Author: Leo Kolivakis

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

Hal Dardick of the Chicago Tribune reports, Mayor floats plan to fix city’s smallest pension fund:

Mayor Rahm Emanuel on Monday floated a new idea to fix the city’s smallest government worker pension system, one that he hopes will become a model to address far greater financial woes in the largest retirement fund.

Under the plan, both taxpayers and newly hired city laborers would pay more toward pension costs, and in return, workers could retire two years earlier.

But the Emanuel administration declined to say precisely how much money such an approach could save, and the mayor does not plan to press state lawmakers for approval during the final scheduled week of spring session.

City officials hope the plan would pass muster with the Illinois Supreme Court, which in March struck down an earlier Emanuel plan aimed at addressing the money shortfalls in pension funds covering laborers and municipal employees.

What “we want is a concrete and sustainable funding path that’s not going to get caught up in any legal process, and if there should be some sort of lawsuit on any of this, this is extremely strong, and should not put us in a position of two years of uncertainty like we were” on the previous plan, said Michael Rendina, senior adviser to the mayor.

The Emanuel administration provided an outline of the plan Monday. Starting next year, newly hired employees would pay 11.5 percent of their wages toward retirement, compared with 8.5 percent today. Employees hired from 2011 to 2016 also could opt to pay more into the pension fund, city officials said. In exchange, workers who make the higher pension payments could retire at 65 instead of 67. The plan would not affect people hired by the city before 2011 or laborers who have already retired.

The city would gradually increase how much it puts into the laborers’ pension fund, with the aim of reaching 90 percent funding by 2057. To come up with part of the money, Emanuel would spend all of the proceeds from a $1.40-a-month tax hike on emergency services slapped onto all city phone bills in 2014. That boosted city revenue by about $40 million a year.

The administration, however, did not provide a schedule of how payments would increase the next 40 years. City Hall officials also said they don’t yet have figures on how much money they expect to save under the proposal. The laborers’ fund is about $1.2 billion short of what’s needed to pay retiree benefits. It’s at risk of going broke in about 11 years.

Joe Healy, business manager for Laborers Local 1092, said the two unions representing city laborers have agreed to the deal, figuring that the extra employee contributions represent an equal trade for retiring two years earlier. But Healy also cautioned that the Laborers’ Annuity and Benefit Fund is still reviewing the numbers on the value of the trade-off.

Emanuel went back to the drawing board after the state’s high court rejected his 2014 plan to restore financial health to both the laborers’ fund and the Municipal Employees’ Annuity and Benefit Fund. Justices ruled that reduced cost-of-living increases violated a clause in the Illinois Constitution that states retiree benefits “shall not be diminished or impaired.”

But the court left unanswered the question of whether the city could require employees to pay more toward their retirement and also suggested the city could give employees the option of keeping their own plan or switching to a new one, provided they were offered something of value — “consideration” in legal contract parlance. With the mayor’s new plan, the earlier retirement is the consideration, Rendina said.

Ralph Martire, the executive director of the Center for Tax and Budget Accountability who was critical of the legal soundness of the Emanuel’s earlier plan, said the outline of the latest one likely would fall within the boundaries of the constitution. The city can “create any kind of new” pension plan it wants for employees yet to be hired, and it can provide options to current employees — provided one of the choices is keeping their current plan.

“I don’t see how there’s a constitutional complication to it,” said Martire, who added one caution: If future benefits fall below those provided by Social Security — which city workers don’t receive — the city could ultimately run afoul of federal law and have to pay more into the funds.

The $1.2 billion laborers’ shortfall is significantly smaller than the ones faced by city pension funds for municipal workers, police officers and firefighters. The municipal workers’ fund alone is nearly $10 billion short and at risk of going broke within eight years.

Still, the mayor hopes that the new laborers’ bill serves as a model for talks with the municipal workers’ fund, and city officials have started talking to leaders of some of the dozens of unions that represent those city employees. “If we reach agreement with them, we’ll have to come up with alternate funding source for that,” said Alexandra Holt, the city’s budget director.

Emanuel’s latest pension plan comes as he’s under pressure for solutions. After the Supreme Court ruling in March, Wall Street agencies that evaluate city creditworthiness warned the city that it could further downgrade the city’s already low debt ratings if it did not come up with a plan. At the time, Emanuel financial aides told the analysts that the city would come up with a plan within weeks.

Given unresolved problems with all four city pension funds, it’s uncertain whether proposing a plan for the smallest of the funds will soothe the angst felt on Wall Street over the city’s financial problems. Emanuel last week won City Council approval to borrow up to $600 million, and a lowered credit rating could increase interest costs.

Karen Pierog of Reuters also reports, Chicago, unions reach deal to rescue city pension fund:

Chicago would increase its annual contribution to its laborers’ retirement system, as would newer workers, in order to save the fund from insolvency, under an agreement in principle announced on Monday by Mayor Rahm Emanuel and unions.

While the city hailed the deal for the smallest of its four pension systems, a solution has yet to emerge for its largest fund, covering more than 50,000 active and retired municipal workers.

The city will dedicate $40 million a year from a 2014 increase in its 911 telephone surcharge to the laborers’ fund, under the agreement. Workers hired after Jan. 1, 2017, would have to contribute 11.5 percent of their salaries, while those hired after Jan. 1, 2011, would choose between contributing 11.5 percent and retiring at age 65 or contributing 8.5 percent and retiring at 67.

Chicago needs the Illinois legislature to approve later this year a five-year phase-in of the higher contributions by the city to the laborers’ system to attain a 90 percent funding level by 2057. The fund, which had $1.36 billion in assets at the end of 2014, covers nearly 3,000 active workers and 2,700 retirees.

In March, the Illinois Supreme Court tossed out a 2014 state law aimed at making the laborers’ fund and the municipal pension system solvent by requiring higher contributions from the city and affected workers and reducing benefits.

Emanuel has said that ruling put Chicago into a straitjacket by reaffirming iron-clad protection in the Illinois Constitution against reducing public sector worker pension benefits.

Chicago Budget Director Alex Holt said the deal for the laborers’ fund does not reduce benefits but gives newer workers choices as to when they can retire.

“Choice is one of the areas that the Illinois Supreme Court indicated should pass constitutional muster,” she told reporters in a conference call.

The impact of the high court’s ruling, along with new accounting changes, more than doubled the unfunded liability for the municipal fund to $18.6 billion at the end of 2015 from $7.13 billion at the end of 2014, according to an actuarial report by Segal Consulting released last week. It predicted the system will run out of money within the next 10 years in the absence of increased funding.

“We feel that the solution we laid out for laborers offers a good framework for discussions with the (municipal) fund,” said Chicago Chief Financial Officer Carole Brown.

Those new accounting changes really sting. Elizabeth Campbell of Bloomberg reports, Chicago’s Pension-Fund Woes Just Became $11.5 Billion Bigger:

Chicago’s pension-fund shortfall just got $11.5 billion bigger.

Thanks to the defeat of the city’s retirement-fund overhaul by the Illinois Supreme Court and new accounting rules, Chicago’s so-called net pension liability to its Municipal Employees’ Annuity and Benefit Fund soared to $18.6 billion by the end of 2015 from $7.1 billion a year earlier, according to its annual report. The fund serves some 70,000 workers and retirees.

The new figure, a result of actuaries’ revised estimates for the value in today’s dollars of benefits due as long as decades from now, doesn’t change how much Chicago needs to contribute each year to make sure the promised checks arrive. But it highlights the long-term pressure on the city from shortchanging its retirement funds year after year — decisions that are now adding hundreds of millions of dollars to its annual bills and have left it with a lower credit rating than any big U.S. city but once-bankrupt Detroit.

“The longer they wait to get this fixed, the more expensive it’s going to get for the city’s taxpayers,” Richard Ciccarone, the Chicago-based president of Merritt Research Services LLC, which analyzes municipal finances.

The estimate presented Thursday to the board of the municipal fund, one of Chicago’s four pensions, will add to what had been an unfunded retirement liability for the city estimated at $20 billion.

A key driver was the court ruling striking down Mayor Rahm Emanuel’s plan that cut benefits and boosted city and employee contributions. Without it in place, the fund is now set to run out of money within 10 years.

That triggered another change. New accounting rules, adopted tokeep governments from using overly optimistic investment-return forecasts to mask the scale of their liabilities, require them to use more modest assumptions once pension plans go broke. As a result, the reported liabilities jump.

The Chicago fund is notable because very few governments have been affected by the change, according to Ciccarone. “The investment returns are not going to fix the problems themselves,” he said.

City officials from Emanuel to Chief Financial Officer Carole Brown have said the city is working on a solution to shore up the retirement system. Chicago has already passed a record property-tax increase that will bolster the police and fire funds.

Under the traditional way of estimating the municipal fund’s obligations, which is how annual contributions are set, the shortfall rose to $9.9 billion as of Dec. 31, based on market value of its assets, according to the actuaries report. That’s up from $7.1 billion a year earlier.

The pension is only 32 percent funded — meaning it has 32 cents for every dollar it owes — compared to 42 percent last year, according to the actuaries. And it has to sell 12 percent to 15 percent of its assets every year to pay out benefits.

City officials are having “very good discussions” with the unions about the issue, according to Emanuel, who has made clear that he disagrees with the court’s ruling to throw out his plan.

“We’re working through the issue to get to what I call a responsible way to fund their pensions within the confines, the straitjacket that the court has determined,” Emanuel told reporters at City Hall on Wednesday.

A proposal is pending in the state legislature to bolster funding for the benefit fund. The plan would ensure it’s 90 percent funded by the end of fiscal year 2055. Jim Mohler, executive director of the fund, told board members on Thursday that it’s a “fluid situation.”

I’ve already covered Chicago’s pension nightmare in detail. If you ever want to get a glimpse of America’s future pension crisis, have a look at what’s going on in Chicago because it’s coming to a city near you. I guarantee you will see a series of never-ending crazy hikes in property taxes to pay for chronically underfunded public pensions.

When Greece was going through its crisis last year, my uncle from Crete would call me and blurt: “It’s worse than Chicago here!” referring to the old Al Capone days when Chicago was the Wild West. Little did he know that in many ways, Chicago is much worse than Greece because Greeks had no choice but to swallow their bitter medicine (and they’re still swallowing it).

In Chicago, powerful public unions are going head to head with a powerful and unpopular mayor who got rebuffed by Illinois’s Supreme Court when he tried cutting pension benefits. Now, they are tinkering around the edges, increasing the contribution rate for new employeesof the city’s smallest pension, which is not going to make a significant impact on what is truly ailing Chicago and Illinois’s public pensions.

All these measures are like putting a band-aid over a metastasized tumor. Creditors know exactly what I’m talking about which is why I’ll be shocked if they ease up on the city’s credit rating.

Importantly, when a public pension is 42% or 32% funded, it’seffectively broke and nothing they do can fix the problem unless they increase contributions and cut benefits for everyone, top up these pensions and introduce real governance and a risk-sharing model.

When people ask me what’s the number one problem with Chicago’s public pensions, I tell them straight out: “Governance, Governance and Governance”. This city has a long history of corrupt public union leaders and equally corrupt politicians who kept masking the pension crisis for as long as possible. And Chicago isn’t alone; there are plenty of other American cities in dire straits when it comes to public finances and public pensions.

But nobody dares discuss these problems in an open and honest way. Unions point the finger at politicians and politicians point the finger at unions and US taxpayers end up footing the public pension bill.

This is why when I read stupid articles in Canadian newspapersquestioning the compensation and performance at Canada’s large public pensions, I ignore them because these foolish journalists haven’t done their research to understand why what we have here is infinitely better than what they have in the United States and elsewhere.

Why are we paying Canadian public pension fund managers big bucks? Because we got the governance right, paying public pension managers properly to bring assets internally, diversifying across public and private assets all around the world and only paying external funds when it can’t be replicated internally. This lowers the costs and improves the performance of our public pensions which is why none of Canada’s Top Ten pensions are chronically underfunded (a few are even over-funded and super-funded).

What else? Canada’s best public pensions — Ontario Teachers, HOOPP and even smaller ones like CAAT and OPTrust — have implemented arisk-sharing model that ensures pension beneficiaries and governments share the risk of the plan so as not to impose any additional tax burden on Canadian taxpayers if these plans ever become underfunded. This level of governance and risk-sharing simply doesn’t exist at any US public pension which is why many of them are chronically underfunded or on the verge of becoming chronically underfunded.

Below, FBN’s Jeff Flock breaks down Chicago’s growing pension shortfall. Like I said, get ready for never-ending property tax hikes if you live in cities like Chicago, it’s only going to get worse.

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

David Paddon of the Canadian Press reports, CPPIB posts weakest rate of return since 2009:

The Canada Pension Plan Investment Board’s annual rate of return dropped to 3.4 per cent last year, the lowest since the Great Recession, the CPPIB said Thursday in its annual report.

However the Toronto-based fund manager, which shepherds investments on behalf of the Canada Pension Plan, says its 10-year inflation-adjusted rate of return was 5.1 per cent — above the Chief Actuary of Canada’s benchmark of 4.0 per cent.

In addition, CPPIB notes that its assets increased over the 12 months ended March 31 by $14.3 billion to $278.9 billion.

By comparison, its 2015 rate of return was 18.3 per cent and the 2014 rate of return was 16.1 per cent — the fund’s best two years since it suffered a 18.8 per cent decline in asset value in the 2009 fiscal year amid a global market meltdown.

“Over the past 12 months, despite one of the more challenging investment environments in recent years and predominately negative equity markets, the CPP Fund generated a moderate gain,” Mark Wiseman, the CPPIB’s out going president and chief executive, said in a statement.

Wiseman has been instrumental in leading CPPIB as it pursued an “active” investment strategy into a variety of assets including real estate, public and private stocks and infrastructure assets around the world.

“In the first 10 years of our active management strategy, we have generated significant value for CPP contributors and beneficiaries, which would not have been earned through a passive portfolio.”

The fund says investments, after costs, have added $125.6 billion cumulatively in the past 10 years, including fiscal 2016. It says 57 per cent of its total assets are from investment income since the fund was created in 1999.

Earlier Thursday, the Canada Pension Plan Investment Board announced that Wiseman is leaving to take a senior role at U.S.-based investment firm BlackRock Inc., which has a total of about US$4.7 trillion in assets under management, including a range of products that includes mutual funds and the iShares exchange-traded funds business.

The U.S. firm said Wiseman will head its global active equity business, which manages US$275 billion, and become chairman of the company’s global investment committee when he joins the company in September.

Under Wiseman, the CPPIB has grown its head office in Toronto and added offices in other financial centres, including one last year in Mumbai, India.

Wiseman will be replaced June 13 by Mark Machin, who currently heads the fund’s international arm.

Machin, 49, joined CPPIB in March 2012. Prior to that, he spent 20 years at investment bank Goldman Sachs.

Heather Munroe-Blum, who chairs the CPPIB board, said the directors were unanimous in selecting Machin, who she said has been instrumental in shaping and executing CPPIB’s investment strategy over the last four years — a period when the fund has invested billions outside of Canada.

Earlier this year, Wiseman was named by the Liberal government as one of 14 members of a new council on economic growth to help advise federal Finance Minister Bill Morneau.

Note to readers: This is a corrected story. An earlier version said Wiseman was named to the council on economic growth this week.

Matt Scuffham of Reuters also reports, Canada’s CPPIB fund posts 3.7 pct gain in last fiscal year:

The Canada Pension Plan Investment Board (CPPIB), one of the world’s biggest dealmakers, said on Thursday it delivered gross investment returns of 3.7 percent last year despite volatile global equity markets.

The CPPIB, which manages Canada’s national pension fund, said it ended the year to March 31 with net assets of C$278.9 billion, compared with C$264.6 billion a year ago.

“This year’s results highlight the real-time impact of short-term market volatility, reinforcing why we focus on long-term results,” said Chief Executive Mark Wiseman.

CPPIB put out a press release going over its fiscal year 2016 results(added emphasis is mine):

The CPP Fund ended its fiscal year on March 31, 2016 with net assets of $278.9 billion compared to $264.6 billion at the end of fiscal 2015. The $14.3 billion increase in assets for the year consisted of $9.1 billion in net investment income after all CPPIB costs and $5.2 billion in net CPP contributions. The portfolio delivered a gross investment return of 3.7% for fiscal 2016, or 3.4% net of all costs.

“It has now been a decade since we adopted our active management strategy. This milestone presents a reasonable timeframe to take stock of our progress to date, as we position the organization to maximize returns over the long run,” said Mark Wiseman, President & Chief Executive Officer, CPP Investment Board (CPPIB). “The value that we have generated over and above our passive benchmark for the decade, as well as our absolute 10-year return, signal that CPPIB is on track to continue to perform. Nonetheless, as a long-term investor, it is incumbent that we remember that even 10 years is short in the context of our strategies to create value-building growth for multiple generations of beneficiaries. Some of our active management programs have only taken root recently, as we continue to build the required capabilities to continue to add value over the long term. We believe that the advanced maturity of our programs, and the quality and diversification of the assets in the portfolio, will generate even greater value-add in the decades ahead.”

In the 10-year period up to and including fiscal 2016, CPPIB has contributed $125.6 billion in cumulative net investment income to the Fund after all CPPIB costs, and $160.6 billion since inception in 1999, meaning that over 57% of the Fund’s cumulative assets are the result of investment income.

“Over the past twelve months, despite one of the more challenging investment environments in recent years and predominately negative equity markets, the CPP Fund generated a moderate gain. This outcome demonstrates the benefits of a resilient, highly diversified global portfolio. This year’s results highlight the real-time impact of short-term market volatility, reinforcing why we focus on long-term results,” said Mr. Wiseman. “In particular, we saw a stark contrast between the significant upswing in the final quarter of fiscal 2015 compared to the broad declines in the same quarter this fiscal year. We experienced similar quarter-to-quarter volatility in terms of currency impact, which fluctuated dramatically over the year. Importantly, we look through such volatility, relentlessly focusing on the far horizon.”

A number of other factors contributed to CPPIB’s strong fiscal 2016 results, including an overall gain from the portfolio’s private equity assets, real estate and fixed income holdings. The benefit of the Fund’s diversification across currencies also played a role in its returns, as the Canadian dollar fell modestly against most global currencies over the course of the fiscal year.

“This year, each of our investment programs fired on all cylinders, contributing positive returns to the Fund. We continued to see the benefits of a broadly diversified portfolio across geographies and asset classes, and our private assets served as a safe harbour from the rough seas of the public markets,” said Mr. Wiseman. “Our highly skilled professionals across CPPIB’s international offices completed a number of complex global transactions that will add value to the Fund for the years to come.”

The CPP Fund is a global portfolio that holds assets denominated in many foreign currencies and we generally do not hedge these back to the Canadian dollar. Accordingly, when the Canadian dollar weakens as it did in 2015, the Fund will benefit from currency gains. Similarly, when the Canadian dollar strengthens, as it has more recently, the Fund will experience currency losses. The Fund’s largest foreign currency exposure is to the U.S. dollar. The Canadian dollar weakened by 2.1% against the U.S. dollar in fiscal 2016. We believe costly hedging of foreign investments is not appropriate for the CPP Fund. While currency exchange rate fluctuations may have a significant impact on our results in any given year or quarter, we do not expect them to have a significant impact on the Fund’s long-term performance.

Long-Term Sustainability

The Canada Pension Plan’s multi-generational funding and liabilities give rise to an exceptionally long investment horizon. To meet long-term investment objectives, CPPIB is building a portfolio and investing in assets designed to generate and maximize long-term, risk-adjusted returns. Accordingly, long-term investment returns are a more appropriate measure of CPPIB’s performance than returns in any given quarter or single fiscal year.

In the most recent triennial review released in December 2013, the Chief Actuary of Canada reaffirmed that, as at December 31, 2012, the CPP remains sustainable at the current contribution rate of 9.9% throughout the 75-year period of his report.The Chief Actuary’s projections are based on the assumption that the Fund will attain a prospective 4.0% real rate of return, which takes into account the impact of inflation. CPPIB’s 10-year annualized net nominal rate of return of 6.8%, or 5.1% on a real rate of return basis, was comfortably above the Chief Actuary’s assumption over this same period. These figures are reported net of all CPPIB costs to be consistent with the Chief Actuary’s approach.

The Chief Actuary’s report also indicates that CPP contributions are expected to exceed annual benefit payments until 2023, after which a portion of the investment income from CPPIB will be needed to help pay pensions.

Performance Against Benchmark

CPPIB measures its performance against a market-based benchmark, the Reference Portfolio, representing a passive portfolio of public market investments that can reasonably be expected to generate the long-term returns needed to help sustain the CPP at the current contribution rate.

In fiscal 2016, the CPP Fund’s net return of 3.4% outperformed the Reference Portfolio by 4.4%, delivering $11.2 billion in net dollar value-added (DVA) above the Reference Portfolio’s return, after all CPPIB costs.

Given our long-term view, we track cumulative value-added returns since the April 1, 2006, inception of the benchmark Reference Portfolio. Cumulative value-added over the past 10 years totals $17.1 billion, after all CPPIB costs.

“In addition to a strong focus on total Fund returns, dollar value-added is another important performance measure,” said Mr. Wiseman. “In the first 10 years of our active management strategy, we have generated significant value for CPP contributors and beneficiaries, which would not have been earned through a passive portfolio. Looking towards the next 10 years, we expect both good and bad years, but we will stay the course with our prudent and responsible long-term strategy. So, while we saw exceptional value-add above our benchmark in fiscal 2016, we know that this will not always be the case in any one-year period.”

Total Costs

CPPIB total costs for fiscal 2016 consisted of $876 million, or 32 basis points, of operating expenses, $1,330 million of investment management fees and $437 million of transaction costs. CPPIB reports on these distinct cost categories, as each is materially different in purpose, substance and variability. We report the investment management fees and transaction costs we incur by asset class and report the net investment income our programs generate after deducting these fees and costs. We then report on total Fund performance net of these fees and costs, as well as CPPIB’s overall operating expenses.

Fiscal 2016 CPPIB operating expenses reflect higher personnel and general operating expenses, such as increased staff levels and premises costs related to our headquarters and six international offices. It also reflects the continued expansion of CPPIB’s operations and further development of our capabilities to support over 25 distinct investment programs. International operations accounted for approximately 30% of total operating expenses.

Fiscal 2016 investment management fees and transaction costs reflect the continued growth in the volume and sophistication of our investing activities.

The increase in investment management fees is due in part to the continued growth in the level of commitments and the average level of assets with external managers, as the Fund continues to grow.

The increase in transaction costs corresponds with a significant increase in investment activity. This year, we completed 10 global transactions valued at over $1 billion, each involving complex due diligence and negotiations, as we worked diligently to deploy capital efficiently. Given the nature of these costs, they will vary from year to year according to the number, size and complexity of our investing activities in any given period.

Portfolio Performance by Asset Class

Portfolio performance by asset class is included in the table below. A more detailed breakdown of performance by investment department is included in the CPPIB Annual Report for fiscal 2016, which is available at www.cppib.com.

Asset Mix

We continued to diversify the portfolio by the return-risk characteristics of various assets and geographies during fiscal 2016. Canadian assets represented 19.1% of the portfolio, and totalled $53.3 billion. Foreign assets represented 80.9% of the portfolio, and totalled $225.8 billion.

Investment Highlights

During fiscal 2016, CPPIB completed 60 transactions of over $200 million each, in 12 countries around the world.

Highlights for the year include:

Private Investments

· Completed the acquisition of Skyway Concession Company LLC (SCC) with OMERS and Ontario Teachers’ Pension Plan for a total consideration of US$2.9 billion. CPPIB, OMERS and Ontario Teachers’ each owns a 33.33% interest in SCC and contributed an equity investment of approximately US$560 million each. SCC manages, operates and maintains the 7.8-mile Chicago Skyway toll road under a concession agreement, which runs for another 88 years.

· Jointly acquired Petco Animal Supplies, Inc. (Petco) with CVC Capital Partners for a total consideration of approximately US$4.6 billion. Petco is a leading specialty retailer of premium pet food, supplies and services, which operates more than 1,400 Petco locations across the U.S., Mexico and Puerto Rico.

· Signed an agreement with Wolf Infrastructure Inc. to establish a midstream energy infrastructure investment vehicle focused on acquisition opportunities in Western Canada. Wolf will focus on opportunities to create value through active management and operations of the assets held in the vehicle. CPPIB will provide equity funding in support of Wolf’s strategy with a goal to initially invest more than $1 billion in the sector.

· Acquired Antares Capital, through Antares Holdings, a subsidiary of CPPIB Credit Investments Inc., alongside Antares management, for a total consideration of approximately US$12 billion. CPPIB Credit Investments’ equity investment was approximately US$3.9 billion. Antares is a leading lender to middle market private equity sponsors in the U.S.

Public Market Investments

· Invested RMB 3.2 billion (C$688 million) in the common equity of Postal Savings Bank of China (PSBC). With more than 400 million retail customers and nearly 40,000 branches, PSBC is China’s largest bank by customers and distribution network and is the sixth largest bank by total assets in China.

· Acquired 52.9 million common shares of Entertainment One Ltd. (eOne) for £142.4 million. Following the investment, CPPIB participated in eOne’s subsequent rights issue as well as open market purchases, increasing CPPIB’s pro forma ownership interest to approximately 19.8% for a total of more than £190 million invested. eOne is a leading international independent film and television entertainment company.

· Invested US$378 million in Enstar Group Limited (Enstar), a global specialty insurance company, through two transactions for an aggregate interest of approximately 14%. In June 2015, CPPIB invested US$267 million for a 9.9% interest in Enstar. In March 2016, CPPIB completed a follow-on investment of US$111 million in Enstar for an additional 3.8% interest. Enstar is a market leader in acquiring and managing closed blocks of property & casualty insurance.

Real Estate Investments

· Formed a joint venture with Welltower Inc. to purchase a 97.5% interest in a portfolio of six seniors housing properties in Florida, known as Aston Gardens, for an aggregate purchase price of US$555 million. CPPIB is a 45% owner of the joint venture and Welltower owns the remaining 55%. The Aston Gardens portfolio comprises six private-pay primarily independent-living seniors housing properties in Florida with a total of 1,930 rental units.

· Formed a student housing joint venture entity, Scion Student Communities LP, with GIC and The Scion Group LLC (Scion). The Joint Venture, through its subsidiary UHC Acquisition Sub LLC, signed an agreement to acquire University House Communities Group, Inc. (UHC), a leading student housing portfolio in the U.S., for a total consideration of approximately US$1.4 billion, including the cost to complete current development projects. Through the Joint Venture, CPPIB and GIC will each own a 47.5% interest in UHC and Scion will own the remaining 5%.

· Committed an additional US$1 billion to the Goodman China Logistics Partnership (GCLP), established with Goodman Group in 2009 to own and develop logistics assets in Mainland China, consistent with CPPIB’s 80% ownership interest in GCLP. To date, CPPIB has committed US$2.6 billion to GCLP, which has now invested in 45 logistics projects in 16 Chinese markets.

· Formed a strategic joint venture with Unibail-Rodamco, the second largest retail REIT in the world and the largest in Europe, to grow CPPIB’s German retail real estate program. The joint venture was formed through CPPIB’s indirect acquisition of a 46.1% interest in its retail platform Unibail-Rodamco Germany with an initial equity investment of €394 million. In addition, CPPIB has committed a further €366 million in support of Unibail-Rodamco Germany’s investment strategies.

Investment Partnerships

· Acquired a stake of approximately 20% in Homeplus, Tesco’s South Korean business, for US$534 million, as part of a consortium led by MBK Partners. The total transaction value was approximately US$6 billion. Homeplus is one of the largest multi-channel retailers in South Korea and the number two player in both hypermarkets and supermarkets.

Investment highlights following the year end include:

· Entered into an agreement, through a wholly owned subsidiary of CPPIB, to purchase 40% of Glencore Agricultural Products (Glencore Agri) from Glencore plc for US$2.5 billion. Glencore Agri is a globally integrated grain and oilseed business with high-quality port, logistics, storage and processing assets in Canada, Australia, South America and Europe. The transaction is expected to close in the second half of the calendar year.

· Signed an agreement with Cinven to jointly acquire Hotelbeds Group (Hotelbeds) for a total enterprise value of €1.165 billion. Hotelbeds is the largest independent business-to-business bedbank globally, offering hotel rooms to the travel industry from its inventory of 75,000 hotels in over 180 countries.

Asset Dispositions

· Sold our 45% interest in two assets, Oakwood Plaza shopping centre (Hollywood, FL) and Dania Pointe development project (Dania Beach, FL). Proceeds to CPPIB from the sale were approximately US$91.3 million. Oakwood Plaza was acquired in 2010 and Dania Pointe development was acquired in 2014 alongside our joint venture partner Kimco Realty.

· The Capital London Fund in which CPPIB is an 80% equity holder, sold 55 Bishopsgate, an office building in London, U.K. Proceeds to CPPIB from the sale were approximately £150 million. The property investment was made in 2006.

· Sold our 45% indirect stake in 600 Lexington Avenue, a Midtown Manhattan office building. Proceeds to CPPIB from the sale were approximately US$79 million. The property was acquired in 2010 alongside our joint venture partner SL Green.

Corporate Highlights

· Collaborated with S&P Dow Jones Indices, and its analytical partner RobecoSAM, in the development of the S&P Long-Term Value Creation (LTVC) Global Index. The index is designed to measure companies that have the potential to create long-term value based on sustainability criteria and financial quality. CPPIB is among six of the world’s largest institutional investors voicing their support for the index as a powerful catalyst to influence corporate and investor behaviour. As an immediate indicator of this potential, CPPIB and other investors have committed to initially allocate approximately US$2 billion to funds tracking the S&P LTVC Global Index. The creation of the index was a key recommendation stemming from CPPIB’s Focusing Capital on the Long Term initiative.

· CPPIB Capital Inc. (CPPIB Capital), a wholly owned subsidiary of CPPIB, completed two debt offerings in fiscal 2016. In January 2016, CPPIB Capital completed a $1.25 billion debt offering of three-year term notes. In May 2015, CPPIB Capital completed a $1.0 billion debt offering of five-year, medium-term notes. CPPIB utilizes a conservative amount of short- and medium-term debt as one of several tools to manage our investment operations. Debt issuance gives CPPIB flexibility to fund investments that may not match our contribution cycle. Net proceeds from both private placements will be used by CPPIB for general corporate purposes.

· In October 2015, we officially opened a new office in Mumbai, India’s financial capital, representing our seventh office, internationally. The Mumbai office expands CPPIB’s global reach and enhances our strategy to build a diversified investment portfolio. The on-the-ground presence in India will allow CPPIB to better identify new investment opportunities through local expertise and partnerships, while also monitoring current assets.

· Announced executive appointments to the Senior Management Team:

o Patrice Walch-Watson joined CPPIB as Senior Managing Director, General Counsel & Corporate Secretary. Ms. Walch-Watson joined CPPIB from Torys LLP where she was a Partner with expertise in mergers and acquisitions, corporate finance, privatization and corporate governance.

o Mary Sullivan joined CPPIB as Senior Managing Director & Chief Talent Officer. Ms. Sullivan joined CPPIB from Holt Renfrew & Co. Ltd., where she was Senior Vice-President, People. She brings a wealth of experience and leadership from renowned Canadian and global corporations to CPPIB.

If you read this press release carefully, you just get a glimpse of how massive CPPIB has become, running sophisticated operations around the world that rival powerhouses like Blackstone, Carlyle and others.

You also see how clueless the folks at the Fraser Institute are in terms of the “costly” CPP or how ignorant Andrew Coyne is when he writes on the ‘bloated state’ of the CPP, questioning the merits of active management at CPPIB (not to mention how ignorant he is on other aspects of the Fund too, calling the Reference Portfolio a “fraud”).

Lost in all the media circus on why Mark Wiseman is leaving the Fundare the fiscal year results which were much better than meets the eye. In fact, I had a quick chat with Mark last night and he was gracious in providing me with some key slides going over the results. I’m not going to cover all of them but will focus on some key slides.

First,  just like PSP Investments, CPPIB’s fiscal year ends at the end of March. And we all know the first quarter was weak and very volatile. If you look at calendar year results, CPPIB gained 16% in 2015, outperforming all its large peers in Canada, including the Ontario Teachers’ Pension Plan which gained 13% last year (click on image):

Second, as stated in the press release above, currency swings matter a lot because CPPIB doesn’t hedge its foreign currency exposure(click on image):

We can debate the merits of not hedging F/X risk but we can’t debate the fact that on any given year, CPPIB will either enjoy bigger gains from foreign currency exposure or suffer F/X losses if the loonie rallies relative to other currencies (for those that hedge currency risk, it’s the exact opposite).

Third, have a look at the next slides and tell me that Andrew Coyne is right to question CPPIB’s active management and long-term investment strategy (click on images):

Of these, that middle slide 10 is the key one which clearly demonstrates that since embarking in many active management strategies in Public and Private Markets, CPPIB has generated $161 billion in cumulative net investment income over the last ten years (but Andrew Coyne thinks this is all a “fraud”, what a joke!).

Anyways, I really think every Canadian should stop reading silly articles and reports from Andrew Coyne and the Fraser Institute and take the time to read CPPIB’s 2016 Annual Report which goes into a lot more detail on costs, operations and strategies. The 2016 Annual report is available here.

One critical point I will make is that CPPIB and others should always include portfolio performance by asset class relative to the benchmark of each asset class for the last fiscal or calendar year and over the last four years (to gauge compensation), as well as include a clear description of the benchmarks governing each asset class. This information should be publicly available in their press releases governing results.

[Note: To be fair, the way CPPIB calculates its Reference Portfolio is much more complicated and rigorous than other large shops, so maybe they can’t show benchmarks for all investment activities too easily but I still think they should provide more information on each investment activity relative to benchmarks.]

One thing I will grant Andrew Coyne is reading these annual reports trying to find information which should be easily available is daunting and cumbersome.

Still, I will provide you with a summary table on total compensation because Canadians have a right to know how much we pay senior public pension fund managers (click on image, from page 82 on 2016 Annual Report):

As you can see, CPPIB’s senior managers are very well compensated but they’re also delivering the long and short-term results to justify their compensation (they beat all their large Canadian peers in calendar year 2015 and have done very well over the last four fiscal years which is how the bulk of their compensation is determined).

In my opinion, this compensation, while hefty for most Canadians, is very fair given the long-term results they have produced and it’s hardly “outrageous” by any stretch of the imagination given their skill sets and the assets they manage. (By the way, don’t fall off your chair, Mark Machin’s compensation is reported in Hong Kong dollars and I include footnotes to explain details).

What else can I share with you? I’d like to see a little more “ethnic” diversification at CPPIB’s senior level (click on image):

I know, these top jobs are very competitive and only the “best of the best” get them but I have a problem when I look at an image of CPPIB’s top brass (or that of any Canadian public pension) and it doesn’t reflect our country’s diverse population.

All of Canada’s Top Ten need to do a much, MUCH better job diversifying their workforce at all levels of their organization. Period, end of discussion.

On diversity, I’d like to see Canada’s Top Ten adopt specific programs targeting women, visible minorities, aboriginals and people with disabilities and publish a detailed “Diversity Report” every year and include it in their annual report (I know, it’s a hassle but Canadians have a right to know this information).

[Note: CPPIB recently initiated a program to focus more on gender diversity but I would like to see more done with measurable action plans and regular reports that provide hard statistics on diversity at all levels of the organization.]

Finally, I would like to end by addressing some nonsense the media is spreading about Mark Wiseman’s “abrupt” departure. There is nothing cynical going on here. The man received a great offer to move on and work for the world’s largest asset manager where he will be reporting to someone and doing all sorts of interesting things.

Also, the person replacing Mark Wiseman wasn’t named in a hasty decision. The Board was aware of Mark’s departure and they had time to carefully think about a suitable replacement (hint: look at my Davos clip in my last comment and you’ll get a clue of when the Board was informed to start looking for someone).

Mark Machin (pronounced Maychin) was Mark Wiseman’s right hand and personally responsible for CPPIB’s international expansion over the last four years. He has over 20 years experience working at Goldman Sachs and is more than capable of taking over the helm at CPPIB.

Mark Wiseman has nothing but good things to say about him and from by brief email exchange with Mr. Machin congratulating him, he seems like a very nice and decent guy (Mark told me he is).

So stop reading all the garbage in the media and trust the Board at CPPIB is on top of things. CPPIB is in very capable hands and Mark Wiseman will stay on for the next few months (as a senior advisor) to make sure the transition process goes very smoothly. I have no worries and trust Mark Machin will do an outstanding job as the new CEO of CPPIB.

Below, the appointment of an internationally-focused executive to head up Canada’s largest pension fund is the right choice, says Leo de Bever, the former head of the Alberta Investment Management Corporation. If you’re tired of Leo Kolivakis, listen to Leo de Bever, he’s much wiser than me!

Also, BNN’s Paige Ellis reports on her conversation with outgoing CPPIB CEO, Mark Wiseman. The soon-to-be head of Global Active Equity at BlackRock says his decision to leave the firm was not motivated by compensation. He also explains why he gave CPPIB’s board of director notably less notice than his predecessor.

Third, Kevin O’Leary says this on Mark Wiseman: “four years is enough, time to play in the big league.” You got love “Mr. Wonderful”, even though his remarks on working at CPPIB are a bit off (it’s nothing like public service!), whenever he smells opportunity, he pounces on it!

Lastly, Canada Pension Plan Investment Board names Mark Machin to replace outgoing CEO Mark Wiseman. Machin heads CPPIB’s international investments. Bloomberg’s Scott Deveau reports.

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

Bruce Johnstone of the Regina Leader-Post reports, Saskatchewan Pension Plan marks 30 years of quiet success:

Since 1986, the Saskatchewan Pension Plan (SPP) has been quietly been going about its business of providing a voluntary, no-frills and inexpensive pension plan for the two out of three people who don’t have access to a company pension.

But this year being its 30th anniversary, the SPP is emerging from its headquarters in the west-central town of Kindersley (pop. 5,400) to toot its own horn, but in a very quiet, understated sort of way.

“Incremental growth” has been the key to our success, said Katherine Strutt, general manager of SPP, in a recent interview with the Leader-Post.

“Growing by new members and members contributing more because they’re allowed to contribute up to $2,500, but also by being able to transfer from existing RRSPs to help their (SPP) balances grow, that’s been a big part of our success story as well.”

From humble beginnings, the SPP has grown to $445 million in assets and 33,000 members.

“We don’t have a lot of bells and whistles. People are just looking for a good investment with a low fee,” said Strutt, who joined SPP in 1990, serving the last 23 years as general manager.

In fact, the SPP is a model for other provinces looking to help people who are looking for a basic pension plan, in addition to Old Age Security.

SPP is a money-purchase, defined-contribution pension plan that in many ways works like an RRSP. In fact, you can transfer up to $10,000 in existing RRSP investments per year to your SPP.

Despite its name, it is not restricted to Saskatchewan residents. Anyone between 18 and 71 with available RRSP room can contribute.

The plan is aimed at the two-thirds of people who do not have the benefit of a workplace pension plan, including self-employed workers or employees of small businesses, farmers, artists, tradespeople, etc.

“For a lot of smaller employers, with fewer than 10 or 20 employees, … maybe they can’t commit to a registered pension plan. Maybe it’s too costly and they can’t afford to make the RPP contributions,” Strutt said.

“We found that the (SPP) resonates with a lot of these small employers,” Strutt said. “Employers like the SPP because it’s locked in, it’s going to be used for the employee’s retirement, it stays with them and follows them (if they change jobs).”

The SPP also allows smaller businesses to compete for employees with larger employers in terms of benefits. “Some employers are putting in the entire $2,500, or matching the employee’s contribution and some are doing it as a bonus, top-up.”

In 2010, the SPP changed its contribution limit from $600 to $2,500 but the contributor has to have earned income. “Social contributions” are also allowed. “For those people who have a lower-earning spouse or stay-at-home spouse and they want to have a pension plan for them, they can do that.”

“It’s like having access to the top money managers with no minimum investment. It really helps people bridge that gap between what they’re going to get from OAS and private savings. This is just a cost-effective way of putting a cap on that.”

It was exactly four years ago that I covered Canada’s secret pension plan in detail. I’m happy to see the contribution limit has been raised to $2500 (it should be raised to a much higher amount) and that the plan is steadily growing offering its 33000 members a safe, low cost pension solution to help them save for retirement.

If you’re a professional with no workplace pension or if you own a small business and want to cover your employees’ pension needs, you should definitely get in touch with the folks at the Saskatchewan Pension Plan (SPP) by clicking here. You can even transfer up to $10,000, in cash, per calendar year into your SPP account from existing RRSPs, RRIFs and unlocked RPPs.

Equally important, if you, your spouse or any of your children suffer from a disability, learn all you can about the Registered Disability Savings Plan and keep this in mind:

Effective July 1, 2011, for deaths occurring after March 3, 2010, the existing registered retirement savings plan (RRSP)rollover rules are extended to allow a rollover of a deceased individual’s RRSP proceeds to the registered disability savings plan (RDSP) of the deceased individual’s financially dependent child or grandchild with an impairment in physical or mental functions. A qualifying beneficiary is referred to as an eligible individual. For more information, see Eligible individual. These rules also apply to registered retirement income fund (RRIF) proceeds, to certain lump sum amounts paid from registered pension plans (RPPs) and, under proposed changes, to the Saskatchewan Pension Plan (SPP).

Why is the Saskatchewan Pension Plan the best Canadian pension plan you never heard of? Because absent an enhancement of the Canada Pension Plan which I’ve been arguing for a long time, we need better solutions to cover many hard working Canadians getting fleeced by banks and mutual funds charging them outrageous fees for mediocre returns (they aren’t all bad, as I stated here, I like Calgary-basedMawer Balanced Fund run by Greg Peterson, which gained 10.5% in 2015 and has been performing exceptionally well over the last three, five and ten years ).

And those fees add up over the years, eating away a huge chunk of Canadians’ retirement nest eggs. In fact, as Diane Urquhart stated in my comment on a reality check for pensions: “Canadian mutual fund investors that save regularly over the next 30 years would have close to 25% higher retirement savings if Canadian mutual fund suppliers were charging the world average mutual fund fees rather than Canadian mutual fund fees.”

But Canadians remain oblivious to this reality and that is a function of how illiterate people generally are on constructing a well-balanced retirement portfolio based on fairly easy principles like using ETFs,rebalancing and diversifying their portfolio and using the power of dividends to build long-term wealth. Go read my comment on building on CPPIB’s success and pick up and read classics like William Bernstein’s The Four Pillars of Investing and The Intelligent Asset Allocator, Marc Litchenfeld’s Get Rich With Dividends and my favorite, Peter Lynch’s One Up on Wall Street. 

In my opinion, there should be mandatory high school or college courses covering these principles because most Canadians are clueless and “just go to the bank and deal with some representative which makes them check off boxes” or they get bamboozled by some broker which places them in high fee managed products. If you think hedge funds are a scam, you should dig deeper into the Canadian mutual fund industry, it’s the biggest scam of all, enriching banks, insurance companies and mutual fund companies while impoverishing many hard working Canadians (there are exceptions but in general, this is the sad reality).

But the truth is markets are volatile and with interest rates at historic lows and turning negative all over the word, I expect a lot more volatility in public markets, so it’s best that Canadians focus on their work and let experts focus on their retirement needs. This is why the Saskatchewan Pension Plan (SPP) makes so much sense for many self-employed professionals and small business employees with no workplace pension looking for a low-cost professionally managed pension.

But make no mistake, when it comes to bolstering the country’s retirement policy, Canada’s secret pension plan isn’t the best solution and it pales to enhancing the CPP. Why? The Saskatchewan Pension Plan is great but it’s not a large, well-governed defined-benefit plan,the gold standard of pensions.

The SPP is a large defined-contribution plan which means over a very long period, it cannot compete with Canada’s large well-governed DB plans. Sure like them, it uses its size to lower fees, which is a good thing but unlike them, it cannot attract and retain qualified pension professionals who invest directly across public and private markets and offer the security and stability of defined-benefits. Like defined-contribution plans, it too is subject to the vagaries of public markets.

This is why I keep harping on enhancing the CPP. Despite what those hacks at the Fraser Institute think, CPPIB is cost efficient and you’re not getting less bang for your CPP buck. This is all nonsense financed by Canada’s powerful financial services industry.

Speaking of nonsense, CBC reports that a group representing manufacturers and exporters wants the Ontario government to haltimplementation of its new provincial pension plan until a federal review of the Canada Pension Plan is completed:

The Canadian Manufacturers & Exporters said Tuesday that the costs of administering the Ontario Retirement Pension Plan can be avoided by working with Ottawa on a national approach to retirement income security.

“Manufacturers play a key role in ensuring the strength of the Ontario economy,” said Ian Howcroft, Ontario vice-president at CME. “These changes need to make sense for them.”

Howcroft said mandatory cost increases put manufacturers at a competitive disadvantage.

“Employers already offering pension plans should be exempt from further increases associated with either an ORPP or a CPP change,” he said.

In February, the Ontario government said it was pushing back the rollout dates for the ORPP to give larger businesses more time to enroll.

The new provincial plan would cover some three million Ontarians who don’t have workplace pensions.

Workers at large companies (with 500 or more employees) were scheduled to start contributing in January 2017, but contributions now won’t begin until 2018.

At the same Ontario made that announcement, federal Finance Minister Bill Morneau said he hopes to introduce an enhancement to the CPP before the end of 2016.

I can’t understand groups like the Canadian Manufacturers & Exportersor the Canadian Federation of Independent Business crying foul every time policymakers discuss the ORPP or enhancing the CPP.

They really need to get informed on why ORPP is going ahead despite what happens to enhancing the CPP, and more importantly, they need to understand why these policies will ultimately benefit their members, the Canadian economy and hard working Canadians.

Importantly, enhancing the CPP or introducing the ORPP isn’t a tax, it’s implementing smart long-term economic and retirement policy that will benefit the country for decades to come.

By the way, these trade groups should look at the rules to understand who is exempt and who isn’t and they should contact the Saskatchewan Pension Plan if they want to cover the employees. I doubt this will exempt them from the ORPP or the enhanced CPP but it makes a lot of sense to look into it.

As far as the ORPP, Mitzie Hunter, Ontario’s Associate Minister of Finance, ORPP, Multicultural Minister, tweeted this announcement (click on image):

These are all excellent choices. Eileen Mercier is a professional director and was the Chair of the Ontario Teachers’ Pension Plan from 2007 to 2014. She currently serves on many boards, including Intact Financial Corporation. She is one great board member to have on this nominating board.

Carol Hansell is the is Senior Partner of Hansell LLP. Over her more than 25 years in practice, she has led major transactions for public and private corporations and governments and has served on many boards of organizations across a variety of sectors. She was a board member at PSP Investments for many years where she oversaw governance and human resources and other activities and was recently named to serve on the advisory council to update Ontario business law.

Susan Wolburgh Jenah is President and Chief Executive Officer of the Investment Industry Regulatory Organization of Canada (IIROC), a position she has held since the regulator was established in June of 2008.

These are all very accomplished professionals with great experience and lots of wisdom and knowledge which will serve them well as they take part in ORPP’s Board Nominating Committee.

Below, Katherine Strutt, general manager of SPP, goes over how the Saskatchewan Pension Plan is celebrating 30 years in 2016. I also embedded a clip on how to become a member of the SPP.

Get informed, absent and enhanced CPP or ORPP, for many of you, this may be the best Canadian pension option you never head of.

Lastly, another option for incorporated professionals and business owners with no workplace pension is to set up a Personal Pension Plan (PPP) offered by INTEGRIS. Jean-Pierre Laporte, its CEO and founder, sent me an INTEGRIS white paper to go over what his company offers, so do your due diligence and look into what they have to offer. I embedded a short clip below explaining their approach.

Jean-Pierre also shared this with me:

The SPP is a stunted DC arrangement. The contribution limits are too low to allow for a meaningful pension in the long run, no matter how prudently it is managed.  Just like you can’t truly retire on a TFSA (unless you are Warren Beatty, I guess).

He’s right the contribution limits are too low and that is something which needs to be addressed in the future, but for now, this plan does offer many Canadians without a workplace pension another option.

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

Andy Blatchford of the Canadian Press reports, Will big pension funds and Ottawa partner to build tomorrow’s infrastructure?:

The Trudeau government’s newfound enthusiasm about a big Montreal transit proposal has given Canadians a glimpse at one way Ottawa could fund billions in public infrastructure, like roads, bridges and rail, over the long haul.

In recent days, senior Liberals have been talking up an unusual funding model for the $5.5-billion light-rail plan for Montreal, calling for a partnership that includes Ottawa and a public pension fund.

The idea was put forward by Quebec’s massive public pension fund manager, which recently announced its proposal to build a large electric rail network connecting Montreal to its suburbs.

The fund, the Caisse de depot et placement du Quebec, is prepared to pump $3 billion into the project — and it wants the provincial and federal governments to kick in the rest.

A subsidiary of the Caisse would operate the rail network and gradually recoup the pension plan’s investment through user fees. Eventual profits would be funnelled into Quebecers’ public nest egg — the Quebec Pension Plan — which is managed by the Caisse.

The idea was made public after the Liberal government signalled in its March budget that it would like to engage deep-pocketed pension funds and other “innovative sources of funding” to help raise much-needed cash for long-term infrastructure projects — when it’s in the public interest.

So far, this first example of a potential federal partnership with a major pension plan appears to have stoked excitement among senior Liberal cabinet ministers.

“I salute the innovative efforts of the Caisse de depot et placement du Quebec, which, through its metropolitan electric network, is proposing a new business model to implement major infrastructure projects,” Finance Minister Bill Morneau told a business crowd late last week in Montreal.

“We have the chance in Canada to count on pension funds that have developed an expertise in infrastructure that is recognized around the world.”

Morneau added that Ottawa is studying the Caisse’s plan with “lots of interest.”

His inaugural budget followed through on a Liberal election pledge to double infrastructure spending over the next 10 years, raising the overall federal investment to $120 billion.

The party has argued boosting infrastructure spending will increase productivity, generate more long-term growth and create jobs.

The plan, however, comes at a cost.

Infrastructure spending is expected to contribute to a string of five-straight budgetary deficits that could add more than $110 billion to Canada’s public debt.

Seeking out other sources of cash for infrastructure could increase the number of new investments while helping prevent the country from sliding even deeper into the red.

The first phase of the Liberal plan calls for $11.9 billion of spending over five years. It’s focused on projects such as repairing aging water and public transit infrastructure as well as providing cash for smaller projects that can be completed by 2019.

There’s also money available for planning larger, more-ambitious projects that would be part of the program’s second phase, the details of which have yet to be unveiled.

That’s where the Caisse’s light-rail plan comes in — it features a type of funding model the government could increasingly tap into.

Infrastructure Minister Amarjeet Sohi told the Senate’s question period last week that the timing of the government’s second phase aligns with the Montreal proposal. He added that the government is working “very closely” with the Caisse.

“This is one of the most innovative and creative projects that I have seen in my short while in this portfolio, and it will be transformative for the region of Montreal,” Sohi said.

“I see this as a great opportunity for us to support innovation in delivery of infrastructure, because we do need to engage public sector pension funds, as well as private sector funds, to make sure the amount of infrastructure that we build across the country engages other stakeholders and partners.”

In their remarks last week, both Sohi and Morneau complimented Caisse CEO Michael Sabia, whom Morneau has named to his economic advisory council.

The council, tasked with helping the government map out a long-term growth plan, also features another head of a powerful public pension plan: Mark Wiseman, president and CEO of the Canada Pension Plan Investment Board.

The groups will meet for the first time Monday north of Ottawa. Morneau and Sohi will both be among several cabinet ministers present at the meeting.

Large Canadian pension plans, such as the Caisse and CPPIB, have invested billions in infrastructure projects abroad. Funds like these covet access to the reliable, predictable returns that infrastructure offers through revenue streams such as user fees, like tolls.

In its budget, the Liberals also mentioned something called “asset recycling,” a system that could see governments in Canada lease or sell stakes in existing major public assets such as highways, rail lines, and ports.

Wiseman has praised asset recycling as a model Canada could use to attract long-term capital as it deals with its growing infrastructure deficit.

Sabia has argued that opening the door to pension plans to make more infrastructure investments in Canada would create a win-win scenario.

“Every time you take the train, every time you buy a ticket, obviously it is a contribution to your retirement fund,” Sabia said last month after he announced the Montreal rail proposal.

I agree with Michael Sabia, Ottawa’s push to court Canada’s large pensions on infrastructure is a win-win for everyone. I expect to see more projects where Canada’s Top Ten pensions are called to bankroll infrastructure and help manage existing (mature) infrastructure assets like bridges, rail lines, airports, highways, and ports or to develop new (greenfield) infrastructure projects.

In order to understand why this push for “asset recycling”  makes so much sense for the federal government, pensions and the economy, you need to think like a large Canadian pension fund, meaning you need to take a very long-term view of things:

• Governments around the world are cash-strapped at a time when the world is in a serious economic rut. From where I’m standing, the deflation dog is barking very loudly and Harvard economist Larry Summers is right, monetary policy alone isn’t going to pull the global economy out of its rut. We need more fiscal stimulus in the form of massive infrastructure spending.
• Summers has warned that pushing off repairs of America’s crumbling infrastructure to future generations creates the “worst and most toxic” debts. He’s absolutely right. America will fall $1.44 trillion short of what it needs to spend on infrastructure through the next decade, a gap that could strip 2.5 million jobs and $4 trillion of gross domestic product from the economy, a report from a society of professional engineers said last week.
• In Canada, the situation isn’t any better. The 2016 Infrastructure Report Card shows that Canada’s critical infrastructure is in dire straits with over a third of municipal infrastructure in either fair, poor or very poor condition.
• Spending on infrastructure is desperately needed not only to modernize it but also to boost the economy, making the country much more competitive for future growth. Investing in infrastructure means investing in good jobs that pay decent wages (good multiplier effect) but also investing in the future prosperity of the country to meet the challenges of an increasingly more competitive global economy.
• Where do Canada’s large pension funds come into the picture? It turns out Canada’s Top Ten pensions know a thing or two about investing in infrastructure. They own prize infrastructure assets in Australia, Britain, Europe, and around the world and unlike private equity or hedge funds, they invest huge sums directly in infrastructure, making this the asset class of choice in terms of finding stable, recurring cash flows and decent yield at a time when most public and private assets are over-valued.
• Investing in domestic infrastructure carries the added benefit of not taking any foreign exchange risk and not dealing with regulatory risks that can come if a foreign government changes the rules of the game. Canadian pensions have Canadian dollar denominated liabilities, so it makes much more sense for them to invest in domestic infrastructure.
• But why infrastructure? Why not stocks, bonds, private equity, real estate, and hedge funds? Again, think like a large Canadian pension fund, which means take a total portfolio approach to allocate risk in the best, most cost efficient manner to maximize returns without taking undue risk.
• In a world where ultra low and negative rates are here to stay and where the Governor of the Bank of Canada is warning pensions to brace for lower rates, where are Canada’s large pensions going to obtain the yield to meet their long-dated liabilities which go out 75+ years? Stocks and corporate bonds are over-valued and very volatile and government bonds offer historic low yields. Hedge funds and private equity funds? Turns out those investments have run their course and overwhelmingly enrich hedge fund and private equity gurus, not so much pension beneficiaries. Sure, if you select the right funds, you’ll make money but you’ll pay big fees for those returns and you won’t be able to invest large sums directly like you can with infrastructure (and to a lesser extent real estate).In terms of scalability, costs and stable and predictable returns over a very long horizon, investing large sums in infrastructure makes perfect long-term sense for Canada’s large pensions.
• The key difference between Canada’s large pensions and their US counterparts is a world class governance model which allows them to attract and retain talent which can invest directly across public and private investments all around the world, foregoing external manager fees. Canada’s large pensions a world renowned infrastructure investors who have the expertise required to invest and develop domestic infrastructure assets much better than any government organization can. Unlike government bureaucrats, Canada’s large pension fund managers are compensated based on their long-term returns so it’s in their best interests to see these investments flourish over a long period. In other words, their alignment of interests are better than civil servants managing infrastructure projects.

Now, after going through all this, if you’re still not convinced that “asset recycling” makes sense for all stakeholders, including Canadian taxpayers, then I don’t know what to tell you.

I don’t want to make it sound like investing in infrastructure is the end all and be all of economic policy (it isn’t going to make a huge dent, especially if Canada’s real estate bubble bursts), but it makes really good sense and if it’s done properly using the expertise of Canada’s large public pensions, it will pay long-term dividends to the economy and help fund these large pensions over many years.

What about smaller Canadian pension plans that can’t invest directly in infrastructure? Well, they can seek advice from experts like David Rogers and Stephen Dowd at Caledon Capital Management or invest in private infrastructure funds like the one at Fiera Infrastructure or invest in shares of publicly traded Brookfield Infrastructure Partners (BIP). Or they can talk to OMERS to provide them with solutions to meet their infrastructure needs.

But it’s going to be hard to compete with the big boys when it comes to infrastructure. They have the funds and the expertise to invest large sums directly into domestic and international infrastructure. 

By the way, if your kid wants enter finance, steer him or her toward a career in infrastructure. Ideally, they will obtain a degree in mechanical engineering and then go on to do an MBA and go work at some private infrastructure company like SNC-Lavalin Group or at a European giant like Vinci, Hochtief or Ferrovial. I would recommend anyone looking for a career in infrastructure to gain operational, not just financial transaction experience in this asset class.

However, it’s not just engineers with MBAs that are needed. Law firms need to develop in-house expertise in infrastructure investments as they too can benefit from this secular push into infrastructure. Start planning and start thinking long-term when it comes to how more infrastructure investing is going to change our economy. 

Finally, the rumor mills in Montreal are that Michael Sabia, who wentfrom outsider to rainmaker, is preparing for a career in politics after he leaves the Caisse. He has publicly denied any speculation that he’s preparing for a career in politics but you never know, Premier Sabia or Minister Sabia has a nice ring to it (we need more qualified people entering public office). 

Last week in Montreal, Michael Sabia and Ron Mock gave a presentation on Best Practices in Fund Management: Lessons from the Canadian Public Pension Model at the 69th CFA Institute Annual Conference. My former Caisse colleague Miville Tremblay who now works at the Bank of Canada moderated this panel discussion which also featured University of Michigan law professor Dana Muir and he told me it was a success and well attended by participants from all over the world.

Unfortunately, this discussion is not publicly available as of now. Miville told me that is entirely up to the CFA Institute. Below, you can watch a panel discussion on The Changing Global Bond Market and its Implications featuring Carolyn Wilkins, Senior Deputy Governor of the Bank of Canada.

I also embedded a short clip from CDPQ Infra, the infrastructure group led by Macky Tall which the Caisse recently spun off as an independent subsidiary (just like they did for real estate which isIvanhoé Cambridge). The clip shows you the benefits of the newRéseau électrique métropolitain (our city desperately needs it and more initiatives like it!).

The Caisse recently changed its organizational model to face anticipated volatility, modest returns and ‘anemic growth’, consolidating investments in public and private companies under chief investment officer Roland Lescure, who had held the no. 2 position since 2009.

It is also creating a new division, Depositors and Total Portfolio Construction, which will be led by Jean Michel (former head of Air Canada Pension Fund), who was appointed as VP of Advisory Services to Depositors and Strategic Analysis just over a month ago.

All these are great moves which Sabia initiated. Jean Michel brings a wealth of experience from Air Canada Pension Fund where he and his small team performed miracles to bring that pension plan back to fully funded status (using the same strategies that HOOPP and OTPP use) and Roland Lescure is a class act who should be CIO of Public and Private markets like his counterparts at Teachers and elsewhere.