Author: Leo Kolivakis

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

CBC News reports, Caisse putting $1.5B US into Bombardier for stake in rail business:

Bombardier has signed a deal that will see the Caisse de dépôt et placement du Québec (CDPQ) invest $1.5 billion US in a newly created company that will hold the company’s rail transportation business.

The giant Quebec pension fund — Canada’s second-largest — says the investment will help stabilize the company’s current financial situation.

The Caisse says it’s betting on Bombardier and in rail transportation.

The $1.5 billion represents a 30 per cent stake in a new holding company, BT Holdco.

The company is a subsidiary of Bombardier Transportation and will be based in Germany.

The investment comes less than a month after the provincial government announced a bailout of more than $1.3 billion in the company’s struggling CSeries jet program. Bombardier posted a loss of $4.9 billion US in the third quarter.

Rail industry has ‘growth potential’

The Montreal-based company says the deal concludes its review of financing options for Bombardier Transportation, which sells subway cars and other mass transit systems.

“This investment by CDPQ, which has a long history as one of our major investors, is a testimonial to the growth potential of the rail industry and to Bombardier’s leadership in seizing the opportunities this market offers on a global scale,” Bombardier chief executive Alain Bellemare said in a statement.

Caisse president Michael Sabia said the investment is a safe bet.

“Bombardier Transportation is a global leader in the rail industry, with a robust backlog, predictable revenues, and meaningful potential for growth,” Sabia said in a statement.

Karl Moore, an associate professor at McGill University, said it’s a solid business deal, with more upside than Quebec’s investment in Bombardier’s CSeries program.

“It’s a different part of the business. As Michael Sabia points out, it’s a global business. It’s relatively resilient during tough economic times because it’s about government spending on rail companies, long-term infrastructure projects,” he said in an interview with CBC’s The Exchange.

He said protecting Quebec industry is less a consideration than getting good return for the pension fund that the Caisse invests.

“They’ve structured it in a way that they will get very good returns in a safe manner,” he said.

Vanessa Lu of the Toronto Star also reports, Quebec pension fund buys $1.5B stake in Bombardier rail:

After a global search for an investor in its rail division, in the end Bombardier Inc. stayed close to home, turning to Quebec’s biggest pension fund for a $1.5 billion (U.S.) cash infusion.

In exchange for the money, the Caisse de dépôts et placement du Quebec gets a say in board members as well as the promise of at least 9.5 per cent annual returns for its 30 per cent stake in a new holding company known as BT Holdco.

If Bombardier Transportation doesn’t deliver, then the Caisse can increase its stake to as much as 42.5 per cent over the next five years. If the company delivers better returns, then the Caisse can reduce its stake.

Caisse CEO Michael Sabia touted the arrangement, which values the company at $5 billion (U.S.), as giving its depositors “bond-like” protection but with the “up side” of equity.

Bombardier has the option to buy out the Caisse at the end of three years, with guaranteed returns of a minimum 15 per cent, on an annual compound basis.

Sabia called that 15 per cent rate very attractive, but said he hopes the pension fund isn’t bought out that point.

“We think the transportation business has a lot of interesting potential,” said Sabia during a conference call on Thursday. “Bombardier Transportation is already a global champion. I think it can be an even bigger and stronger one.”

That’s especially true because of demand in emerging markets like Asia and Latin America, he added.

“Obviously, there’s still a lot of work to do. That’s no secret,” Sabia said.

Bombardier’s Class B shares, which are down almost 70 per cent year to date, closed unchanged on Thursday at $1.28.

The Toronto Transit Commission is furious with Bombardier over its long-delayed streetcar order, first placed in 2009. To date, the TTC only has 11 streetcars, with another en route from Thunder Bay.

Originally, 73 were supposed be in use by the end of 2015, but the schedule was revised to 20, which Bombardier says will only be 16.

In December, the TTC is expected to file a notice of complaint, seeking $50 million in damages over the delay.

The investment by Caisse comes on the heels of a $1 billion (U.S.) commitment from the Quebec government for a 49.5 per cent stake in Bombardier’s struggling CSeries program.

Development of the CSeries program is years behind schedule and billions over budget, but the flight testing is now complete. The company expects certification soon.

However, sales for the all-new plane, in two sizes, have been sluggish with only 243 firm orders to date – and none in a year.

Porter Airlines, which has placed a conditional order for 12 planes, and options for another 18, will not be allowed to fly the jets from Toronto’s island airport, now that the Liberals have taken power in Ottawa.

As Bombardier has burned through cash to get the CSeries launched, it has had to make substantial job cuts and shelved plans for the Learjet85. Earlier this year, Bombardier raised $3 billion (U.S.) through a debt and equity offering.

With the Quebec investment and the deal with Caisse, which is scheduled to close in the first quarter of 2016, Bombardier estimates it will have access to $6 billion (U.S.) in cash and cash equivalents by year’s end.

As a condition of the Caisse deal, Bombardier must ensure there is always $1.25 billion (U.S.) in liquidity. Sabia said the Caisse never considered investing in the CSeries program, choosing instead in the train division.

Bombardier’s CEO Alain Bellemare, who took over from Pierre Beaudoin in February, says the company has plenty of cash to complete all its programs including the CSeries jet and new Global 7000/8000 business jets.

It also provides a cushion in case market conditions prove difficult, Bellemare told reporters on Thursday. “We now have ‘a safety net,’” he said. “We will also re-establish confidence with our clients which is key if we want to continue selling our products.”

On the third-quarter conference call in October, Bellemare said an additional $2 billion (U.S.) investment would be needed for the CSeries program in the coming years, given it is not expected to get to profitability before 2020 or 2021.

While Quebec has called on the federal government to join in with a cash infusion, the new Liberal government hasn’t acted yet.

Bellemare said the company is continuing talks with the federal government for assistance, declining to offer any details.

It’s only a matter of time before the federal government matches the $1 billion (U.S.) the Quebec government invested in Bombardier.

What do I think about Bombardier getting billions from the provincial and federal government at a time when Quebec’s public school teachers are striking against austerity and demanding much deserved salary increases? It makes me cringe especially since I know the company has been poorly managed over the last few years as its upper management made all sorts of terrible decisions, all of which are reflected in Bombardier’s sagging stock price (click on image):

But the company is too important to Quebec’s economy to let it fall by the wayside and I’m not talking only about direct jobs. I’m also talking about a lot of small and medium sized enterprises that rely on Bombardier’s ongoing operations.

Still, one thing I would like to emphasize is not to look at the Caisse’s investment in Bombardier Transportation as an extension of the Quebec government’s decision to invest in the struggling CSeries program.

First, Bombardier Transportation has problems but it’s a growing business with great potential in developed and emerging markets. Second, the Caisse isn’t stupid. It structured the deal to ensure a guaranteed return and if it doesn’t get it, it will increase its stake in the growing transportation division. Third, the deal is structured in a way to ringfence it from the troubled CSeries program.

All this to say, when we want to help a giant Quebec corporation, we’re better off going through the Caisse than some government agency which doesn’t have return and risk in mind when handing out corporate welfare checks to poorly managed companies.

 

Photo by  Renaud CHODKOWSKI via Flickr CC License

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

Andy Kessler, a former hedge-fund manager and the author of “Eat People,” wrote a comment for the Wall Street Journal, Forcing Green Politics on Pension Funds:

The beauty of the stock market is that no one can tell you where to put your money—until now. Last month the Obama administration’s Labor Department issued Interpretive Bulletin 2015-01, which tells pension funds what factors to use when choosing investments, including climate change. Only a few tax lawyers noticed, but with U.S. pensions at $9 trillion, this is a gross power grab that will hurt the retirees it claims to protect.

In 2008 Labor issued guidance for parts of the Employee Retirement Income Security Act of 1974, affectionately known as Erisa, that environmental, social and government factors—for instance, climate change—may affect the value of investments.

Most pension fund managers, who have a fiduciary responsibility to maximize returns, have assumed that such factors can act as a tie breaker, if all other things are equal. The thinking was: Thanks for the heads up about the climate, but leave the investing to us. Managers could still weigh other factors above climate change without getting sued.

No more. According to the Oct. 26 bulletin from Labor: “Environmental, social and governance issues may have a direct relationship to the economic value of the plan’s investment. In these instances, such issues are not merely collateral considerations or tiebreakers, but rather are proper components of the fiduciary’s primary analysis of the economic merits of competing investment choices.”

The word “primary” is the rub. Investing is hard, as anyone who has bought a stock only to watch it crater 20% a week later knows. There are thousands of factors that influence daily stock prices—product, profits, management, competition, interest rates, global unrest, government interference, technology and so on.

You may have an opinion on climate change, I may have another. If it were settled science, would we need marching orders from Labor? Al Gore invests using his thesis on sustainable capitalism, and good for him. Just don’t force that on the rest of us.

This government is essentially saying: Don’t you dare invest in anything that causes or is hurt by climate change, or you’ll be sued for failing your fiduciary responsibilities. Energy, utilities and industrials are 20% of the market. How can pension funds now own any of them?

This is a divestment program, nicely paired with the U.N. conference on climate change in Paris later this month. But it won’t work. Stock prices are a collective opinion on the prospect of a company. As reality changes, so do opinions. There are plenty of socially responsible investment funds; they rarely succeed. You can shun alcohol, tobacco and gambling stocks all you want, but many Americans enjoy all three, often at the same time. As long as profits go up, these stocks will do well, leaving the socially responsible behind. At least that’s by choice.

Pushing politics on retirement funds will destroy returns. One little secret on Wall Street is that Erisa rules drive hedge funds to avoid pension money. It slows them down. As pension funds divest, hedge funds and other managers will gladly buy up undervalued climate-challenged companies.

The argument over climate change should roll on, but keep government out of portfolios. Facebook ’s headquarters is on the San Francisco Bay. Sea-level “projections” from the National Research Council forecast it’ll eventually be swallowed up by rising oceans. So do I have to remove the stock from my IRA?

While I disagree with Kessler that “one little secret on Wall Street is that Erisa rules drive hedge funds to avoid pension money” (Are you kidding me? Hedge funds love dumb pension money chasing a rate-of-return fantasy), I agree with him that green politics should not take precedence over pension investments.

Go back to read my last comment on Ontario pensions’ fossil fuel disaster where I state the following:

[..] as I argued three years ago when bcIMC was slammed over unethical investments, once you push the envelope on responsible investing, you quickly divest from many companies in all industries, including big pharma, big tobacco, big banks, and big fast food companies that need lots of cows to make hamburgers (and cow emissions are more damaging to the planet than cars).

There’s something else I want you to think about, pension funds have a fiduciary duty to achieve their return objective without undue risk. That’s investment risk, not undue risk to the environment. Clean energy sounds great, and I’m all for it, but these stocks are also very volatile (mostly follow trends in energy prices), not to mention these companies aren’t as big as fossil fuel companies so it’s impossible for pensions to easily make the switch out of fossil fuel into clean tech.

And another thing, what if all those investors betting big on a global recovery turn out to be right?  You will see a massive rally in coal, steel, oil and oil drilling stocks. I wonder then if the Canadian Centre for Policy Alternatives will publish research on the cost of divesting out of fossil fuels (it’s easier being an armchair quarterback when the prevailing trend is going your way).

There is a cost to every decision, including divesting out of fossil fuel assets. If your pension plan’s stakeholders are fine knowing their pension can potentially underperform other pensions that are not divesting from these assets and even fail to achieve their required rate-of-return over the long-term because of such decisions, then fine.

But I think a lot of these decisions are driven by a green agenda which hasn’t clearly thought of all the costs attached to divesting out of fossil fuel assets. Unlike Kessler, I’m a big believer in global warming and what Al Gore and eminent scientists are warning about, I just don’t believe that this is what should drive pension investments.

Folks, the world is a sewer. That’s just a fact of life. We need to listen to environmentalists but they also need to understand what pension funds are all about, namely, delivering the maximum rate of return without taking undue investment risk, which includes illiquidity risk in clean tech shares.

If you have any thoughts on this topic, let me know and I’ll be happy to publish them (LKolivakis@gmail.com).

 

Photo by  penagate via Flickr CC

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

Tyler Hamilton of the Toronto Star reports, Ontario pension funds lost $2.4B from oil, coal investments:

Ontario’s five largest pension funds lost an estimated $2.4 billion during the last half of 2014 because of investments in fossil-fuel assets, according to a study released Tuesday by the Canadian Centre for Policy Alternatives.

It calculated that the Ontario Teachers’ Pension Plan took by far the biggest financial hit, losing $1.77 billion from fossil-fuel bets during a time that saw the price of oil cut nearly in half.

“If they’re putting money into fossil-fuel stocks, it should be incumbent on managers and trustees to justify why they’re doing that,” said Marc Lee, a senior economist with Policy Alternatives.

The study analyzed 20 Canadian pension funds with $587 billion in assets under management, including the Ontario Municipal Employees Retirement System (OMERS), Healthcare of Ontario Pension Plan (HOOPP), Ontario Pension Board, and Ontario Public Service Employees Union (OPSEU) Pension Trust.

On average, about 5 per cent of assets under management were in the form of fossil-fuel company stocks, which had a total value estimated at $27 billion prior to the oil-price crash. Six months later, the value of those equities had fallen by $5.8 billion, which the study called a conservative estimate.

Lee said losses can largely be blamed on declining oil and gas prices. He conceded that the analysis was limited by the lack of detailed disclosure from the funds’ managers.

“It’s why there needs to be more transparency,” he said. “That’s the conversation we hope to trigger with this report.”

Canadian pension funds have been largely silent on the issue of climate risks, while funds in Europe and parts of the United States have been much more engaged in the discussion, and are taking action.

In France, for example, amended legislation now requires institutional investors to report their carbon footprints and efforts to reduce them. Lawmakers in California have gone so far as to pass a bill forbidding its big pension funds from investing in coal stocks.

Last week, in advance of the G20 summit in Turkey, Bank of England governor Mark Carney proposed the creation of an industry-led disclosure task force on climate-related risks.

Carney, who is also chair of the Financial Stability Board, has previously warned that the “vast majority” of fossil fuel reserves may have to be left in the ground if the world is to keep global temperatures from rising to dangerous levels.

Disclosure of climate risks, Carney told a Lloyd’s of London event in September, “will expose the likely future cost of doing business, paying for emissions, changing process to avoid those charges, and tighter regulation.”

More big investors are choosing to reduce their exposure to climate risks. A recent report from consultancy Arabella Advisors found that 430 institutions, including the Canadian Medical Association, have committed to phasing out their fossil-fuel investments to some degree.

Meanwhile, more than 100 institutional investors representing $8 trillion in assets have signed the one-year-old Montreal Carbon Pledge. Those that took the pledge have committed to “measure, disclose and reduce portfolio carbon footprints.”

Addenda Capital, The Co-operators and the United Church are among the Canadian signatories, but so far there is no commitment from Canada’s largest pension funds.

That includes the Canada Pension Plan Investment Board (CPPIB), which manages $273 billion of Canadians’ retirement savings.

A separate report released Monday by Corporate Knights Capital estimated that the CPPIB has sacrificed $7 billion (U.S.) in value since 2012 by not shifting investment from carbon heavy energy companies and utilities to companies that get at least 20 per cent of revenues from clean technologies or new energy.

Dan Madge, a spokesperson for the CPPIB, said the fund’s investment in Canadian equities closely resembles the broader TSX Composite, which is heavily weighted towards energy. Dropping a major sector from the portfolio “would not be prudent,” he said, adding that it would reduce diversification and prevent the CPPIB from engaging directly with energy companies on the need for better disclosure on climate risks.

“Engaging with companies on this topic and pressing for improvement are necessary to protect long-term value,” Madge said. “Selling our fossil-fuel holdings to investors who might not be as engaged as we are is not the most responsible course of action.”

Besides, he added, total long-term performance of the fund is what matters. On that front, the CPPIB fund has a 10-year nominal rate of return of 8 per cent.

Corporate Knights also analyzed 13 other prominent global funds, including the $40.5 billion (U.S.) Bill & Melinda Gates Foundation Trust Endowment, which gave up $1.9 billion, and the $5.6 billion University of Toronto pension and endowment fund, which sacrificed $419 million.

Had the U of T divested from fossil fuels three years ago, it could have generated a large enough return to pay tuition for its entire student body for four years, said Brett Fleishman, a senior analyst at 350.org.

The University of Toronto Asset Management Corporation declined comment for this story.

Demand for insight on how carbon risks can affect stock holdings led the Toronto Stock Exchange to launched three new indices last month that track a “fossil-free” and two carbon-reduced versions of the S&P/TSX 60.

This article is part of a series produced in partnership by the Toronto Star and Tides Canada to address a range of pressing climate issues in Canada leading up to the United Nations Climate Change Conference in Paris, December 2015. Tides Canada is supporting this partnership to increase public awareness and dialogue around the impacts of climate change on Canada’s economy and communities. The Toronto Star has full editorial control and responsibility to ensure stories are rigorously edited in order to meet its editorial standards.

How weak energy prices hurts pensions

The Canadian Centre for Policy Alternatives looked at how falling oil and coal prices from June to December 2014 affected fossil-fuel equity holdings in 20 Canadian pension funds.

Here are the estimated losses:

Ontario Teachers’ Pension Plan: $1.77 billion

Ontario Municipal Employees Retirement System: $192 million

Healthcare of Ontario Pension Plan: $53 million

Ontario Pension Plan: $154 million

Ontario Public Service Employees Union Pension Trust: $188 million

Source: Canadian Centre for Policy Alternatives

You can read the report from the Canadian Centre for Policy Alternatives here. There’s no doubt that Ontario’s large public pension funds have lost a ton of money in energy and commodity shares over the last couple of years, and they will lose more in the future as I see no end to the deflation supercycle. The same goes for all of Canada’s large public pension funds which also invest a portion of their portfolio in Canada’s resource rich S&P/ TSX.

There’s also been a push to divest away from fossil fuel assets around the world. In June, Norway’s $890 billion government pension fund, the largest sovereign wealth fund in the world, said it will sell off many of its investments related to coal, making it the biggest institution yet to join a growing international movement to abandon at least some fossil fuel stocks.

In September, California passed a bill requiring the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) to divest their holdings in companies that receive at least half their annual revenue from coal mining.

Over in Boston, Jameela Pedicini, the inaugural vice president of sustainable investing at the Harvard Management Company, will depart in December for the New York-based Perella Weinberg Partners. Pedicini, who will leave HMC after just two and a half years, departs after her department suffered criticism from environmental groups over the Management Company’s steadfast refusal to divest the endowment, now valued at $37.6 billion, from the fossil fuel industry.

So what’s wrong with this “social awakening” to push large pensions and endowments to divest away from fossil fuel assets and into socially responsible investments? On one level, nothing, provided they can find suitable investment opportunities elsewhere which will allow them to make their rate-of-return objective in clean energy and other socially responsible investments.

But as I argued three years ago when bcIMC was slammed over unethical investments, once you push the envelope on responsible investing, you quickly divest from many companies in all industries, including big pharma, big tobacco, big banks, and big fast food companies that need lots of cows to make hamburgers (and cow emissions are more damaging to the planet than cars).

There’s something else I want you to think about, pension funds have a fiduciary duty to achieve their return objective without undue risk. That’s investment risk, not undue risk to the environment. Clean energy sounds great, and I’m all for it, but these stocks are also very volatile (mostly follow trends in energy prices), not to mention these companies aren’t as big as fossil fuel companies so it’s impossible for pensions to easily make the switch out of fossil fuel into clean tech.

And another thing, what if all those investors betting big on a global recovery turn out to be right?  You will see a massive rally in coal, steel, oil and oil drilling stocks. I wonder then if the Canadian Centre for Policy Alternatives will publish research on the cost of divesting out of fossil fuels (it’s easier being an armchair quarterback when the prevailing trend is going your way).

 

Photo by  Paul Falardeau via Flickr CC License

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

Karen Seidman of the Montreal Gazette reports, Pension paid to McGill’s former principal rankles employees:

Amid a climate of austerity on the McGill University campus, new revelations about the pension that former Principal Heather Munroe-Blum recently started collecting has rankled many union groups.

Access to Information documents show that Munroe-Blum, who retired from her position as principal in 2013 and is no longer teaching at McGill, is entitled to a supplementary pension of almost $284,000 a year on top of the almost $87,000 she gets from regular pension plans from McGill and the University of Toronto.

The information also suggests that Munroe-Blum may have been earning much more than has been documented, perhaps as high as $740,000 — which would make it the richest package of any university president in Canada, then or now. That’s based on the fact that her supplementary pension entitlement should represent about 50 per cent of her highest average earnings.

However, Olivier Marcil, vice-principal of communications and external relations for McGill, said in an email that her salary was $369,000 plus benefits as previously reported, but that “adjustments were made to her pension calculation during that time which resulted in the ($284,000 pension payment) amount” (click on image below).

Munroe-Blum’s salary and benefits were often a sore point on campus, especially after it was revealed she was collecting a base salary of $369,000 as Quebec universities were being asked to absorb $124 million in cuts. There were also “contract benefits” of $128,000 to $226,000 a year.

The combined pensions, which she just started collecting on July 1, are bringing her almost $371,000 a year — which is as much as she was allegedly earning during her tenure as principal. Her supplementary pension alone — which was negotiated as part of her 2003 contract confirming her appointment as principal and vice-chancellor — has already paid her more than $96,000 since July 1.

“During her tenure here they reduced the benefits of the pension plan for employees but she has this insane, over and above pension plan which no one else gets,” said Sean Cory, president of the Association of McGill University Research Employees. “The amount that she is getting really caught me off guard.”

He says the fact that her regular pensions from U of T and McGill are $86,850 combined shows “just how good this extra pension plan is,” with Munroe-Blum collecting an additional $284,000 a year for the rest of her life.

It also raises some important questions: Why is Munroe-Blum being credited with years of service at both McGill and U of T for the purpose of calculating her supplemental pension from McGill? With 12 1/2 years of service at U of T, prior to joining McGill, this effectively doubles her pension entitlement and enables her to collect for all of that time at the higher principal’s salary rather than having some of it at the lower professor’s or vice-president’s salary she would have earned at U of T.

Marcil said that was negotiated into her original contract and that “I personally don’t know whether or not this is or was common practice among other university presidents.”

Why did McGill agree to such a lucrative pension package for Munroe-Blum? When she left the principal’s post in 2013, Stuart Cobbett, chair of McGill’s board of governors, defended her departure package in an op-ed in the Montreal Gazette, saying the university had great results to show from her leadership.

But Cory said Munroe-Blum’s pension package makes him wonder how many other former principals are collecting equally lucrative pensions, and how McGill — which has been crying about austerity and cutbacks — can sustain such long-term payments.

Molly Swain, president of McGill’s support employees union, said the revelations about Munroe-Blum’s pension package comes as McGill claims to have no money and is constantly instituting belt-tightening measures.

“That makes this tough to swallow,” she said, adding her union is representing students who were remunerated with only room and board for overseeing first-year students in residence and have been fighting to get what they believe is their rightful monetary compensation.

“It’s extremely hypocritical,” she said. “That’s an absolutely massive pension. It’s appalling.”

She said it also points to a culture at McGill, and other universities, of there being no accountability and quietly providing income and benefits that go well beyond the base salary of their top administrators.

However, that is something that seems to be changing. McGill’s current principal, Suzanne Fortier, made public her contract and the details of her compensation ($390,000 and not a lot of other perks), as did Alan Shepard, the president of Concordia University. The Université de Montréal has had a policy in place since 2009 that determines salaries based on the median of rectors and presidents of Canadian universities.

Still, Swain said, Munroe-Blum’s deal is concerning for employees.

“The university is maintaining austerity for a certain group of people — but not for people at the top,” she said.

Earlier this week, I discussed how some people retire in EU style. And let there be no doubt that Dr. Heather Munroe-Blum who was appointed chairperson of the board of directors of the Canada Pension Plan Investment Board in June 2014 is enjoying a retirement package that most Canadians can only dream of (add to this $160,000 a year compensation she gets for being CPPIB’s chair).

The dispute here is whether her McGill pension was padded by including her years of experience at University of Toronto at a time when she was putting the squeeze on McGill employees’ pensions. She obviously signed a contract where she wisely negotiated her pension as part of her overall compensation (this is what all of Canada’s highly paid senior pension fund managers do for their own compensation as well as what Canadian and American corporate CEOs do when negotiating their outrageous pensions).

Of course, it’s no secret that there’s no love lost between McGill employees and Heather Munroe-Blum. My departed friend, Sam Noumoff, used to criticize her when we would get together for the Men’s club at Alep restaurant to enjoy Montreal’s best Syrian & Armenian cuisine. “She’s a ruthless corporate b*tch,” Sam used to say and his sentiment was shared by other professors at the table (most of which are cynical ex Marxists like he was).

I never met Dr. Munroe-Blum so I won’t criticize her on a personal level or question the way she handled McGill’s finances back then. She has an impressive career but she obviously pissed off many employees with her cost cutting decisions (some of which were needed) and her reportedly confrontational style didn’t help either. But to be fair, it’s the nature of the job and I don’t know many university or hospital administrators who are loved during a period where they’re implementing severe budget cutbacks.

One thing this article does raise, however, is the need to introduce a lot more transparency and accountability to the way Canadian universities report their finances and pension deficits. In March 2012, I discussed my thoughts on offering Canadian universities pension relief and stated the following:

Why will universities with these defined-benefit plans be ‘exempted’ from more stringent tests for pension solvency that apply to businesses? I have friends who are professors and others who work at various universities, including McGill, and they’re not to happy with the way their DB plans have been mismanaged (McGill got sucked into the non-bank asset backed commercial paper –ABCP — scandal that rocked the Caisse and other large Canadian pension funds).

The problem at Canadian universities and other universities is that they hide their pension problems from public scrutiny. Why? Because they’re petrified if the public finds out, it will impact their fundraising as well as their constant cries to increase tuition fees.

Now, I happen to think you can make a case for raising tuition fees marginally, especially here in Quebec where students enjoy the lowest tuition fees in Canada and are asking for “free tuition like in Denmark” (without understanding how the Danish system works). But when I see how Canadian universities are mismanaged — not just their pensions but general mismanagement in their operations — makes me think twice about raising tuition fees.

True, universities are not corporations and shouldn’t be run like corporations. But why should we give their defined-benefit plans less stringent tests for solvency? Who is monitoring their performance and why isn’t this information easily accessible to the public and updated on a regular basis? I can say the same thing about Canadian cities and municipalities, the other pension time bomb which is rarely discussed. Most people haven’t got a clue of what the hell is going on at these city plans.

This is why I think we should consolidate all defined-benefit pension plans — private and public — into larger public DB plans which are operating under more scrutiny and are more transparent and accountable for the decisions they take (not perfect but better than most smaller plans).

If it were up to me, I would either roll up all university pensions to be managed by our large well governed provincial plans or have CAAT pension plan manage all Canadian university pensions since that’s what they specialize in and are doing a great job at it (see CAAT’s 2014 Annual Report here).

Of course, in my ideal world, every Canadian would have their pension managed by CPPIB or several CPPIBs by enhancing the CPP. I’ve discussed my thoughts on this when I went over introducing real change to Canada’s pension plan as well as when I went over breaking Ontario’s pension logjam.

Speaking of CPPIB, its latest quarterly results for fiscal 2016 are available here:

The CPP Fund ended its second quarter of fiscal 2016 on September 30, 2015, with net assets of $272.9 billion, compared to $268.6 billion at the end of the previous quarter. The $4.3 billion increase in assets for the quarter consisted of $4.2 billion in net investment income after all CPPIB costs and $0.1 billion in net CPP contributions. The portfolio delivered a gross investment return of 1.62% for the quarter, or 1.55% on a net basis.

For the six month fiscal year-to-date period, the CPP Fund increased by $8.3 billion from $264.6 billion at March 31, 2015. This included $4.0 billion in net investment income after all CPPIB costs and $4.3 billion in net CPP contributions. The portfolio delivered a gross investment return of 1.6% for this period, or 1.5% on a net basis.

“Despite significant declines across all major global equity markets and mixed results in fixed income markets this quarter, the CPP Fund showed a modest gain. Broad diversification of the investment portfolio across geographies and asset classes contributed to the Fund’s resiliency,” said Mark Wiseman, President & Chief Executive Officer, CPP Investment Board (CPPIB). “As a long-term investor, our five- and 10-year returns are the most important measurements of our performance, and these remain strong.”

CPPIB is performing very well given the difficult investment environment. I don’t pay attention to quarterly results and don’t see trouble at Canada’s biggest pensions.

I’m sure Heather Munroe-Blum has a handful being the chairperson of this mega fund but she’s doing a great job and has a very experienced board of directors backing her up as well as a very experienced and competent senior management team delivering outstanding long-term results.

My only beef with CPPIB’s board and senior management team, as well as that of other large Canadian public pensions is that they lack true diversity at all levels of their organization. Here they can learn a thing or two from Prime Minister Trudeau who nominated Canada’s most diverse cabinet ever (click on image below; they are sitting with the Governor General of Canada, David Johnston, who was the Principal of McGill back in my days of attending that university and was liked by most people and still is):

Nevertheless, critics claim Trudeau’s diverse cabinet is not a true Canadian portrait without referring to the fact that he nominated two ministers with disabilities, two aboriginal ministers, and Canada’s first Muslim minister

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

Chris Witkowsky of PE Hub reports, Canada’s PSP Investments opens NY office for private debt:

Another massive Canadian pension is making a move into the U.S. to directly compete with GPs.

The Public Sector Pension Investment Board, with $112 billion under management, formed PSP Investments Holdings USA LLC, a New York-based private debt investment group. The New York office, at 450 Lexington Avenue, is PSP’s first foreign office.

The group is expected to initially focus on private credit and debt, but will eventually include a small team for private investments, PSP said in a statement.

The private debt group is led by David Scudellari, who recently joined PSP’s U.S. affiliate as senior vice president, head of principal debt and credit investments of PSP Investments. Scudellari has held leadership roles at Goldman Sachs and Barclays Capital, where he was global head of finance and risk — Canada for Barclays in New York.

Scudellari is joined by Ziv Ehrenfeld, senior director, principal debt and credit investments. Prior to PSP, Ehrenfeld was a member of the leveraged finance group at Barclays focusing on natural resources.

“The leveraged finance landscape is currently in transition. With traditional capital providers having lost significant market share in the last few years, there is an attractive opportunity for a long-term investor such as PSP Investments to enter this trillion-dollar plus asset class through its U.S. affiliate,” said André Bourbonnais, president and chief executive officer of PSP Investments.

Scott Deveau of Bloomberg also reports, Canada’s Public Sector Pension Names Scudellari for Debt Unit:

The Public Sector Pension Investment Board, one of Canada’s largest pension plans, has appointed David Scudellari to head a new unit focused on debt and credit investments.

Scudellari will lead PSP Investments Holding USA LLC, based in New York and help build up the firm’s presence in more illiquid and alternative debt securities. He has more than 30 years experience in capital markets, including positions at Barclays Capital Inc. and Goldman Sachs Group Inc., according to a statement from PSP.

“The leveraged finance landscape is currently in transition,” said Andre Bourbonnais, PSP chief executive officer in a statement. “With traditional capital providers having lost significant market share in the last few years, there is an attractive opportunity for a long-term investors such as PSP Investments to enter this trillion-dollar-plus asset class.”

PSP, which oversees the retirement savings of federal public servants, including the Canadian Forces and the Royal Canadian Mounted Police, is Canada’s fifth-largest pension plan with C$112 billion ($85 billion) in assets under management.

André Bourbonnais is right, the leveraged finance landscape has drastically changed following the 2008 crisis. Many banks have exited this market but don’t be fooled, the competition for leveraged finance talent between banks, hedge funds, private equity funds and now Canada’s large public pension funds is fierce.

Still, it’s been a bad year for leveraged loans and while U.S. deal activity remains steady, there are many factors impacting the market:

It is always important for individual investors to know what is going on in the market. This year, one notable change in deal activity is the drop in leveraged finance transactions and the significant increase in corporate M&A activity. Deal activity in the U.S. remains steady, but the landscape has changed. Private equity firms and leveraged finance bankers are unable to raise enough capital in the debt markets to fund their acquisitions and larger, cash rich corporations are filling that void. Due to high stock prices and limited organic growth, corporations are engaging in takeovers in an effort to spur greater revenues.

Accordingly, this year has seen lots of M&A and less leveraged loan issuance than previous years. Retail investors, however, can rest assured that these are signs of a health market, relying on liquidity rather than risk debt issuance.

A disappointing year for leveraged loans

The leveraged loan market is likely to have one of its weakest years since 2012. Leveraged loans, which are typically issued to fund corporate acquisitions in the middle market have declined because cash-rich corporations are buying up all the opportunities, noted Bloomberg.

Since private equity firms and leveraged finance bankers cannot compete with their larger peers, only $235.1 billion of debt has been sold to institutional investors in 2015 – a 40 percent drop over the previous year. Additionally, only $37.5 billion of leveraged loans have been issued stemming from leveraged buyouts this year, versus $58.4 billion in 2014. It is important to point out that is not necessarily bad news for retail investors, although it is for leveraged finance bankers. William Conway, chief investment officer at private-equity firm Carlyle Group pointed out how M&A has eclipsed leveraged loan activity.

“With corporations struggling to find growth, they have turned to M&A to meet revenue targets while private equity activity has remained relatively muted,” said Conway, noted the media outlet. “It’s clearly an easier time to sell than it is to buy.”

Corporate M&A leads the charge in deal activity

Bloomberg reported while leveraged loan activity is lower than in previous years, total deal activity in the U.S. is strong. There have been many corporate takeovers in 2015 amounting to an impressive $1.09 trillion. In comparison, $45.6 billion was attributed to leveraged buyouts managed by private equity firms this year.

The reason that large corporations are funding so many deals this year is because organic growth has been slow, but stock prices are high, providing lots of liquidity. Companies have lots of cash reserves and need to bolster revenues. Accordingly, these corporations have leaned heavily on acquisitions and takeovers to maintain their growth. Barclays Managing Director of leveraged finance Ben Burton explained that executive officers have been confident in their buying activity this year and that the increased M&A has caused leveraged loan opportunities to dry up.

“We’ve been seeing management teams and their boards more willing to go out and do transformative M&A,” said Burton, according to the news source. “That’s taken supply away from the leveraged-loan market.”

Private equity players are edged aside

In a recent article, The Wall Street Journal described private equity firms as “wallflowers at a global deal-making party,” referring to their inability to generate strong deal activity this year. To clearly illustrate how much leveraged loans are in decline, in 2006, private equity deals represented 19 percent of all deals in the U.S. market. In the time before the credit crisis of 2008, private equity firms like KKR, Carlyle, and Blackstone completed many multi-billion dollar acquisitions, thanks to liberal funding from banks and bond investors. Post financial crisis, new regulations and stricter lending practices have made it more difficult for private equity players and leveraged finance bankers to raise enough money to fund their desired opportunities.

Ultimately, because of new regulations and high stock prices, leveraged loan issuance is on the decline, but this may be a good thing for individual investors. Cash rich corporations engaging in heavy M&A activity is likely to keep valuations high. The Wall Street Journal noted transactions such as Royal Dutch Shell’s $69.8 billion purchase of BG Group and Charter Communications’ $56.8 billion purchase of Time Warner Cable. For the everyday investor, high valuations and low debt levels mean a safer economic landscape to invest in for the long term. Leveraged loans are not a common investment vehicle for the common investor, but shares in publicly traded corporations are. As such, the current situation may provide some comfort to those who wish to see stability in their broad market portfolios.

If you read the article above, you might be wondering why PSP or any Canadian pension fund would want to enter the U.S. leveraged loan market. But unlike private equity funds and banks, Canadian pensions aren’t hindered by strict regulations and they have huge funds and a much longer investment horizon than banks, hedge funds and private equity funds.

Moreover, if the Fed does decide to raise rates in December — a big “if” — I expect to see a flurry of M&A activity (it’s already happening) but this won’t last forever. At one point, it will be difficult for companies to finance acquisitions through M&A and that’s when leveraged loans will come back in vogue.

As far as PSP, André Bourbonnais is clearly departing from his predecessor’s global strategy and is not avoiding opening up offices around the world. He is also departing from his predecessor’s strategy of keeping tight lip on all of PSP’s deals.

This deal follows CPPIB’s acquisition of GE’s financing arm and it shows you how Canada’s large public pension funds are positioning themselves and how they are setting up foreign subsidiaries to source deals and to properly compensate the talent they need to operate these ventures (guys like Scudellari don’t come cheap but it’s smarter hiring him than doling out huge fees to PE funds!).

This latest deal follows other global deals PSP has engaged in since Bourbonnais took over the helm in July. Along with the Caisse and CPPIB, PSP is eyeing Indian infrastructure assets. The Australian Financial Review reports PSP Investments is biding for BrisCon’s Brisbane tollroad, AirportLinkM7, joining the bidding group headed by Australian infrastructure investor CP2.

What else? ATL Partners, an aerospace and transportation focused private equity firm, is partnering with the PSP Investments to form SKY Leasing:

As part of the transaction, SKY Leasing will acquire certain assets of Sky Holding Company controlled by leasing industry veteran Richard Wiley. Wiley and other key members of SHC management will form the leadership team of SKY Leasing.

“We are very excited to partner with ATL and PSP Investments, two investors with a deep understanding of the commercial aerospace sector,” said Wiley. “We look forward to building a best-in-class lessor with an initial target of $1 billion of Boeing and Airbus aircraft.”

With headquarters in Dublin, Ireland, and ancillary operations in San Francisco, California, SKY Leasing has over $250 million of initial equity capital available to provide sale/lease-back financing solutions globally to commercial airlines seeking to lease young mid-life Boeing and Airbus aircraft. SKY Leasing will also act as servicer to 54 aircraft on behalf of three securitizations.

“We have admired Richard’s prior ventures at SHC, Pegasus and Jackson Square Aviation and are delighted to partner with him and his management team in establishing SKY Leasing,” said Frank Nash, CEO of ATL. “As a sector-focused private equity fund, ATL is mandated to deploy equity capital into the transportation continuum and we see tremendous opportunity in delivering financial solutions to the global commercial fleet.”

“As a long-term investor, PSP Investments views aviation finance as an attractive sector to deploy significant capital in the years ahead,” said Jim Pittman, managing director of Private Equity for PSP Investments. “This investment is consistent with our direct and co-investment strategy to partner with experienced management teams who have the capability to scale investments over time. We look forward to supporting SKY Leasing as it pursues its ambitious growth plans.”

Glad to see Jim Pittman is still around at PSP as he was one of the few good guys I remember from my time there. Derek Murphy, the former head of PSP’s Private Equity group and the man who hired Jim, departed PSP shortly after André Bourbonnais took over and was replaced by Guthrie Stewart.

Another nice guy who is still around is Neil Cunningham, PSP’s Senior Vice President and Global Head of Real Estate Investments. I’ve openly questioned PSP’s ridiculous real estate benchmark when covering PSP’s fiscal 2015 results but that has nothing to do with Neil. It was a golden handshake between Gordon Fyfe and Neil’s predecessor, André Collin who is now president of Lone Star Funds, that sealed that deal (of course, Neil and the rest of the senior managers at PSP still benefit from this ‘legacy’ RE benchmark).

Anyways, PSP just formed a joint venture with Aviva Investors to invest in central London real estate:

Under the equal partnership, Aviva Investors’ in-house client Aviva Life & Pensions U.K. has agreed to sell 50% of its stake in a central London real estate portfolio to PSP Investments. Aviva previously owned 100% of the portfolio. The portfolio consists of 14 assets across London, made up of existing real estate or those with planning consent.

Aviva Investors will manage the assets and development for the joint venture.

The spokeswoman for PSP Investments said financial details of the transaction are confidential. The net asset value of PSP Investments’ real estate portfolio as of March 31, was C$14.4 billion ($11.4 billion,) she said.

“This investment is consistent with PSP Investments’ real estate strategy to invest in prime and dynamic city centers that we expect will outperform in the future, and is complementary to PSP Investments’ existing portfolio in London,” said Neil Cunningham, senior vice president, global head of real estate investments at PSP Investments, in a news release from Aviva Investors. Further details were not available by press time.

Aviva Investors has more than £31 billion ($47.8 billion) of real estate assets under management. PSP Investments manages C$112 billion of pension fund assets for Canadian federal public service workers, Canadian Forces, Reserve Force and the Royal Canadian Mounted Police.

I don’t know enough details about this deal to state my opinion but I have to wonder why Aviva Investors is looking to unload half its stake and why PSP is buying prime real estate in London at the top of the market (trust me, I know how out of whack London’s real estate prices have become).

But Neil isn’t a dumb guy, far from it, and I have to take his word that he expects these assets to outperform in the future and that they are complementary to PSP’s existing portfolio. I hope so because I’m sure PSP paid top dollar (more like pounds) to acquire these assets.

 

Photo by  Horia Varlan via Flickr CC License

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

Ari Altstedter of Bloomberg reports, Hedge Funds + Leverage Are Hot Formula for Canada Pension Plans:

The words “bold” and “pension fund” don’t always go together easily. Then again, neither do bold and Canada.

But Canadian public pension funds are once again employing bold strategies in a world where interest rates have remained persistently low at the very moment that aging baby boomers are increasingly drawing down their retirement funds.

With traditionally safe pension investments such as bonds no longer yielding enough to cover obligations, a number of Canadian plans are ramping up leverage strategies — approaches intended to squeeze more profit from their investments by doubling down with debt. They are mortgaging some of their swankiest skyscrapers and forming in-house hedge funds that invest in complex derivatives like forwards, swaps and options, accepting more risk in an effort to keep their promises to retirees.

“We have to earn that return somehow,” said Jim Keohane, chief executive of the Healthcare of Ontario Pension Plan, which has been among the most aggressive pursuing the new leveraged strategies. “If I don’t do this, what am I going to do instead?”

It’s not the first time the Canadian funds have pushed the envelope internationally. As early as the 1990s some began establishing private equity arms to take active stakes in businesses, successfully competing with Wall Street giants for such assets as department stores, highways and, recently, pieces of GE Capital.

Hero, Goat

Today, at least seven of Canada’s large pensions have “substantial” in-house hedge fund operations. By comparison, none do in the U.S. and only two do in Europe, according to data from the international pension fund consultancy CEM Benchmarking Inc. CEM, based in Toronto, declined to name the funds, but did say the five that have been at it the longest have beaten their benchmarks by an average of 0.9 percent annually over the last five years while the 10 largest U.S. funds have managed no extra return.

“In a world where safe investments provide unacceptably low returns, they have to move farther out the risk spectrum to get the kinds of returns they need,” said Malcolm Hamilton, a retired pension fund actuary who’s now a senior fellow at Toronto’s C.D. Howe Institute. “At the end of the day, you turn out being a hero or a goat, and there’s not much room in between.”

Poaching Talent

U.S. pension funds have generally addressed the same pressures by retaining the services of Wall Street hedge funds, CEM data shows, but high fees can eat away at gains.

Unlike in Canada, where professional boards tend to oversee public funds, in the U.S. the responsibility lies with elected officials who are hesitant to approve the compensation needed to attract Wall Street talent, according to Tsvetan Beloreshki, a New York-based pension fund consultant at FTI Consulting.

Canada’s public pensions, in contrast, have been poaching top talent off Wall Street for some time. The ranks at the Canada Pension Plan Investment Board, which manages the nation’s primary public retirement fund, includes veterans from hedge fund Golden Tree Asset Management and private equity giant Carlyle Group, as well as investment banks such as Morgan Stanley, JPMorgan Chase & Co. and Goldman Sachs Group Inc., according to the CPPIB website.

Derivatives Magnify

Don Raymond was recruited from Goldman to head up CPPIB’s public markets investments in 2001 and later began luring former colleagues from Wall Street as he set up an in-house hedge fund operation. At the time, leverage on CPPIB’s balance sheet — measured as the difference between total assets and net assets — was less than one percent. By 2011 it stood at 10 percent and by the end of the fiscal year, it had grown to 22 percent, according to publicly available data compiled by Bloomberg.

CPPIB returned 18.3 percent its fiscal year ended March 31 and had C$264.6 billion ($199.2 billion) of assets under management.

“I wouldn’t advise people to follow the Canadian path just because it seems easy; it’s actually not” said Raymond, who departed last year for Alignvest Investment Management. “If things do go wrong in derivatives, they tend to happen a lot faster than unlevered portfolios. A derivative will magnify things.”

Skill Sets

Leverage at Healthcare of Ontario Pension Plan, widely known as HOOPP, now exceeds 100 percent of its net assets, leading to a more than doubling of the total assets at its disposal to invest. Ontario Teachers’ Pension Plan, the nation’s third largest, has leverage equal to half its net assets.

HOOPP earned 17.7 percent in 2014 while Ontario Teachers’ returned 11.8 percent. The Standard & Poor’s/TSX Composite Index, Canada’s benchmark equity gauge, returned 10.5 percent in 2014, including dividends.

“Traditional skill sets in pension funds are much different than what we have,” said HOOPP’s Keohane. “A lot of what we do is more like what you would see in a hedge fund.”

Asked about the leverage on its balance sheet, a spokesman for Ontario Teachers’ said derivatives are a better way to invest in certain assets. A spokesman for CPPIB said its leverage is a form of cash management that keeps the fund “nimble” and boosts returns.

Fund Firepower

In the case of HOOPP, Keohane said the fund needs to earn 3.4 percent above inflation to cover its pension obligations, no small feat given 10-year Canadian government bonds yield half that, U.S. ones are at about 2.3 percent and yields on $1.9 trillion of European debt are actually below zero. “So what we’re trying to do is find things that add incremental return with the least amount of risk,” he said.

The fact derivatives, unlike equities, can eventually expire and provide a payout means that risks from leveraging can be contained by investors with the means to ride out any interim storms, Keohane said. “We have an advantage over hedge funds because we have a balance sheet they don’t,” he said. “Nobody’s going to shake us out of a trade.”

Caisse Study

Yet that’s precisely what happened in the financial crisis to Caisse de depot et placement du Quebec, Canada’s second largest pension plan. The Caisse suffered a 25 percent loss in 2008 following a collapse in Canada’s market for bonds backed by short term corporate loans.

Those losses were compounded by leverage that had grown to 56 percent of assets, according to Roland Lescure, the fund’s current chief investment officer, who joined in a management shake-up made after the crisis.

“Suddenly, a book of derivatives that was not supposed to carry any directional risk started carrying some,” he said. The Caisse has since brought its leverage down to about 20 percent of assets, mostly mortgages on its properties.

Proponents of today’s hedge fund strategies say the Caisse’s 2008 failure didn’t occur from using derivatives themselves, but from devoting too much money to a single market, which happened to freeze up.

C.D. Howe’s Hamilton is understanding of the new strategies but, recalling the financial crisis, still uneasy. “I’m sure there are a lot of banks who thought they knew exactly what they were doing, and they had the risks all covered off — until they didn’t.”

In 2009, I covered the Caisse’s $40 billion train wreck and how the media has completely covered up the ABCP scandal. There were poor decisions that took place at the highest level of the organization and it had nothing to do with derivatives but with greed and beating a ridiculous benchmark by taking the dumbest possible risks.

That’s why Michael Sabia was brought in to clean up the place and he has done a very good job, more or less. Roland Lescure is a very sensible and smart CIO who isn’t a cowboy and sticks to delivering solid results without taking undue risk.

The Caisse wasn’t the only one taking stupid risks back then. In a clear case of abuse of derivatives, PSP was using its AAA balance sheet to sell credit default swaps, something independent financial analyst Diane Urquhart discussed on my blog. This was on top of buying ABCP, albeit not to the scale of the Caisse. All this led to PSP’s disastrous fiscal 2009 results (again, senior managers didn’t take my warnings seriously back then and it ended up costing me my job).

As far as Ontario Teachers’ Pension Plan (OTPP) and the Healthcare of Ontario Pension Plan (HOOPP), they’re in another league when it comes to internal alpha generation which is why they’re the two best pension plans in Canada and the world. You can read more on Teachers’ 2014 results here and HOOPP’s 2014 results here.

Both these pension plans are fully funded, manage their assets and liabilities very closely, and they use derivatives extensively to intelligently leverage up their respective portfolios. Jim Keohane, HOOPP’s president, has always told me that their use of derivatives is done in a way that reduces overall risk. And to be sure, their long investment horizon allows them to take derivative bets that hedge funds can only dream of (like the S&P put strategy which helped them generate huge returns in 2012).

As far as Ontario Teachers’, it allocates risk internally and if it can’t, it will allocate risk to the world’s best hedge funds and squeeze them hard on fees (OTPP is much larger than HOOPP which is why it can’t do it all internally). The folks at Teachers’ also use derivatives extensively to “juice” their returns but again, we’re not talking crazy risk here, more like intelligent risk taking behavior where they can capitalize on their large balance sheet and long investment horizon.

Teachers, HOOPP, the Caisse, CPPIB and all of Canada’s large pensions are also doing direct investments in private equity, real estate and infrastructure, all of which are long-term, illiquid asset classes. In the last few years, most of the added value generated by these funds has come from these asset classes where they can scale up more easily.

This is one reason why Canada’s pension fund was able to knock it out of the park in fiscal 2015. CPPIB is attracting talent from Wall Street, and buying it by bringing good things to life, but I take all this nonsense on poaching talent away from the Street with a shaker of salt. The top guys at Canada’s large pensions get paid extremely well but let’s not kid each other, even their comp doesn’t match that of a top trader at Goldman or an elite hedge fund or what a managing partner of a big private equity fund receives in compensation.

[In a private meeting, Mark Wiseman, president of CPPIB, once told me: “If I could afford to hire David Bonderman I would but I can’t, so unlike infrastructure where we invest directly, in private equity, we will always invest and co-invest with top funds.” But the GE deal proves that CPPIB can also go out and buy talent if it wants to invest in certain segments of private equity directly.]

Now, you might read this and think why can’t U.S. public pension funds do the same thing as their Canadian counterparts? The answer: lack of proper pension governance. U.S. public pensions are plagued by too much political interference and that’s why they will never pay their pension fund managers properly to bring assets internally. It’s not that they don’t have smart people, they do, it’s that the entire investment process has been hijacked by consultants which pretty much shove everyone in the same high fee brand name funds.

I had a very long day, was at a conference all morning meeting with real estate, private equity and VC funds in “speed dating” session that was fun but it drained me (thank god I never tried speed dating for real!).

 

Photo credit: “Canada blank map” by Lokal_Profil image cut to remove USA by Paul Robinson – Vector map BlankMap-USA-states-Canada-provinces.svg.Modified by Lokal_Profil. Licensed under CC BY-SA 2.5 via Wikimedia Commons

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

Jake Burman of the Express reports, Now UK taxpayers forced to contribute billions towards Brussels bureaucrats’ pensions:

The cost of pensions for retired EU civil servants and MEPs has seen the EU’s estimated pension responsibilities soar by more than £8.6billion last year.

UK taxpayers will have to pay a staggering £5billion over the coming decades because of the swelling pensions bill – which also includes an extortionate £4.5billion in private sickness insurance.

European auditors have previously identified the pensions of retired Brussels bureaucrats as a major influence in increasing contributions from national governments towards the EU.

Pawel Swidlicki, from the think tank Open Europe, slammed Brussels for failing to control the rocketing EU pensions bill – despite enforcing brutal cuts on pensioners in EU countries like Greece.

He said: “The spiralling bill for EU officials’ pensions is the legacy of years of inefficient management and overly generous terms and conditions.

“The UK and many other countries have introduced tough reforms to make public sector pensions sustainable. It is high time the EU follows suit.”

David Cameron is aiming to reduce the EU’s administrative bill as part of his renegotiation of the UK’s relationship with Brussels.

However pensions pose a major problem for the Prime Minister.

Last year, the UK hopelessly failed to halt a cut to the contribution paid by Brussels bureaucrats towards their pensions – which reduced from 11.6 per cent to 10.6 per cent.

It came despite the fact the cost of servicing EU pensions will increase by a staggering 5.2 per cent next year.

The number of retired EU staff claiming a pension worth 70 per cent of their final basic salary is also expected to increase by 4 per cent in 2016 – which will take the annual bill to £1.1billion.

A spokeswoman for the European Commission said the dramatic increase was caused by a “significant decrease in the interest rate”.

She said: “This is an estimate of the value of the total liability at a given point in time.”

“It probably will never be paid as it stands.”

Increasing numbers of retired MEPs are also paid under the EU pensions bill – despite of not contributing towards their own pension.

The pension is currently worth £13,760 for each five-year term served as MEP, while the schemes liabilities have grown to more than £230 million over the last five years.

Forget the chocolates, the beer and the moules frites. The most rewarding way to pass the time in Brussels is to sit behind a desk at the commission, the council, the parliament or indeed any of the EU’s principal institutions, accruing years in their extraordinarily generous and expensive pension schemes. These EU bureaucrats sure know how to retire in style.

Unfortunately, the math simply doesn’t add up and deflation will decimate these pensions. Let me share with you a true story. A friend of mine once ran into an older gentleman on the beach outside of Patras, Greece. My friend struck up a conversation with him and asked him how old he was. Much to the surprise of my buddy who didn’t give him more than 70 years of age, the man was 95 years old!

My friend was in awe in how good shape he was so he asked him his secret. The man looked at him and said: “After twenty years of working at the Greek civil service, I retired at the age of 40 and never worked another day in my life.”

So basically this guy worked 20 years and then went on to collect a very decent pension for 55 years. This type of nonsense is why Greece is in the predicament it’s in today. Far from being the exception to the rule, this was commonplace in Greece.

When I stated that longevity risk won’t doom pensions, I certainly wasn’t referring to such egregious abuses. And if you think this is just a Greek or European problem, think again.

Romy Varghese of Bloomberg reports, Lifeguards Get Pensions? At Age 45? They Do in Atlantic City (h/t, Suzanne Bishopric):

Joseph D. Rush, Jr. joined the beach patrol in Atlantic City when qualifying tests were conducted in stormy weather at sea to judge an applicant’s mettle, local Republican leaders signed off on each hire and lifeguards attended movies free by flashing their badge. He retired in 2000 with an annual lifeguard’s pension of $30,000.

Lifeguard pension?

That’s right, lifeguard pension. It’s one of those relics from the lavish and loud Prohibition-era Atlantic City depicted in television and film. Despite just a four-month beach season and a battered casino industry, lifeguards who work 20 years, the last 10 of them consecutively, still qualify at age 45 for pensions equal to half their salaries. When they die, the payments continue to their dependents.

About 100 ex-lifeguards and survivors collected anywhere from $850 to $61,000 from the city’s general fund last year, according to public records. In all, it comes to $1 million this year. That’s a significant chunk of cash for a municipal government with annual revenue of about $262 million and, more importantly, it’s emblematic of the city’s broader struggle to downsize spending and contain a budget deficit that has soared as the local economy collapsed.

Kevin Lavin, the emergency manager appointed by New Jersey Governor Chris Christie to stabilize the finances of the city of 39,000, has cited lifeguard pensions as a possible item for “shared sacrifice” in a community already forced to fire workers and raise taxes. He intends to reveal more about his plans in a report that could come as early as this week.

Retired lifeguards don’t intend to sit idly by and watch their pensions carried away by the political and economic tide.

“We worked under the precept that we were going to get a pension, and that’s a certain amount of money,” said the 84-year-old Rush. “I’m not responsible for the mismanagement of the politicians, and I’m not responsible for the casinos leaving.”

As formerly-bankrupt Detroit was home to auto making, Atlantic City for decades was a one-industry gaming haven, the Las Vegas of the East Coast. Along the marina and beaches, patrolled by lifeguards, casinos shook money loose from their guests, generating a bounty for the city to subsidize the pensions for the part-timers and bankroll a municipal workforce well above the national average.

Budget Deficit

Today, the junk-rated city, where more than a third of its residents live in poverty, is struggling to avoid bankruptcy. Four ocean-side casinos — one in three — shuttered last year. Its tax base has eroded by 64 percent over the past five years. Investors in May demanded a lofty 7.75 percent yield on bonds maturing in 2040 even though the state could divert aid to make the payments if needed. The city closed a $101 million deficit this year partly by plugging in casino revenue it hasn’t received yet.

“Cities on a downward spiral have these legacy costs that are very difficult to eliminate,” said Howard Cure, director of municipal research in New York at Evercore Wealth Management, which oversees $5.9 billion in investments. “There are only so many people you can fire.”

Atlantic City, developed as a resort community in 1854, drew revelers long before its first casino opened in 1978. People eager to escape the stifling summer heat of nearby cities such as Philadelphia thronged its beaches, and drank and gambled illegally in back rooms during the Prohibition era with the complicity of city officials.

Keeping bathers safe was an important enough consideration that nearly from its start the resort city hired “constables of the surf” to watch over them, according to Heather Perez, archivist at the Atlantic City Free Public Library. In 1892, they were organized into the beach patrol.

Golden Era

The pension plan is the product of a 1928 state law sponsored by an Atlantic City Republican legislator named Emerson Richards, who lived in a palatial apartment near the lifeguard headquarters and threw parties, such as an annual Easter eggnog celebration, attended by political wheelers and dealers.

The statute creating the lifeguard pensions hasn’t been changed since 1936, according to state library records. Four percent of pay is deducted to help cover the benefit, which nonetheless needs to be subsidized by city taxpayers.

While many on patrol moved on after stints as high school and college students, others hung on to their positions year after year, particularly teachers who had the summers free, said Democratic state senator Jim Whelan, a former city mayor.

“What we call ‘teach and beach,’” said Whelan, who was also a lifeguard and teacher but fell short of qualifying for the lifeguard pension. “Not a bad life.”

Half Century

Rush was one of the longer lifers, working the beach for 52 years before, during and after a teaching career in Wilmington, Delaware. After retiring from that job in 1985, he extended the lifeguard season by working the winter months repairing boats and re-splicing rescue ropes.

“It’s a rough ocean,” Rush, who estimates he participated in 1,000 rescues, said. “You go save somebody, it’s a hard job. Just ask someone who was saved to see how important the job is.”

As part of his review, Lavin, the emergency manager installed in January, is looking at whether the benefit is in the community’s best interest, said Bill Nowling, his spokesman. “The city has limited resources and needs to make tough decisions about how it funds programs going forward,” he said.

The system wouldn’t be a burden if the city had managed it properly, said Michael Garry, president of the beach patrol union. He said he’s talking to lawmakers and Lavin on how to cut costs for the city.

“Nobody ever sits there and says, ’why do we need the police. Why do we need fire,’” he said. “We’re a little accustomed to having to justify everything about us.”

While ‘teach and beach’ is a great lifestyle, it was only a matter of time before the system crumbled precisely because it was poorly managed as there was no accountability, transparency and shared risk in these lifeguard pensions.

There are a lot of abuses in U.S. public pensions that go unreported until one day municipalities go belly-up and the bond vigilantes swoon in to get their cut of the public pension pie. Jack Dean over at Pension Tsunami has done a great job documenting many cases of public pension abuses going on all over the United States.

Of course, I’m an ardent defender of public and private defined-benefit plans and think that America’s pension justice is rewarding the fat cats on Wall Street and Corporate America while condemning millions of poor and working poor to pension poverty.

Are there abuses in the system? You bet there are but the solution isn’t to cut DB plans and replace them with DC plans, it’s to introduce real reforms in the governance of pensions as well as implement a shared risk pension model that will ensure the sustainability of these plans going forward.

Let me once again recommend a book written by Jim Leech and Jacquie McNish, The Third Rail. I covered it here and while I don’t agree with everything in the book, especially in regards to Rhode Island’s former Treasurer and now Governor Gina Raimondo who has been heavily criticized for mishandling pensions, I agree with the thrust of the book and think it’s required reading for anyone delving into pension policy.

A lot of my thinking on introducing real change to Canada’s pension plan was influenced by this book and my experience working at large pension funds as well as talking to many pension experts through my blog. Unlike some, I consider pensions to be an integral part of public policy which is why I’m concerned when I see Congress introduce pension fixes that could backfire.

But in order to ensure the viability of public pensions, we have to first ensure their governance is right and that the risk of these pensions is equally shared among all the key stakeholders. We simply can’t afford pensions at all cost and we have to start rigorously analyzing all public pensions and make sure they’re on the right track.

Let me end by stating that pension abuses don’t only happen in Brussels and Atlantic City, they also happen in Ottawa. Sherry Noik of Yahoo News reports, Ex-MPs could cost Canadians $220M in pensions, severances:

Giving MPs the pink slip is going to cost Canadians an estimated $220 million, according to figures released this week.

There were 180 MPs who either didn’t run or were defeated in Monday’s election and are now set to collect very generous pensions and severances, the Canadian Taxpayers Federation (CTF) said in its report.

About $5.3 million per year will go out in pension payments to MPs who failed to get re-elected or retired, collectively totalling $209 million by the time they all reach 90 years of age, the report’s author Aaron Wudrick found.

Twenty-one of the former MPs are expected to collect more than $3 million each in lifetime pension earnings thanks, in part, to a plan that had taxpayers contribute $17 for every $1 an MP put in.

At the top of the list is Peter MacKay, who stepped down earlier this year after 18 years and four months in the House of Commons, where he held high-profile posts including Foreign Affairs, National Defence, Justice and Attorney General.

The 50-year-old could collect up to $5.9 million on his total contributions of $254,449.

MP pensions accrue at between 3 and 5 per cent per year — more if they serve as cabinet ministers, party leaders or committee chairs.

The CTF’s lifetime estimates are based on pension payments up to age 90, using a “conservative” annual indexation of 2 per cent.

So Liberal Gerry Byrne, who served as MP for 19 years and six months, contributed $211,504 to his pension. By age 90, he will have collected $5.2 million.

Because they are under the pension kick-in age of 55, MacKay and Byrne also stand to collect severance cheques: $123,750 and $86,650, respectively, or half their annual salary.

In fact, 27 MPs will receive an estimated total of just over $11 million in severance payments even though they chose to leave the job, CTF calculations show.

And perhaps those who were sent packing shouldn’t be compensated with severance either, Wudrick says.

“It isn’t fired without cause, it’s fired with cause — people don’t want you anymore,” he says. “You’re elected — it’s like voters are handing you a four-year fixed-term contract.”

Regardless, he says, the fact they receive a half-year salary seems overly generous, especially when many of the departing MPs only served one term.

But Canadians won’t have to be so generous with the current crop of MPs thanks to pension reforms passed by Parliament in 2012.

MPs’ contributions have been gradually increasing so that by Jan. 1, 2017, they will reach a more equitable ratio, much closer to the type of scheme typical in the private sector: at that point, taxpayers will end up paying about $1.60 for every $1 an elected official contributes. The full-pension age has also been raised to 65 from 55.

For its report, the CTF used information from the Members of Parliament Retiring Allowances Act and from the MPs’ official biographies.

Unlike the CFT, I think departing MPs are entitled to (at least) half a year severance even if they only served one term as the nature of the job is such that these individuals take a big risk going into politics. But when it comes to pensions, MPs had their snouts in the trough, and it was high time to introduce a more equitable arrangement to fund their generous pensions.

As you can see, there are some people who are retiring in EU style but the great majority are struggling and face the very grim prospect of pension poverty. Now more than ever, policymakers around the world need to start implementing the right pension policies to bolster their retirement system.

 

Photo by  @Doug88888 via Flickr CC License

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

John W. Schoen of CNBC reports, Pension ‘fix’ by Congress could backfire:

The latest effort by Congress to save your pension may be putting it further at risk.

Tucked away in last week’s bipartisan budget deal was a provision to sharply raise the premiums on a government-run fund to backstop private pension funds that go bust. With the fund falling deeper in the red, the higher premiums charged to companies offering traditional defined benefit pensions are intended to help put the Pension Benefit Guaranty Corp. back on a solid financial footing.

But critics say the higher premiums — set to rise from $57 per covered worker this year to $78 in 2019 — could prompt even more companies to freeze or close out their traditional defined benefit pensions that pay retirees a guaranteed monthly check for life.

“The premium increase is just another unnecessary burden on employers who sponsor defined benefit plans, giving them more reasons to consider exit strategies,” said Annette Guarisco Fildes, president of the ERISA Industry Committee, which advocates for large companies that offer pensions.

Long before premiums began rising, companies that offer defined benefit pensions plans had been moving to freeze them (fixing participants’ retirement benefits no matter how much longer they work) or closing them to new workers.

A survey released earlier this year by benefits consultant Aon Hewitt of nearly 250 employers representing 6 million employees found that, of the roughly three-quarters who still offer a defined benefit plan, a third were closing them and another third had frozen them.

Of the companies with plans that remained open, 14 percent of companies said they were “very likely” to close them this year, 9 percent said they were “very likely” to freeze them and 5 percent said there were very likely to terminate them. (Companies terminating plans typically offer participant a lump sum payout to replace the monthly defined benefit income.)

The trend continues a decade-long decline in defined benefit plans in favor of defined contribution plans like 401(k) retirement plans. That historic shift has been cited by some retirement researchers as a major reason for the deficit in retirement savings estimated by the Employee Benefits Research Institute at more than $4 trillion for U.S. households in which the breadwinner is between ages 25 and 64.

Companies that still offer their workers defined pension benefits are facing their own funding shortfall, with too little money set aside in pension assets to cover the cost of paying current and future retiree benefits.

Both public and private pension funds were hit hard by the 2008 financial crisis, which wiped out trillions of dollars in investments that were used to pay retiree benefits. Since then, low interest rates have cut returns and increased the amount of money needed to generate enough income to write monthly checks to retirees.

Underfunded pensions, of course, represent the biggest potential liability for the Pension Benefit Guaranty Corp., which steps in when a pension fund can no longer cover what it owes its participants. Many of the biggest shortfalls have hit older companies with declining profits and large pools of older workers and retirees. Of the 10 biggest pension takeovers by the agency in the last four decades, five were plans offered by airlines and four were pension plans for steel companies.

Since 2000, the cost of backstopping failed pension plans has overtaken the money set aside to cover that cost, leaving the corporation with a deficit of more than $60 billion. Without the higher premiums, agency officials say, the fund will run eventually out of money.

Estimating when that might happen is not easy, especially given the move by pension plan sponsors to reduce their liabilities by closing or freezing plans. A lot also depends on how quickly companies move to shore up pensions that are underfunded.

Since the Great Recession ended, and the economy and stock market have recovered, many private plans have gained ground and raised funding levels. But they still face a multi-billion-dollar gap.

The defined benefit plans offered by 100 large companies tracked by benefits consultant Milliman face a $366 billion pension funding shortfall, based on the latest data available. On average, they’ve set aside less than 82 cents for every dollar in obligations to current and future retirees.

The recently enacted budget also includes a higher tax penalty for underfunded pensions, starting in 2017.

Those single employer sponsors, who manage pension assets for workers of only one company, are in much better shape than so-called multi-employer plans, which cover workers from more than company.

About a quarter of the roughly 40 million workers who participate in a traditional defined benefit plan are covered by these multi-employer plans, according to the Bureau of Labor Statistics.

Those plans, which typically cover smaller companies and unions, face an even tougher set of financial challenges than larger plans that can spread risk over a bigger pool of workers. Declining union enrollments, for example, mean there are fewer active workers to cover the cost of paying retirees, many of whom are living longer than was expected when these plans were established.

Multi-employer plans also face an added burden of their shared pension liabilities. When one company in the plan fails to keep up with contributions, for example, the burden on the other members increases. In the last four years, the Department of Labor has notified workers in more than 675 of these plans that their plans are in “critical or endangered status.”

I recently covered Teamsters’ pension fund, stating multi-employer plans are withering away and it’s all part of a much bigger problem. The article above is excellent and provides a great overview of what’s wrong with Congress’s latest pension fix and why so many American defined-benefit plans are closing or on the verge of closing.

First, as I discussed in the quiet Screwing of America, the latest effort by Congress to “fix” pensions will backfire spectacularly and pretty much ensure more pension poverty in the world’s most powerful nation. When it comes to pensions, there is no justice in America.

Second, companies are increasingly shifting retirement risk onto employees by closing DB plans and shifting new or existing employees to DC plans, or looking to offload pension obligations to some insurance company which will gladly de-risk a DB plan for a nice fee and then offer annuities to employees.

While offloading pension risk makes sense, I agree with those who argue that de-risking pension sponsors may end up with a bad case of buyer’s remorse:

[…] the knee-jerk move by many plan sponsors to offload their pension risks may be a little hasty. While there may be a natural inclination to want to rid themselves of their pension obligations as soon as financially possible, now may not necessarily be the best time to do it.

Mark Firman, a pension lawyer with McCarthy Tetrault, notes that by buying up annuities, some firms may be trading in one type of risk for two others — what he refers to as reputation risk and regret risk. 

The idea, says Mr. Firman, is that companies — particularly those in booming sectors like energy — who purchase annuities as a first step toward winding down their defined-benefit pensions, may find they are harming their image as progressive employers among current and prospective talent, labour bargaining units and socially conscious institutional investors. That’s the reputation risk. For those who prefer cold, hard numbers to less definitive, warm and fuzzy aspects of business management, the regret risk will likely have deeper resonance.

Purchasing an annuity today when interest rates are low means getting an insurance company to buy a greater liability and to do so for a higher fee. That higher fee goes toward protecting the insurance company not only from the longevity risk it’s buying but also the likely risk of future interest rate hikes.

“If and when interest rates rise down the road, not only will the liabilities become scaled back but if you did want to de-risk at that point, the annuities will be cheaper,” says Mr. Firman. “Employers who are de-risking today may find out that they may miss out on the opportunity for substantial pension surpluses, which is a situation that we were more used to seeing in the 1990s than we’re seeing today.”

However, unlike the 1990s, pension legislation (in Canada) now allows plan sponsors greater access to those surpluses, which could be used for myriad business-development initiatives and investments.

The good news is there may be a happy medium for plan sponsors who are looking to de-risk in the short term but not necessarily with the intent to wind down their plans entirely or imminently.

According to the Towers Watson data, of the $2.2-billion in annuities purchased in 2013, $850-million was made up of what the consulting firm refers to as “buy-in” transactions. While very similar to the more traditional “buy out” annuities, buy-ins vary on a number of important levels, not least of which is a reversal clause that allows plan sponsors to countermand the transaction down the road — for a fee, of course.

Towers Watson recently closed a buy-in deal worth approximately $500-million — perhaps the largest single annuity transaction in Canadian history — but the plan sponsor preferred to remain anonymous. A similar, $150-million dollar deal was finalized between Sun Life Financial Inc. and the Canadian Wheat Board last year.

David Burke, Canadian retirement leader for Towers Watson, says his practice has been trying to steer pension sponsors away from de-risking and toward what he refers to as “right-risking” — a more sophisticated strategy that takes into account each individual sponsor’s solvency and liability scenarios, their future intentions with respect to the lifespan of the plan and prospective market conditions – to better gauge if, when and how they should limit pension-related risks.

“I’m going to be very curious to see what plan sponsors do in the next few years assuming the funding status is 100%,” says Mr. Burke. “My guess is some are going to get out … and some might say I’m going to … take my risk in a different way but I’m not going to de-risk.”

His comments are echoed by Mr. Forestell, who believes basic annuity buy-outs will quickly evolve into more complex transactions. “What I expect to see in the next year or year and a half is more creative deals in how to do the annuities,” he says.

In the interim, the movement to de-risk is likely to intensify and understandably so given the nail biting that has taken place in recent years. The pity is there will likely be more than a few sponsors stricken with buyer’s remorse a decade from now. Then again, by that point the idea of a defined-benefit pension may very well be an abstract and quasi-historical concept in the private sector.

Of course, insurance companies will tell you now is the right time to de-risk your DB plan and companies struggling with their pension costs are doing the rational thing by offloading future pension obligations onto them.

The problem here isn’t with companies, which are acting very rationally, it’s with the national retirement policy. In my opinion, pensions should be mandatory and managed by well governed public pension funds and backed by the full faith and credit of the federal government. We should also introduce the shared-risk model to make sure these public pensions remain solvent no matter what economic environment awaits them in the future.

This is why I’ve long argued for enhancing the Canada Pension Plan to introduce real change to Canada’s retirement system and argued the United States needs to enhance Social Security for millions of Americans that are falling through the cracks. Of course, to do this properly, the U.S. needs to adopt and improve on Canada’s pension governance and get independent, qualified investment boards to supervise its sprawling public pensions.

Remember, my view is that there is no end to the deflation supercycle and that deflation will decimate all pensions, especially corporate plans that are not chasing a rate-of-return fantasy and are using market rates (not rosy investment assumptions) to discount their future liabilities.

This is why now is the time to introduce real change to the retirement policies of advanced nations and treat pensions like we treat health care and education. In my opinion, a vibrant democracy has three pillars: solid public health care, education and pensions. All three contribute to the economy in important ways but faced critics only focus on the costs, not the benefits of defined-benefit plans.

It’s important to educate people on the the huge advantages of well-governed defined-benefit (DB) plans. These include pooling investment risk, longevity risk, and significantly lowering costs by bringing public and private investments and absolute return strategies internally to be managed by well compensated pension fund managers who are also able to invest with the very best external managers as they see fit, making sure alignment of interests are there. DB plans also offer huge benefits to the overall economy, ones that will bolster the economy in tough times and reduce long-term debt.

In short, there shouldn’t be four, five or more views on DB vs DC plans. The sooner policymakers accept the brutal truth on DC plans, the better off hard working people and the better off advanced economies struggling with global deflation will be.

I end this comment by referring you to a recent comment my friend Brian Romanchuk published on his blog, Pensions And Public Policy: The Golden Era. I will let you read his comment but he concludes by stating this:

The success of the early post-war public and private pensions were the result of them being aligned with the political environment of the time. There is little political consensus on many important contemporary issues, and so pensions represent just another area of policy incoherence. This incoherence means that it is unclear what reforms would be seen as successful. I hope to discuss such reforms in later articles.

I agree with Brian, there’s way too much policy incoherence on pensions and other important economic topics. In my view, any paradigm shift in macroeconomics has to incorporate a coherent view which convincingly argues for bolstering well-governed public defined-benefit pensions recognizing the long-term benefits this will have on growth and reducing debt.

Former media executive Mel Karmazin said Wednesday he’s no longer invested in the stock market, and that he’s basically in cash. Karmazin also discussed the buyback bubble which is  the real bubble the Fed is fueling.

In fact, I couldn’t resist to comment on Paul Krugman’s last piece, The Conspiracy Consensus, stating the following:

The Fed doesn’t care about about Republicans or Democrats, only about big banks and their elite hedge fund and private equity clients. Interestingly, while the Fed needed to lower rates and engage in QE to prevent another Great Depression, ZIRP and QE ended up exacerbating inequality via several channels. First, companies were incentivized to borrow big and repurchase shares to pad the bloated compensation of their top brass. Second, U.S. public pensions were forced to take on more risk investing in hedge funds and private equity funds to make their 8% pension rate-of-return fantasy. Lastly, historical low rates punish savers and reward financial speculators as people who need to rely on a fixed income can’t invest in fixed income assets that yield enough.

This is why I’ve long argued that U.S. Social Security needs to move the way the Canada Pension Plan has moved which has assets managed by the Canada Pension Plan Investment Board, a national pension fund which directly invests in public and private markets and is supervised by a qualified, independent investment board. But first you need to get the governance right and unfortunately, the U.S. will never get the governance right because there are too many powerful interests milking public pension funds dry. All this to say, there is a conspiracy which is going on at the Fed but it has nothing to do with what the Republicans or Democrats are claiming.

Also, at one point on Wednesday morning on CNBC, Karmazin discussed how he agonized cutting defined-benefit plans for employees under 55 years old, knowing full well that it penalized employees but he needed to do it to save one of the companies he was managing.

The truth is if America went Dutch on pensions, CEOs wouldn’t have to agonize over such decisions and employees can have peace of mind that even if their company went under, they’ll be able to retire in dignity and security. In fact, going Dutch/ Canadian on pensions is the only pension fix that won’t backfire and pay off in the very long-run.

 

Photo by Sarath Kuchi via Flickr CC License

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

Julia Lurie of Mother Jones reports, 100 CEOs Have More in Retirement Savings Than 41 Percent of Americans Combined (h/t, Suzanne Bishopric):

You’ve heard about income inequality—about how, for example, the top 10 percent of Americans control more than half of all income.

But we’ve heard less about inequality when it comes to retirement savings. According to a report released this week by the Center for Effective Government and the Institute for Policy Studies, just 100 CEOs have retirement accounts that total $4.6 billion—that’s more than the retirement assets of 41 percent of Americans, or 116 million people. The authors used SEC filings to examine the 100 largest retirement accounts among Fortune 500 CEOs, and found that the average CEO has saved up $49.3 million for retirement. By contrast, the median balance in 401(k) accounts at the end of 2013 was $18,433.

Even more than the overall disparity, what caught my eye was the race and gender inequality, both at a CEO level and in the general population. The CEOs with the 10 largest retirement funds were all white men, and their retirement assets dwarfed those of the top 10 CEOs who were women or people of color. (Two women are counted in both of the latter groups: Indra Nooyi of Pepsi, and Ursula Burns of Xerox. Click on image)

And the majority of people of color and female heads of household have no retirement assets. Without a pension, IRA, or 401(k) account, these individuals will be completely dependent on Social Security when they do retire—and the average Social Security benefit is $1,223 per month (click on image).

So, what’s going on here? Nari Rhee, a researcher who studies retirement disparities at the University of California-Berkeley Labor Center, says a number of factors make the retirement gap so big. First, of course, is the income gap: Full-time, working women make 78 percent of what men do; the median wealth of white households is 10 and 13 times that of Latino and black households, respectively. And with less money, there’s less to stow away for the future.

But in addition, people of color are more likely to invest the money that they do save on housing or a business than in stocks, bonds, or mutual funds. The fallout: People of color were hit harder by the collapse of the housing market in 2008.

And finally, says Rhee, people of color are less likely to work in jobs that offer retirement benefits, particularly since so many jobs are concentrated within low-wage or part-time work in the private sector (think food service or manufacturing, construction, manufacturing, or janitorial staff).

All of this together helps create financial disparity during retirement: one in five retired Latino Americans and about one in six retired blacks live under the poverty line, compared with about 1 in 15 whites.

The report calls for a cap on deferred compensation and an expansion of Social Security benefits and public pensions. Without changes, says Anderson, “We’re really looking at a retirement crisis where you’re going to have millions of seniors with unmet basic needs and, on the other hand, a privileged few corporate executives with platinum pensions.”

I touched upon the gross inequity in retirement income in my weekend comment on the quiet screwing of America but this article breaks it down and demonstrates the stark contrast among racial and gender lines.

Not surprisingly, America’s retirement crisis is disproportionately hitting women and people of color but it’s also hitting many hard working white Americans who are unable to save for retirement and even if they do manage to save, they’re living a 401(k) nightmare, all  part of a de facto retirement policy that has failed millions of Americans.

But have no fear, Blackstone is here, and if Tony James gets any traction on his solution to America’s retirement crisis, pretty soon every American will be saving and investing like U.S. public pensions, paying inordinate fees to private equity and hedge funds that are underperforming the market.

Don’t worry folks, this is all part of Wall Street’s license to steal. As long as the “big boys” and the “big banks” that service them make off like bandits, it doesn’t matter if millions of Americans are falling through the cracks, condemned to pension poverty. This is how trickle down economics works: “‘If you feed enough oats to the horse, some will pass through to feed the sparrow.”

And what are U.S. politicians doing to address America’s looming retirement crisis? They’re enabling it, doing everything wrong by weakening Social Security instead of bolstering it and hiking pension premiums for companies making it easier for them to drop defined-benefit plans. No U.S politician is willing to accept the brutal truth on DC plans.

Worse still, you have politicians like Chris Christie who publicly decry government stealing from retirees at GOP debates as his state government funnels hundreds of millions in financial fees to Wall Street.

It’s enough to make you sick. I used to think America’s retirement crisis is a slow motion train wreck. Now I realize, just like the heroin epidemic, it’s more like a speeding train heading off a cliff and for millions, the American dream is turning out to be a living nightmare.

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

Suzanne Woolley of Bloomberg reports, You’re About to Get Too Expensive for Your Pension Plan:

The federal budget deal could speed the long, lingering death of old-fashioned defined-benefit pension plans, in which employers reward years of service by providing a guaranteed stream of income in retirement.

The deal could affect any pre-retiree in a former employer’s pension plan by increasing the per-head premiums that plan sponsors must pay to the Pension Benefit Guaranty Corp. If it goes through as written, every person in a plan will get more expensive at the stroke of a pen.

Employers are already deeply concerned about the extent and uncertainty of future pension liabilities and are trying to shed them. The proposed increase in the budget legislation would push even more pension plans to manage costs any way they can, including reducing participant head count, said Alan Glickstein, a senior retirement consultant with Towers Watson.

The budget deal calls for a 22 percent hike, spread out over three years, in flat-rate, single-employer premiums paid to the PBGC, which acts as a backstop to a company’s pension liability should the company become insolvent. Those premiums will already have risen from $31 in 2007 to $64 in 2016; by 2019 they will reach $78.

An increasingly common way companies get rid of those liabilities is by offering participants a chance to take their pensions all at once, as lump sums based on the present value of their future benefits. After strong years for such offers in 2013 and 2014, the activity rose dramatically in 2015, said Matt McDaniel, who leads Mercer’s U.S. defined-benefit risk practice.

More lump-sum deals aren’t good news for employees, about 40 percent to 60 percent of whom take the deals. Most who take lump sums of less than $50,000 cash those retirement funds out rather than roll them into an IRA, paying income tax and a 10 percent penalty if they aren’t at least 59½. While it depends on individual circumstances, it usually makes more financial sense to leave the money in the plan and have it trickle out during retirement.

Perversely, the premium hikes could wind up hurting, not helping, the Pension Benefit Guaranty Corp., because they may not fully offset shrinking head count in pension plans. Benefit consultants are frustrated. “This has nothing to do with pension policy, but is simply a device to raise revenue,” said Towers Watson’s Glickstein. Higher premiums “would be a factor that causes a move away from these plans, and the whole point of the PBGC is to strengthen the employer pension system, so it’s kind of ironic.”

A statement by the Erisa Industry Committee, an association that advocates for the employee benefit and compensation interests of large employers, said it was “outraged.” Its Oct. 27 statement quoted the committee’s president as saying that “even the PBGC’s own analysis does not call for an increase in premiums on single-employer defined benefit plans. PBGC premium increases like the one announced today do nothing to encourage single-employers to continue defined benefit plans or improve benefits for retirees; in fact, the increases only work to further weaken the private retirement system.”

In response to the criticism, an Obama administration official spoke with Bloomberg BNA‘s Pension & Benefits Daily, telling David Brandolph that with the underfunding in the PBGC’s single-employer program, “the proposed premium increases are necessary to ensure that PBGC will be able to pay retiree benefits when pension plans fail. Even with these changes, premiums would likely remain a relatively small percentage of a company’s annual pension contribution and a tiny fraction of total compensation costs.” The official noted that the increases take effect over three years to allow companies to plan for the new costs.

Last week, I ripped into Blackstone’s Tony James and his solution to America’s retirement crisis and followed up with a comment looking at why there shouldn’t be four or more views on DB vs DC plans but only one view which clearly explains the brutal truth on DC plans.

This week, Congress and the Senate just passed a budget and debt deal that they’ll be sending to President Obama which will make it harder for companies to offer defined-benefit pensions. And this is all happening less than a year after Congress effectively nuked pensions.

What is going on in the United States of pension poverty is a real travesty. I call it the quiet screwing of America where corporations flush with cash buy back their shares to pad the outrageous compensation of their top brass while they put off hiring and much needed investments and now Congress made it easier for them to justify their decision to cut defined-benefit plans for their employees.

Not surprisingly, both Democrats and Republicans joined forces to pass this bill, which goes to show you when it comes to corporate interests, there’s no divisive politics, just a bipartisan, unified front to pander to their corporate and Wall Street masters.

This week I learned that some 8,737 UPS retirees could soon see their pension checks cut as they receive their pensions from the cash-strapped Central States Pension Fund (see my previous comment on Teamsters’ pension fund). A month ago, CBC reported that employees of the decommissioned Hub Meat Packers in Moncton will see their pensions slashed by as much as 25 per cent.

In an equally disturbing example, the Washington Post reports on how military veterans are scrambling to sell their pensions through pension advance schemes in an effort to make ends meet, a huge mistake which will squeeze them into pension poverty.

Meanwhile, according to a new study, the 100 top U.S. CEOs have as much saved for retirement as 50 million Americans, thanks in large part to special savings plans that their employees don’t receive:

The Center for Effective Government found that the 100 biggest nest eggs of corporate chiefs added up to $4.9 billion, or 41 percent of what American families have saved for retirement. David Novak, the former CEO of Yum Brands, the company that owns Taco Bell, Pizza Hut and KFC, had the largest nest egg, worth $234.2 million, or enough money to provide an annuity check of about $1.3 million a month starting at age 65.

By contrast, almost three in 10 Americans approaching their golden years have no retirement savings at all, the study said, and more than half between 50 and 64 will have to depend on Social Security alone, which averages $1,233 per month.

Aside from fatter paychecks, CEOs get two other perks to help them grow their retirement funds faster than their employees can. Companies and business groups argue that CEO retirement packages are tied to executive performance and necessary to be able to attract top executives.

Special Pensions

More than half of Fortune 500 CEOs receive supplemental executive retirement plans (SERPs), a type of tax-deferred defined-benefit plan for the C-suite. These plans have come under heat from shareholders as expensive and unnecessary.

CEOs enjoy these plans even as companies eliminate regular defined-benefit plans for employees. Only 10 percent of companies provide defined-benefit pension plans, covering just 18 percent of private sector workers, according to the Bureau of Labor Statistics. In the early 1990s, more than a third of private sector workers had pension plans.

Executive Tax-Deferred Compensation Plans

Almost three-fourths of Fortune 500 companies offer their senior executives tax-deferred compensation plans. Unlike 401(k) plans offered to regular workers, these special plans have no limits on annual contributions. That allows CEOs to invest a lot more in their retirement than everyday Americans. For example, last year, 198 CEOs running Fortune 500 companies were able to invest $197 million more in these plans because they were not hamstrung by limitations on defined compensation plans, the study found.

American workers over 50 can contribute only $24,000 a year to 401(k) plans, while younger employees have an $18,000 limit.

This is the new pension normal. CEO compensation which includes lavish pensions is soaring to obscene levels while companies are looking to slash pension costs, offloading them to insurers or employees, or if they go belly up, pensions become the problem of some cash-strapped government pension agency which backstops pensions and slashes benefits.

While this is going on pretty much everywhere, at least in Canada there’s talk of enhancing the Canada Pension Plan. In the U.S., there’s a dangerous shift in pension policy which will come back to haunt the country as social welfare costs skyrocket and pension poverty soars, placing more pressure on an ever growing debt problem.

What is the solution to the U.S. retirement crisis? I stated my thoughts last week when looking at the DB vs DC debate:

In short, I believe that now is the time to introduce real change to Canada’s retirement system and enhance the CPP for all Canadians.

I’m also a big believer that the same thing needs to happen in the United States by enhancing the Social Security for all Americans, provided they get the governance right, pay their public pension fund managers properly to manage the bulk of the assets internally and introduce a shared risk pension model in their public pensions.

It’s high time the United States of America goes Dutch on pensions and follows the Canadian model of pension governance. Now more than ever, the U.S. needs to enhance Social Security for all Americans and implement the governance model that has worked so well in Canada, the Netherlands, Denmark and Sweden (and even improve on it).

And some final thoughts for all of you confused between defined-benefit and defined-contribution plans. Nothing, and I mean nothing, compares to a well-governed defined-benefit plan. The very essence of the pension promise is based on what DB, not DC, plans offer. Only a well-governed public DB plan can offer retirees a guaranteed income for the rest of their life.  

What are the main advantages of well-governed DB plans? They pool investment risk, longevity risk, and they significantly lower costs by bringing public and private investments and absolute return strategies internally to be managed by well compensated pension fund managers. DB plans also offer huge benefits to the overall economy, ones that will bolster the economy in tough times and reduce long-term debt.

In short, there shouldn’t be four, five or more views on DB vs DC plans. The sooner policymakers accept the brutal truth on DC plans, the better off hard working people and the entire country will be over the very long run.

You’ll forgive me if I keep beating the same drum on this topic but it’s absolutely crucial that policymakers around the world get their pension policy right.

On Friday morning, I received an email telling me that the Canada Mortgage and Housing Corporation (CMHC), a major Canadian Crown corporation, was reverting back to defined-benefit plans for all their employees after shifting new employees into DC plans back in 2012.

The person who sent me that email is a pension authority who shared this with me: “Hopefully, some others will come to same conclusion that a risk shared DB is the most cost effective way to provide a secure retirement and will follow their example.”

He’s absolutely right which is why I’m hoping to see Canadian and U.S. policymakers move toward enhancing and bolstering defined-benefit plans for all their citizens (see my last comment on breaking Ontario’s pension logjam).

Lastly, I discussed inequality in a recent comment of mine looking at which bond bubbles worry the Fed. I think it’s shameful that our society values overpaid hedge fund managers and CEOs and does little to fight for the rights of our most vulnerable, including the poor, the disabled and the elderly who are increasingly confronting pension poverty.

 

Photo by  Bob Jagendorf via FLickr CC License