPP, the Old Age Security pension and the Guaranteed Income Supplement. While a second government pension might benefit some middle-class Canadians, it would reduce the income available during their working years for raising families and paying mortgages, as well as for personal investments. Advocates of pension reform seem oblivious to the fact that, thanks to health improvements, many older Canadians prefer to continue working beyond the traditional retirement age of 65. Canadian seniors are not the doddering grandmas and grampas of the government’s imagination, but a vibrant and energetic cohort of people who aren’t prepared to be put out to pasture.

The situation represents a problem for Morneau. To halt Ontario’s plunge into ORPP he needs agreement on a federal enhancement to CPP that won’t do more harm than good. To significantly change CPP he also needs agreement from seven of 10 provinces representing two-thirds of the population. But Quebec is reluctant — “I don’t think there’s any sort of crisis in our public pension system,” says Finance Minister Carlos Leitao — Saskatchewan is opposed and British Columbia has doubts. Manitoba’s new Conservative government may also by more prone to small, targeted improvements over a sweeping revamp.

Ontario’s ORPP would threaten the balkanization of a system intended to apply equally to all Canadians. It is in Canada’s interest to avoid this. Morneau must find a way to prevent Ontario from undermining the system as a whole while averting reforms that would be just as damaging. It’s a daunting task, demanded by an unnecessary crusade.

Every time provincial finance ministers get together to discuss enhancing the CPP, Canadians are bombarded by flimsy articles claiming “everything is fine, we don’t need to enhance the Canada Pension Plan.”

True, there is no imminent crisis and Canadian seniors are doing quite well on a relative basis but this is an extremely naive and shortsighted argument against not enhancing the CPP. It’s like knowing the tsunami is coming but we should all just relax instead of preparing for it (click on image):

The premise behind enhancing the CPP is to offer Canadians who are not saving enough for retirement a pension that ensures they can retire in dignity and security in an era that will be marked by ultra low rates and returns.

I know, some experts claim there is no savings problem in Canada, but other experts disagree and think that far too many Canadians are ill-prepared for retirement. Others claim that the majority of Canadians are saving, just not wisely (although the advice they offer is equally terrible).

The truth is a lot of Canadians aren’t saving enough in large part owing to the ongoing housing bubble in this country that keeps inflating residential real estate prices to epic levels. Many people are barely making their mortgage payments, leaving very little or no money to save for retirement.

But even those that do manage to save a lot of their discretionary income are better off with an enhanced CPP. Why? Because regardless of their family income and amount of savings, nothing beats a defined-benefit plan which offers predetermined benefits indexed to inflation that are not subject to the vagaries of public markets. Also, they can’t outlive their pension contributions to the CPP whereas most Canadians with no workplace pension will outlive their savings soon after they retire.

What else? Despite the critics, Canadians are getting a great bang for their CPP buck. The folks over at CPPIB are pension experts who know what they’re doing. They have the resources to pool investments, lower costs and invest directly in public and private markets across the world, leveraging off their scale, internal expertise and long investment horizon which allows them to capitalize on short-term market dislocations that can hurt or wipe out individual savers.

What about all those critics who claim that enhancing the CPP is a “tax” which will hurt the economy? They are completely and utterly clueless. Those CPP contributions will help fund the future retirement of millions of Canadians. And as the population ages, people with a fixed and secure income are in a better position to spend, allowing the federal and provincial governments to collect tax revenue in the form of sales taxes (conversely, the less money they have, they less they spend, the less sales taxes governments collect). Also, more people retiring in dignity and security means less money has to be spent on social welfare programs, reducing the overall debt.

In fact, the direct and indirect benefits of defined-benefit plans are grossly under-appreciated. It’s simply mind-boggling that anyone claiming to be a policy expert fails to see them. I don’t care about their political affiliation, good pension policy is good economic policy for the long-run. Period.

I mention this because one of my close friends is a die hard Conservative who totally agrees with me on enhancing the CPP. He too doesn’t understand the case against enhancing the CPP (many Conservatives are way off on this issue letting politics cloud their judgment).

As far as Ontario, the ORPP isn’t an impediment to an enhanced CPP and Premier Kathleen Wynne is signalling she’s willing to abandon her proposal to create a provincial pension plan if Monday’s meeting leads to a deal on improvements to the Canada Pension Plan.

Please keep all this in mind as the finance ministers debate yet again whether or not to enhance the CPP. I hope they get this right and finally introduce much needed change to bolster Canada’s retirement system.