Author: Leo Kolivakis

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

Tom Anderson of CNBC reports, Most older Americans fall short on retirement savings:

How bad is America doing when it comes to retirement savings? The Government Accountability Office looked into the question, and its answer is sobering.

A new GAO analysis finds that among households with members aged 55 or older, nearly 29 percent have neither retirement savings nor a traditional pension plan.

“There hasn’t been a significant increase in wages, people have student loans and other debt, and many are continuing to struggle financially,” said Charles Jeszeck, the GAO’s director of education, workforce and income security, which analyzed the Federal Reserve’s 2013 Survey of Consumer Finances to come up with its estimates. “We aren’t surprised that people have not saved a lot for retirement”(click on image below).

Even among those who do have retirement savings, their nest eggs are small. The agency found the median amount of those savings is about $104,000 for households with members between 55 and 64 years old and $148,000 for households with members 65 to 74 years old. That’s equivalent to an inflation-protected annuity of $310 and $649 per month, respectively, according to the GAO.

“I don’t care what anyone says. That’s not enough income for retirement,” said Anthony Webb, senior research economist at the Center for Retirement Research at Boston College, who reviewed the GAO report.

Social Security remains a fundamental part of most Americans’ retirement plans, with benefits providing most of the income for about half of households age 65 and older, according to the GAO.

The agency studied the level of Americans’ retirement savings at the request of Sen. Bernie Sanders of Vermont, an independent who is seeking the Democratic nomination in the 2016 presidential election and is also the ranking Democratic member on the Senate’s subcommittee on primary health and retirement security.

Estimates about the size and scope of the retirement savings problem vary widely, the GAO found. In addition to examining the Survey of Consumer Finances, it reviewed nine studies conducted between 2006 and 2015 by a variety of organizations, including academics, benefits consultant Aon Hewitt, the Employee Benefit Research Institute (EBRI) and the Investment Company Institute. Based on these reports, it concluded that one-third to two-thirds of workers are at risk of falling short of their retirement savings targets, in part because of the range of assumptions about how much income is required in retirement.

The research that the GAO examined consistently showed that people aged 55 to 64 are less confident about their retirement and plan to work longer to afford retirement. However, a 2012 study by the EBRI found that about half of retirees said they retired earlier than planned because of health problems, changes at their workplace or having to care for a spouse or another family member. This suggests “that many workers may be overestimating their future retirement income and savings,” wrote GAO researchers.

“EBRI’s model does show that a significant percentage of households will run short of money in retirement,” said Jack VanDerhei, EBRI’s research director. “This is because we model all the major risks in retirement.”

Reports like those and the GAO analysis should serve as a wake-up call about the lack of Americans’ retirement savings, said Catherine Collinson, president of the Transamerica Center for Retirement Studies.

Transamerica’s retirement research, which wasn’t included in the GAO’s review, doesn’t give board projections about America’s retirement readiness because retirement is “a very personal question,” she said. But Collinson stressed the need for more people to calculate their projected retirement needs and to plan ahead accordingly. “As a society, we cannot do enough to raise awareness about the magnitude of this problem.”

I’ve covered the pension crisis looming in the United States of Pension Poverty in great depth on my blog. It’s not just a savings crisis. America’s great 401(k) experiment has failed. As discussed in the article above, even people who are able to save aren’t saving enough and even if they manage some savings, they remain vulnerable to a downturn in the market and don’t know how to properly invest so that they don’t outlive those savings. And even if they did, they will likely outlive those savings.

But fret not, just like millions of Canadians will not have the luxury of living a retirement dream, millions of Americans are increasingly realizing that retirement is pure fantasy and they will have to work well past 65 to achieve any sort of retirement.

In fact, Eric Rosenbaum of CNBC reports, New retirement age is not 65, not 80, not 95: It’s higher:

Human life has reached an inflection point—one that matters a great deal for those planning for retirement.

One hundred years ago, the average lifespan was about 42. That’s now doubled. People are living longer and trying to stretch their income to make ends meet and stay ahead of inflation, but that’s not the inflection point financial advisors are really concerned about—that’s just the everyday blocking and tackling on behalf of client portfolios. The emerging challenge goes way beyond that.

Scientists have found the mechanisms that govern aging and are already doing experiments in rats on how to reverse it. They’ve found species that do not die of old age, such as the jellyfish Turritopsis.

“We’re adding three months to life per calendar year,” said Salim Ismail, former innovation director at Yahoo and founding executive chairman of Singularity University. “It’s not an if, it’s a when, and the point in time is in the 15- to 20-year range,” said Ismail, speaking at the Exponential Finance conference in New York City on Wednesday.

“In a decade or two, or three, there will be a class of people taking treatments who can live for a long time, and that affects employment planning, retirement planning … Society will never have seen that before,” Ismail said.

When it comes to the rise of technology, financial advisors have been challenged by the robo-advisors, and the financial media has latched on to the trend of online investment management as an existential crisis for the advisory business. Advisors contend that the robo-advisors haven’t been tested in a down market—they all launched after the financial crisis. And they can’t do the hand-holding that an advisor—part therapist, part life counselor—can.

But for advisors such as Ric Edelman, chairman and CEO of Edelman Financial Services—which has 27,000 clients and 41 offices in the U.S. and launched its own robo-advisor two years ago—the really critical technology challenge for financial advisors and their clients is exponential health care.

“The first person to reach age 150 has already been born,” Edelman said during an Exponential Finance panel discussion on the future of the advisory business. “How do I talk to a client preparing to retire at 65 using the traditional model and with planning software that only goes to age 95? The financial model is broken.”

Crazy talk

Edelman said the shift from a linear to a cyclical lifeline is already starting to be seen: The average American at age 35 has already had eight jobs. “It’s not going to be birth, school, job, retirement, death,” he said. Soon individuals will cycle between work, school, sabbaticals, more schooling and more work in a cycle that has never before existed.

“It’s going to be less about money in the future and more about the future,” said Bill Bachrach, chairman and CEO of financial advisory consultant Bachrach & Associates. “How do you sit down with someone in their 30s or 40s and tell them that they are going to live to 110 or 120 and haven’t prepared financially for that?”

Bachrach said that at first the challenge won’t be that the information is overwhelming; it’s that the client won’t even believe what the advisor is saying, making it the most difficult and potentially costly conversation an advisor needs to initiate. “They will look at you like you are smoking crack,” he said. “It’s the singularity conversation, and if they think an advisor is crazy, then the advisor will lose the client.”

A 401(k) for a 1,000-year-old baby

The push and pull between financial advisors and financial technology, meanwhile, is nothing new for those who have been in the business for a long time.

“We’ve been dealing with it for decades with financial-planning software,” Bachrach said. “You don’t see us using a slide rule and yellow pad anymore.”

Edelman said the day when his firm delivers a tablet preloaded with financial-planning tools to a client by FedEx ahead of a video conference—rather than rely on its expensive and time-consuming network of 41 nationwide offices—is coming. Avatars will also be used to deliver financial counseling.

“It’s all those things we have to move more toward,” he said.

Ultimately, Bachrach said, consumers will start going to advisors and saying, “I’ve heard about the ‘singularity,’ and I may have another 40 years when I thought I would have a lot of money and then transfer that wealth to my kids. But if I live another 40 to 50 years, how do I do that?”

Advisors may be able to help baby boomers massage the immediate issue, which Bachrach summed up as “boomers screwing Gen X and Gen Y again. … ‘We first destroyed the planet, and now we’re stealing your inheritance.'”

But no advisor or software today has the solution for the question of immortality. “It’s back to human skills,” he said. “I’m not sure how robo-advisors do that, but maybe they get better and better.”

Time is on the side of financial advisors in practicing their approach to this question.

“Forget the person who lives to 150; it’s the baby living to 1,000,” said Ismail of Singularity University.

I doubt you will see many people living till 150 years old but there will be more centennials in the future and this will place more pressure on the “traditional financial model” (whatever that is) as well as on pensions already struggling with longevity risk.

Is there a better solution to America’s retirement crisis? Yes but it will be one that takes great political courage to implement, especially in the politically charged atmosphere of Washington where they’re still debating “big government” vs “smaller government.”

I touched upon it in my comment on 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 (and state) 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.

The time has come for enhanced Social Security just like the time has come for enhanced CPP. Canadians are lucky they have the CPPIB which is managing hundreds of billions and doing an outstanding, albeit not perfect, job.

In the U.S., there is no comparable public pension fund at the federal level which operates at arms-length from the government. There are many delusional state pension funds clinging to the pension rate-of-return fantasy, but there is no movement to transform and enhance Social Security to address America’s new pension poverty.

More importantly, U.S. and Canadian policymakers have to confront the brutal truth on defined-contribution plans and realize that they will never address the needs of millions of hard working people desperately looking to retire in dignity and security.

And what happens to old people when they’re confronted with pension poverty? Well, they live in isolation and shame, are malnourished, are more prone to get sick placing more pressure on the healthcare system which is already stretched, and they don’t spend money, which is bad for consumption and government revenues.

Importantly, the pension crisis will add to social welfare costs and debt, and it’s very deflationary, which is something the billionaires touting the “bigger short” haven’t even thought of.

A more worrying trend is the rise in crime among elderly people. Carol Matlack of Bloomberg recently reported, Instead of Playing Golf, the World’s Elderly Are Staging Heists and Robbing Banks:

British tabloids were abuzz after a dramatic recent heist in London’s Hatton Garden diamond district, as thieves made off with more than £10 million ($15.5 million) in cash and gems from a heavily secured vault. According to one theory, the gang used a contortionist who slithered into the vault. Others held that a thirtysomething criminal genius known as the “King of Diamonds” had masterminded the caper.

But when police arrested nine suspects, the most striking thing about the crew wasn’t physical dexterity or villainous brilliance. It was age. The youngest suspect in the case is 42, and most are much older, including two men in their mid-seventies. At a preliminary hearing on May 21, a 74-year-old suspect said he couldn’t understand a clerk’s questions because he was hard of hearing. A second suspect, 59, walked with a pronounced limp.

Young men still commit a disproportionate share of crimes in most countries. But crime rates among the elderly are rising in Britain and other European and Asian nations, adding a worrisome new dimension to the problem of aging populations.

South Korea reported this month that crimes committed by people 65 and over rose 12.2 percent from 2011 to 2013—including an eye-popping 40 percent increase in violent crime—outstripping a 9.6 percent rise in the country’s elderly population during the period. In Japan, crime by people over 65 more than doubled from 2003 to 2013, with elderly people accounting for more shoplifting than teenagers. In the Netherlands, a 2010 study found a sharp rise in arrests and incarceration of elderly people. And in London, police say that arrests of people 65 and over rose 10 percent from March 2009 to March 2014, even as arrests of under-65s fell 24 percent. The number of elderly British prison inmates has been rising at a rate more than three times that of the overall prison population for most of the past decade.

The U.S seems to have escaped the trend: According to the Bureau of Justice Statistics, the rate of elderly crime among people aged 55 to 65 has decreased since the 1980s. While the population of elderly prison inmates has grown, that mainly reflects longer sentences, especially for drug-related crimes.

Elderly people in developed countries tend to be “more assertive, less submissive, and more focused on individual social and economic needs” than earlier generations were, says Bas van Alphen, a psychology professor at the Free University of Brussels who has studied criminal behavior among the elderly. “When they see in their peer group that someone has much more money than they do, they are eager to get that,” he says. Older people may also commit crimes because they feel isolated. “I had one patient who stole candies to handle the hours of loneliness every day,” says van Alphen, who describes such behavior as “novelty-seeking.”

Rising poverty rates among the elderly are being blamed in some countries. That’s the case in South Korea, where 45 percent of people over 65 live below the poverty line, the highest rate among the 30 developed countries belonging to the Organization for Economic Cooperation and Development. “The government should make an all-out effort to expand the social safety net and provide jobs and dwellings for the elderly,” the Korea Times newspaper editorialized this month, warning that by 2026 more than 20 percent of the country’s population will be over 65.

The “Opa Bande” (“Grandpa Gang”), three German men in their sixties and seventies who were convicted in 2005 of robbing more than €1 million ($1.09 million) from 12 banks, testified at their trial that they were trying to top up their pension benefits. One defendant, Wilfried Ackermann, said he used his share to buy a farm where he could live because he was afraid of being put in a retirement home.

The perpetrators of the London jewel heist, though, were neither isolated nor impoverished. Prosecutors say the thieves disabled an elevator and climbed down the shaft, then used a high-powered drill to cut into the vault. Once inside, they removed valuables from 72 safe deposit boxes, hauling them away in bags and bins and loading them into a waiting van. Although their faces were obscured by hardhats and other headgear, the tabloids gave each thief a nickname based on distinctive characteristics seen on camera. Two of them, dubbed Tall Man and Old Man, “struggle to move a bin before they drag it outside,” the Mirror newspaper reported in its analysis of the security footage. “The Old Man leans on the bin, struggling for breath.”

Most of the nine men charged in the case appeared to be ordinary blokes. The hard-of-hearing 74-year-old was described by his London neighbors as an affable retiree who loves dogs; the 59-year-old with a limp was said to be a former truck driver. Another defendant runs a plumbing business in the London suburbs. All nine are being held in custody on charges of conspiracy to commit burglary; they haven’t yet entered pleas.

Richard Hobbs, a sociologist at the University of Essex who studies crime in Britain, says the country’s criminal underworld has changed dramatically in recent years. Rather than congregating in pubs or on street corners, many criminals now live seemingly ordinary lives, raising families and running legitimate businesses. They still participate in crime, but only with trusted associates. “They don’t see themselves as criminals, they see themselves as businessmen,” Hobbs says.

That makes it easier for elderly criminals to stay in the game. Older criminals often have extensive networks to draw on for needed expertise, Hobbs says. And some essential skills, such as money laundering, don’t require physical vigor.

Still, geriatric crime poses special challenges. During the trial of Germany’s “Grandpa Gang,” the gang members described how their 74-year-old co-defendant, Rudolf Richter, almost botched a 2003 bank heist by slipping on a patch of ice, forcing them to take extra time to help him into the getaway car. And the 74-year-old had another problem, co-defendant Ackermann told the court: “We had to stop constantly so he could pee.”

Geriatric crime is no laughing matter and neither is the global pension crisis. When people ask me why I’m so convinced global deflation will eventually hit America, I simply state the obvious, namely, the world is incapable of dealing with underinvestment and that chronic and high long-term unemployment, rising inequality, aging demographics and the global pension crisis are all structural issues which will ensure decades of global deflation. This will place enormous pressure on public finances but nobody is paying attention. The reflationistas and economists explaining the inflation puzzle should smoke that in their pipe!!

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

Michael Babad of the Globe and Mail reports, Millions of Canadians risk losing ‘retirement of their dreams,’ study warns:

The deputy chief economist at Canadian Imperial Bank of Commerce is making an impassioned plea to reform the country’s retirement system as quickly as possible.

“Add it all up, and there are some 5.8 million working-age Canadians who will see more than a 20-per-cent drop in their living standards upon retirement,” Benjamin Tal said in a report.

“That’s why the time to act is now.”

Canada’s Conservative government is studying the possibility of a voluntary expansion of the Canada Pension Plan, the idea being that working people could pay higher premiums for stronger benefits down the road.

It’s not just CPP, Mr. Tal added in an interview, but also the fact that Canadians simply aren’t saving enough. So “we have to be more creative” to encourage savings, whether via CPP, RRSPs or other ways.

“Without getting into the politics of it, it is important to remember why a change to the system is essential,” said Mr. Tal.

“While many Canadians, particularly those now close to 65, are on a path to the retirement of their dreams, the data show that millions of others are headed for a steep decline in living standards in the decades ahead, particularly those who are currently younger and who are in middle income brackets,” he added.

You’re okay if you were born during the Second World War because you’d maintain your standard of living when you take lower expenses into account.

The “leading edge” of the baby boomers are set up almost as well.

“But their children are much less well positioned, given the current trend towards lower savings rates and reduced private pension coverage,” said Mr. Tal, who arrived at the 5.8-million figure by studying age and income groups.

“On average, the replacement rate of those born in the 1980s, who will retire towards the middle of this century, will be only 0.7, implying a 30-per-cent drop in their standard of living.”

You can read an older report from Benjamin Tal and Avery Shenfeld, Canadians’ Retirement Future: Mind the Gap, to get a better understanding of the arguments they use to support their case.

Kudos to CIBC for being at the forefront, highlighting the ongoing retirement crisis this country is experiencing and will experience in the future. Tal is right, people aren’t saving enough, which is why I’m against the latest proposal of a voluntary CPP expansion as it’s doomed to fail (even though some argue for it, I think it should be mandatory).

The Tories are backtracking on enhanced CPP but they’re putting forth ridiculous policies which will primarily benefit the richest Canadians and the financial services industry catering to them. These aren’t the people that need help to retire in dignity and security.

But some Canadians are living a retirement dream. One of them is federal Justice Minister Peter Mackay who just announced he’s retiring from politics. By leaving politics now, he will be collecting his full pension of $128, 832 at the age of 55:

The National Post’s Kelly McParland points out in a column today this bit of information about former defence minister Peter MacKay. MacKay, 49 years old, announced last week he would be leaving federal politics:

“By quitting now, Peter MacKay will be able to collect his full Parliamentary pension at age 55 rather than 65. That amounts to $128,832 a year, or $1.3 million over the decade,” writes McParland. “That makes me feel so much better. You can spend a lot of quality time with your family for $128, 831 a year. If he’d stuck around longer, he’d have had to contribute more and wait longer. Atta boy Peter, soak that public!”

Jennifer Henderson of the CBC News also reports, Peter MacKay exit allows him to collect full pension at 55:

By choosing not to reoffer in this year’s federal election, Justice Minister Peter MacKay joins a growing list of Conservative MPs who will avoid the impact of pension changes that will triple the amount they must contribute and lock in some of the money for an extra 10 years.

Under new pension rules for MPs passed in 2013, all politicians elected for the first time in the next election must wait until age 65 before they can draw a pension.

It’s more complicated for MPs who have been in the House of Commons prior to January 2016. Their years of pensionable service prior to that date can be collected at age 55. Any pension they earn after January 2016 can’t be drawn until they turn 65, according to the Treasury Board of Canada.

MacKay’s decision not to reoffer was announced last week. He’ll be able to collect his full yearly pension of $128,832 at age 55.

Growing family

MacKay’s current salary as an MP — $167,400 — combined with his $80,100 top-up as a cabinet minister totals $247,500 annually.

MacKay was first elected to Ottawa in 1997 as MP for Pictou County and has been a cabinet minister since 2006. He told reporters in Stellarton last week that he’s not reoffering in the next election so he can spend more time with his wife Nazanin Afshin-Jam, their son Kian and their second child, due in the fall.

MacKay is the latest in a list of more than 30 Conservative MPs who have said they are not planning to reoffer. That includes a handful of sitting or former cabinet ministers under age 50, including John Baird, Shelley Glover and Christian Paradis.

A spokeswoman from MacKay’s office refused to comment Monday on whether the upcoming change in pension rules played a role in the timing of his departure.

“He is not reoffering so he can spend more time with his family,” she said.

Contributions will triple

The Canadian Taxpayers Federation fought for the new rules for MP pensions, which it criticized for being “too generous.” The federation has said the new rules should bring them more in line with other plans.

MPs elected in 2015 will be expected to triple their annual pension contributions — from $11,000 a year currently to $39,000 by 2017. It’s a change that will bring federal politicians closer to a split with taxpayers, who have been paying most of the shot.

Taxpayers contributed almost $30 million to the federal plan in 2011-2012.

“For every $1 paid in by members of Parliament, almost $24 was being put in by the taxpayer,” said Aaron Wudrick, the federal director for the Canadian Taxpayers Federation.

“We think that is really out of whack with what most Canadians can expect from their pensions. The new rules will see that ratio brought down to about $1.62 per dollar — so not quite one-for-one, but certainly a lot more reasonable in terms of what taxpayers are expected to contribute.”

Now, to be fair to Peter Mackay, he spent the last 18 years in federal politics and these are thankless and brutal jobs, especially when you have ministerial duties. But if you think he’s quitting politics at the age of 49 to “spend more time with his family,” you’re crazy. There’s no doubt in my mind he and other Tories not planning to reoffer are quitting now to collect that big fat federal pension as early as possible — a pension they can count on for the rest of their life. They will truly be living the Canadian retirement dream.

Who else is living the Canadian retirement dream? All those Canadian public pension plutocrats collecting millions in compensation. They will be taken care of for the rest of their lives too.

Unfortunately, for millions of others, this won’t be the case. Their retirement dreams will be shattered as they confront a retirement nightmare, living in pension poverty. This is why I keep harping on a mandatory enhancement of the CPP. Canada is on the verge of a major economic crisis and the last thing we need is a retirement crisis to add fuel to the fire.

I’ll tell you about another person who isn’t living a retirement dream, yours truly. If there was any justice in this world, I’d be receiving the Order of Canada or the pension lifetime award for the personal sacrifices I’ve taken with this blog. I don’t want awards, couldn’t care less. I just want people to respect the laws of this country and stop discriminating against me and other persons with disabilities when it comes to employment. In the meantime, please contribute to this blog via PayPal at the top right-hand side. I thank those of you who are regular subscribers and hope more will join.

Finally, the death of Jacques Parizeau touched many Quebecers. Parizeau, a giant of the Quiet Revolution who nearly led Quebec separatists to victory, was instrumental in the creation and development of the Caisse and many other public and para-public organizations. Premier Philippe Couillard said the former Quebec premier will have a state funeral and the province will rename the Caisse de depot’s headquarters after him.

Parizeau leaves behind a complicated economic legacy and unfortunately is remembered for his comments blaming “money and ethnic votes” when the Parti Québécois (PQ) lost the 1995 referendum. I say unfortunately because far from being a racist, Parizeau actually did a lot for Quebec’s cultural communities.

Let me share a little story here. In 1976, after the PQ victory, the separatist government was threatening to close down Greek schools in Montreal because they weren’t teaching enough French. The leaders of the Hellenic Community of Montreal approached my friend’s father, Dr. Nicholas Mandalenakis, a pathologist at Sacré Coeur Hospital, for help.

Some of the doctors at Sacré Coeur had contacts at the PQ government and a meeting was arranged with the then Minister of Education, Jacques-Yvan Morin. My friend’s father spoke perfect French and convinced the minister to get funding. In exchange, Montreal’s Greek schools would teach primarily French in their curriculum along with English and Greek.

It is because of Jacques-Yvan Morin and Jacques Parizeau, the then Minister of Finance who quickly liberated the funds in days, that Montreal’s Greek schools got subsidized and went on to be truly successful trilingual schools. At the time, some dumb, closed-minded Greeks in the media called my friend’s father a “traitor” but he was instrumental in brokering this deal and still speaks highly of Morin and Parizeau for what they did back then.

It’s amazing how Quebec has changed since 1976. In some ways, I find it a much better Quebec but in others, it’s gotten much worse. In particular, there are fewer and fewer opportunities for all Quebecers, including ethnic minorities and anglos, especially in finance. I worry a lot about the future of this province and the future of our country. Sadly, the leaders of yesterday aren’t there today.

 

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.

The CBC reports, Joe Oliver to consult on ‘voluntary’ Canada Pension Plan boost:

Finance Minister Joe Oliver says his government is ready to start consulting Canadians on allowing larger, “voluntary,” contributions to the Canada Pension Plan.

“We are open to giving Canadians the option to voluntarily contribute more to the Canada Pension Plan to supplement their current retirement savings,” he told the House of Commons on Tuesday.

Oliver said the move would build on the Harper government’s record of creating more options for retirement savings, including the pooled pension plans and tax-free savings account alternatives championed by the Conservatives. A statement released by his office said that “by providing voluntary, flexible savings tools, Canada’s retirement system is, in fact, now among the best in the world.”

No more details were provided in his brief answer to a planted question from a Conservative caucus colleague. It’s unclear how the voluntary contributions would work, or what limits would apply.

But Oliver reiterated his government’s position on hiking basic premiums, something federal government talking points have called a “mandatory, job-killing, economy-destabilizing, pension-tax hike on employees and employers.”

“What we will not do is reach into the pockets of Canadians with a mandatory payroll tax, like the Liberals and the NDP would do,” Oliver said in question period.

“A one-size fits all pension tax hike is not what Canadians want, nor what they need,” Oliver’s release said.

Policy reversal?

This is the second time in two years the government has seemingly done an about-face on the CPP issue.

In 2010, then-finance minister Jim Flaherty announced consultations had begun to expand CPP, calling the program “the envy of the world.”

He said the expansion should be “modest and phased in,” and that provinces were on board.

Then, in 2013, he abruptly backtracked and started referring to the CPP as a “payroll tax” that the country couldn’t afford until there was more economic growth.

Employees and employers are each required to contribute up to almost $2,480 annually on income up to $53,600.

This year, the CPP pays out a maximum benefit of $12,780.

Past proposals have suggested doubling both the contribution cap and the maximum payout. Although Flaherty had made it clear he wasn’t in favour of going that high, he never publicly outlined what numbers he had in mind.

Oliver now intends to spend the summer months ahead of a coming election consulting with “experts and stakeholders,” on what voluntary contributions to the CPP might look like.

Finance critic NDP MP Nathan Cullen questioned what he called the Conservatives’ “death-bed conversion” to CPP enhancement.

“It’s incredibly vague. It’s a non-announcement today. This is at the very last minute. If they were serious about this, we would have seen something a lot sooner,” he said.

Ontario Liberal MPP Mitzie Hunter, the associate minister of finance, dismissed the announcement, saying the federal government “has made it clear they have no real interest in enhancing CPP.”

“It’s disappointing that the federal government is only concerned with their short-term election prospects instead of providing a secure retirement for millions of Canadians.”

Canada’s most populous province recently passed a bill approving the creation of a provincial pension plan that would start in 2017. Ontario’s plan, which would be phased in over a two-year period, would be for those who don’t have a workplace plan.

Bill Curry and Steven Chase of the Globe and Mail also report, Tories propose voluntary expansion of Canada Pension Plan:

The federal Conservative government is proposing a voluntary expansion of the Canada Pension Plan, adding a pre-election twist to the politically charged debate over how best to boost Canadian savings.

Finance Minister Joe Oliver made the announcement Tuesday in the House of Commons, promising that consultations will take place over the summer on the details.

The general premise is that Canadians who choose to pay higher CPP premiums would receive higher guaranteed payments in retirement.

The announcement marks a significant shift for the Conservatives, who have long resisted changes to the CPP on the grounds that higher premiums would represent job-killing payroll taxes.

It also amounts to a key campaign promise because this measure will not be in place before an expected Oct. 19 federal election.

“Our Conservative government believes all Canadians should have options when saving for their future. That is why we intend to consult on giving Canadians the voluntary option to contribute more to the Canada Pension Plan to supplement their retirement savings,” Mr. Oliver said.

Though the announcement represents a significant policy shift, the Finance Minister did not take questions from the media and few details were provided.

This expansion of the CPP on a voluntary, instead of compulsory, basis is an attempt by the Conservatives to offer voters another way to save for retirement without obliging them to do so.

The Tories have been at loggerheads with the opposition parties – and most provinces – over the issue for years.

Labour groups and the seniors advocacy group CARP have long argued that voluntary savings vehicles do not work and that a mandatory CPP expansion is needed to ensure that all Canadians are saving enough for retirement.

The Conservatives have sided with business groups, such as the Canadian Federation of Independent Business, that argue that increasing mandatory contributions to the CPP by employees and employers would be damaging to the economy.

The CFIB said Tuesday that it was “delighted” by Mr. Oliver’s proposal, provided that it would also be a voluntary decision as to whether or not employers make larger contributions for employees.

Susan Eng, the vice-president of CARP, also responded positively, although she stressed that mandatory increases are still likely to be needed.

Mr. Oliver said the voluntary plan would build on other government initiatives, including tax-free savings accounts and pooled registered pension plans.

He suggested that the Tories give Canadians more choice than the Liberals and the NDP.

However, Liberal finance critic Scott Brison noted it was his party that advocated both a mandatory and a voluntary expansion of the CPP in the 2011 election campaign.

NDP finance critic Nathan Cullen called the move a “deathbed conversion” by the Conservatives.

“You can tell when the government’s serious about something: They ram it through an omnibus bill. When they’re not serious about it, they launch a series of consultations over the summer on the eve of an election as if somehow they were going to be converted at the very last minute,” he said. “This is about polls. It’s about the Conservatives realizing they’re in trouble.”

At one point during the past several years of debate over CPP reform, the Conservatives spoke out against the idea they now propose.

In 2010, Jim Flaherty, then the finance minister, took the view that further voluntary savings vehicles were not enough.

The government later changed course. While Mr. Flaherty briefly advocated for expanded mandatory CPP contributions, Prime Minister Stephen Harper has long opposed the idea in his public comments.

The Ontario government has been among the most vocal advocates urging the federal government to support an expanded CPP. When Ottawa decided against the idea, Ontario proposed its own supplemental pension plan, which would begin in 2017 and would apply only to workers who do not have a company pension plan.

Ontario has suggested that if Ottawa changes its position and decides to support an expanded CPP, it would not go ahead with its own pension plan.

Ontario’s associate finance minister, Mitzie Hunter, described the federal proposal as “disappointing.”

“Two things are clear – people are not saving enough for retirement, and we don’t have a federal partner willing to tackle this problem,” she said in a statement.

Say it ain’t so? Have the Harper Conservatives who continuously pander to the financial services industry finally seen the light on why now is the time to enhance the CPP? Do they finally realize the benefits of defined-benefit plans and how enhancing the CPP is not only a good pension policy but good economic policy for a country teetering on disaster?

The federal government is also looking at relaxing the 30 percent rule to allow federal pensions to invest more in infrastructure in Canada, which makes a lot of sense if they allow all our public pensions to do so and open infrastructure investments to global pensions and sovereign wealth funds.

Unfortunately, this latest about-face on enhanced CPP is nothing more than a farce. Harper’s government doesn’t have a clue of what they’re doing on enhanced CPP and I can’t say the Liberals or NDP are any better (a bit better but far from perfect).

As an ultra cynical Greek-Canadian who is tired of seeing politicians in Greece and Canada talk from both sides of their mouth, let me give it to you straight up. This latest proposal is going nowhere and even if it’s implemented, the “voluntary” nature of it means it will only benefit the richest Canadians much like increasing the tax-free savings account limit to $10,000 a year (the few who  need it the least will wisely sign on but the majority who really need it will opt out).

By the way, a new survey shows a third of Canadians won’t take advantage of new TFSA limits:

A new survey suggests about a third of Canadians don’t have the money to take advantage of new rules under which Ottawa almost doubled the amount that can be contributed each year to tax-free savings accounts.

The poll done for CIBC found that roughly 34 per cent of respondents said they either didn’t have the money to take advantage of the new $10,000 limit or had other investment plans.

Breaking the figure down, 18 per cent of those surveyed said they would probably contribute less than the old limit of $5,500, while 12 per cent said they would not have enough savings this year to make a contribution. Four per cent said they would contribute to other saving plans.

The survey found just 10 per cent said they typically contribute the maximum and would now invest $10,000, while an additional 17 per cent said they would try to increase their contributions above $5,500.

Twenty per cent of those responding did not have a TFSA account and had no plans to open one.

The online survey was conducted between April 30 and May 4, less two weeks after the federal budget announcement.

Shocking eh? Not really. Most Canadians are in debt up to their eyeballs, paying off multiple credit cards and trying to make their mortgage payment every month on their insanely overvalued homes (when you see official denial from the finance minister and our central banker, you know they’re worried about Canada’s housing bubble but don’t worry, according to some, Canada is the new Switzerland. Sigh!!).

I use my old Greek indicator to gauge economic activity. I talk to a few Greek taxi drivers and restauranteurs in Montreal to get the real scoop. They all tell me business is down across the board. Restauranteurs and cab drivers are praying the good weather holds up for the Grand Prix next weekend so they can make up for a devastating winter, but they tell me the economy is terrible and “people just aren’t spending like they used to” which is why many retail stores are closing in Montreal. Hopefully, the lower loonie and some tourism will help but that is only temporary relief.

Anyways, back to the Tories and their latest proposal. Why am I so skeptical? Easy. Enhanced CPP shouldn’t be voluntary, it should be mandatory for almost all Canadians (minus the poor and working poor). This is why behind the scenes, I’ve argued with some Liberals on their proposal because they too want to make enhanced CPP optional.

It doesn’t work that way folks. Yes, higher CPP premiums means less money to spend on the economy and housing but it in the long-run, it also means more Canadians will be able to retire in dignity and security. And people who receive defined-benefit pensions are able to spend more in their golden years, allowing the government to collect more in sales and income taxes.

More importantly, RRSPs and TFSAs are savings vehicles, not defined-benefit pensions, and they place the retirement onus entirely on individuals to make the right investment decisions to be able to retire comfortably. When it comes to their retirement, most Canadians need a reality check because they’re getting raped on fees investing in mediocre mutual funds which underperform the market over the long-run.

There is a much better option. Make enhanced CPP mandatory and have the money managed managed by the Canada Pension Plan Investment Board which just recorded a record 18.3% gain in fiscal 2015.

“But Leo, you just finished crucifying these guys for lacking a truly diverse workforce at all levels representing Canada’s multiculturalism and you still want to enhance the CPP for all Canadians?!?”

Absolutely! I’m very hard on the CPPIB because I hold them to a much higher standard than any other large Canadian public pension because they represent all Canadians and even though I like their governance and operations, I think there can be significant improvements (see my discussion here).

In particular, I’m a stickler for diversity in the workplace and give a failing grade in this department to all of Canada’s coveted top ten, not just CPPIB.  And don’t kid yourselves, things are getting worse not better when it comes to diversity at Crown corporations, government organizations and private sector federally regulated businesses.

How do I know this? Because of my struggles to find full-time employment after I was wrongfully dismissed at PSP but also through my conversations with people with disabilities — much more disabled than me — who are frustrated with the lack of opportunities for them to find full-time work.

But aren’t federally regulated employers suppose to hire people regardless of their age, sex, ethnic background, sexual orientation or disability? That all sounds great on paper but the brutal reality is the unemployment rate for minorities, especially people with disabilities is sky-high, and the hiring decisions at these places are often done in a covert manner to circumvent our laws.

When Michael Sabia, Mark Wiseman, Gordon Fyfe, Andre Bourbonnais or Ron Mock want someone in, there in. And when they want them out, they’re out. It’s that simple (this goes on everywhere but these are public pensions).

I remember a conversation I had with Mark Wiseman where he told me he contributes to the Multiple Sclerosis Society of Canada. I felt like saying “that’s great but what are your doing as the leader of Canada’s biggest Crown corporation to hire people with disabilities?”

The only big federally regulated Canadian bank that actually has a diversity blueprint is the Royal Bank but I can tell you from experience this is a bogus program that doesn’t actively go out to search and hire minorities or people with disabilities and the jobs they offer are low level jobs that pay peanuts. But at least the Royal Bank has a diversity blueprint which is more than I can say for many other large private and public sector employers.

But my diversity qualms aside, I’m a huge believer in mandatory enhanced CPP for most Canadians and think the time has come that we do away with company pensions altogether and have pensions managed by our large well-governed public pensions that pool investment and longevity risks, lower costs by investing directly across public and private investments where they can and with top global funds where they can’t.

Imagine for a second if we didn’t have Air Canada, Bombardier, Bell pensions or AIMCo, OTPP, HOOPP, Caisse, OMERS, bcIMC, etc but several large, well-governed public pensions that operate at arms-length from the government and manage the pensions of all Canadians across the public and private sector. It wouldn’t be one CPPIB juggernaut but several CPPIBs and there wouldn’t be an issue of pension portability.

I’m telling you we have the people and resources to do this. All we lack is political will in Ottawa which is why Ontario is right to go it alone despite all the criticism Premier Wynne has faced. Some think the Conservative pension promise sets up showdown with Ontario but I don’t think so.

The sad reality is that our politicians have ignored the pension crisis in this country for far too long and that will impact our debt and deficit in the future as social welfare costs climb. Enhancing the CPP on a voluntary basis isn’t a good pension policy; it’s a dead giveaway to rich Canadians with high disposable income just like increasing TFSA and RRSP limits are a dead giveaway to the rich and the financial services industry. These aren’t the people that need help to retire in dignity and security.

If you have any questions or concerns on this comment and my views, feel free to reach me at LKolivakis@gmail.com. You don’t have to agree with me and I know I can be very blunt and “controversial” (euphemism for someone who highlights uncomfortable truths) but that is my style and I make no apologies whatsoever for it (ask Tom Mulcair, Gordon Fyfe, Mark Wiseman, etc.).

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

I will give an interview to CPAC on this matter at 1:30 this afternoon where my main two comments will be that:

• The federal government should first consult the provinces rather than the public because the CPP can be amended only with the approval of at least 7 provinces covering at least 2/3 of the Canadian population.
• Because participation in the CPP is mandatory, no voluntary contributions can be made to it. Voluntary contributions could only be made to a new plan (i.e. other than CPP), which would still require provincial approval because pensions are under provincial jurisdiction control.

I thank Bernard for his timely and wise insights. He is someone who understands what’s at stake when it comes to molding the right retirement policy.

 

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

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

Benefits Canada reports, CPPIB posts record 18.3% return:

The Canada Pension Plan Investment Board (CPPIB) delivered a net investment return of 18.3% for fiscal 2015—the biggest one-year return since it was created.

The CPP fund ended the year with net assets of $264.6 billion, compared to $219.1 billion at the end of fiscal 2014. The $45.5 billion increase in assets for the year consisted of $40.6 billion in net investment income after all CPPIB costs and $4.9 billion in net CPP contributions.

Multiple factors contributed to fiscal 2015 growth, including all major public equity markets, bonds, private assets and real estate holdings.

Combined, all three of CPPIB’s investment departments delivered substantial investment income to the Fund. International markets, both emerging and developed markets, advanced significantly, boosting returns further as CPPIB continues to diversify the fund. The benefit of the fund’s diversification across currencies also played a role in its returns, as the Canadian dollar fell against certain currencies, including the U.S. dollar.

In the 10-year period up to and including fiscal 2015, CPPIB has contributed $129.5 billion in cumulative net investment income to the fund after all CPPIB costs, and more than $151.5 billion since inception in 1999, meaning that over 57% of the fund’s cumulative assets are the result of investment income.

The Canadian Press also reports, CPP Investment Board has record year, targets U.S. for near term growth:

The Canada Pension Plan Investment Board sees the United States as a key destination for investments in the near term, but expects to shift a bigger share of its assets to faster-growing emerging economies over time.

Emerging markets equities account for about 5.9 per cent of the assets managed by the CPP Investment Board, but chief executive Mark Wiseman said Thursday the fund is building its capabilities in markets like India, China and Latin America in a “slow and prudent progression.”

“We believe they will undoubtedly have ups and downs, but in the long run those economies will produce disproportionately higher growth than the developed economies of Europe and North America,” Wiseman said.

The CPP Fund reported Thursday a return of 18.3 per cent for its latest financial year, its best showing ever.

Compared with the end of fiscal 2014, the fund’s assets were up $45.5 billion from the end of fiscal 2014 — the biggest one-year gain since the fund received its first money for investments in March 1999.

In the medium term, Wiseman said there are “excellent prospects” in the United States, which is home to about $100.7 billion or 38 per cent of the fund’s assets — the largest of any country.

“We see more investment opportunities there than in other developed world markets,” Wiseman said.

As for Canada, which represented about 24.1 per cent of the fund’s assets as of March 31, Wiseman said the CPPIB continues to have a positive view despite the impact of the recent oil price shock.

He said lower energy prices, the decline in the loonie’s value against the U.S. dollar, and “solid growth” in the United States — Canada’s biggest market — should help the overall economy.

“So, by and large, we remain optimistic about Canada as well as the U.S,” Wiseman said.

The CPP Investment Board says there were multiple reasons for the strong investment performance last year, including growth at all major stock markets, bonds, private assets and real estate holdings.

Only $4.9 billion of last year’s increase came from employer and employee contributions while $40.6 billion came from investments. None of the fund’s assets were required to pay benefits to current retirees, with contributions expected to carry the load until the end of 2022.

The value of its investments also got a $7.8-billion boost in fiscal 2015 from a decline in the Canadian dollar against certain currencies, including the U.S. dollar and U.K. pound.

The fund’s 10-year inflation-adjusted rate of return was 6.2 per cent — well above the 4.0 per cent that Canada’s chief actuary estimates is necessary.

Finally, take the time to read CPPIB’s press release, CPP Fund Totals $264.6 Billion at 2015 Fiscal Year-End:

The CPP Fund ended its fiscal year on March 31, 2015, with net assets of $264.6 billion, compared to $219.1 billion at the end of fiscal 2014. The $45.5 billion increase in assets for the year consisted of $40.6 billion in net investment income after all CPPIB costs and $4.9 billion in net CPP contributions. The portfolio delivered a gross investment return of 18.7% for fiscal 2015, or 18.3% on a net basis.

“The CPP Fund generated exceptional returns this year, achieving both the highest one-year return and annual investment income since our inception,” said Mark Wiseman, President & Chief Executive Officer, CPP Investment Board (CPPIB). “More importantly, our 10-year return, a measure that better indicates how we seek to serve contributors and beneficiaries, reached 8.0% on a net basis.”

In the 10-year period up to and including fiscal 2015, CPPIB has contributed $129.5 billion in cumulative net investment income to the Fund after all CPPIB costs, and over $151.5 billion since inception in 1999, meaning that over 57% of the Fund’s cumulative assets are the result of investment income.

“First, let me cite the hard work, dedication and capabilities of the CPPIB team across all of our offices, as well as close collaboration with our key partners worldwide,” added Mr. Wiseman. “Many factors helped lift the year’s results but the impact of decisions made over several years – and patience – is evident.”

Multiple factors contributed to fiscal 2015 growth, including all major public equity markets, bonds, private assets and real estate holdings. Combined, all three of CPPIB’s investment departments delivered substantial investment income to the Fund. International markets, both emerging and developed markets, advanced significantly, boosting returns further as CPPIB continues to diversify the Fund. The benefit of the Fund’s diversification across currencies also played a role in its returns, as the Canadian dollar fell against certain currencies, including the U.S. dollar.

“While any large increase helps foster public confidence in the sustainability of the Fund, results can and will fluctuate in any given year,” said Mr. Wiseman. “The Fund’s horizon, size and funding allow us to accept more risk and invest differently than almost all other investors, including having a high tolerance for potential future negative shocks. In the same way that we temper our enthusiasm for this year’s exceptional performance, we will also stay on course even through negative returns in any given short-term period. As a result of our unique position, we focus on long-term results of 10-plus years.”

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

Long-Term Sustainability

In the most recent triennial review released in December 2013, the Chief Actuary of Canada reaffirmed that, as at December 31, 2012, the CPP remains sustainable at the current contribution rate of 9.9% throughout the 75-year period of his report. The Chief Actuary’s projections are based on the assumption that the Fund will attain a prospective 4.0% real rate of return, which takes into account the impact of inflation. CPPIB’s 10-year annualized nominal rate of return of 8.0%, or 6.2% on a real rate of return basis, was comfortably above the Chief Actuary’s assumption over this same period. These figures are reported net of all CPPIB costs to be consistent with the Chief Actuary’s approach.

The Chief Actuary’s report also indicates that CPP contributions are expected to exceed annual benefits paid until the end of 2022, after which a portion of the investment income from CPPIB will be needed to help pay pensions.

Performance Against Benchmarks

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

In fiscal 2015, the CPP Fund’s gross return of 18.7% outperformed the Reference Portfolio delivering $3.6 billion in gross dollar value-added (DVA) above the Reference Portfolio’s return, after external management fees and transaction costs. Net of all CPPIB costs, the investment portfolio exceeded the benchmark’s return by 1.3%, producing $2.8 billion in net DVA.

“Dollar value-added is an important measure as it shows the difference between active investments made relative to their benchmarks in dollar terms. We will maintain a greater focus on total Fund – absolute as well as relative – returns, by continuing to develop and apply our capabilities more widely to portfolio management,” said Mr. Wiseman. “Our attention to both measures helps maximize returns, CPPIB’s objective, in the best interests of current and future beneficiaries, since the source of pension benefits is the total Fund. To reduce volatility, DVA is particularly valuable when it is generated as loss reduction in negative market conditions. Both total returns and DVA can vary widely from year-to-year depending on market conditions. Accordingly, both measures must be looked at over longer periods of at least one market cycle, such as five years or more.”

Given our long-term view and risk-return accountability framework, we track cumulative value-added returns since the April 1, 2006, inception of the Reference Portfolio. Cumulative value-added over the past nine years totals $5.8 billion, after all costs.

Total Costs

CPPIB total costs for fiscal 2015 consisted of $803 million or 33.9 basis points of operating expenses, $1,254 million of external management fees and $273 million of transaction costs. CPPIB reports on these distinct cost categories as each is materially different in purpose, substance and variability. We report the external management fees and transaction costs we incur by asset class and report the investment income our programs generate net of these fees. We then report on total Fund performance net of CPPIB’s overall operating expenses.

Fiscal 2015 CPPIB operating expenses reflect increased incentive compensation due to strong total Fund and DVA performance over the past four years, and the continued expansion of CPPIB’s operations and further development of our capabilities to support 17 distinct investment programs. International operations accounted for approximately 30% of operating expenses, including the impact of a weaker Canadian dollar relative to countries we have operations in.

Fiscal 2015 external management fees and transaction costs reflect the continued growth in the volume and sophistication of our investing activities. With external management fees also reflecting performance-based fees, the year-over-year increase was in part driven by higher performance fees for exceptional financial performance. The increase in transaction costs in fiscal 2015 was due to a large private market transaction.

Portfolio Performance by Asset Class

Portfolio performance by asset class is included in the table below. A more detailed breakdown of performance by investment department is included in the CPPIB Annual Report for fiscal 2015, which is available at www.cppib.com.

Asset Mix

We continued to diversify the portfolio by return-risk characteristics of various assets and geographies during fiscal 2015. Canadian assets represented 24.1% of the portfolio, and totalled $63.8 billion. International assets represented 75.9% of the portfolio, and totalled $201.0 billion.

Investment Highlights

During fiscal 2015, CPPIB completed 40 transactions of over $200 million each, in 15 countries around the world. Highlights for the year include:

Private Investments

• Signed an agreement to invest approximately £1.6 billion to acquire a 33% stake in Associated British Ports (ABP) with Hermes Infrastructure, an existing U.K.-based partner. ABP is the U.K.’s leading ports group, owning and operating 21 ports with a diverse cargo base, long-term contracts with a broad mix of blue chip customers and experienced management.

• Expanded our Australian infrastructure portfolio with a A$525 million commitment to build and operate a new tunnelled motorway in Sydney, called NorthConnex. This transaction was completed with Transurban Group and Queensland Investment Corporation, our existing partners in the Westlink M7 toll road. CPPIB will own a 25% stake in the nine-kilometre motorway that will connect Sydney’s northern suburbs with the orbital road network and will be the longest road tunnel project in Australia.

• Completed our first investment in India’s infrastructure sector with the country’s largest engineering and construction company. We committed US$332 million in the Larsen & Toubro Limited (L&T) subsidiary, L&T Infrastructure Development Projects Limited (L&T IDPL), which has a portfolio of 20 infrastructure assets, including India’s largest private toll road concession portfolio spanning over 2,000 kilometres.

• Completed a US$596 million secondary private equity investment in two JW Childs funds. As the lead investor, CPPIB invested US$477 million in a secondary transaction related to the JW Childs Equity Partners III fund, which provided an attractive liquidity solution to existing limited partners. We also committed US$119 million to a new fund, JW Childs Equity Partners IV. JW Childs focuses primarily on mid-market investments in the consumer products, specialty retail and healthcare services sectors across North America.

Public Market Investments

• Acquired 172,382,000 ordinary shares of Hong Kong Broadband Network Limited (HKBN) as the sole cornerstone investor in HKBN’s initial public offering. CPPIB invested HK$1,551 million for an approximate 17% ownership interest, becoming the largest shareholder. HKBN is Hong Kong’s second largest residential broadband service provider by number of subscriptions, reaching more than 2.1 million residential homes and 1,900 commercial buildings.

• Received an additional Qualified Foreign Institutional Investor (QFII) quota of US$600 million to invest in China A-shares that are traded on the Shanghai and Shenzhen Stock Exchanges. Since 2011, when CPPIB obtained its QFII licence, a total allocation of US$1.2 billion has been granted to CPPIB, thereby making it among the top 10 largest QFII holders.

• Invested US$250 million in the initial public offering of Markit Ltd., representing an approximate 6% ownership interest. Founded in 2003, Markit is a globally diversified provider of financial information services that enhance transparency, reduce risk and improve operational efficiency.

Real Estate Investments

• Entered into a new real estate sector with the 100% acquisition of a U.K. student accommodation portfolio and management platform operating under the Liberty Living brand, at an enterprise value of £1.1 billion. Liberty Living is one of the U.K.’s largest student accommodation providers with more than 40 high-quality residences located in 17 of the largest university towns and cities across the U.K.

• Committed RMB 1,250 million to jointly develop the Times Paradise Walk project, a major mixed-use development in Suzhou, the fifth most affluent city in China, with Longfor Properties Company Ltd. The mixed-use development comprises residential, office, retail and hotel space for a total gross floor area of 7.9 million square feet. It is designed to be a top-quality, one-stop commercial destination in Suzhou with completion scheduled in multiple phases between 2016 and 2019.

• Significantly expanded CPPIB’s real estate portfolio in Brazil during the year. We committed approximately R$1.3 billion to Brazilian retail, logistics and residential assets this year, bringing our total equity commitment to date to R$5.5 billion. This included a R$507 million commitment for a 30% ownership stake in a new joint venture with Global Logistic Properties comprising a high-quality portfolio of logistics properties located primarily in São Paulo and Rio de Janeiro.

• Invested approximately €236 million in Citycon Oyj to hold 15% of the shares and voting rights, expanding CPPIB’s retail platform in the Nordic region. Citycon is a leading owner and developer of grocery-anchored shopping centres in the region. The investment helped to support Citycon’s acquisition and development opportunities.

Investment highlights following the year end include:

• Entered into a joint venture partnership with GIC to acquire the D-Cube Retail Mall in Seoul, South Korea from Daesung Industries for a total consideration of US$263 million. Following the transaction, GIC and CPPIB will each own a 50% stake in the mall. Completed in 2011, D-Cube is an income-generating, high-quality retail mall in a prime location.

• Entered into an agreement to form a strategic joint venture with Unibail-Rodamco, the second largest retail REIT in the world and the largest in Europe, to grow CPPIB’s German retail real estate platform. The joint venture will be formed through CPPIB’s indirect acquisition of a 46.1% interest in Unibail-Rodamco’s German retail platform, mfi management fur immobilien AG (mfi), for €394 million. In addition, CPPIB will invest a further €366 million in support of mfi’s financing strategies.

• Signed an agreement to acquire an approximate 12% stake, by investing £1.1 billion alongside Hutchison Whampoa, in the telecommunications entity that will be created by merging O2 U.K. and Three U.K.

• Signed a definitive agreement to acquire Informatica Corporation for US$5.3 billion, or US$48.75 in cash per common share, alongside our partner, the Permira funds. Informatica is the world’s number one independent provider of enterprise data integration software. The transaction is expected to be completed in the second or third quarter of calendar 2015.

• Invested US$335 million in the senior secured notes of Global Cash Access, Inc. (GCA) through our Principal Credit Investments group. GCA is the leading provider of cash access solutions and related gaming and lottery products to the gaming sector.

Asset Dispositions

• Signed an agreement, together with BC European Capital IX (BCEC IX), a fund advised by BC Partners, management and other co-investors, to sell a 70% stake in Cequel Communications Holdings, LLC (together with its subsidiaries, Suddenlink) to Altice S.A. Upon closing of the proposed sale, it is expected that BCEC IX and CPPIB will each receive proceeds of approximately US$960 million and a vendor note of approximately US$200 million. CPPIB and BCEC IX will each retain a 12% stake in the company.

• Announced that AWAS, a leading Dublin-based aircraft lessor, signed an agreement to sell a portfolio of 90 aircraft to Macquarie Group Limited for a total consideration of US$4 billion. CPPIB owns a 25% stake in AWAS alongside Terra Firma, which owns the remaining 75% stake.

• Sold our 50% interest in 151 Yonge Street to GWL Realty Advisors. Proceeds from the sale to CPPIB were approximately $76 million. Located in downtown Toronto, 151 Yonge Street was acquired in 2005 as part of a larger Canadian office portfolio acquisition.

• Sold our 39.4% interest in a Denver office properties joint venture to Ivanhoé Cambridge. Proceeds from the sale to CPPIB were approximately US$132 million.

Corporate Highlights

• In May 2015, we continued to expand our global presence with the official opening of a CPPIB office in Luxembourg, representing our sixth international office. We have a significant and growing asset base in Europe today. Establishing an office in Luxembourg supports our global strategy of building out our internal capabilities to support our long-term investment goals. Through our Luxembourg office, we will conduct asset management activities such as investment monitoring, cash management, finance and operations, including transaction support, legal and regulatory compliance.‎ Looking ahead, we expect to complete our previously announced plans to open an office in Mumbai later in calendar 2015.

• Welcomed the appointment of Dr. Heather Munroe-Blum as the new Chair of CPPIB’s Board of Directors. Dr. Munroe-Blum succeeded Robert Astley, CPPIB’s Chair since 2008, upon the expiry of his term on October 26, 2014.

• Welcomed the appointment of Tahira Hassan to CPPIB’s Board of Directors in February 2015 for a three-year term. Ms. Hassan also serves as a non-executive Director on the Boards of Brambles Limited and Recall Holdings Limited and held various executive leadership roles with Nestlé for more than 26 years.

• Announced senior executive appointments:

• Mark Jenkins was promoted to Senior Managing Director & Global Head of Private Investments responsible for leading the direct private equity, infrastructure, principal credit investments, natural resources and portfolio value creation functions. Mr. Jenkins joined CPPIB in 2008 and most recently held the role of Managing Director, Head of Principal Investments.

Not exactly the epitome of diversification and Canadian multiculturalism, eh? Having said this, I trust Mark Wiseman and his senior managers are doing an outstanding job managing this juggernaut.

One thing I won’t hide from you is that I’ve applied to jobs at CPPIB and even got an email from Mark nicely explaining “why I don’t fit” in their organization and that they tried to find me ” a suitable position.” This is all rubbish to me because when David Denison was in charge of the place, I went as far as an interview for a job before the folks at PSP cut me off with one phone call (I know a lot more than people give me credit for which is why I find these excuses downright insulting).

Also, I know far too many talented folks who haven’t been hired at CPPIB and all of them have received lame, if not laughable excuses. The same with other large Canadian pensions. Something is seriously wrong in the HR departments at CPPIB, the Caisse, PSP, Ontario Teachers and elsewhere if they’re not hiring these talented individuals (and I include myself in that group). And I have no qualms stating this publicly.

Getting hired at these places is all about politics. I also noticed they don’t like hiring people who are smarter than them or who can challenge them in any way, shape or form. Too bad, this is why the culture at these places reeks of politics, and why I just don’t buy that “the best and brightest” are working at these places (again, I’m entitled to my opinion and the folks working at these places are entitled to theirs but I can give you my A-list of amazing individuals that were not hired for flimsy reasons at any of these coveted organizations).

I’m starting to get cynical in my old age. I’ll end on a positive note, however. These results are only one year but the long-term results, the ones that count, are equally impressive. CPPIB is doing something right to manage the hundred of billions they’re responsible for. And again, in spite of my criticism, I still maintain that we need to enhance the CPP for all Canadians. Period.

Take the time to read all the recent articles on CPPIB here. They have been very busy lately on all sorts of deals, some with partners and some with their peers like the Caisse.

 

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.

Lorrie Goldstein of the Toronto Sun reports, Wynne’s pension boondoggle?:

Suppose Premier Kathleen Wynne’s Liberal government forced you into its Ontario Retirement Pension Plan (ORPP) and took 1.9% of your earnings up to a maximum of $1,643 annually for your entire working life.

Suppose it invested this money into poorly-run, money-losing Ontario public infrastructure projects, in which the government partnered with private companies and lost its shirt — and thus your future pension benefits.

Based on the scant information the Liberals are giving out in preparing to implement their ORPP on Jan. 1, 2017, that could happen. Here’s why.

In Finance Minister Charles Sousa’s 2014 budget, here’s how the Liberals explained how they will invest over $3.5 billion annually in mandatory pension contributions.

These will come from more than three million Ontario workers who will be forced into the ORPP because they do not have private pension plans, and from their employers.

(The ORPP will be funded by a 1.9% annual payroll tax imposed on these workers, plus an additional 1.9% annual tax for each employee, paid by their employers.)

“By … encouraging more Canadians to save through a proposed new Ontario Retirement Pension Plan, new pools of capital would be available for Ontario-based projects such as building roads, bridges and new transit,” the Liberals said.

“Our strong Alternative Financing and Procurement model, run by Infrastructure Ontario, will allow for the efficient deployment of this capital in job-creating projects.”

Really? First, the purpose of the ORPP should not be to help the Liberals fund infrastructure because they’re broke and can’t get the money elsewhere, other than by holding a fire sale of provincial assets like Hydro One, which they’re already doing.

The only purpose of the ORPP — similar to the stated one of the Canada Pension Plan (CPP) — should be to “maximize returns (to contributors) without undue risk of loss.”

To do that, the Canada Pension Plan Investment Board (CPPIB), which invests mandatory contributions on behalf of working Canadians so the plan will have the funds to pay them a pension upon retirement, operates independently of the federal and provincial governments.

As the CPPIB says in its 2014 annual report:

“As outlined in the CPPIB Act, the assets we manage ($219.1 billion) belong to the (18 million) Canadian contributors and beneficiaries who participate in the Canada Pension Plan. “These assets are strictly segregated from government funds.

“The CPPIB Act has safeguards against any political interference (operating) at arm’s length from federal and provincial governments with the oversight of an independent … Board of Directors. CPPIB management reports not to governments, but to the CPPIB Board of Directors.”

To be sure, the CPPIB has been criticized over everything from its administrative costs, to the bonuses it pays to senior executives, to the wisdom of some of its investment decisions.

But on the key issue of how it is run, politicians, by law, aren’t allowed to interfere in its investment decisions, for obvious reasons.

By contrast, the Wynne government is sending contradictory messages about how investments needed to ensure its solvency will be decided by the ORPP.

On the one hand, Sousa says, “our plan would build on the strengths of the CPP … publicly administered at arm’s length … (and) have a strong governance model, with experts responsible for managing its investments.”

But on the other, the Liberals want a substantial amount of the funds raised by the ORPP to go to “new pools of capital” for “Ontario-based” infrastructure projects.

These are contradictory statements.

Either the ORPP investment board will be independent in its investment decisions, or it will be ordered, or influenced, by the Wynne government to make investments in Ontario infrastructure projects the government wants to build.

As for the Liberals’ claim their, “strong Alternative Financing and Procurement model, run by Infrastructure Ontario, will allow for the efficient deployment of this capital in job-creating projects”, Ontario Auditor General Bonnie Lysyk recently examined that model.

She concluded Infrastructure Ontario frequently gets its head handed to it in partnerships with the private sector, to the tune of billions of dollars in added costs.

Lysyk said the government could save money on infrastructure projects if it could competently manage them itself. (A big “if”.)

Finally, the CPPIB, which has a five-year annualized rate of return of 11.9% and a 10-year rate of 7.1%, invests only 6.1% of its portfolio in infrastructure (including a stake in the Hwy. 407 ETR).

Based on the little the Wynne government has said about how it will operate the ORPP, we should all be concerned.

The Toronto Sun as been quite critical of Premier Wynne’s pension mystery:

Premier Kathleen Wynne’s Ontario Retirement Pension Plan (ORPP) will have a huge impact on the pocketbooks of millions of workers.

But with the plan set to start Jan. 1, 2017, the Liberals have provided little information about it.

Among the key unanswered questions:

Who will be included?

How will the Liberals invest the $3.5 billion-a-year it will generate?

Wynne has said except for the self-employed, if you work for a business that does not provide a private pension plan, you have to join the ORPP.

You will pay 1.9% of your annual salary into the ORPP through a payroll tax, with your employer matching your contribution.

To give an idea of the costs, if you make $45,000 annually starting at age 25 and contribute for 40 years, you will make annual payments of $788, matched by your employer. At age 65 you will receive a pension until you die of $6,410 annually, in 2014 dollars.

If you earn $90,000 annually (earnings above this are exempt), you will pay $1,643 annually and receive a pension of $12,815.

But what is Wynne’s definition of a private pension plan?

Originally it was thought to mean any private workplace pension.

But pension experts now say it’s unclear whether workers in defined contribution plans will be exempt from the ORPP.

In these plans, the employer and employee make annual contributions, but there is no guarantee of what the final pension will be.

By contrast, defined benefit plans pay a pre-determined pension based on salaries and years of experience.

(We do know workers with defined benefit plans will be exempt from the ORPP.)

But it’s also unclear how the province will invest the $3.5 billion annually in new revenue the ORPP will generate, important so that it remains solvent and able to meet its financial obligations.

Wynne’s Liberals have sent out contradictory messages on this.

They have said both that the ORPP will be managed by an independent investment board like the Canada Pension Plan, but also that it will invest in Ontario government public-private infrastructure projects, meaning the board won’t be truly independent.

Ontarians have a right to answers. After all, it’s their money at stake.​

No doubt, Ontarians have a right to know more details of this new pension plan, but I think the media is getting ahead of themselves here. There have been quite a few dumb attacks on the ORPP, all backed by Canada’s powerful financial services industry.

Having said this, I like Lorrie Goldstein’s comment above because he’s right, when politicians get involved in public pensions, it’s a recipe for disaster. Infrastructure Ontario is proof of how billions in public finances are squandered on projects with little or no accountability.

The first thing this Liberal government needs to do is create a legislative act which clearly outlines the governance of this new pension plan. This sounds a lot easier than it actually is. Not long after I was wrongfully dismissed at PSP in October 2006, I was approached by the Treasury Board of Canada to conduct an in-depth report of the governance of the public service pension plan. I wrote about it in my comment on the Auditor General slamming public pensions:

I wrote my report on the governance of the federal government’s public sector pension plan for the Treasury Board back in the summer of 2007. The government hired me soon after PSP Investments wrongfully dismissed me after I warned their senior managers of the 2008 crisis. And I didn’t mince my words. There were and there remains serious issues on the governance of the federal public sector pension plan.

I remember that summer very well. It was a very stressful time. PSP was sending me legal letters by bailiff early in the morning to bully and intimidate me. I replied through my lawyer and just hunkered down and finished my report. The pension policy group at the Treasury Board didn’t like my report because it made them look like a bunch of incompetent bureaucrats, which they were, and they took an inordinate amount of time to pay me my $25,000 for that report (the standard amount when you want to rush a contract through and not hold a bidding process).

If I had to do it all over again, I wouldn’t have written that report. The Treasury Board buried it, and it wasn’t until last summer that the Office of the Auditor General finally started looking into the governance of the federal public sector pension plan.

In 2011, the Auditor General of Canada did perform a Special Examination of PSP Investments, but that report had more holes in it than Swiss cheese. It was basically a fluff report done with PSP’s auditor, Deloitte, and it didn’t delve deeply into operational and investment risks. It also didn’t examine PSP’s serious losses in FY 2009 or look into their extremely risky investments like selling CDS and buying ABCP, something Diane Urqhart analyzed in detail on my blog back in July 2008.

I had discussions with Clyde MacLellan, now the assistant Auditor General, and he admitted that the Special Examination of PSP in 2011 was not a comprehensive performance, investment and operational audit. The sad reality is the Office of the Auditor General lacks the resources to do a comprehensive special examination. They hire mostly CAs who don’t have a clue of what’s going on at pension funds and they need money to hire outside specialists like Edward Siedle’s Benchmark Financial Services.

Pension governance is my forte, which is why Canada’s pension plutocrats get their panties tied in a knot every time I expose some of them for being grossly overpaid public pension fund managers.

But compensation is just one component of good pension governance. If you listen to some CEOs at Canada’s coveted public pensions, you’d think it’s the most important factor in determining their success but I beg to differ. It’s one of many factors that has contributed to the long-term success at Canada’s large public pensions.

Clearly, the most important thing is to separate the operations of a pension fund from government bureaucrats looking to interfere in decisions in their hopeless attempt to influence key investment decisions and indirectly buy votes. Public pensions funds need to be governed by qualified, independent board of directors.

I’ve worked in the private sector (BCA Research, National Bank), at Crown corporations (Caisse, PSP Investments, BDC) and the public sector (Canada Revenue Agency, Treasury Board, Industry Canada), and I can tell you what works and what doesn’t at all these places. The last thing I want to see is government bureaucrats interfering with the operations of public pensions, especially ones like the ORPP or CPPIB.

Wynne’s government has taken bold steps to bypass the federal government, which is still pandering to banks and insurance companies, to introduce its version of an enhanced CPP for Ontario’s citizens which need better retirement security. If the feds did the right thing and enhanced the CPP for all Canadians, we wouldn’t be talking about the Ontario Retirement Pension Plan (ORPP).

But now that the horse is out of the barn, Ontarians have a right to know a lot more. As always, the devil is in the details. I know there are eminently qualified people consulting the Liberals on this new pension plan, people like Jim Keohane, HOOPP’s CEO and someone who believes in this new plan.

Of course, I wasn’t invited to share my thoughts and for good reason. I’ve seen the good, bad and ugly working at and covering Canada’s pensions and would recommend world class governance rules that would make Canada’s pension plutocrats very nervous.

In the Leo Kolivakis world of pension governance, there would be no nonsense whatsoever. I would change the laws to make sure all our public pension funds have to pass a rigorous and comprehensive performance, risk and operational audit by a fully independent and qualified third party group that specializes in pension proctology (and it’s not just Ted Siedle). These audits would occur every three years and the findings would be disclosed to the public via the auditor generals (they can oversee such audits).

What amazes me is how everyone touts how great Canada’s pension governance is when in reality I can point to some serious lapses in the governance at all our coveted public pension plans. For example, none of our “world class” public pensions disclose board minutes (with an appropriate lag) or even televise these minutes. When it comes to communication, some are a lot better than others but they still need to improve and have embeddable videos of speeches and more explaining how they invest (Ontario Teachers and HOOPP does a decent job there; communication at PSP is non-existent).

What else? Diversity, diversity, diversity! I’m tired of seeing good old white boys (and a token white lady) when I look at the senior managers of the Canada Pension Plan Investment Board or other large Canadian public pensions. Don’t get me wrong, I’m sure they’re highly qualified professionals but the sad reality is this image doesn’t represent Canada’s rich cultural diversity and it sends the wrong message to our ethnic and other minorities.

When I wrote my comment on the importance of diversity at the workplace, I recommended that each of our public pension funds include a diversity section in their annual report discussing what steps they’re taking to diversify their workforce and include hard numbers on the hiring of women, visible minorities, aboriginals and people with disabilities.

This is one area where I think we need more, not less, government intervention because I simply don’t trust the “independent” board of directors overseeing these funds and think they’re all doing a lousy job on diversity at the workplace just like they’re doing a lousy job getting the benchmarks of their private market investments right, which is why you’re seeing compensation soar to unprecedented levels at some of Canada’s large public pensions (I believe in paying for performance that truly reflects the risks an investment manager is taking).

As you can see, I don’t mince my words and I certainly don’t suck up to any of Canada’s “powerful” pension titans. They’re perfectly content blacklisting me from being gainfully employed at their organizations because of my blog and more truthfully, because I have progressive multiple sclerosis (even though it’s illegal to discriminate and I’m perfectly capable of working as long as they accommodate me which they are required to do by law), and I’m content writing my comments exposing all the nonsense I see at their pensions.

The irony is if any of these powerful pension titans had any brains whatsoever, they’d be working feverishly hard to hire me or find me a good job so I can stop writing my blog exposing uncomfortable truths. Instead, they keep discriminating against me, providing the lamest excuses and quite frankly, violating my right to apply to jobs I’m eminently qualified for (unfortunately and hardly surprisingly, Mr. Bourbonnais is no different from his predecessor and it remains to be seen if he’ll change PSP’s culture for the better. So far, I see more of the same, except he will surround himself with his own French Canadian people).

On that note, I’m off to the gym to enjoy my day. I don’t get paid enough for writing these lengthy, hard-hitting comments and I’m going to spend a lot more time analyzing these schizoid markets and trading stocks and less time on Canada’s pensions which keep disappointing me on so many levels.

You can dismiss some or all of my comments as coming from a ‘disgruntled former employee’ but the truth is if any of you had to put up with a fraction of what I have put up with, you’d be curled up in a fetal position, completely depressed from life. I’m actually quite happy with my life and choose to fight on even when the odds are stacked against me.

My last word of advice to Premier Wynne is to fight the feds and all negative press and forge ahead with the Ontario Retirement Pension Plan (ORPP). Good pension policy makes for good economic policy. If you want to put an Ontario spin to this plan, follow the example of the Caisse which has a dual mandate in Quebec and is going to handle some of Quebec’s infrastructure projects.

But whatever you do with the ORPP, make sure you get the governance right, following examples at CPPIB and elsewhere, and set the bar extremely high when it comes to governance. I’ve only provided a few examples on how governance can be improved at all of Canada’s large public pensions, there are plenty more. The ORPP is in a beautiful position to learn from others, incorporating some of their governance and improving on it where it falls short (if you want my advice, you need to pay me big bucks to consult you because I learned from my past mistakes consulting the feds).

 

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

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

Bill Curry of the Globe and Mail reports, Liberals would encourage pension funds to invest in infrastructure:

Enticing large pension funds to spend big on Canadian infrastructure projects will form a key part of the Liberal Party’s cities agenda, which is among the next policy planks that Leader Justin Trudeau will announce in the coming weeks.

Mr. Trudeau and his team of advisers are working on the final details of the infrastructure platform, which the party has long said would form a significant part of its pitch to voters in the October election.

But having decided to largely devote future surpluses toward tax cuts and enhanced direct payments to families, there is little room left to promise major additional spending on infrastructure.

Senior Liberals responsible for the party’s economic policies say the infrastructure component will draw inspiration from Australia and Britain, where efforts are being made to plan infrastructure projects so they meet the needs of pension investors looking for large, long-term projects that are open to private investment.

Liberal finance critic Scott Brison said in an interview that the Liberal plan would not interfere with the mandate of large Canadian pension funds such as the Canada Pension Plan, but would aim to address the reasons these funds are more likely to invest in infrastructure abroad than at home.

“You can respect absolutely the independence of Canadian pension funds to do their jobs – and that is maximize long-term pension security and returns for their members – but at the same time you can package projects within Canada that are attractive to not just Canadian pension funds but global pension funds,” he said. Mr. Brison and Liberal MP Chrystia Freeland met Monday with The Globe and Mail’s editorial board.

While no date has yet been set for the release of the party’s infrastructure platform, the annual meeting of the Federation of Canadian Municipalities is scheduled for June 5-8 in Edmonton and the party would like to have details ready by then to discuss with Canada’s mayors and city councillors.

Mr. Trudeau was also in Toronto on Monday where he delivered a speech to the Canadian Club that promoted the tax policies he announced last week. He argued that taxing high-income Canadians to pay for these measures is a better way to raise revenue than the NDP’s proposal of higher corporate tax rates.

The tax proposals were the first of what is expected to be a series of policy announcements in the coming weeks that will include infrastructure, child care and innovation.

Attracting more pension investment in Canadian infrastructure would require selling Canadians on a much larger role for public-private partnerships than is currently the case. It would also mean going further in a direction that is already preferred by the Conservatives. It is the Harper government that created a Crown corporation – PPP Canada Inc. – in 2009 focused on public-private partnerships for infrastructure. The 2015 federal budget promised a new public transit fund that would run through PPP Canada and would receive $1-billion in annual funding starting in 2019-20.

A 2013 analysis by the Organisation of Economic Co-operation and Development looked specifically at pension-fund investment in infrastructure and compared the Australian and Canadian approaches.

It said Canadian pension funds have been dubbed the “Maple revolutionaries” by the Economist magazine for their expertise in infrastructure investing around the world, but that these funds “bemoan the lack of investment opportunities at home.”

The report said these funds view public-private partnerships in Canada as too small. While Mr. Brison and Ms. Freeland said in interviews Monday they are interested in Australia’s approach, the OECD report questioned whether these policies would be popular with Canadians.

“Australia has a history of privatization over the last two decades, especially in large transport items such as airports, ports, toll roads and tunnels. In contrast, only very few privatizations of public infrastructure assets have occurred in Canada,” it said. “According to observers, there is no widespread political will to do so in the foreseeable future.”

Meanwhile, a 2011 program in Britain called the Pensions Infrastructure Platform that was meant to entice pension investment in infrastructure has run into criticism and has so far failed to meet its initial targets.

So what do I think of the Liberals’ new infrastructure platform to entice Canada’s large pensions to invest in domestic infrastructure? I need to see the details but one infrastructure expert I contacted told me “the key obstacles to having more pension funds participate in the Canadian infrastructure space are at the municipal and provincial level (not federal).”

However, as I recently stated in a comment on how the federal budget is looking at boosting federal pensions, we desperately need to change the rules to create more PPPs in Canada and get our big pensions on board to invest in these projects.

The Caisse’s bid to handle some of Quebec’s infrastructure projects will be closely scrutinized to see if it can successfully manage large greenfield projects while maintaining its independence from direct government intervention. There are critics who think the Caisse won’t make money off these projects, but that remains to be seen.

The truth is infrastructure projects are exorbitantly expensive and even if you get all of Canada’s top ten pensions to invest in domestic infrastructure, you still need massive government investment to finance these projects.

Consider high speed trains. Canada has no high speed trains going from coast to coast. But even if you built one going from Toronto to Montreal, it will cost billions and you still need to price the fares competitively or else people will just fly or take the old railway route. In other words, high speed trains are amazing but at $800 or $1,000 a round trip fare from Montreal to Toronto, you’re not going to get the critical mass to finance such a project.

That’s why the federal and provincial governments need to be involved. Infrastructure projects are very expensive but there’s no denying Canada needs to invest billions to modernize our infrastructure and keep up with a growing population.

This is where pensions can play a critical role. Canada’s large pensions have been investing directly in infrastructure all around the world for years. They already own a huge chunk of Britain’s infrastructure and are continuously looking to invest in high quality infrastructure assets. This is why the Caisse is chunneling into Europe and why its CEO Michael Sabia has stated they are looking to invest in U.S. infrastructure.

And it’s not just the Caisse. Last week, CPPIB announced that it has purchased a stake, worth about $1.6 billion, in two U.K. telecommunications companies. In April, CPPIB bought big stakes in the UK’s top ports.

Back in December, Ontario Teachers’ CEO Ron Mock stated the plan is seeking foreign investments out of necessity, not lack of confidence in Canada:

The strategy has come with challenges. Mr. Mock said one of the biggest difficulties is navigating the legal systems and governance requirements of foreign countries when buying large stakes in their companies.

Mr. Mock cited Asian companies that have not yet gone public among investment opportunities he’s keeping an eye on. He said the pension fund doesn’t typically make venture capital investments in Canadian companies because those types of investments are generally in the tens of thousands of dollars, while he’s looking to invest hundreds of millions at a time.

“As a fiduciary, we really do have to focus on earning the returns on behalf of the teachers,” he said.

Another opportunity he’s keeping his eye on is infrastructure investments in Europe and Canada. He said pension funds have a role to play in helping Canada address its crumbling infrastructure problem over the next 10 years.

“I think that is a vital opportunity in Canada,” he said.

No doubt about it, Canada’s large pensions can play an integral role in funding domestic infrastructure but they have to maintain their arms-length approach in making such investments and not be forced to invest in these projects by any government.

All of Canada’s large pensions are shifting huge assets into infrastructure as they look for very long-term investments with steady cash flows offering them returns between equities and bonds. Infrastructure investments are an integral part of asset-liability management at pensions which typically pay out liabilities over the next 75+ years (the duration of infrastructure assets fits better with the duration of the liabilities of these plans).

The problem right now is there aren’t enough domestic opportunities so our large pensions are forced to invest in infrastructure projects abroad. This introduces legal, regulatory, political and currency risks (their liabilities are in Canadian dollars). For example, PSP’s big stake in Athens airport makes perfect long-term sense but if Greece defaults and exits the euro, all hell can break loose and the leftist or worse, a junta government, might nationalize this airport. Even if they don’t nationalize, if they reintroduce the drachma, it will significantly damper PSP’s revenues from this project.

As far as incorporating models from Australia and the UK, I think Australia has got it mostly right. They privatized their airports and ports and Canada needs to do the same to fund other projects. The UK’s experience with the Pensions Infrastructure Platform has its share of critics but there have been some big deals there too.

Whatever the Liberals decide to do, their initiative needs to entice foreign pension and sovereign wealth funds as well. It won’t be enough to have Canada’s large pensions on board. And as I stated above, our governments will still need to invest billions in domestic infrastructure.

From an economic policy perspective, massive investments in infrastructure are needed especially now that Canada is on the precipice of a major crisis. We’re living in Dreamland up here and I fear the worst as Canadians take on ever more crushing debt. The country desperately needs good paying jobs, the type of jobs massive infrastructure projects can provide.

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

The National Post weighed in on Canada’s pension debate in an editorial comment, The Ontario Retirement Pension Plan Act — a costly, unneeded plan:

Unnoticed amid the budget hoopla last week, the Ontario Retirement Pension Plan Act was passed into law, authorizing the provincial government to annex a portion of the wages of millions of Ontarians, totalling $3.5-billion annually, to invest on their behalf. You will forgive us if we do not cheer. This is bad policy, as unnecessary as it is misconceived, and destined to cause much harm.

To its alleged necessity, first: the Wynne government continues to claim there is a pension “crisis,” on account of the vast numbers of Ontarians who are said to be chronically “undersaving.” There is no evidence of this. Between the Canada Pension Plan, Old Age Security, Registered Retirement Savings Plans, and other private savings vehicles, the vast majority of Ontarians are not only in no danger of indigence when they retire — poverty, at record lows for the population at large, is even lower among the elderly — but can maintain themselves at a standard of living comparable to that of their working years.

Experts advise this requires a retirement income of one half to two thirds of earnings. According to a study by economists Kevin Milligan and Tammy Schirle, virtually every Canadian household in the bottom two fifths of the income scale meets or exceeds the 50 per cent threshold. At higher incomes, it is true, you find greater numbers with inadequate savings, particularly where neither spouse has a workplace pension: overall, these account for about one in six households.

And that’s only if you ignore the increasing amounts of savings held outside RRSP-type instruments, or in the equity in people’s houses. So it’s not clear there’s any need to force even these individuals to save more, let alone forcing everyone to, even assuming one could: many will simply save less through their RRSPs to make up for the income the government takes from them.

And that, remember, is what’s involved here. The Wynne government likes to make it sound like a gift they are giving Ontarians. But the money workers will receive, eventually, is only money the government takes from them, now: it’s a forced savings plan, not a redistribution scheme. Which might be tolerable, if the government had a halfway sensible plan to invest it. There are disturbing signs it does not.

While the plan is often said to be based on the CPP — indeed, it is touted as a substitute for expanding the CPP — the government has often cited the Quebec Pension Plan approvingly. The CPP’s runaway costs, wildly inflated salaries and exploding payroll are themselves a source of concern, but it is at least notionally focused on maximizing returns to pensioners (even if it underperforms the market as often as not). But the QPP is something else again: through the Caisse de Dépot et Placement du Québec, it is mandated to use pensioners’ savings to support Quebec’s “economic development,” meaning whatever schemes come into politicians’ heads.

So when we read in Ontario budget documents that the plan, starting in 2017, will provide “new pools of capital for Ontario-based project such as building roads, bridges and new transit,” we may be excused for feeling the government has something other than pensioners’ best interests in mind. And to the extent that Ontarians realize this, they will be less inclined to see it as a savings plan, and more as a tax grab by another name. But by then it will be too late.

Wow! The imbeciles at the National Post have really outdone themselves. They must be pissed the NDP just booted out the Conservatives in Alberta in an election upset, and now they’re targeting Ontario’s new pension plan which just received legislative approval to begin collecting contributions from large companies starting on January 1st, 2017 (not sure when the plan begins operations).

To be fair, the National Post comment raises some good points but completely bungles up most others. First, I met Kevin Milligan and Tammy Schirle at a conference in Ottawa back in November 2013 and wrote about it in my comment on whether Canada is on the right path:

I think the presentation that got a lot of us thinking was the one by Kevin Milligan, an associate professor of economics at the University of British Columbia. He argued convincingly that lower income Canadians are better off in retirement now and forcing them to pay more into the CPP will leave them worse off. You can read the paper he co-authored with Tammy Schirle of Wilfrid Laurier University by clicking here. The two main conclusions of their paper are:

1) CPP reform that expands coverage for lower earners can do them harm–it transfers income from a period they are doing poorly (while working) to one in which they were already doing better (retired).

2) An expansion of the CPP that simply expanded the year’s maximum pensionable earnings (YMPE) upwards would have nearly the same impact on combined public pension income as the PEI proposal, but with greater simplicity.

But there was no debating that expanding the CPP would benefit the bulk of working Canadians who don’t have a workplace pension. Premier Kathleen Wynne said the province had to create its own retirement plan for the more than two-thirds of Ontario workers who don’t have a pension at work because the federal government refuses to enhance the Canada Pension Plan.

Where else does the comment above fall short? It attacks the CPPIB’s “runaway costs, wildly inflated salaries and exploding payroll” as a source of concern but fails to put it into proper context. I’ve also criticized Canada’s pension plutocrats, some of whom I think are outrageously overpaid, but there is no denying that the Canadian governance model is the envy of the world and this is the main reason why Canada’s large public pensions are global trendsetters.

The problem with compensation is that pretty much everyone working in finance is way overpaid and grossly self-entitled, some a lot more than others. And when you’re a pension based in Toronto trying to attract talent, competing with big banks and Canadian hedge funds, you have to pay up or risk hiring mediocre/ inexperienced employees who won’t help you deliver strong performance. At the end of the day, it’s long-term  performance that counts and even though I take shots at some of Canada’s senior pension executives for padding their compensation by beating their bogus private market benchmarks, they still have to deliver on their targets or else they can’t collect their hefty payouts.

And there is no denying that Ontario has the best pension plans in the world. Go read my comment on Ontario Teachers’ 2014 results as well as that on the Healthcare of Ontario Pension Plan’s 2014 results. There are a lot of talented individuals working there that really know their stuff and you have to pay up for this talent. The same goes for CPPIB, OMERS, and the rest of the big pensions in Canada. If you don’t get the compensation right, you’re basically condemning these public pensions to mediocrity.

What else does the National Post comment miss? It completely ignores the benefits of Canada’s top ten to the overall economy but more importantly, it completely ignores a study on the benefits of DB plans and conveniently ignores the brutal truth on DC plans.

But the thing that really pisses me off from this National Post editorial is that it fails to understand costs at the CPPIB and put them in proper context relative to other global pensions and sovereign wealth funds with operations around the world and relative to the mutual fund industry which keeps raping Canadians on fees for lousy performance. It also raises dubious and laughable points on the Caisse and QPP with no proper assessment of the success of the Quebec portfolio or why our large public pensions can play an important role in developing Canada’s infrastructure.

But the National Post is a rag of a national newspaper and I would expect no less than this terrible hatchet job from its editors. The only reason I read it is to see what the dimwits running our federal government are thinking. And from my vantage, there isn’t much thinking going on there, just more of the same nonsense pandering to Canada’s financial services industry and the brain-dead CFIB which wouldn’t know what’s good for its members if it slapped it across the face (trust me, I worked as a senior economist at the BDC, the CFIB is clueless on good retirement policy and many other policies).

 

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

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

Chris Johns of The Irish Times reports, Pension crisis is still a financial disaster waiting to happen:

Benjamin Franklin famously said the only two things about which we can be certain are death and taxes. If he were alive today he might be tempted to add pensions crisis as a third certainty of human existence.

I wrote my first “pensions are in crisis” article (for this newspaper) more than a decade ago. That is not a claim to successful futurology or deep insight. It was merely an observation of an existing state of affairs. It was also something that pension experts had been warning about for a long time. Attempts have been made to make things better but these have mostly been piecemeal. Of course, with regard to the National Pension Reserve Fund, it was a case of one step forward and then fall off a cliff. Many pensions are still in crisis, both public and private.

The list of culprits is a familiar one: we are living longer. In particular, we are living longer than expected by the actuaries who set up the pension schemes in the first place – yet another example of the futility of forecasts. Investment returns have also, in many instances, been lower than forecast. The ending of company defined benefit schemes has also created more problems than it solved.

Dilemma

All of this is standard stuff. The response of pension experts is always a rational one: above all else, we should be saving more for our old age. The action taken by most of us is often to yawn and pay attention to something more interesting. Like slowly boiled frogs, we do nothing as the problem builds. Curiously, unlike boiled frogs, we know what is happening and why. We also know what to do to escape the pensions dilemma but mostly choose not to.

This is where it gets interesting. The pensions industry yells louder at everyone to save more. During good times and bad times, the experts are mostly ignored. It’s not just about the recent recession leaving no money left over for saving. When things were booming we saved more but still nowhere near enough.

All of these remarks apply to many economies, not just Ireland’s. We are uninterested in our pension arrangements. Attempts to persuade people to do something often fail. Perhaps it is time to face up to this and acknowledge the consequences for public policy: a lot of people are going to be very disappointed by their pension entitlements. State pensions will remain a significant part of old-age income. This, in turn, will generate another fiscal crisis, sooner or later.

The political power of older people is growing in line with their numbers. Few politicians are willing to antagonise a most important bloc of voters. It seems to be easier to cut public sector pay than to take on pensioners. Nobody dares tackle existing benefits, some of which are as daft as they are unaffordable.

Journeys on the Aircoach from Killiney to Dublin Airport are illustrative. The conversation is often about overseas villas and the latest cruise. These well-heeled pensioners are travelling to their holiday destination in leather-seated, free wifi luxury at the expense of the taxpayer. It really is quite an experience.

Indefensible

Free travel for all is just one indefensible, unaffordable benefit that, I forecast, will never be tackled. I am not going to mention healthcare spending for fear of what will happen to me the next time I am on that bus.

It is tempting to say I must be wrong: a future financial crisis will force politicians to do the right thing and sort out pensions and unaffordable entitlement spending. But we have just lived through the worst financial crisis of all time which left many “unsustainable” benefits untouched and did little to sort pension arithmetic that doesn’t add up. These are battles that seem to be too hard, politically, to fight.

Future governments will be faced with a paradox: the ever-increasing power of pensioners will lead to ever-decreasing willingness to tackle unaffordable spending commitments. But those older people will be growing more and more disgruntled with their pensions.

There is no doubt in my mind the global pension crisis is getting worse and that along with the jobs crisis, these will be the political issues of the next decade(s). The author is correct, this isn’t an Irish problem, it’s a global problem and quite amazingly, it’s a topic that receives little if any attention because most people just prefer to ignore it until it’s too late.

What happens when it’s too late? As an extreme example, look at Greece. Their pensions are on the verge of collapse and the country’s left-wing leaders are desperately trying to negotiate terms to save them. But as Greece searches for a new deal, the reality is that its economy is in a dire predicament because decades of public sector profligacy have finally caught up, and the math simply doesn’t add up.

I had a chat with a friend of mine in Greece yesterday who told me he thinks most Greeks are “hopelessly delusional.” He shared the following with me:

“…there are 2.5 million private sector workers supporting 1.5 million public sector workers in Greece. How is this sustainable? I got into a fight with a professor of geology who was complaining to me her salary went down from 2,300 euros a month to 1,300 euros a month and she still has to work 12 hours a week. I told her she’s lucky she still has a job and told her to go see my butcher who works close to 60 hours a week and only earns 750 euros a month to feed his family of four. And it drives me crazy when I hear Greeks talk about the good old drachma days when they were collecting 25% interest at a bank but the inflation rate was sky high and you took out loans at 40% interest, if you were lucky.”

He added:

“The country is in desperate need of reforms but Greeks are incapable of governing themselves and cutting public sector expenses. Did you know that by law you’re not able to foreclose on a primary residence in Greece? Did you know that if you own a private business you cannot fire more than 2% of your workforce at a time? The Greek government owes private businesses billions of euros in arrears and isn’t paying them so many businesses close up shop, at which point people lose their job. But god forbid we cut expenses at Greece’s over-bloated public sector, all hell will break loose. Still, this is what Greece needs, someone to come in here and make the needed cuts and I think that is what is going to happen once Syriza balks and signs a new agreement on specific reforms.”

On Grexit, he doesn’t think it’s going to happen. Instead, he thinks Syriza will eventually cave and the ECB will take over the IMF loans to Greece (about 30 billion euros) and then Germany and other creditors will put the screws on Greek leaders to reform their economy once and for all (I certainly hope he’s right).

But while Greece is an extreme example, other European countries face equally big challenges, especially when it comes to their pensions. Paul Kenny, a senior investment consultant at Mercer Ireland, wrote a comment for The Irish Times on how quantitative easing is creating new challenges for pension schemes:

The first month of quantitative easing (QE) has come and gone. Although early indicators are positive, it will take some time to tell whether QE will ultimately lift the euro zone out of its economic malaise. But the immediate impact of QE on defined benefit (DB) pension schemes is clear, and it is creating huge challenges.

QE has dealt Irish DB pension schemes, which are facing exceptionally low interest rates, yet another blow. The €60 billion per month of bond purchases in which the European Central Bank (ECB) is engaged is distorting an already stressed market very significantly.

Although QE has boosted asset returns, the considerable associated reductions in bond yields have pushed DB liability values to ever-dizzying heights and reduced expected returns on asset portfolios. This brings further massive financial reporting pressures for plan sponsors, who are committed to delivering pension benefits to their employees.

Liabilities

QE has likely already increased the value of Irish DB scheme liabilities by up to 20 per cent (ie by between €10 billion and €15 billion across all plans), making an already difficult situation at the end of 2014 considerably worse.

Yields on long-dated German bonds have now fallen below zero at maturities up to just under 10 years. As a result, local insurers are or may soon be pricing annuities at negative interest rates, resulting in the rather bizarre outcome that it may cost more than the sum of expected future payments to buy out a pension benefit.

For schemes that are required to reserve to this level under the local regulatory test, this provides significant funding difficulties.

For schemes in wind-up, it may result in an even more unfair distribution of assets from the viewpoint of non-pensioners.

The concept of building a regulatory funding hurdle around what is a very uncompetitive annuity buy-out market in Ireland remains a concern. This has not been adequately alleviated by the advent of sovereign annuities, which remain a relatively unused and unwieldy solution.

How should trustees react to these QE-related challenges? First, they need to realise that QE will not be permanent. It is scheduled to run until September 2016 and although it may be extended beyond then, there are some challenges in upsizing the programme. As a result, the current issues, although extremely challenging, may be temporary.

Second, they need to be aware that QE has provided massive support to asset prices but that this support will not be permanent and, at some stage, assets will have to stand on their own feet.

Caution

Third, they need to treat with caution the Pensions Authority’s position that bonds are the optimum investment class.

In its 2014 annual report, it expressed concern about the level of investment risk to which Irish DB pension schemes are exposed.

Risk management and diversification away from volatile equities should certainly be encouraged and supported. However, now is a very expensive time to reduce risk by increasing allocations to euro zone bonds. De-risking in this form, while QE is influencing the market, will likely have a permanent impact on pension benefits (through benefit reduction or a forced move away from DB schemes).

The regulatory framework should ideally take account of the unprecedented market conditions Irish schemes face due to QE and allow schemes that are well managed, have defined risk management strategies and are sustainable over the long term to navigate the current short-term challenges.

Unfortunately, there appears to be little sign of pragmatism or even acknowledgement that we going through extraordinary market conditions. The Pensions Authority says “…there should be no question of changing the standard in order to give schemes and their members the false impression that the situation is easier than it actually is… ”

Accordingly, it falls to trustees and sponsors to make sensible risk management decisions and do their best to plot a course for the long term while managing short-term financial challenges.

I’m not so sure this is a temporary problem. If anything, my fear is that Euro deflation crisis will get worse as politicians there keep putting off major structural reforms, forcing the ECB to take on more expansive and aggressive quantitative easing in the future. This is why I don’t agree with those who think now is the time to short the mighty greenback.

Closer to home, I read a comment from real estate doom and gloomer Garth Turner on why Stan is a lucky guy:

Stan worked on the line at GM’s Oshawa plant for thirty years. “Last of the breed,” he says. “Man, look at the news.” Indeed. GM just punted a thousand workers, who will be gone by November. When Stan started there, 15,000 guys crowded the gates. Now there are 3,600. Soon, a third less. “This place is doomed,” he prophecies.

Pensions are one reason, which is why I was talking to the guy. GM Canada has about 30,000 retirees drawing monthly cheques. It also has an unfunded pension liability estimated to be more than $2 billion. That’s despite a $3.2-billion cash gift the company received from the government when GM was bailed out in ‘09. It effectively means most company pensioners today are drawing taxpayer money. Yep, just like civil servants. Except most ex-GM workers get more.

Stan never saved a nickel, has no RRSPs, no TFSA, no investment portfolio and $12,500 in his TD Canada Trust daily savings account earning 0.10%. But he does have a house east of Toronto he paid $220,000 for, plus a wife who works at Loblaws.

But Stan’s one lucky dude. He has a gold-plated pension from the olden days when automakers secretly sweated as the union’s brass swaggered to the negotiating table. He also has a big choice to make. He can collect a monthly cheque until he dies. Or he can commute it – taking over the pension himself with a lump-sum payment. In his case, it will be just under $1 million – some of it rolled into a tax-free registered account, some of it in taxable cash.

“I’m scared,” he said. “I can’t sleep, and now all I do is worry.” That’s normal, I told him. People lacking money worry occasionally about being poor. People who have money obsess about losing it. It’s why rich people never smile.

Well, Stan made his choice finally. He took the money, will have it invested privately and get his monthly allowance that way. Here’s why.

“I don’t trust them.” These are the words of a guy who’s watched the ranks of the employed decimated, seen his company rescued from colossal failure by the government, and knows there’s not enough money in the pot to fund his pension for the next 35 years. In fact, unfunded pension liabilities are a ticking timebomb with the potential to blow up the lives of many unsuspecting people.

For example, Canada Post has an unfunded pension liability of $6.5 billion, which should explain why it’s trying hard to get out of the mail delivery business and laying off armies of people. Across Canada it’s estimated there are $300 billion worth of pensions that public sector workers are expecting that actually have no dollars allocated to them. Some bitter surprises are in store.

Anyway, Stan’s smart. Why even take a chance when you can take the money now?

Then there’s this: “What if they screw up again?” Governments struggling with their own debts and deficits might not be so generous with GM the next time it hits the rocks. Pensioners in Canada could live through the same experience as cops and firefighters have in American cities and states where pension benefits are arbitrarily cut. Already teachers in Ontario have been forced to pay more into their massive pension plan and will be receiving less, just to keep it solvent.

By taking the money and putting it to work, hopefully matching long-term investment returns, Stan will never deplete it and harvest a monthly amount equal to that the pension administrators were promising.

Most importantly he said, “I have to do this for Brenda.” Smart. If Stan took the company pension the way most of his greying buddies are, with its stress-free payments, then died in a few years, Brenda would get a small and temporary survivor benefit. But by commuting the pension amount, Stan’s family owns 100% of the money – forever. If he passes first (“Like that won’t happen…”) then Brenda gets every cent, to support her and help the kids as they get established.

Besides, there couldn’t be a better time for the guy to be doing this, since interest rates have cratered. Low rates make a commuted pension worth more in today’s dollars, since the present value of it rises. If current rates were a couple of percentage points higher then the autoworker’s pension value would be at least $300,000 lower. In fact, his commuted value jumped enough to buy a new RV with the tiny quarter-point bank rate drop in January.

Like I said. Lucky dude.

Finally, Stan can take his wad, invest it reasonably for growth and stability, and end up paying less tax than his pension-collecting pals. That’s because a portion of his income can be deemed return of capital, which means it’s not reportable, keeping him in a lower tax bracket.

Of course, in return for these benefits, he worries. He has to trust someone with his million. And that is the highest hurdle.

Although I understand why Stan opted to take a lump sum pension payment, I don’t share Garth Turner’s enthusiasm for this option as it places the onus on Stan to invest that money wisely and make sure he and his beneficiaries don’t outlive those savings.

He’s probably going to invest the money in some crappy “balanced” mutual fund which will underperform the market and get eaten alive on fees. Even if he invests wisely in dividend staples like Bell Canada and those much loved Canadian banks which I’m shorting, he might live through another financial crisis and take a huge hit at a time when he needs stable income during his retirement.

As you can see, when it comes to retirement policy, Garth Turner is just as clueless as his Conservative buddies in Ottawa. If they had any policy sense whatsoever as to what’s best for Canada which is about to go through a major crisis, they would have enhanced the Canada Pension Plan for all Canadians by now. Instead, they will increase the TFSA limit to help rich Canadians, which is just another dead giveaway to the financial services industry.

So, if you ask me, Stan is right to worry as the burden of retirement falls entirely on him now, but he should focus on his health first and foremost, and worry less about his retirement savings (retirement anxiety is bad for your health, another reason which is why I prefer DB plans!). As for others living in Ontario, there is hope as the provincial government recently passed legislation to create a provincial pension plan for more than three million people who do not have a workplace pension, despite critics’ warnings it amounts to a job-killing payroll tax (they are clueless too!).

When it comes to the pension crisis, Ontario is wisely bypassing the feds and going it alone. I can only hope other provinces will follow its lead because the pension crisis isn’t going away in Canada and elsewhere. It’s only going to get worse, forcing politicians to take some very tough decisions down the road. I just hope they take the right decisions, not the politically expedient ones which will exacerbate pension poverty.

 

Photo by Roland O’Daniel 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.

Arlene Jacobius of Pensions & Investments reports, Ontario Teachers CEO calls alternative investments ‘too expensive’:

Ontario Teachers’ Pension Plan, Toronto, is starting to step back from investing in alternative investments such as real estate and infrastructure because they are “too expensive,” said Ron Mock, president and CEO of the C$154.4 billion ($126.4 billion) pension fund, while speaking on a panel at the Milken Institute Global Conference in Beverly Hills, Calif., on Wednesday.

“There’s a lot of money crowded into the broadly defined alternatives space,” Mr. Mock said. “We find it too expensive. It’s time for us to step back.”

Instead, Ontario Teachers executives are investing “between the asset classes where we found the most interesting deals today,” he said.

For example, Ontario Teachers is an investor in the U.K. and Irish lotteries for their stable cash flows and high rate of return, which can be improved with technological upgrades, Mr. Mock said.

“(The lottery investment) is almost like an infrastructure asset,” he said.

Even though Ontario Teachers is being more cautious in its infrastructure investments, Canada’s eight pension funds are “dying to come into the U.S. to fund (the country’s) infrastructure needs” using direct investments, Mr. Mock said. “We are working with the government because there are impediments.”

But Mr. Mock said sovereign wealth funds and pension plans are untapped capital pools for global infrastructure.

Hiromichi Mizuno, executive managing director and chief investment officer of Japan’s ¥137 trillion ($1.15 trillion) Government Pension Investment Fund, Tokyo, also said on the panel that the pension fund has a 5% cap rather than a target allocation for alternative investments. This means Japan’s pension fund executives can invest in alternative investments opportunistically rather than try to meet a target allocation.

In order to better appreciate the context of Ron Mock’s remarks, I highly recommend you read my overview of Teachers’ 2014 results where he shared a lot of insights on their asset-liability approach to investing.

I’ve known Ron long enough to tell you he doesn’t make big proclamations to get his name in the papers. He’s been thinking long and hard of what increased competition from global pensions and sovereign wealth funds means for Ontario Teachers and other big investors.

And Ron is always thinking about risks that lurk ahead — like 18 to 24 months ahead! I remember a time when he came over to the Caisse and talked about his investment approach in front of Henri-Paul Rousseau, Gordon Fyfe and others. On the plane ride over to Montreal, he had jotted some notes on a napkin which would form the basis of his strategy and he had forgotten the napkin in the conference room on the 11th floor. Gordon called me to go pick it up from the conference room and bring it to him outside as they shared a ride after the meeting (I didn’t peek, I swear!).

So why is Ron Mock sounding the alarm on alternatives? Maybe he’s worried that we are about to experience a significant shift in Fed policy which will undermine America’s risky recovery and hurt real estate and infrastructure assets. Or maybe he’s worried of global deflation which will be even more devastating to risk assets, especially illiquid alternatives. Or maybe he just thinks things are getting out of whack and this huge influx of sovereign wealth and pension money chasing yield at all cost is bidding up prices of private market investments to ridiculous levels.

I don’t know exactly what he’s thinking but he reads my blog regularly and he knows my thoughts as I’ve personally expressed them to him. I love what Tom Barrack, the king of real estate who cashed out before the crisis said at the time: “There’s too much money chasing too few good deals, with too much debt and too few brains.”

In January 2013, I openly questioned whether pensions are taking on too much illiquidity risk, and used insights from Jim Keohane, president and CEO of the Healthcare of Ontario Pension Plan (HOOPP) to make some points. Jim shared the following back then:

I find this whole discussion quite interesting. I agree with the commentary of the former pension fund manager. Private assets are just as volatile as public assets. When private assets are sold the main valuation methodology for determining the appropriate price is public market comparables, so you would be kidding yourself if you thought that private market valuations are materially different than their public market comparables. Just because you don’t mark private assets to market every day doesn’t make them less volatile, it just gives you the illusion of lack of volatility.

Another important element which seems to get missed in these discussions is the value of liquidity. At different points in time having liquidity in your portfolio can be extremely valuable. One only needs to look back to 2008 to see the benefits of having liquidity. If you had the liquidity to position yourself on the buy side of some of the distressed selling which happened in 2008 and early 2009, you were able to pick up some unbelievable bargains.

Moving into illiquid assets increases the risk of the portfolio and causes you to forgo opportunities that arise from time to time when distressed selling occurs – in fact it may cause you to be the distressed seller! Liquidity is a very valuable part of your portfolio both from a risk management point of view and from a return seeking point of view. You should not give up liquidity unless you are being well compensated to do so. Current private market valuations do not compensate you for accepting illiquidity, so in my view there is not a very compelling case to move out of public markets and into private markets at this time.

Interestingly, nothing has changed since Jim shared those comments. If anything, things have gotten much worse from a valuation perspective and risks are higher than ever now that the Fed is hinting it’s ready to start raising rates if economic data improves.

But even if the Fed doesn’t raise rates anytime soon, the advent of global deflation should give big investors enough worries to pause and think about their entire strategy toward alternatives. Is it time to stick a fork in private equity? Are hedge fund fees ridiculously high? Is real estate the mother of all alternatives bubble, ready to burst and wreak havoc on public pensions and sovereign wealth funds?

On that last question, Tom Barrack (yup, the same guy from above), came out at the Milken conference to warn of amateurs investing in riskier assets:

Too many investors have moved outside their areas of expertise as they seek higher returns, posing dangers for riskier assets, according to Colony Capital Inc. Executive Chairman Thomas Barrack Jr.

“Everybody is outside of their own asset class,” Barrack said in a Bloomberg Television interview Tuesday with Erik Schatzker and Stephanie Ruhle at the Milken Institute Global Conference in Beverly Hills, California. “When amateurs enter the marketplace for all of this, you are going to get an abundance of something and it is usually not good.”

Central banks globally have pushed investors into higher-yielding assets by reducing interest rates and purchasing bonds. The Standard & Poor’s 500 Index reached an all-time high on Friday and sovereign debt in Europe is trading at negative yields.

“Institutional investors that are in this endless search for yield are ignoring the risk peril of all the consequences of those things,” he said.

Investors with an abundance of liquidity have used real estate as a safe haven, Barrack, 68, said. Apartments in New York City and London are serving as a “safe deposit box” for foreign investors, he said. The influx of money, particularly from international players seeking less risk, has pushed up property values.

“Real estate has become the last bastion,” he said. “The liquidity in the world has created this flurry for solidity. If you do not think there is a bubble at that level, you are going to be mistaken.”

Little Experience

Capitalization rates, a measure of real estate investment yield that falls as prices rise, are being driven down by buyers with less experience in property investing, Sam Zell, the billionaire chairman of Equity Group Investments, said during a Global Conference panel discussion about real estate.

“Capital investment in the last 10 to 20 years is all about allocation,” said Zell, 73. “It’s not a whole bunch of amateurs, but a bunch of people that may not have a lot of experience in real estate, but with a whole lot of money.”

To protect themselves from possible future losses, real estate investors should look for “equity-type returns” in the capital stack, Barrack said during the panel discussion.

“Floating debt can choke and kill you quickly,” he said.

Stagnant Rents

While commercial-property prices have risen, office rents in most urban downtowns, with the exception of New York City, are effectively at the same levels as 20 years ago, Barrack said.

Including such expenses as leasing commissions, tenant improvements and property taxes, “if you effectuate down in current dollars, true office rents are about the same as in 1995,” he said in the television interview.

Colony Capital oversaw about $24 billion of equity before Barrack combined it with Colony Financial Inc. this year. His firm in recent years has owned Michael Jackson’s Neverland Ranch, invested in single-family rental homes and distressed mortgages.

“When the masses start entering the water and thinking they can navigate the waves, I get out,” said Barrack.

Got to love Tom Barrack, he just says it like it is. Real estate, which has long been touted as the best asset class, might have seen its best days ever as the future looks increasingly gloomy for a lot of reasons, especially if America’s risky recovery falters next year.

Barbara Corcoran, founder at The Corcoran Group, talked about New York City real estate on Bloomberg, the lack of affordable housing in the city and why the market may be in a new bubble. She thinks things are fine but she’s so blatantly talking up her business.

And it’s not just New York. The same nutty thing is going on in London and other real estate hot spots around the world as the world’s elite fight with global pensions and sovereign wealth funds for prime real estate assets. What a joke, this is definitely going to end badly and a bunch of amateurs are going to get their heads handed to them.

Below, Ron Mock, the president of Ontario Teachers’ Pension Plan, talks about hedge funds, private equity, the eurozone crisis and the Canadian economy with CNBC (January 2015). I also embedded an Economist interview with Ron from the Canada Summit (December, 2014). Listen to his comments on how “going global introduces a whole other layer of complexity.”

Update: An astute private equity manager sent me this after reading my comment above:

These sweeping asset class statements are perhaps too broad, although no doubt like every asset class, valuations are high by historical standard. But whether this means an asset class issue or reflects an OTPP specific portfolio view deserves further thought. There are many ways to construct PE exposure, and not all portfolios share common attributes. That’s why institutional PE performance is all over the map at any point in time.

As to whether there is more or less volatility in PE verses public markets, that’s also more portfolio specific than the commentators note. There are huge variations in structures and types of underlying investments that make for many choices that are part of active portfolio management. Some portfolios are in fact less volatile and/or cyclical by design, others not.

In such a non-homogenous and flexibly defined area like PE, overall and average asset class attributes are not instructive as to merit or lack thereof of this style of investing. At the heart is whether one gets paid for illiquidity. At an average asset class level, this has probably not been the case for many years, it just takes a long time for this outcome to both surface and be understood.

The solution is that PE should be viewed as an execution business, not an allocation business. Through this lens, the opportunity for playing a role in a larger organization’s portfolio context is cultural. Those with long term beliefs aligned with the reality of the activity will, as usual, do fine.

I thank this person for sharing these insights and agree with many of the points he raises. Still, when you are the size of OTPP, you can’t help but making broad asset class observations and I think many big institutions should heed Ron Mock’s warning and keep it in mind as they pile into alternatives.

 

Photo by debsilver 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.

BNN reports, Federal budget promises to review pension investment rules:

The government says it will review a rule that prohibits federal pension funds from holding more than 30 percent of the voting shares of a company.

The Federal Budget said Canadian pension funds are among the most experienced private sector infrastructure investors in the world, but currently face limits on their investment activities.

The government plans to launch a public consultation “on the usefulness” of the current prohibition.

But Ian Russell, President of the Investment Association of Canada, tells BNN rolling back investment limits for pension funds will have big consequences.

“Those pension funds do not pay tax. So the dividends that flow from those investments would not be non-taxable,” said Russell. “Secondly, there is scope for a significant concentration of corporate Canada and voting control among these large tax-exempt pension funds.”

The rule covers large federal government pension plans, so amendments would not affect Canada’s major provincial pension plans such as the Caisse de dépôt et placement du Québec or the Ontario Teachers’ Pension Plan.

“Lifting the 30-percent rule is certainly something we would welcome and we will be participating in the public consultations,” said Mark Boutet, vice-president of communications and government relations for the Public Sector Pension Investment Board (PSP Investments), which invests on behalf of federal government employees.

I’m curious to see how these consultations will go but lifting the 30-percent rule would help Canada’s large federal government pensions, which includes PSP Investments and CPPIB, to invest more of their assets funding private Canadian infrastructure projects.

Of course, if you’re going to implement such a change, why limit it to big federal pensions? Why not allow all of Canada’s large public and private pensions to enjoy the same investment opportunities as their federal counterparts? This would be the fair thing to do.

As far as reaction to the federal budget, CUPE’s analysis blasted the Conservatives stating it was a dead giveaway to the rich and had this to say on retirement security and pensions:

The measures in this budget on retirement security will overwhelmingly benefit the wealthy with their private savings, while other changes they are considering will put the retirement savings of working Canadians at risk, with the introduction of ‘target benefit plans.’

• Reduces the minimum amounts seniors must withdraw from their RRIFs after they reach age 71.
• Increases the annual contribution limit for TFSAs to $10,000.
• Considering changes to pension laws to allow federally regulated employers to establish target-benefit pension plans and to income tax laws to enable provinces to also establish target benefit plans.

While the change to RRIFs will help some seniors and is supported by seniors’ organizations, only half of all seniors have RRSPs or RRIFs, so this measure will largely benefit the few who are better off, while reducing tax revenues.

The real pension crisis is that 6 in 10 workers don’t have any workplace pension plan. Much better would be to improve the Canada Pension Plan (CPP) and Guaranteed Income Supplement (GIS) so all Canadians could depend on decent incomes in retirement. Labour has a fully-costed proposal to double CCP benefits, which is supported by provinces, pension experts, the NDP, and the Canadian public.

CUPE also called for the government to cancel its plan to increase the retirement age for Old Age Security (OAS) and the GIS to 67. These cuts will mean middle-class Canadians will lose about $13,000 in retirement income and nearly a quarter million future seniors per year could face poverty, all the while Conservatives provide huge tax cuts to the wealthy through TFSAs. The NDP has also committed to reversing this change and restoring the age of retirement to 65.

The Conservative government is intending to give the green light to federal jurisdiction employers to establish target benefit plans that will allow them to walk away from the pension promises they have already made. Workers and all those affected should also vigorously oppose this.

The budget also announced that Conservatives are considering changes to allow pension funds to own more than 30 per cent of the shares of a company. This is intended to facilitate further privatization of infrastructure investments through P3s and could increase the volatility of pension fund investments.

I agree with CUPE on some points, but totally disagree with it on others. Increasing the TFSA limit will predominantly help rich Canadians with high disposable incomes as they will tuck away more or their income into tax free savings but it will also help people with RRIFs shift assets into TFSAs.

Still, the net effect of this policy is to boost assets at Canadian banks, mutual fund companies and insurance companies. In other words, it’s another dead giveaway to the financial services industry. It will boost the profits of the ultra wealthy Desmarais family, which owns mutual fund and insurance companies, but will do nothing to help average Canadians retire in dignity and security (only enhancing the CPP for all Canadians will achieve this goal).

Where I disagree with unions is their insistence on maintaining the retirement age at 65 when Canadians are living longer and working longer and their myopic and Marxist position that privatizing infrastructure is a terrible thing and will increase the volatility at Canada’s large pensions.

This is utter nonsense and shows you unions don’t want to share the risk of their plans or are clueless when it comes to longevity risk, managing assets and liabilities, and the important role Canada’s large pensions play in terms of investing in infrastructure projects around the world. These private market investments have risks but because of their long investment horizon and steady cash flows, they offer important characteristics to pensions from a liability-hedging perspective.

There are many advantages of investing in Canadian infrastructure through P3s. It just makes sense as the risk of the projects will be shared by the private sector, but since these are Canadian projects, there is far less regulatory or legal risks than investing abroad and no currency risk, which is good for pensions hedging for Canadian dollar liabilities.

If you look around the developed world, you will see many cash strapped governments that have no funds to invest in much needed infrastructure projects. Canada is no different. Our large pension funds can play a key role here but only if the federal government allows them to invest more in domestic private infrastructure projects.

Are there tax implications to lifting the 30 percent rule? Sure there are but there are also big benefits. I find it abhorrent that a relatively rich and vast country like Canada has no high speed trains to connect our cities, not to mention our roads, bridges, ports and airports are a total disgrace and need major investments. Where is the money to fund such projects going to come from?

The Caisse’s deal with the provincial government to handle some infrastructure projects offers a blueprint but the federal and provincial governments need to do a lot more to allow Canada’s large pensions to invest in domestic infrastructure projects.

Of course, lifting the 30 percent rule will be met by vigorous opposition in corporate Canada because it’s weary of giving our large public pensions more power to vote against their senor executives’ excessive compensation packages. I happen to think this is a good thing and hope to see our large pensions torpedo any excessive compensation packages that aren’t based on measurable long-term performance objectives.

Those of you who want to read more on the federal budget can read Mackenzie Investments’ 2015 Federal Budget Bulletin. It covers the main points well and provides a good overview for individual investors.

As always, if you have anything to add on lifting the 30 percent rule, please email me at LKolivakis@gmail.com. I got to get back to trading these schizoid markets dominated by computer algorithms. Short sellers are ripping into biotech shares this week, similar to last year’s big unwind. Just remember this, where there’s blood, there’s big opportunity. Below, a list of small biotech shares I’m tracking that are getting killed so far this week (click on image):

As I’ve repeatedly warned in the past, trading small cap biotechs isn’t for the faint of heart. You can lose 30% on any given week, and sometimes a ton more in a single day (check out the 70% haircut Aerie Pharmaceuticals experienced after it announced phase III results that didn’t meet expectations).

Public markets are volatile by their very nature but some segments are frighteningly volatile. This is another reason why Canada’s large public pensions are increasingly shifting assets into infrastructure, real estate and other private markets. Why should they play a rigged game where they’re destined to lose against big banks and big trading outfits? It makes more sense for them to invest in low volatility assets that provide stable cash flows over a very long investment horizon and where they have more control over their investments.

 

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