Author: Leo Kolivakis

Adam Mayers of the Toronto Star reports, How a 30-minute chat with Trudeau broke Ontario’s pension logjam:

Justin Trudeau came to town Tuesday and managed to achieve, in a 30-minute meeting with the premier, what 18 months of effort had previously failed to do.

Trudeau removed one of the biggest obstacles to the progress of Ontario’s retirement pension plan, namely the issue of how to the collect the premiums and keep track of what is owed in payments.

It’s an unexciting piece of bureaucratic process, but it’s also absolutely vital. If the government can’t keep accurate records, the plan will fail.

This missing piece is one reason why there’s been little visible movement in the past year on the Ontario Retirement Pension Plan (ORPP). The plan’s outline is this: The ORPP is coming in 2017, starting with larger employers. The plan is aimed at those Ontarians who lack a company pension plan; at its best, it will replace about 15 per cent of income to maximum earnings of $90,000, or $13,500 a year. It will be in addition to a Canada Pension Plan payment.

The ORPP couldn’t easily move ahead without federal co-operation, and the Harper Conservatives offered none.

Trudeau unlocked the jam Tuesday by making a promise to Wynne. According to Wynne’s spokesperson Zita Astravas, Trudeau said that once he takes office, he will direct the Canada Revenue Agency and departments of finance and national revenue to work with Ontario officials on the registration and administration of the ORPP, The Star’s Robert Benzie reported.

This is the same pension-administration help that Ottawa had extended to Quebec and Saskatchewan, but denied to Ontario.

This week’s news is important because it means the ORPP can move ahead on its own, while Ontario participates in talks to expand the CPP. The Ontario plan hedges against the fact that expanded CPP talks will fail, but if they succeed, the province’s effort isn’t wasted because its plan would be folded into the improved CPP.

Nothing has so far been said about CPP talks. But at a campaign stop in Toronto, Trudeau said he’d get going with the provinces within 90 days of becoming prime minister.

That gives him until Jan. 17 to make good on his promise, a tight schedule given the long list of things on the new government’s plate. But given Trudeau’s nod to Wynne just a week after winning the election, the odds have improved that the CPP will be high on the new finance minister’s list.

Polls show that Canadians are worried about retirement security and support a better national pension plan. They trust the CPP, seeing it as well run and reliable. They often quibble with the amount they are paid, but that’s a political decision, not something the CPP Investment Board controls.

Research carried out by the Gandalf Group for the Healthcare of Ontario Pension Plan (HOOPP) in the middle of the election campaign confirms that Trudeau and Wynne are moving with public opinion.

The research looks at attitudes toward workplace pensions, and in particular defined benefit pension plans. These plans are on the retreat in the private sector, but still widely available in the public sector.

Among the findings:

• 77 per cent support increasing CPP costs and benefits;
• 54 per cent say any contribution changes to the CPP should be mandatory;
• 70 per cent support the idea of the ORPP to increase pension benefits;
• 74 per cent said higher pension contributions are a form of savings, and an investment in the future. Only 20 per cent saw the higher premiums as a tax, which is how the Conservatives painted the cost of a better CPP.

In a world of economic uncertainty and powerful global forces, stronger public pensions protect workers against forces outside their control. After a decade of inaction and small thinking, it seems the will is there to do something. All that remains is finding the way.

ORPP at a glance

• It will be mandatory for 3 million Ontarians without company pensions.
• Contributions begin in 2017, with larger employers going first.
• Modelled after CPP. Has survivor benefit, but is not transportable. There is no opt out.
• Workers and employers each contribute 1.9 per cent of earnings up to a maximum annual income of $90,000.
• At its best, the pension aims to replace 15 per cent of income.
• The fund would collect $3.5 billion a year, which would be invested at arm’s length.

Source: Ontario Ministry of Finance

What are my thoughts on all this? Go back to read last week’s comment on real change to Canada’s pension plan following the Liberals’ sweeping victory. There, I critically examined the Liberals’ pension policy but unequivocally supported any effort to enhance the CPP even if I think the Canadian economy is on the verge of a serious recession:

My regular readers know my thoughts on the Canadian economy. I’ve been short Canada and the loonie for almost two years and I’ve steered clear of energy and commodity shares despite the fact that some investors are now betting big on a global recovery. I think the crisis is just beginning and our country is going to experience a deep and protracted recession. No matter what policies the Liberals implement, it will be tough fighting the global deflationary headwinds which will continue wreaking havoc on our energy and commodity sectors and also hurt our fragile real estate market. When the Canadian housing bubble bursts, it will be the final death knell that plunges us into a deep recession.

Having said this, I don’t want to be all doom and gloom, after all, this blog is called Pension Pulse not Greater Fool or Zero Hedge. I’d like to take some time to discuss why I think the new Liberal government will be implementing some very important changes to our retirement system, ones that will hopefully benefit us all over the very long run regardless of whether the economy experiences a very rough patch ahead.

Unlike the Conservatives led by Stephen Harper who were constantly pandering to Canada’s financial services industry, ignoring the brutal truth on DC plans, both the Liberals and the NDP were clear that they want to enhance the CPP for all Canadians, a retirement policy which will curb pension poverty and bolster our economy providing it with solid long-term benefits.

Of course, as always, the devil is in the details. Even though I agree with the thrust of this retirement policy, I don’t agree with the Liberals and NDP that the retirement age needs to be scaled back to 65 from 67. Why? Because Canadians are living longer and this will introduce more longevity risk to Canada’s pension plan.

But longevity risk isn’t my main concern with the Liberals’ retirement plan. What concerns me more is this notion of voluntary CPP enhancement. I’ve gotten into some heavy exchanges on this topic with Jean-Pierre Laporte, a lawyer who founded Integris, a firm that helps Canadians invest for their future using a smarter approach.

Jean-Pierre is a smart guy and one of the main architects of the Liberals’ retirement policy, but we fundamentally disagree on one point. As far as I’m concerned, in order for a retirement policy to be effective, it has to be mandatory. For me, any retirement policy which is voluntary is doomed to fail. Jean-Pierre feels otherwise and has even written on what forms of voluntary CPP enhancement he’s in favor of.

There are other problems with the Liberals’ retirement policy. I disagree with their stance on limiting the amount in tax-free savings accounts (TFSAs) because while most Canadians aren’t saving enough, TFSAs help a lot of professionals and others with no pensions who do manage to save for retirement (of course, TFSAs are no substitute to enhancing the CPP!).

More importantly, Bernard Dussault, Canada’s former Chief Actuary shared this with me:

“Unfortunately, there is a major flaw in the Liberal Party of Canada’s resolution regarding an expansion of the Canada Pension Plan, which is that their proposal would exclude from coverage the first $30,000 of employment earnings.

Indeed, although the LPC’s proposal would well address the second more important goal of a pension plan, which is to optimize the maintenance into retirement of the pre-retirement standard of living, it would completely fail to address the first most important goal of a pension plan, which is to alleviate poverty among Canadian seniors.”

I thank Bernard for sharing his thoughts with my readers and take his criticism very seriously.

Let me be crystal clear here. I don’t think the Liberals can afford to squander a golden opportunity and not introduce mandatory CPP enhancement for all Canadians. Anything short of this would be a historical travesty and it would dishonor Pierre-Elliott Trudeau’s legacy and set us back decades in terms of retirement and economic policy. 

Why am I so passionate on this topic? Because I’ve worked at the National Bank, Caisse, PSP Investments, the Business Development Bank of Canada, Industry Canada and consulted the Treasury Board of Canada on the governance of the public service pension  plan. I’ve seen first-hand the good, the bad and ugly across the private, public and quasi-public sector. I know what makes sense and what doesn’t when it comes to retirement policy which is why I was invited to speak on pensions at Parliament Hill and why the New York Times asked me to provide my thoughts on the U.S. public pension problem.

I’ve also put my neck on the line with this blog and have criticized and praised our largest public pension funds but one thing I know is that we need more defined-benefit plans covering all Canadians and we’ve got some of the very best public pensions in the world. Our top ten pensions are global trendsetters and they provide huge benefits to our economy. That’s why you’ll find a few pension fund heroes here in Canada.

Are the top ten Canadian pensions perfect? Of course not, far from it. I can recommend many changes to improve on their “world class governance” and make sure they’re not taking excessive and stupid risks like they did in the past. The media covers this up; I don’t and couldn’t care less if it pisses off the pension powers.

But when thinking of ‘real change’ to our retirement policy and economy, we can’t focus on past mistakes. We need to focus on what works and why building on the success of our defined-benefit plans makes sense for bolstering our retirement system, providing Canadians with a safe, secure pension they can count on for the rest of their life regardless of what happens to the company they work for.

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

I stand by my comments and even though I’m happy to see it’s full steam ahead on the ORPP, I would prefer to see full steam ahead on enhancing the CPP (and QPP here in Quebec). Only that will propel Canada to the top spot in the global ranking of pension systems.

It’s important to educate Canadians 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 entire country will be over the very long run.

All this to say that I don’t really care if the Liberals won the federal election and Kathleen Wynne is happy and embracing Justin Trudeau. I take all these political grandstanding photo ops with a grain of salt. It’s time to get down to business and let me assure the Liberals in Ottawa and Queen’s Park in Toronto there’s a hell of a lot work ahead and if they screw up this historic opportunity to significantly bolster our national retirement system, future historians will not be kind to them.

But when discussing enhancing the CPP, there are a lot of issues that need to be properly thought of including whether the federal government wants to give the new pension contributions to CPPIB or direct them to a new entity. There’s also the issue of pension governance and I think it’s high time we stop patting each other on the back here in Canada and get to work on drastically improving pension governance at Canada’s top ten pensions.

In particular, it’s time to remove the Auditor General of Canada from auditing our large public pensions (it’s woefully under-staffed and lacks the expertise) and either have OSFI, which already audits private federally regulated pension plans, or better yet the Bank of Canada audit our large pubic pensions and keep a much closer eye on all their investment and operational activities.

I’ve long argued that we need to perform comprehensive operational, performance and risk management audits at all our large public pensions. These should be performed by independent and qualified third parties to make sure that the governance at these pensions is indeed “world class” and the findings of these audits which can be done once every two or three years must be made public.

Some of Canada’s public pension plutocrats will welcome my suggestion, others won’t. I couldn’t care less as I’m not writing these lengthy blog comments to pander to them or anyone else. I speak my mind and I’ve seen enough shenanigans in the pension fund industry to know that when it comes to pension governance, we can always improve things, even in Canada where we pride ourselves on being leaders on governance. For me, it’s all about transparency and accountability.

If you have anything to add to this debate, feel free to email me at LKolivakis@gmail.com. I don’t pretend to have the monopoly of wisdom when it comes to pensions and investments but I think I’m doing my part in educating people on the real issues that matter most when it comes to their retirement security.

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.

Barbara Shecter of the National Post reports, CPPIB adds Mumbai to list of global offices, commits to stake in Cablevision:

The Canada Pension Plan Investment Board has opened an office in Mumbai to support and expand on $2 billion of investments made in India since 2010.

The new Mumbai office joins a list of seven international hubs including London, Hong Kong, New York and Sao Paulo. As with the others, the office in India will allow the pension giant’s management team to develop local expertise and partnerships, and will provide access to investment opportunities that “may not otherwise have been available,” said chief executive Mark Wiseman.

He noted that Canada’s largest pension has already made investments in the country in segments including infrastructure, real estate and financial services.

These include a 3.9 per cent stake in Kotak Mahindra Bank, India’s third-largest private sector bank by market capitalization, and a US$332-million investment in L&T Infrastructure Development Projects, the unlisted subsidiary of India’s largest engineering and construction company.

On Tuesday, the same day the new Mumbai office was announced, CPPIB issued a separate announcement saying it would take a US$400-million stake in U.S. cable operator Cablevision Systems Corp.

Toronto-based CPPIB is teaming up with a group of investors, including funds advised by BC Partners and BC European Capital IX, to provide 30 per cent of the equity in Altice’s proposed acquisition of Cablevision, one of the largest cable operators in the United States with millions of customers in greater New York.

The transaction is expected to close in the first half of 2016, subject to regulatory approvals.

Euan Rocha of Reuters also reports, Canada’s CPPIB opens office in India to scout for opportunities:

The Canada Pension Plan Investment Board, one of the country’s largest pension fund managers, opened an office in Mumbai on Tuesday as it scouts for investment opportunities on the Indian subcontinent.

CPPIB, which has already committed to invest more than $2 billion in India, sees its long investment horizon aligning with the financing needs of India’s economy.

The Toronto-based fund owns a nearly 4 percent stake in Kotak Mahindra Bank, one of the largest private sector banks in India. It has also committed to investments in infrastructure projects in India, office buildings, and to providing structured debt financing to residential projects in major Indian cities.

“The opening of an office in Mumbai allows CPPIB to develop local expertise, build important partnerships and access investment opportunities that may not otherwise have been available,” CPPIB head Mark Wiseman said in a statement.

You can read CPPIB’s full press release on opening an office in India here. This is all part of CPPIB’s long-term strategy to invest in public and private markets in emerging markets.

Why invest in India? There are plenty of reasons. In June 2010, Goldman Sachs Asset Management put out a nice little white paper, India Revisited, which made a solid case for investing in the country based on an advantageous demographic profile, a growing middle class, a healthy financial system, low levels of private and corporate leverage, conservative regulations and a domestically driven economy which insulated India from the worst effects of the 2008 global economic crisis.

Of course, there are plenty of pitfalls investing in India too. According to a 2008 NRI guide going over the advantages and disadvantages of investing in India, corruption is rampant in that country:

India, despite its enormous manpower, is facing a shortage of qualified skilled professionals due to lack of adequate public education system. The wage rates, hence, are going higher and higher eroding the cost advantage that has served India for a decade now.

Infrastructure is another field where India has to pull up its socks. Foreign investors, in their day-to-day course of business deal with PIO. But when these foreign investors come to India, they witness inadequate and not up-to-the-mark airports, seaports, roads, power grids, communication system and facilities, health care and education.

If India has to become a superpower, her government has to work with full commitment and dedication in all the fields mentioned above. Indirection, uncertainty and revisiting settled issues eternally characterise business negotiations in India.

Corruption is another huge predicament that has to be minimised as much as possible if India is to become an apple of the investors’ eyes. The Indian courts have huge backlog of more than 27 million cases, with many cases taking more than a decade to get solved! Unfriendly labour laws, difficulty in getting patent rights, and various other legal and ethical challenges add to India’s affliction. What officials put forth is not exactly how the true picture is.

India, no doubt, is a tough place to do business. But all said and done, we cannot deny the fact that India is a strong contender for the post of ‘economic superpower of the future’ and its strategic location works in its favour abundantly. We at NriInvestIndia.com believe that the ginnie has been let out of the bottle and soon the world would realize the potential of the Indian financial markets: including both stock markets and mutual funds. And if the challenges are taken care of, then it is a heavenly abode for all investors.

The ginnie has been let out of the bottle which is why CPPIB and other large global investors like Norway’s massive sovereign wealth fund are investing more in India.

In my opinion, however, the real opportunities in India lie in private, not public markets which gives CPPIB a big advantage over other investors. Anyone can invest in iShares MSCI India (INDA) which pretty much tracks the iShares MSCI Emerging Markets ETF (EEM). But a large investor like CPPIB can invest in real estate, infrastructure and private equity deals in that country, opening the door to a lot more lucrative investment opportunities.

Does CPPIB need to open up offices in various regions of the world? There, I’m a little more skeptical. CPPIB, Ontario Teachers and others love opening up offices to have “boots on the ground” but I prefer PSP’s approach of partnering up with the right partners in various countries to find the very best opportunities in public and private markets (I always ask myself a simple question: Do we really need to open up offices around the world or are we better off sourcing opportunities through partners?).

It’s also worth noting that investing in emerging markets via public or private markets carries a whole set of unique risks, including more volatility and currency risk.

Last October, I questioned CPPIB’s risky bet in Brazil and pointed out that while this makes sense over the long run, the fund will deal with volatility and huge currency losses over the short run (the Brazilian economy has gotten clobbered as China’s growth and demand for commodities has slowed and even though CPPIB doesn’t need to sell its Brazilian assets, their valuations are not immune to public market and currency woes).

One area where CPPIB can help India is in bolstering its antiquated pension system which ranks dead last in Mercer’s global ranking of pension systems.

As far as CPPIB’s cable deal, you can read its press release here. It basically partnered up with BC Partners, one of the best private equity funds in the world, to co-invest alongside it and join forces with Altice, in the latter’s acquisition of Cablevision:

Altice, the European cable and telecoms group which last month announced it will buy US cable television company Cablevision for $17.7bn including debt, said on Tuesday that the two would take a 30 per cent stake in the company for around $1bn.

Altice, known for being acquisitive, has previously bought rivals in France, the US and Israel. Following the announcement of the Cablevision deal it announced a new equity capital raising exercise of around €1.8bn.

From the announcement:

Altice N.V. (Euronext: ATC, ATCB) today announced that funds advised by BC Partners (“BCP”) and Canada Pension Plan Investment Board (“CPPIB”) have entered into a definitive agreement to acquire 30% of the equity of Cablevision Systems Corporation (NYSE: CVC) (for approximately $1.0 billion).

Together with the recent Cablevision debt financing and the Altice equity issuance, the acquisition of Cablevision is fully funded.

The cable wars are heating up everywhere, especially in the U.S., and this is a good long term deal as long as they didn’t overpay for it and get regulatory approval.

Photo by sandeepachetan.com travel photography 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.

Tom DiChristopher of CNBC reports, Millennials face ‘Great Depression’ in retirement: Blackstone COO:

Americans in their 20s and 30s are facing a retirement crisis that could plunge them back into the Great Depression, Blackstone President and Chief Operating Officer Tony James said Wednesday.

“Social Security alone cannot provide enough for these people to retain their standard of living in retirement, and if we don’t do something, we’re going to have tens of millions of poor people and poverty rates not seen since the Great Depression,” he told CNBC’s “Squawk Box.”

The solution is to help young people save more by mandating savings through a Guaranteed Retirement Account system, he said. Right now, young people cannot save enough on their own because they face stagnant incomes and heavy student-debt burdens.

The Guaranteed Retirement Account was proposed by labor economist Teresa Ghilarducci in 2007 as a solution to the problem of retirement shortfalls that inevitably arise when contributions are voluntary.

A GSA system would require workers to make recurring retirement contributions, which would be deducted from paychecks. Employers would be mandated to match the contribution, and the federal government would administer the plan through the Social Security Administration.

Ghilarducci has proposed a mandatory 5 percent contribution, but James said a 3 percent requirement rolled into GRAs could outperform retirement savings vehicles like IRAs and 401(k)s.

He noted that a 401(k) typically earns 3 to 4 percent, while a pension plan yields 7 to 8 percent. The average American pension plan has a 25 percent allocation to alternative investments — including real estate, private equity and hedge funds — with the remainder invested in markets, he said.

“The trick is to have these accounts invested like pension plans, so the money compounds over decades at 7 to 8 percent, not at 3 to 4,” he said.

A 25-year-old who earns 3 to 4 percent per year would retire with $75,000, not nearly enough to annuitize and live on, James said. A 7-percent-per-year investment would yield $200,000 at retirement, he said.

Under the plan James is proposing, the government would offer a 2 percent guarantee on GRAs.

“The key to it is taking that capital, setting up the Guaranteed Retirement Accounts and investing it well for the very long term,” he said. “We have to do that and we have to do that professionally.”

James spoke ahead of the Center for American Progress’s conference on creating more inclusive prosperity and promoting long-term planning in the private sector.

Hazel Bradford of Pensions & Investments also reports, Blackstone’s James calls for national retirement savings plan:

Blackstone Group President and Chief Operating Officer Hamilton “Tony” James called for a national retirement savings plan to address inadequate retirement preparedness that will hit the next generation of Americans particularly hard.

“We absolutely have to start now,” Mr. James said at a Center for American Progress conference in Washington on Wednesday. “It has to be mandated. Nothing short of a mandate will provide future generations a secure retirement.”

Mr. James recommended a proposal by Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at The New School in New York, to create a retirement savings plan for everyone based on 3% annual salary contributions shared equally among employees and employers. The federal government would guarantee a 2% return, through a modest insurance premium on such accounts. “With corporate profits at an all-time high, this should be a manageable burden,” he said, adding that the approach “is going to require us to look beyond the next election cycle.”

Mr. James also called for redirecting $120 billion in annual retirement tax deductions to give every worker a $600 annual tax credit to save for retirement.

Speaking at the same event on creating long-term value, Treasury Secretary Jacob Lew said the corporate tax system “is broken” and that capital gains rates should be higher. “But we also have to realize that that is not the whole answer,” Mr. Lew said.

So Tony James and the folks at Blackstone are finally realizing the United States of pension poverty is heading down the wrong road when it comes to its national retirement policy? And now they want to help those poor Millennials avoid a Great Retirement Depression?

How noble of them. Unfortunately their prescription is worse than the disease and if you ever heard of that old expression “beware of Greeks bearing gifts” then you should also beware of private equity sharks promoting a retirement policy which will help them garner ever more assets to manage so they can keep charging insane fees.

Please repeat after me, when it comes to hedge funds, private equity funds and real estate funds, the name of the game is asset gathering. Period. Sure, Blackstone is a great alternative asset manager but the private equity industry is changing, times are a lot tougher and regulators are scrutinizing these funds a lot more closely.

It’s not that I disagree with Tony James, Millennials are most definitely going to experience a retirement depression, just like baby boomers are experiencing right now. But when he starts spewing nonsense about having these Guaranteed Retirement Accounts invest like pension plans which invest in alternative investments like hedge funds, private equity and real estate, and enjoy 7-8 percent annualized returns, he’s blatantly lying and talking up his industry.

Folks, I’ve been warning you forever that global deflation will continue to wreak havoc on all economies and you’d better prepare for a protracted period of lower returns ahead. This will impact retail and institutional investors, especially all those U.S. public pension funds chasing a rate-of-return fantasy.

With the 10-year Treasury bond yielding 2%, the era of 7-8% annualized returns is a pipe dream and all the hedge funds, private equity funds and real estate funds in the world won’t help you achieve an unrealistic bogey (but it will enrich these overpaid alternatives managers and their buddies on Wall Street which get paid huge fees from these alternative investment funds).

Having said this, something needs to be done. I like Teresa Ghilarducci, an economics professor at the New School for Social Research. She has been on the forefront stating that America’s retirement crisis needs new thinking. The poor lady even received death threats for her novel ideas which goes to show you how pathetically polarized and divisive American politics has become.

What is my solution to America’s great retirement crisis? I discussed my ideas in a recent comment on Teamsters’ pension fund:

Let be clear here, I don’t like multiemployer pension plans because they are poorly governed which is why many risk insolvency unless comprehensive reforms are implemented. But the problem here is much bigger than multiemployer plans. U.S. retirement policy needs a drastic overhaul to properly cover all Americans, most of which have little or no savings whatsoever.

I’ve shared some of my thoughts on what needs to be done when I examined whether Social Security is on the fritz:

…politics aside, I’m definitely not for privatizing Social Security to offer individuals savings accounts. The United States of pension poverty has to face up to the brutal reality of defined-contribution plans, they simply don’t work. Instead, U.S. policymakers need to understand the benefits of defined-benefit plans and get on to enhancing Social Security for all Americans.

One model Social Security can follow is that of the Canada Pension Plan whose assets are managed by the CPPIB. Of course, to do this properly, you need to get the governance right and have the assets managed at arms-length from the federal government. And the big problem with U.S. public pensions is they’re incapable of getting the governance right.

So let the academics and actuaries debate on whether the assumptions underlying Social Security are right or wrong. I think a much bigger debate is how are they going to revamp Social Security to bolster the retirement security of millions of Americans. That’s the real challenge that lies ahead.

Yes folks, 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).

I know, for Americans, these are all “socialist” countries with heavy government involvement and there is no way in hell the U.S. will ever tinker with Social Security to bolster it. Well, that’s too bad because take it from me, there is nothing socialist about providing solid public education, healthcare and pensions to your citizens. Good policies in all three pillars of democracy will bolster the American economy over the very long-run and lower debt and social welfare costs.

If U.S. policymakers stay the course, they will have a much bigger problem down the road. Already, massive inequality is wiping out the middle class. Companies are hoarding record cash levels — over $2 trillion in offshore banks — and the guys and gals on Wall Street are making off like bandits as profits hit $11.3 billion in the last six months.

Good times for everyone, right? Wrong! Capitalism cannot sustain massive inequality over a long period and while some think labor will rise again as the deflationary supercycle (supposedly) ends, I worry that things will get much worse before they get better.

In another recent comment of mine looking at pension fund heroes, I stated the following:

So after reading all my comments, let’s go back to Dan McCrum’s question above, where are the pension fund heroes? I’d say most of them are in Canada where plans like OTPP and HOOPP keep delivering stellar returns as they match assets and liabilities with or without external hedge funds and pension funds like CPPIB bringing good things to life on a massive scale, which is why it’s also posting great returns.

In fact, all of Canada’s top ten are performing well and providing great benefits to the Canadian economy which is why I’m a stickler for enhancing the CPP here. If the U.S. got its governance right, I would also recommend it enhances Social Security for all Americans.

And a couple of days ago looking at real change to Canada’s pension plan, I shared this with you:

Let me be crystal clear here. I don’t think the Liberals can afford to squander a golden opportunity and not introduce mandatory CPP enhancement for all Canadians. Anything short of this would be a historical travesty and it would dishonor Pierre-Elliott Trudeau’s legacy and set us back decades in terms of retirement and economic policy. 

Why am I so passionate on this topic? Because I’ve worked at the National Bank, Caisse, PSP Investments, the Business Development Bank of Canada, Industry Canada and consulted the Treasury Board of Canada on the governance of the public service pension  plan. I’ve seen first-hand the good, the bad and ugly across the private, public and quasi-public sector. I know what makes sense and what doesn’t when it comes to retirement policy which is why I was invited to speak on pensions at Parliament Hill and why the New York Times asked me to provide my thoughts on the U.S. public pension problem.

I’ve also put my neck on the line with this blog and have criticized and praised our largest public pension funds but one thing I know is that we need more defined-benefit plans covering all Canadians and we’ve got some of the very best public pensions in the world. Our top ten pensions are global trendsetters and they provide huge benefits to our economy. That’s why you’ll find a few pension fund heroes here in Canada.

Are the top ten Canadian pensions perfect? Of course not, far from it. I can recommend many changes to improve on their “world class governance” and make sure they’re not taking excessive and stupid risks like they did in the past. The media covers this up; I don’t and couldn’t care less if it pisses off the pension powers.

But when thinking of ‘real change’ to our retirement policy and economy, we can’t focus on past mistakes. We need to focus on what works and why building on the success of our defined-benefit plans makes sense for bolstering our retirement system, providing Canadians with a safe, secure pension they can count on for the rest of their life regardless of what happens to the company they work for.

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

The central problem with U.S. public pension funds is the lack of proper governance which leaves them open to undue political interference. In fact, unlike in Canada, the entire investment process at U.S. public pension funds has been hijacked by useless investment consultants which typically recommend the same brand name funds institutional investors should be avoiding.

This is why I’m not surprised to see so many top hedge funds are underperforming this year (but still collecting 2% management fee on the multibillions they manage!). When the pension herd chases yield with little or no regard to the macro environment and the underlying structure of the investment environment, this is what happens.

So forgive me if I’m more than a bit cynical on Tony James’s solution to America’s retirement crisis.  What the U.S. needs is to accept the brutal truth on DC plans, go Dutch on pensions, enhance Social Security for all Americans and adopt Canadian-style pension governance and even improve on it.

In other words, U.S. public pension funds have to stop farming assets out to be managed by high fee hedge funds, private equity and real estate funds and have to adopt the right governance which would allow them to attract talented pension fund managers and pay them properly so they can manage pension assets internally at a fraction of the cost (Don’t worry, the Blackstones of this world will still make a killing).

Photo by TaxCredits.net

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

Last week, Keith Leslie of the Globe and Mail reported, Wynne says Ontario may drop pension plan if Liberals win election:

Ontario Premier Kathleen Wynne suggested Tuesday that her government would drop the idea of a provincial pension plan if Liberal Leader Justin Trudeau becomes the next prime minister.

Wynne couldn’t convince the Harper government to enhance the Canada Pension Plan, so her Liberal government introduced an Ontario Retirement Pension Plan that would mirror the CPP, essentially doubling deductions and benefits.

If Trudeau wins the Oct. 19 election and is willing to improve the CPP, that would address her concerns about people without a workplace pension plan not having enough money to live on when they retire, said Wynne.

“If we have a partner in Justin Trudeau to sit down and work out what they’re looking at as an enhancement to CPP, that was always my starting point, that was the solution,” she said.

Trudeau is campaigning on a promise to expand the CPP and to return the age of eligibility for old age security to 65 from 67, and said he’d begin talks with the provinces on improving the CPP within three months of taking office.

New Democrat Leader Tom Mulcair also promises to enhance the CPP, and says he’d convene a First Ministers’ meeting on improving the pension plan within six months of forming government. Like the Liberals, the NDP would also return the age for OAS eligibility to 65.

Ontario’s pension plan, scheduled to begin Jan. 1, 2017, will require mandatory contributions of 1.9 per cent of pay from employers and a matching amount from workers — up to $1,643 a year — at any company that does not offer a pension.

As Wynne campaigned with federal Liberal candidates in the Toronto area Tuesday, she insisted she was not worried her attacks on Stephen Harper’s Conservatives will make it hard to work with them if they’re re-elected.

“Well, you know, it seems to me that before the federal election campaign started there was a little bit of a challenge working with Stephen Harper, but obviously I will continue to try to do that if Stephen Harper is the prime minister,” she said to cheers and laughter from Liberal supporters.

Wynne, who has been the most vocal premier in the federal campaign and has clashed repeatedly with Harper over the Ontario pension plan, said the provinces need a government in Ottawa that will work with them on retirement security, climate change, infrastructure and the Syrian refugee crisis.

“I will work with whomever is the prime minister, but I really believe that in this country, at this moment, we have an opportunity to elect a prime minister who understands that working with the provinces and territories is in the best interests of the country,” she said.

Ontario voters historically have supported different parties in government at the federal and provincial levels, but Wynne isn’t worried about campaigning herself out of a job in the next provincial election.

“I think the opportunity we have right now is to have a federal government and a provincial government that are on the same page, that are actually pulling in the same direction, and that’s exactly what I’m looking forward to,” she said.

Wynne also defended her decision to campaign heavily for her Liberal cousins in the federal election as “standing up for the people of Ontario,” and said she didn’t need to take a vacation day from her duties as premier to do it.

“I work seven days a week, so this is part of the work that I do.”

Well, Ontario Premier Kathleen Wynne can breathe a lot easier now that the Liberals have swept into power. After winning a decisive majority in a stunning comeback, Liberal Leader Justin Trudeau will turn his attention Tuesday to forming a cabinet and grappling with the host of urgent challenges that await him.

One of the biggest challenges that awaits Mr. Trudeau is the lackluster Canadian economy. Norman Mogil wrote a guest post for Sober Look on Canada and the oil price shock. In his excellent comment, Canada’s Recession Debate Misses the Point, Ted Carmichael notes the following:

The problem for politicians and policymakers is that the negative terms of trade shock comes from outside Canada, not from changes in the behaviour of domestic consumers, corporations or governments. The current terms of trade shock has many causes, including the development of new technologies that have lowered the cost of producing oil; the decision by Saudi Arabia and other OPEC countries to continue to pump oil at a high rate rather than cut production to support the oil price; and the slowdown in China’s economy which has lowered demand and prices for a broad range of commodities.

Whether or not the downturn in the global commodity super-cycle causes a business-cycle recession measured by GDP and employment is not the most important issue. The most important point to grasp is that Canada is facing a period in which the combined real income of households, corporations and governments are declining and are unlikely to rebound quickly. Even if real GDP resumes growing in the second half of 2015 and employment continues to rise, we will be producing and working more but receiving less real income for our efforts.

What the Economic Debate Should be About

The real economic issue that politicians should be facing is not whether Canada has slipped into a modest business cycle recession, but rather what is the appropriate economic policy response to a lasting negative shock to our national income caused by the fall in the prices of the commodities that we produce.

The Conservative Party wants to stay the course, keeping taxes low, encouraging home-ownership, and pursuing a balanced budget. That is a reasonable start, but does not go far enough in providing incentives to boost growth outside the resource industries.

The Liberal Party wants to raise taxes on high income earners including high-income small business owners, reshuffle child benefits to favour the “middle class”, and incur deficits to fund infrastructure projects. The difficulty in this approach will be to maintain business confidence and to control deficit spending in an environment of weak GDP growth.

The New Democratic Party (NDP) wants to raise corporate taxes, impose carbon taxes, expand government’s role in child care, and pursue a balanced budget. This is a difficult if not impossible set of promises to deliver on during a period of weak commodity prices.

The worst election outcome, but perhaps the most likely according to current polls, would be a coalition government of the NDP and Liberals. Coalition economic policies would likely result in higher taxes on high income earners, small businesses and corporations, increased spending on government provided child-care and infrastructure, and an early loss of control of budget deficits.

All three political parties and all Canadian voters would be well advised start thinking about what kind of pro-investment, pro-growth policies Canada needs to pursue in a period when the main economic engine and source of national prosperity has stalled and shifted into reverse.

Luckily, there is no coalition government of the NDP and Liberals. With a clear majority victory pretty much from coast to coast, the Liberals can implement the policies they have been arguing for.

This also means that the buck now stops with the Liberals their leader Justin Trudeau who will be under pressure to perform. And they better heed Ted Carmichael’s advice and really think hard about about what kind of pro-investment, pro-growth policies Canada needs to pursue in a very difficult global economic environment where deflationary headwinds are picking up steam.

My regular readers know my thoughts on the Canadian economy. I’ve been short Canada and the loonie for almost two years and I’ve steered clear of energy and commodity shares despite the fact that some investors are now betting big on a global recovery. I think the crisis is just beginning and our country is going to experience a deep and protracted recession. No matter what policies the Liberals implement, it will be tough fighting the global deflationary headwinds which will continue wreaking havoc on our energy and commodity sectors and also hurt our fragile real estate market. When the Canadian housing bubble bursts, it will be the final death knell that plunges us into a deep recession.

Having said this, I don’t want to be all doom and gloom, after all, this blog is called Pension Pulse not Greater Fool or Zero Hedge. I’d like to take some time to discuss why I think the new Liberal government will be implementing some very important changes to our retirement system, ones that will hopefully benefit us all over the very long run regardless of whether the economy experiences a very rough patch ahead.

Unlike the Conservatives led by Stephen Harper who was constantly pandering to Canada’s financial services industry, ignoring the brutal truth on DC plans, both the Liberals and the NDP were clear that they want to enhance the CPP for all Canadians, a retirement policy which will curb pension poverty and enhance our economy providing it with solid long-term benefits.

Of course, as always, the devil is in the details. Even though I agree with the thrust of this retirement policy, I don’t agree with the Liberals and NDP that the retirement age needs to be scaled back to 65 from 67. Why? Because Canadians are living longer and this will introduce more longevity risk to Canada’s pension plan.

But longevity risk isn’t my main concern with the Liberals’ retirement plan. What concerns me more is this notion of voluntary CPP enhancement. I’ve gotten into some heavy exchanges on this topic with Jean-Pierre Laporte, a lawyer who founded Integris, a firm that helps Canadians invest for their future using a smarter approach.

Jean-Pierre is a smart guy and one of the main architects of the Liberals’ retirement policy, but we fundamentally disagree on one point. As far as I’m concerned, in order for a retirement policy to be effective, it has to be mandatory. For me, any retirement policy which is voluntary is doomed to fail. Jean-Pierre feels otherwise and has even written on what forms of voluntary CPP enhancement he’s in favor of.

There are other problems with the Liberals’ retirement policy. I disagree with their stance on limiting the amount in tax-free savings accounts (TFSAs) because while most Canadians aren’t saving enough, TFSAs help a lot of professionals and others with no pensions who do manage to save for retirement (of course, TFSAs are no substitute to enhancing the CPP!).

More importantly, Bernard Dussault, Canada’s former Chief Actuary shared this with me:

“Unfortunately, there is a major flaw in the Liberal Party of Canada’s resolution regarding an expansion of the Canada Pension Plan, which is that their proposal would exclude from coverage the first $30,000 of employment earnings.

Indeed, although the LPC’s proposal would well address the second more important goal of a pension plan, which is to optimize the maintenance into retirement of the pre-retirement standard of living, it would completely fail to address the first most important goal of a pension plan, which is to alleviate poverty among Canadian seniors.”

I thank Bernard for sharing his thoughts with my readers and take his criticism very seriously.

Let me be crystal clear here. I don’t think the Liberals can afford to squander a golden opportunity and not introduce mandatory CPP enhancement for all Canadians. Anything short of this would be a historical travesty and it would dishonor Pierre-Elliott Trudeau’s legacy and set us back decades in terms of retirement and economic policy. 

Why am I so passionate on this topic? Because I’ve worked at the National Bank, Caisse, PSP Investments, the Business Development Bank of Canada, Industry Canada and consulted the Treasury Board of Canada on the governance of the public service pension  plan. I’ve seen first-hand the good, the bad and ugly across the private, public and quasi-public sector. I know what makes sense and what doesn’t when it comes to retirement policy which is why I was invited to speak on pensions at Parliament Hill and why the New York Times asked me to provide my thoughts on the U.S. public pension problem.

I’ve also put my neck on the line with this blog and have criticized and praised our largest public pension funds but one thing I know is that we need more defined-benefit plans covering all Canadians and we’ve got some of the very best public pensions in the world. Our top ten pensions are global trendsetters and they provide huge benefits to our economy. That’s why you’ll find a few pension fund heroes here in Canada.

Are the top ten Canadian pensions perfect? Of course not, far from it. I can recommend many changes to improve on their “world class governance” and make sure they’re not taking excessive and stupid risks like they did in the past. The media covers this up; I don’t and couldn’t care less if it pisses off the pension powers.

But when thinking of ‘real change’ to our retirement policy and economy, we can’t focus on past mistakes. We need to focus on what works and why building on the success of our defined-benefit plans makes sense for bolstering our retirement system, providing Canadians with a safe, secure pension they can count on for the rest of their life regardless of what happens to the company they work for.

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

But I understand why some people are concerned about enhancing the CPP now that the economy is weak. In fact, Ted Carmichael shared this with me after reading my comment:

“I agree with you on TFSAs. My concern is that in the lower commodity price environment that we find ourselves, the new government should be focused on creating a business environment that generates stronger private sector real income growth. The election campaign really saw none of the parties addressing this issue, but rather they focused how they would divide up the existing stagnant or shrinking pie. Increasing payroll taxes to fund future retirement benefits is a good long-term policy idea, but perhaps not the most important priority at the present point in the cycle.“

Ted is right, increasing payroll contributions is not the most important priority at the present point in the cycle but my fear is that the longer the federal government puts this off, the worse it will be down the road. And if the Liberals squander their majority and don’t implement major reforms to our retirement system, who will do it in the future?

Let me end this comment by congratulating our next prime minister, Justin Trudeau. Justin went to high school with my younger brother at Brébeuf. He wasn’t a top student but he worked hard and managed to do well in a brutal academic environment. He’s a very nice guy, a family man, and even though he’s relatively young and inexperienced, he’s smart and has a very experienced team backing him up.

I will also praise Stephen Harper and Tom Mulcair who lost but remained gracious. Politics is a thankless and tough job. I know, I saw my stepfather go through many ups and downs as he fought and won a few elections in the riding of Laurier-Dorion. Anyone who tells you politics is easy doesn’t have a clue of what they’re talking about, especially in the age of social media where public officials are scrutinized 24/7.

But now the tough work begins and I will do my part and help the Liberals introduce ‘real change’ to our retirement system, one that bolsters our economy. The challenges that lie ahead are huge but if they implement the right policies, they will hopefully mitigate the fallout from continued global economic weakness and meaningfully bolster our retirement system once and for all.

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 – http://commons.wikimedia.org/wiki/File:Canada_blank_map.svg#mediaviewer/File:Canada_blank_map.svg

So after reading all my comments, let’s go back to Dan McCrum’s question above, where are the pension fund heroes? I’d say most of them are in Canada where plans like OTPP and HOOPP keep delivering stellar returns as they match assets and liabilities with or without external hedge funds and pension funds like CPPIB bringing good things to life on a massive scale, which is why it’s also posting great returns.

In fact, all of Canada’s top ten are performing well and providing great benefits to the Canadian economy which is why I’m a stickler for enhancing the CPP here. If the U.S. got its governance right, I would also recommend it enhances Social Security for all Americans.

Finally, since we are on the topic of pension fund heroes, Northwater Capital Management Inc. (“Northwater”) is pleased to announce the appointment of Neil J. Petroff to the role of Vice Chair, effective October 1, 2015:

Prior to joining Northwater, Mr. Petroff held the position of Executive Vice President of Investments and Chief Investment Officer at the Ontario Teachers’ Pension Plan (“OTPP”) since 2009, where he was responsible for all aspects of the firm’s investment activities as well as the pension fund’s asset-mix and risk allocations. Throughout his 22 year career with OTPP, Mr. Petroff held progressively more senior-level positions which have given him broad exposure and management experience in a wide range of asset classes and investment products. In 2014, Mr. Petroff was recognized as Chief Investment Officer of the Year and he received the prestigious Lifetime Achievement Award at the Industry’s Innovation Awards ceremony.

Before joining OTPP, Mr. Petroff worked at the Bank of Nova Scotia , Guaranty Trust Company and Royal Trustco Limited. Neil has served on several corporate and charitable boards including Cadillac Fairview Corporation Limited, Maple Financial Group Inc. and the Integra Foundation.

“Neil Petroff is truly a world-class investment professional” said David Patterson , Chair and Chief Executive Officer of Northwater. “His substantial experience and expertise will be invaluable to Northwater and its clients as we continue to offer industry-leading alternative investment solutions to institutional investors around the world.”

About Northwater Capital Management Inc.

Northwater Capital Management Inc. has, over the years, been known for being first into new and innovative investment strategies. It was the first Canadian firm in synthetic indexing, fund of funds in hedge funds, intellectual property funds, risk parity portfolios and bespoke liquid alternative strategies. Currently, it manages the Northwater Intellectual Property Funds and the Fluid Strategies portfolios. Founded in 1989, Northwater is a private investment company with offices in Toronto and Chicago.

I completely agree with Dave Patterson, “Neil Petroff is truly a world-class investment professional” and the folks at Northwater are truly lucky to have him on their team. [Note: You should read the latest from Northwater’s Neil Simons, The Missing Piece to Alternative Investing – Part 1.]

You know who else is very lucky? All of you who read my daily insights and don’t pay a dime for them! I’m no pension hero and will never receive a lifetime achievement award (couldn’t care less), but I’m damn proud of  this blog and my unflinching and brutally honest comments on pensions and investments.

So, once again, please take the time to subscribe or donate (to PensionPulse) on the top right-hand side and support my efforts in bringing you the very best insights on pensions and investments. I thank all my institutional subscribers and I’m tinkering with an idea to provide those who subscribe with premium content to give you an edge over your peers and just to thank you for supporting my blog.

Photo by  Dirk Knight via Flickr CC License

Craig Wong of the Canadian Press reports, Savers, pension plans should prepare for lower investment returns, C.D. Howe report suggests:

Retirement savers and pension funds should be prepared for lower investment returns than they had before the financial crisis, a report by the C.D. Howe Institute suggests.

Report authors Steve Ambler and Craig Alexander project a one per cent rate of real return for risk-free investments will form an anchor for the returns on other investments including bonds and stocks.

And while Alexander said that would imply a three per cent return on three-month treasury bills if the Bank of Canada maintains its two per cent inflation target — which would be well ahead of where rates are today — it would be below where it was before the financial crisis and even lower than in the 1990s.

Three-month treasury bills currently earn around 0.42 per cent, however the yield on the same investment was more than four per cent as recently as 2007.

“Today, pension managers would be thrilled with such a return on highly liquid, sovereign-grade assets, and it may seem odd discussing such a high rate at the moment,” said Alexander, a former chief economist at TD Bank.

“Nevertheless, long-term investors, like pension funds, have a multi-decade investment horizon, and the analysis tells us they need to be braced for lower returns than in the past.”

The report noted that an investor hoping to earn a seven per cent annual return won’t be able to do that without taking at least some risk. And with a lower risk-free rate than in the past, that means taking more risk to earn the same return.

The report said the lower risk-free rate will be due, in part, to the impact of the aging population that will weigh on the rate of growth in real income per capita.

With growth in real income per capita expected to average at an annual pace between 0.75 and 1.35 per cent over the next couple of decades, that means the real return on risk-free investments can only be counted on to be close to one per cent, the report said.

Alexander acknowledged that the real risk-free rate today is below the pace of real per capita income growth, but said if economic theory is validated that will change.

“The level of rates today are remarkably low, they are unsustainably low and ultimately there’s going to have to be a rebalancing, but when that rebalancing happens the level of rates is not going to go up to anything like we had before,” he said.

“What it is telling you is that returns on a balanced diversified portfolio could be something in the range of four to six per cent and that’s probably lower than many pension funds are hoping for.”

I don’t agree with the part of rates being “unsustainably low” (more on that below) but agree that we’re entering an era of lower returns. You can read the full C.D. Howe Institute report by Steve Ambler and Craig Alexander by clicking here. I embedded the conclusion below (click on image);

So what are my thoughts? Should savers, pensions, mutual funds, insurance companies, endowments, hedge funds, real estate funds and private equity funds expect lower returns in the future? You bet they should and there’s a simple reason why, one that the folks in the financial services industry are increasingly worried about privately but dismiss publicly and it’s called deflation (not the good kind either, I’m talking about a prolonged period of debt deflation).

I’ve been warning you to prepare for global global deflation for a long time and ignore the chatter on the end of the deflation supercycle. If you read the latest Fed minutes which were released on Thursday, you’ll see for yourself why there’s a sea change going on at the Fed, one where it’s paying a lot more attention to international developments and how they influence the U.S. dollar and inflation expectations.

And as I recently discussed in the Fed’s courage to act, the big surprise in 2016 might be no rate hike. And if we get another downturn, expect more quantitative easing or even negative interest rates if Federal Reserve Bank of Minneapolis President Narayana Kocherlakota manages to sway others on the perils of low inflation.

In fact, HSBC’s Steven Major who has been nailing the interest-rate story, is out with a bold new forecast:

In client note on Thursday titled “Yanking down the yields,” the interest-rates strategist projected that bond yields would be much lower than the markets expected because central banks including the Federal Reserve were reluctant to raise interest rates.

Major sees the benchmark US 10-year yield, now at 2.05%, averaging 2.10% in the fourth quarter, but then tumbling to 1.5% by the third quarter of 2016. He also lowered projections for European bond yields.

If Major is right, it throws a kink in the doomsday scenarios of bond bears like Paul Singer and Alan Greenspan both of whom have been making dire warnings on bonds without properly understanding the structural deflationary headwinds which keep driving bond yields lower:

• The global jobs crisis: Jobs are vanishing all around the world at an alarming rate. Worse still, full employment jobs with good wages and benefits are being replaced with contract jobs or part-time employment with low wages and no benefits.
• Demographics: The aging of the population isn’t pro-growth. As people get older, they live on a fixed income, consume less, and are generally more careful with their meager savings. The fact that the unemployment rate is soaring for younger workers just adds more fuel to the fire. Without a decent job, young people cannot afford to get married, buy a house and have children.
• The global pension crisis: A common theme of this blog is how pension poverty is wreaking havoc on our economy. It’s not just the demographic shift, as people retire with little or no savings, they consume less, governments collect less sales taxes and they pay out more in social welfare costs. This is why I’m such a stickler for enhanced CPP and Social Security, a universal pension which covers everyone (provided governments get the governance and risk-sharing right).
• Rising inequality: The ultra wealthy keep getting richer and the poor keep getting poorer. Who cares? This is how it’s always been and how it will always be. Unfortunately, as Warren Buffett and other enlightened billionaires have noted, the marginal utility of an extra billion to them isn’t as useful as it can be to millions of others struggling under crushing poverty. Moreover, while Buffett and Gates talk up “The Giving Pledge”, the truth is philanthropy won’t make a dent in the trend of rising inequality which is extremely deflationary because it concentrates wealth in the hands of a few and does nothing to stimulate widespread consumption (I know, we can argue that last point but for the most part, you know I’m right).  
• High and unsustainable debt in the developed world: Government and household debt levels are high and unsustainable in many developed nations. This too constrains government and personal spending and is very deflationary, especially in an era of fiscal austerity.
• Technology: Everyone loves shopping on-line to hunt for bargains. Technology is great in terms of keeping productivity high and prices low, but viewed over a very long period, great shifts in technology are disinflationary and some say deflationary. 

Go back to read my comment from earlier this week on the problems at Teamsters’ pension fund where I discussed the limits of inequality and the need to bolster Social Security for all Americans.

U.S. companies are hoarding record cash levels, over $2 trillion in offshore banks, and the guys and gals on Wall Street are making off like bandits as profits hit $11.3 billion in the last six months. Meanwhile, most Americans are barely able to get by because they have little or no savings whatsoever.

Why is this important? Because apart from the weak international economy, there are important domestic structural factors ensuring more inequality and deflation down the road. In fact, when you look at the factors I discuss above, it’s mind-boggling to think the Fed will make the monumental mistake of raising interest rates, even if it’s a one and done deal. Now more than ever, the risks of deflation coming to America are just one policy blunder away.

This is why I agree with Gary Shilling, a well-known deflationista, the 30-year bond yield is going to 2% which is why he continues to be bearish on energy and commodities. Shilling has been forecasting low energy and commodities prices and lower rates for some time and believes the bull market in bonds isn’t over yet.

I agree with Shilling over a longer period but in the near term we are witnessing a commodity rebound lifting world equities, all part of an October surprise where we’re seeing strong rallies in emerging markets (EEM), Chinese (FXI), Energy (XLE), Oil Services (OIH), Oil & Gas Exploration (XOP), Metals & Mining (XME) and solar (TAN).

What remains to be seen is if these rallies in beaten down sectors are counter-trend rallies that will fizzle out quickly or part of a much bigger sector rotation back in commodities and energy.

One thing is for sure, with the Fed out of the way, smart money isn’t worried about a looming catastrophe ahead and is instead betting big on a global recovery. But nervous investors who got pummeled in the summer selloff will use these rallies to take money off the table (click on image below):

As for my outlook, it hasn’t changed much since I wrote in back in January. It’s been a rough and tumble year, especially after China’s Big Bang which has wreaked havoc on markets and beaten the crap out of unsophisticated retail investors and sophisticated hedge funds (more on this next week).

I continue to trade and invest in large (IBB) and small (XBI) biotech shares, loading up on big dips, but I’m fully cognizant that these Risk On/ Risk Off markets can whack me hard at any time. Still, earlier this week, Zero Hedge posted an a comment on the biotech massacre which prompted this response from me on Twitter (click on image):

Again, biotech isn’t for the faint of heart, it’s an extremely volatile sector but in a world where deflation fears reign, you want to invest in sectors that have the right secular headwinds behind them.

Here’s something else I want you all to think about as you prepare for lower investment returns. If you go back in history and look at episodes of low real yields, you will see an increase in financial market volatility which is now being exacerbated by the advent of algorithmic and high-frequency trading. This is all part of the Wall Street code.

Why am I bringing this up? Because if we are entering a prolonged period of low growth, low returns and possibly deflation and whole lot of uncertainty, this volatility will wreak havoc on the portfolios of retail investors and large institutional investors, which includes pension funds and even some large hedge funds struggling in this new environment.

And this worries me a lot because I  see more and more people with little or no savings falling through the cracks and even those that manage to save are going to confront pension poverty down the road. This is why I’m a stickler for enhancing the CPP in Canada and bolstering Social Security in the United States. Now more than ever, the world needs to go Dutch on pensions, providing its citizens with secure public pensions managed by well-governed defined benefit plans.

I better stop there as there’s a lot of food for thought in the comment above that needs to be properly digested by sophisticated and unsophisticated investors.

Photo by www.SeniorLiving.Org

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

Lisa Beilfuss and Aruna Viswanatha of the Wall Street Journal report, Blackstone in $39 Million SEC Settlement:

Blackstone Group LP agreed to pay about $39 million to settle Securities and Exchange Commission charges over some of the buyout-fund manager’s fee practices, in the agency’s second settlement with a big private-equity firm stemming from its broad examination of the industry.

The SEC said Wednesday that the New York firm failed to sufficiently disclose to its fund investors details about big one-time fees Blackstone collected from companies it sold or took public, as well as discounts the firm received on some legal fees that weren’t passed on to the fund investors. Nearly $29 million of the settlement will be distributed to affected fund investors, the SEC said.

Blackstone settled the charges without admitting or denying the SEC’s findings.

The settlement follows KKR & Co.’s June agreement to pay almost $30 million to settle SEC charges that it improperly allocated more than $17 million in expenses, hurting some investors while benefiting the firm’s executives and certain clients. KKR neither admitted nor denied the allegations.

“Our clear message to the entire private-equity industry is that this is an area of great risk, and that whatever the success of the fund over time, hidden or inadequately disclosed fees will not be tolerated regardless of the size of the adviser,” SEC Enforcement Director Andrew Ceresney said in announcing the Blackstone settlement.

The 2010 Dodd-Frank financial-regulation overhaul required private-equity funds to register with the SEC, giving the agency increased authority over the industry.

“This SEC matter arose from the absence of express disclosure in marketing documents, 10 or more years ago, about the possible acceleration of monitoring fees,” Blackstone said, calling the practice common in the industry. Blackstone voluntarily made changes to the applicable policies before the inquiry began, according to a company representative.

Blackstone, the world’s largest private-equity firm, last year curbed its collection of monitoring-termination fees, which are charged by many private-equity firms but have become controversial. Behind those fees are contracts that Blackstone and other large private-equity firms often enter into with companies they buy; the contracts spell out consulting, or “monitoring,” fees paid over a set number of years, often a decade or longer.

If a company is sold or taken public before end of that period, the contract often dictates that the portfolio company “accelerate” the remaining fees, by paying a lump sum for years of future consulting work the private-equity firm won’t have performed. The payments to Blackstone effectively reduced the value of the portfolio companies before sale, the SEC said.

The SEC has criticized these as a type of poorly disclosed “hidden” fee whose cost often is borne by public pension funds and other investors in private-equity funds.

In Blackstone’s case, the SEC said the firm had in most instances only taken the fees while maintaining some ownership stake in the company, but that in a few instances it took fees for a period of 1½ to several years for which it no longer had a stake in the company.

In addition to the monitoring fees, the SEC also took aim at Blackstone’s contracts with its lawyers. Between 2008 and 2011, the SEC said, Blackstone had an agreement with its law firm under which it received a discount on legal services that was “substantially greater” than the discount the funds received, but the difference wasn’t disclosed to the fund investors. The SEC didn’t say what the different rates were.

Adam Samson, Stephen Foley and Gina Chon of the Financial Times also report, Blackstone to pay $39m over SEC probe into fees:

Blackstone is to pay $39m in compensation and fines in the latest action by US regulators to stamp out hidden fees across the private equity industry.

The Securities and Exchange Commission accused the world’s biggest alternative asset manager of failing to fully inform investors about fee practices that it said eroded the value of their holdings.

The enforcement action comes 18 months after an SEC report found “violations of law or material weaknesses in controls” in the collection of fees and allocation of expenses at more than half of the 112 private equity managers the agency inspected.

Earlier this year, Blackstone rival KKR paid $28.7m in another SEC enforcement action, and the regulator also took action against two smaller private equity firms last year.

Andrew Ceresney, director of the SEC’s enforcement division, said the settlements with KKR and Blackstone covered specific practices and did not “imply closure”. The investigation of the industry is continuing, he said, and private equity firms should voluntarily report any historic fee practices they believe may not have been properly disclosed to investors.

The Blackstone settlement focuses on the acceleration of so-called “monitoring fees” that it charges portfolio companies.

Private equity companies charge fees for consulting with companies they own, sometimes with terms as long as a decade. In a bid to recoup what would be lost revenue, many private equity companies charge a large lump-sum fee ahead of a sale or when they take a portfolio company public.

The SEC alleged Blackstone failed to properly disclose the accelerated payment scheme to investors in its funds, which often count pension funds among their ranks.

“The payments to Blackstone essentially reduced the value of the portfolio companies prior to sale, to the detriment of the funds and their investors,” the SEC said on Wednesday.

The regulator also alleged Blackstone failed to tell investors that it had negotiated steep discounts for services from an outside legal firm that were not extended to the funds.

The scale and the complexity of fees paid to the $3.5tn private equity industry has become an increasing concern to public pension funds. In June, a group of senior elected US state officials wrote to the SEC calling on the agency to ensure that all private equity fees are reported clearly and consistently to investors.

The letter was signed by 13 state treasurers and comptrollers, including those in California and New York, who helped to provide oversight for public pensions.

Blackstone, led by Stephen Schwarzman, disclosed the SEC probe into monitoring fees and legal fee discounts in May, and said that it stopped or limited the charging of accelerated monitoring fees last year. It has also said it had beefed up disclosures over such fees.

“This SEC matter arose from the absence of express disclosure in marketing documents, ten or more years ago, about the possible acceleration of monitoring fees, a common industry practice,” Blackstone spokesman Peter Rose said.

“Each accelerated fee was, however, as the SEC order acknowledges, disclosed when received and our Limited Partner Advisory Committee did not exercise its right to object. Moreover, Blackstone voluntarily made changes to the applicable policies well before this inquiry was begun.”

The SEC said nearly $29m of the settlement will be distributed to affected fund shareholders.

Lastly, Dan Primack of Fortune reports, Blackstone Group settles with SEC over fees, will pay out $39 million:

Alternative investment giant The Blackstone Group (BX) this morning reached a settlement with the Securities and Exchange Commission, related to some of the firm’s former private equity fee practices.

Blackstone has agreed to pay a $10 million fine, plus refund nearly $29 million (including interest) to limited partners in its fourth and fifth flagship private equity funds. At issue were so-called accelerated monitoring fees, in which Blackstone effectively charged its portfolio companies for services not actually rendered (without properly disclosing such arrangements to its LPs). Here is how we described the scheme last October:

For years, Blackstone and many other private equity firms have charged something called “accelerated monitoring fees.” What it basically means is that, after buying a company, Blackstone would set an annual fee that the company would pay for various (often undefined and unverified) services. For example, $5 million per year for 10 years. The kicker is that if Blackstone exits the company prior to the 10 years being up — either via a sale or IPO — it gets the extra years in a lump sum payment.

Going forward, Blackstone no longer will write acceleration clauses into its monitoring fee agreements. For existing portfolio companies, it either will distribute 100% of the accelerated fee to limited partners or will cut other fees a commensurate amount.

The SEC also took issue with certain discounts that Blackstone received from law firms from legal work done for the parent company, but which were not also extended to its funds.

Word of the SEC investigation was first disclosed by Blackstone in a May regulatory filing.

“Full transparency of fees and conflicts of interest is critical in the private equity industry and we will continue taking action against advisers that do not adequately disclose their fees and expenses, as Blackstone did here,” Andrew Ceresney, director of the SEC’s enforcement unit said in a press release.

Blackstone spokesman Peter Rose provided the following statement via email:

“This SEC matter arose from the absence of express disclosure in marketing documents, ten or more years ago, about the possible acceleration of monitoring fees, a common industry practice. Each accelerated fee was, however, as the SEC order acknowledges, disclosed when received and our Limited Partner Advisory Committee did not exercise its right to object. Moreover, Blackstone voluntarily made changes to the applicable policies well before this inquiry was begun.”

Back in June, fellow private equity giant Kohlberg Kravis Roberts & Co. (KKR) settled with the SEC over charges that it breached fiduciary duty to investors in its flagship private equity funds between 2006 and 2011.

I’ve already covered hidden “monitoring fees” and hidden rebates from law firms and other third parties in a previous comment on private equity stealing from clients.

What Blackstone, KKR and others did is wrong and while these SEC settlements are a pittance for these alternative investment powerhouses, they represent a sea change for the industry which has prided itself in maintaining a culture of secrecy. The institutionalization of private equity, real estate and hedge funds has attracted regulators which are doing their job, monitoring the practices of these funds to make sure they’re in the best interests of their investors and shareholders.

What are my thoughts? I think these settlements will be forgotten soon enough and the reality is Blackstone, KKR and other alternative investment powerhouses have already taken steps to stop these practices.

Why are they doing this? Because the name of the game for these giants is asset gathering. Period. Paying a settlement of $39 million to the SEC after they took measures to cease these practices is well worth it if they can continue garnering ever more assets from public pension funds and sovereign wealth funds where they make exponentially more than these settlements just on the management fee alone.

And these SEC settlements won’t impact Blackstone’s fundraising activities in the least. In fact, it raised over $17 billion first close for its seventh global buyout fund back in May and it just raised $15.8 billion for its latest global real estate fund, Blackstone Real Estate Partners VIII where things are humming along just fine:

At present, the firm is managing two regional opportunistic real estate funds—the $8.2 billion Blackstone Real Estate Partners Europe IV and the $5 billion Blackstone Real Estate Partners Asia.

The alternative asset manager raised more than 90% of the money from institutional investors, according to people familiar with fundraising in March. Blackstone raised the remainder from the individual investors, a process that took longer to complete because of paperwork, said one person to Bloomberg.

How is Blackstone able to garner billions in assets? When you have people like Jonathan Gray and David Blitzer on your team, it’s not hard to see why investors love this firm. They are the best of breed in alternative investments, literally printing money in real estate, private equity, hedge funds and anything in between.

But things are getting tough for Blackstone and other private equity funds which is why the big shops are emulating the Oracle of Omaha’s approach, trying to collect ever more assets for a longer period, even if it means lower returns.

Still, with public markets getting hit, things are going to get a lot tougher for private equity superheroes which is one reason Blackstone’s shares have gotten hit lately (along with the market and shares of other alternative asset managers; click on images):

Finally, while it’s easy to point the finger at Blackstone, KKR, Carlyle and others, we should also pause and reflect on the role institutional investors play in tracking fees and hidden costs in their fund investments. I just wrote a comment on CalSTRS pulling a CalPERS on PE fees, criticizing both these giant funds for not doing enough to track and disclose private equity fees.

Matt Levine of Bloomberg touched on this last point in his comment, SEC Finds That Blackstone Charged Too Many Fees where he concludes:

As far as I can tell, this is a story of changing norms for private equity. Once upon a time, private equity was a sexy asset class that charged silly fees that were not subject to too much scrutiny by investors. (It was also a very well lawyered asset class that disclosed those fees reasonably clearly.)

But as returns have gotten less exciting, and as outside observers have called on public pension funds to pay more attention to what they pay for investing advice, limited partners have realized that some of the fees they paid to private equity firms were pretty silly. One response has been to stop paying those fees: Even before this SEC case, Blackstone got more conservative about accelerating monitoring fees, presumably because that’s what investors wanted.

But another response has been for investors to regret that they ever paid the fees in the first place, and to attribute that regret not to their own failure to care but to the private equity firms’ failure to disclose. There’s an obvious emotional appeal to that result — it’s much better to blame sophisticated Wall Street fat cats for overcharging than to blame public pension managers for overpaying — even though it doesn’t quite fit the facts.

Read Matt Levine’s entire comment here as he discusses many excellent points on the changing landscape in private equity and how institutional investors are responding (the smart ones are going Dutch on private equity).

Of course, you can read Yves Smith’s comment, SEC Gives Blackstone $39 Million Wet Noodle Lashing Over Private Equity Abuses, but not surprisingly, I find it too harsh.

Once again, if you have anything to add to this comment, feel free to email me at LKolivakis@gmail.com and I’ll be more than happy to edit and add your comments in an update.

Photo by Securities and Exchange Commission 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.

Mary Williams Marsh of the New York Times reports, Teamsters’ Pension Fund Warns 400,000 of Cuts:

A prominent Teamsters pension fund, one of the largest, has filed for reorganization under a new federal law and has sent letters to more than 400,000 members warning that their benefits must be cut.

Any reorganization of the decades-old Central States Pension Fund would take months and would probably be a brutal battle as workers, retirees, union leaders and employers all seek to protect competing interests. It is a multiemployer plan, the type led jointly by a union and a number of companies, that has caused consternation for many years, because if it failed, it could wipe out a federal insurance program that now pays the benefits of a million retirees.

If the reorganization ultimately proves successful, however, it could serve as a model for other retirement plans with similar, seemingly intractable financial problems.

Cutting retirees’ pensions has generally been illegal, except under the most dire circumstances. But the executive director of the Central States fund, Thomas Nyhan, said that reducing payouts to make the money last longer was the only realistic way of avoiding a devastating collapse in the next few years.

“What we’re asking is to let us tap the brakes a little now, and let us avoid insolvency,” he said. “The longer we wait to act, the larger the benefit reductions will have to be.”

He said the Central States fund had been hit by powerful outside forces — the deregulation of the trucking industry, declining union membership, two big stock crashes and the aging of the population — and it was currently paying out $3.46 in pension benefits to retirees for every dollar it received in employer contributions.

“That math will never work,” Mr. Nyhan said. He said the fund was projected to run out of money in 10 to 15 years, an almost unthinkable outcome for a pension fund that became a political and financial powerhouse in the 1960s, when trucking boomed with the construction of the interstate highway system. Central States became famous back then for financing the construction of hotels and casinos in Las Vegas.

In 1982, the Teamsters were barred from investing their retirees’ money because of the union’s ties to organized crime. Under a federal consent decree, the fund’s investment duties were shifted to a group of large banks, where they have remained. The restructuring plan would not change that.

In the coming months, the Treasury Department will review the Central States restructuring plan, to make sure it complies with the new law. It will also receive comments from affected people through a special master, Kenneth Feinberg, who has been retained by the Treasury to iron out conflicts that have come up in other special circumstances, such as the dispute over whether workers at bailed-out companies could receive contractual bonuses.

The Treasury is expected to decide whether to approve the proposal by next May. If it does, Central States’ roughly 407,000 members will then vote on it. Those facing large cuts would be unlikely to vote in favor of the restructuring. But others might see it as an acceptable way to make their pension plan viable over the long term. Active workers will continue to accrue benefits, for example, and Mr. Nyhan said his projections showed that the restructuring could make the pension fund last for 50 more years.

Mr. Nyhan acknowledged that the process would be emotionally charged. Even if a majority votes no, however, the Treasury Department will have legal authority to impose the changes, because the Central States fund is so large that it qualifies as “systemically important.” That means that if it collapsed, it could take down the multiemployer wing of the Pension Benefit Guaranty Corporation, jeopardizing the roughly one million retirees who currently get their pensions through the program. (The federal insurance program for single-employer pensions would not be affected by a possible failure of the multiemployer program.)

In the past, multiemployer pension plans were popular because they gave small companies the chance to offer traditional pensions, and they permitted workers to move from job to job, taking their benefits with them. About 10 million Americans participate in multiemployer pension plans, many of them in sectors like trucking, construction and retailing, where unions are a powerful presence.

Such pension plans were also said to be financially stronger than single-employer pension plans, because if one company went out of business, others would keep contributing to the pooled trust fund that paid the benefits. Both types were insured by the federal government’s pension insurance program, but companies taking part in multiemployer plans paid much smaller premiums and the coverage was very limited — no more than $12,870 per year, compared to around $54,120 a year for a single-employer pension.

Many Teamsters have earned pensions that exceed the multiemployer insurance limit and would be hit hard if the Central States fund failed.

But in recent years, some multiemployer plans ran into severe trouble as more and more participating companies went bankrupt, leaving growing numbers of “orphaned” workers and retirees for the surviving companies in the pool to cover. Companies in the more troubled plans said lenders would no longer give them credit. Last December, Congress enacted the Multiemployer Pension Reform Act of 2014, which set up a legal framework for distressed pension plans to restructure.

According to a summary provided by the Central States pension fund, its restructuring plan would work by slowing the rate at which active Teamsters will build up their benefits in the coming years, and by lowering the payouts to current retirees, with certain exceptions.

Retirees who are 80 or older will not have their pensions cut, and those over 75 will receive smaller cuts than younger retirees. Disability pensions will continue to be paid in full.

A group of about 48,000 workers and retirees who earned their benefits by working at United Parcel Service will continue to have their pensions paid in full, thanks to labor contracts between the Teamsters and the company. UPS was for many years the largest employer in the Central States pension fund, but it withdrew from the fund in December 2007 after making one large final payment. After the stock market crash the following year, UPS and the Teamsters negotiated a separate agreement calling for UPS to shelter those workers from any cuts the Central States pension fund might have to make.

The group that seems exposed to the largest pension cuts consists of about 43,400 “orphans,” or retirees still in the pension fund, even though their former employers no longer exist. Their pensions will be cut to 110 percent of what they would get from the Pension Benefit Guaranty Corporation, or at most, $14,158.

Active workers will not lose any of the benefits they have earned up until now. But in their coming years of work, they will accrue benefits at the rate of 0.75 percent of the contributions their employers pay into the fund. In the past, their accrual rate was 1 percent.

The restructuring will also abolish a rule that bars pensioners from returning to the work force to supplement their reduced pensions.

The president of the International Brotherhood of Teamsters, James P. Hoffa, wrote to Mr. Nyhan last month, saying the new restructuring law “creates the false illusion of participatory democracy,” because it required a vote “that can simply be ignored.” Although Mr. Hoffa is president of the union, he has no say over the pension fund, which is run by a group of trustees from the companies and the union.

“Participants and beneficiaries get to vote, but their vote only counts if they vote to cut their own pensions,” Mr. Hoffa said. “The people who conceived that cynical scheme should be ashamed.” He said he preferred legislation introduced by Senator Bernie Sanders of Vermont, which if enacted would close tax loopholes and redirect the money to supporting troubled multiemployer pension plans.

Mr. Nyhan said he liked Senator Sanders’s proposal too, but recalled that a similar bill was introduced in 2010, when Democratic Party lawmakers controlled Congress, but was never approved. He said he thought it was even less likely that today’s fiscally hawkish, Republican-controlled Congress would enact such a bill. It was not safe to wait and see if the Sanders bill would pass, he said, because the passage of time made the insolvency more likely.

“The easy thing for my board to do would be ignore the problem,” he said. “We just don’t think this is the responsible thing to do.”

“We need either less liabilities or more money, and Congress is telling us we’re not getting more money,” he said.

This is a very important development which impacts all U.S. mutiemployer plans. Unfortunately, I don’t expect any relief from Congress as it effectively nuked pensions last December which led to this restructuring.

Welcome to the United States of pension poverty where important social and economic policies are never discussed in an open, constructive and logical manner. Instead, there is the usual divisive politics of “less” versus “more” government which obfuscates issues and impedes any real progress in implementing sensible reforms in education, healthcare and retirement, the three pillars of a vibrant democracy.

Now, let be clear here, I don’t like multiemployer pension plans because they are poorly governed which is why many risk insolvency unless comprehensive reforms are implemented. But the problem here is much bigger than multiemployer plans. U.S. retirement policy needs a drastic overhaul to properly cover all Americans, most of which have little or no savings whatsoever.

I’ve shared some of my thoughts on what needs to be done when I examined whether Social Security is on the fritz:

…politics aside, I’m definitely not for privatizing Social Security to offer individuals savings accounts. The United States of pension poverty has to face up to the brutal reality of defined-contribution plans, they simply don’t work. Instead, U.S. policymakers need to understand the benefits of defined-benefit plans and get on to enhancing Social Security for all Americans.

One model Social Security can follow is that of the Canada Pension Plan whose assets are managed by the CPPIB. Of course, to do this properly, you need to get the governance right and have the assets managed at arms-length from the federal government. And the big problem with U.S. public pensions is they’re incapable of getting the governance right.

So let the academics and actuaries debate on whether the assumptions underlying Social Security are right or wrong. I think a much bigger debate is how are they going to revamp Social Security to bolster the retirement security of millions of Americans. That’s the real challenge that lies ahead.

Yes folks, 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).

I know, for Americans, these are all “socialist” countries with heavy government involvement and there is no way in hell the U.S. will ever tinker with Social Security to bolster it. Well, that’s too bad because take it from me, there is nothing socialist about providing solid public education, healthcare and pensions to your citizens. Good policies in all three pillars of democracy will bolster the American economy over the very long-run and lower debt and social welfare costs.

If U.S. policymakers stay the course, they will have a much bigger problem down the road. Already, massive inequality is wiping out the middle class. Companies are hoarding record cash levels — over $2 trillion in offshore banks — and the guys and gals on Wall Street are making off like bandits as profits hit $11.3 billion in the last six months.

Good times for everyone, right? Wrong! Capitalism cannot sustain massive inequality over a long period and while some think labor will rise again as the deflationary supercycle (supposedly) ends, I worry that things will get much worse before they get better.

Photo by http://401kcalculator.org via Flickr CC License