Author: Leo Kolivakis

Josephine Cumbo of the Financial times reports, Pensions review recommends later retirement age:

Millions of people should have their state pension age pushed back a year to 68 to cut the UK’s £100bn a year pension costs, according to an independent review commissioned by the government.

John Cridland was appointed to review the state pension age and has recommended it should rise from 67 to 68 by 2039, seven years earlier than currently timetabled.

Experts said this would affect about 5.4m people aged under 45. The current pensionable age is 63 for women and 65 for men, rising to 65 for both by late 2018, 66 by 2020, and age 67 by 2028.

Mr Cridland has also recommended that the “triple lock” — which raises the state pension by whichever is the highest of average earnings, prices or 2.5 per cent — be scrapped in the next parliament and replaced with a link to earnings.

“This report is going to be particularly unwelcome for anyone in their early 40s, as they’re now likely to see their state pension age pushed back another year,” said Tom McPhail, head of retirement policy at Hargreaves Lansdown.

Mr Cridland said his timetable would reduce state pension spending to 6.7 per cent of gross domestic product in 2066-67 — 0.3 per cent less than forecast by the government’s fiscal watchdog the Office for Budget Responsibility — or 5.9 per cent of GDP if the triple lock is also abolished. This financial year, state pension spending was 5.2 per cent of GDP.

“My review considers the consequences of an ageing society,” said Mr Cridland, a former head of the CBI business lobby group. “The aim is to smooth the transition for tomorrow’s pensioners, and to try and make the future both fair and sustainable.”

Britain’s demographic profile is of an ageing society in which people are also living longer: the number of 100-year-olds is expected to rise from 6,000 today to 56,000 by 2050.

Along with Mr Cridland’s recommendations, ministers will also consider a report from the Government Actuary’s Department, which projected state pension age rises on the basis of everybody being in receipt of the state pension for either 32 or 33.3 per cent of their adult life.

Sir Steve Webb, a former pensions minister, said that if the government went ahead with “a more radical” timetable for pension age increases (based on 32 per cent of adult life in retirement) “they would be guilty of misleading parliament”.

“In the last parliament, MPs voted for the new arrangements on state pension age increases, on the basis that people would spend two years in work for every one year in retirement,” said Sir Steve, now director of policy at insurance company Royal London.

“On this basis, no one at work today would have a pension age of 70. But on the more aggressive schedule that the government is considering, everyone in their twenties would have a pension age of 70.”

Mr Cridland’s report does not recommend any changes before 2028.

He has rejected calls for early access to the state pension for people in poor health. But said additional means-tested support should be made available one year before state pension age — effective from when state pension age reaches 68 — for those who are unable to work longer because of ill health or caring responsibilities.

“As government goes about making its decision on the future state pension age in May of this year, these contributions and recommendations will provide important insight,” said Damian Green, secretary of state for work and pensions.

Sarah O of the Express reports the new proposals to reform UK’s state pension isn’t going well with retirees furious over planned cuts:

A review of the age at which people can receive their state pensions also recommended the axing of the ‘triple lock’ which guarantees that pensions rise by the same as average earnings, the consumer price index, or 2.5 per cent, whichever is the highest.

But the UK’s biggest pensioner organisation, the National Pensioners Convention described the Cridland Review as “asking all the right questions, but coming up with the wrong answers”.

Jan Shortt, the new general secretary of the NPC, said: “It seems strange that in his first report, John Cridland went a long way to dispel the myth of generational unfairness, showing that the majority of baby boomers, and those from generations X, born in the 60s and 70s, will get the bulk of their income in retirement from the state pension.

“But he bizarrely ends up recommending that everyone should see the value of their state pension fall by axing the triple lock.”

“He has clearly asked the right questions, but come up with the wrong answers.”

“There can be little doubt that the future of the triple lock will now become a key election issue in 2020 for all generations.”

Caroline Abrahams, charity director at Age UK agreed, saying: “We are firmly of the view that the triple lock needs to stay in place, because it is not yet ‘job done’ when it comes to eradicating pensioner poverty.

“Sixteen per cent of older people are still poor and figures published just last week suggest a rise in pensioner poverty.”

“Looking ahead to 2039 and beyond, we think it is crucial that the state pension continues to retain its value so that the people who retire then can look forward to their later lives with confidence, not fear.”

“Research has shown that abandoning the triple lock would reduce the chance that someone with low earnings retires with an adequate retirement income. The same older people who also stand to lose the most from any rise in the state pension age.”

However the triple lock should be abandoned in order to reduce the impact on future government finances, argued Mr Cridland, the former CBI director general who was appointed as the Government’s independent reviewer of state pension age last year,According to the review’s estimates, the UK – which currently spends £100bn a year on pensions – would spend the equivalent of 6.7 per cent of its GDP on the state pension in the 2066-67 financial year if it adopts the review’s age increase.

Abandoning the triple lock and just linking pension increases to earnings data would reduce this figure to an estimated 5.9 per cent of GDP.

Many pension experts broadly agreed with his recommendation. Former pension minister Baroness Altmann said there was “no economic or social rationale” for the triple lock, adding the 2.5 per cent increase was “not related to any economic variables and is politically motivated.”

“The longer the triple lock stays in place, the more disadvantaged those who are not covered will become and the greater the pressure to increase state pension age even further,” she said.

The government has promised to keep the triple lock in place until 2020, but has not revealed its intentions beyond that.Mr Cridland also recommended raising the state pension age to 68 between 2037 and 2039 – seven years earlier than currently planned.

His review coincided with an independent Government Actuary’s Department report, which pointed to a possible state pension age of 70 for anyone currently aged 30 or under.

And it’s not just retirees that are furious. Zlata Rodinova of the Independent reports, Millenials could have to wait until they are 70 until they get a state pension, says Government review:

Millions of young people could face having to work an extra year before being able to draw a state pension, according to two separate reports.

Under projections drawn up by the Government Actuary’s Department (GAD), people aged under 30, face working until the age of 70 to qualify for a state pension compared to the age of 68 under current legislation.

A separate official review published by John Cridland, former director-general of the Confederation of British Industry (CBI), proposed that state pension age should rise to from 67 to 68 between 2037 and 2039, seven years earlier than originally planned.

The current state pension age – the earliest age that a person can start receiving their state pension – is 63 for women and 65 for men. It is due to rise to 65 for both by late 2018, 66 by 2020, and 67 by 2028.

However, experts said if the new recommendations were adopted , people in their 40s would face their state pension age being pushed back by an extra year. They warned those in their 30s and younger may eventually face the possibility of having to wait until they are 70 before being able to draw their pension.

The Government is under pressure to address the spiralling cost of the £100bn-a-year state pension, which is expected to increased further as a result of rising life expectancy and therefore the increasing ratio of pensioners to workers.

In Thursday’s report, Mr Cridland said the change is necessary to keep the State Pension “fair and sustainable”.

“My review considers the consequences of an ageing society[…]. The aim is to smooth the transition for tomorrow’s pensioners, and to try and make the future both fair and sustainable.”

Vince Smith-Hughes, retirement expert at Prudential, said that as a result of the proposed changes younger people will need to plan ahead.

They are likely to find their state pension age is significantly higher than they currently assume,” he said.

Steven Cameron, pensions director at Aegon said requiring everyone to wait until an “ever increasing age” to draw a state pension is “inflexible and increasingly outdated”.

“This is a missed opportunity to meet the needs of those who through health concerns, job pressures or lack of employment opportunity simply can’t keep working into their late 60s. We call on the Government to keep the door open to future change,” Mr Cameron said.

Prudential research earlier this week found that at least one in seven people retiring last this year made no financial provision for their retirement. The survey found that many rely heavily on the State Pension to provide an income when they stop working.

My advice to those thirty something workers in the UK and everywhere, start planning for your retirement early on so you can deal with unexpected policy shifts like this one where the state pension age is gradually pushed up and benefits are potentially cut.

Last week I discussed how collapsing US pensions might fuel the next crisis, beginning my analysis by noting the following:

“Please repeat after me: The global (not just American) pension crisis is deflationary because it exacerbates income inequality and will condemn hundreds of millions of workers to pension poverty.”

The thing to keep in mind is pensions are important, especially in an ageing population, because they allow people to live out their life after retiring on a modest fixed income. This means they can spend accordingly, allowing governments to collect more sales taxes and boosting overall economic activity in the process.

The UK is trying to slay its pension dragon and this fellow you see above, John Cridland, was appointed to review the pension system and recommended to raise the retirement age faster than previously recommended and to scrap the “triple lock” and link pensions to earnings.

If you ask my opinion, this is just more tinkering at the margins. The real fundamental problem with the UK state pension system is it’s grossly antiquated and needs a major overhaul to make it function more like the Canada Pension Plan – Canada Pension Plan Investment Board model.

In fact, I recommend every country in the world adopts the governance that has allowed Canada’s large pensions to flourish while most of their global counterparts are witnessing their pension deficits skyrocket.

When I met Mark Machin, President and CEO of CPPIB, last fall, he told me flat out: “What Canada has achieved with the CPPIB is quite amazing, no other country in the world has this state pension system.”

And Machin is a UK citizen so he knows what he’s talking about. The model we have for our state pension in Canada is unique and we have a similar model for some some large provincial pensions (like the Caisse managing the assets of the Quebec Pension Plan).

There are other countries with great state pensions, like Denmark and the Netherlands, but very few can claim they have achieved a model based on what Canada has done with the CPP and CPPIB.

This is why I keep telling critics and skeptical Canadians to never bash the Canada Pension Plan and plans to enhance it. We Canadians don’t realize just how good we have it over the long run with this system.

As far as UK pension reform, it’s too late, all these measures to address the growing pension crisis in that country are doomed to fail. All of a sudden, the Brits are waking up to realize how unsustainable and poorly managed their state pension system truly is.

Look, fine, we can openly debate whether the state pension system is unsustainable and whether raising the retirement age makes sense since people are living longer, but at one point there needs to be a much more meaningful discussion on whether the system itself needs much deeper reforms to make it truly sustainable and equitable over the long run.

And it’s not like the UK pension system is terrible, it’s actually pretty decent, but it’s been slipping down the global pensions rankings in the last year, mostly owing to the fact that future retirees can expect a “less generous” income from state and workplace pensions.

I will end this comment with a true story from Greece. A few years ago, before the crisis hit, a friend of mine who is a doctor was swimming at the beach and noticed and elderly man who was in “phenomenal shape.”

My friend approached him and asked him how old he was, thinking the guy was around 65 years old. The elderly man told him he was 85 years old, which just floored my friend. He asked him how he has maintained his youth and strength.

The guy looked at my friend and told him flat out: “I retired at age 40 and never worked another day of my life.”

And then we wonder why the Greek pension system was unsustainable.

Why am I bringing this up? Because no matter where you live, there needs to be an honest, adult discussion on state and other public sector pensions to make sure they are sustainable and to avoid rampant abuses like the one I just mentioned above. And trust me, abuses happen everywhere, not just in Greece.

Update: Bernard Dussault, Canada’s former chief Actuary, shared these insights with me:

The UK government would save even more and would greatly improve inter-generational equity if in addition to increase the pensionable age by 1 from 67 to 68, it would afterwards pursue a permanent slow gradual increase based on the calendar of birth.

Indeed, as statistics generally show that longevity in the developed countries has on average steadily increased over the last few decades by about 2 months (i.e. any generation lives longer than the previous one, i.e. the higher the calendar year of birth, the higher the longevity at age 68) and is expected to pursue doing so, there is a case to keep increasing each coming calendar year the pensionable age by setting it as follows on the basis of the calendar year of birth (CYB, click on image):

I thank Bernard for sharing his thoughts with my readers.

Canada Pension Plan Investment Board (CPPIB), GIC and The Scion Group LLC (Scion) announced today that their student housing joint venture entity, Scion Student Communities LP (together with its subsidiaries, “the Joint Venture”), has acquired three U.S. student housing portfolios for approximately US$1.6 billion. These portfolios comprise:

• US$385 million acquisition of six Class-A properties located primarily in the southern U.S.;
• US$640 million acquisition of 11 Class-A properties in premier university markets across the U.S.; and
• US$550 million in recapitalizations of 12 legacy Scion-owned and operated communities situated in leading campus markets across the U.S.

Since its inception in January 2016, the Joint Venture has completed US$2.9 billion of investments, including the previously announced US$1.3 billion acquisition of University House Communities Group and its 19 properties in June 2016. The Joint Venture has deployed over US$1 billion in equity capital. CPPIB and GIC each own a 45% interest in the three portfolios and Scion owns the remaining 10%.

“The U.S. student housing sector is an attractive investment opportunity, driven by secular strength in enrollment growth and favourable supply dynamics,” said Hilary Spann, Managing Director, Head of U.S. Real Estate Investments, CPPIB. “Achieving scale in this sector is an important global investment objective for CPPIB, and we are pleased to further this goal in the United States with our partners at GIC and Scion.”

The Joint Venture’s well-diversified national portfolio now includes 48 student housing communities in 36 top-tier university markets, comprising 32,192 beds. The average age of the properties is less than five years and over 75% of the assets are located within one mile of their respective campuses.

Adam Gallistel, Regional Head of Americas, GIC Real Estate, said, “These high-quality, revenue-generating assets are good additions to our global student housing portfolio. We remain confident in this sector’s long-term fundamentals and are pleased to continue our strong partnership with Scion and CPPIB.”

The Joint Venture will pursue additional opportunities to acquire high-quality student housing assets primarily in Tier 1 university markets in the U.S.

“We are thrilled to be partnering with two of the world’s premier real estate investors in the ongoing consolidation of the student housing sector,” said Robert Bronstein, Scion’s President. “We especially appreciate the confidence and support of GIC and CPPIB implicit in the volume of investment activity completed by the Joint Venture during its first year of operation as well as the significant commitment of additional growth capital to the partnership. We look forward to the Joint Venture’s continued growth and success.”

About Canada Pension Plan Investment Board

Canada Pension Plan Investment Board (CPPIB) is a professional investment management organization that invests the funds not needed by the Canada Pension Plan (CPP) to pay current benefits on behalf of 19 million contributors and beneficiaries. In order to build a diversified portfolio of CPP assets, CPPIB invests in public equities, private equities, real estate, infrastructure and fixed income instruments. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, São Paulo and Sydney, CPPIB is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. At December 31, 2016, the CPP Fund totalled C$298.1 billion. For more information about CPPIB, please visit www.cppib.com or follow us on LinkedIn or Twitter.

About GIC

GIC is a leading global investment firm with well over $100 billion in assets under management. Established in 1981 to secure the financial future of Singapore, the firm manages Singapore’s foreign reserves. A disciplined long-term value investor, GIC is uniquely positioned for investments across a wide range of asset classes, including real estate, private equity, equities and fixed income. GIC has investments in over 40 countries and has been investing in emerging markets for more than two decades. Headquartered in Singapore, GIC employs over 1,300 people across 10 offices in key financial cities worldwide. For more information about GIC, please visit www.gic.com.sg.

About The Scion Group

Scion is the United States’ largest privately-held owner/operator of student housing communities in major public university markets. Scion’s current portfolio includes 67 properties comprising approximately 46,000 bedrooms, plus management of two university-affiliated communities with an additional 2,200 bedrooms. Scion has focused exclusively on the student housing sector since its inception in 1999, and has provided advisory services and/or invested in over $6 billion of student housing projects. For more information about Scion, please visit www.thesciongroup.com.

So, what are my thoughts on this deal? It’s another real estate deal based on long-term secular trends and it’s a great deal for all parties involved, including GIC and the Scion Group.

You might not know a lot about the US or world student housing market but it’s a huge market. In fact, I urge all of you to read Savills’s latest World Student Housing report to better familiarize with global trends in this market.

The key investment highlights from the latest publicly available report are:

• 2015 was a record year for investment in student housing with $15bn invested globally in the sector. The first half of 2016 saw lower total volumes but mainland Europe continued to rise off a low base.
• US and UK student housing REITs outperformed their all REIT indices by 19 and 16 percentage points respectively.
• Global cross-border investment in the sector accounted for 40% of all deals in the last three years as international investors sought to diversify portfolios

Not surprisingly, US college housing REITs are on the rise:

Like bond prices, real estate investment trust (REIT) values in America continue to soar, as more savers and income investors search for ways to quench their thirst for higher yield without having to take excessive risk with their money. College housing is one category of REIT that has not only been winning the hearts of investors in recent times, but also delivering remarkable returns to its owners. (See also, REITs: How Long Can They Stay This Hot?)

Double-Digit Returns

Since the $1.9-billion acquisition of Campus Crest Communities earlier this year, American Campus Communities (ACC) and Education Realty Trust (EDR) have been the only publicly traded REITs that primarily focus on the college housing market. The two REITs have seen their stock prices increase in the last 12 months by more than 47% and 55% respectively, easily trumping both the 12% increase in the Bloomberg North American Apartment REIT Index and the S&P 500’s total return of 3% realized during the same period. (See also, REITs: Still a Viable Investment?)

Reliable, Recession-Proof Income

With political uncertainty on the rise and weak economic data being released, many investors are beginning to put their efforts into hedging their portfolios in the event that the U.S. and other global economies weaken. One of the contributing factors for such a steep rise in student housing REIT valuations could be that investors are using them as a way to hedge their bets in the market. Unlike others forms of real estate that are susceptible to changes in market conditions, such as commercial property and apartment units, student housing, and college enrollments as a whole, are generally unaffected during recessions, at least in recent history. This may be partly due to the fact that students in the United States have relatively easy access to financing to cover their college-related expenses.

Why are the student-housing landlords getting top grades?

The long-term theme is that college enrollment has boomed over the past few decades, and investment in new on-campus dorms hasn’t come close to keeping up. In the short term, the shares are likely rising because investors are looking to hedge against the possibility of a U.S. recession.

“In an environment of striking political and economic uncertainty, public investors are ascribing value to [the] certainty of cash flows in student housing,” said Ryan Burke, an analyst at Green Street Advisors. “In [the] young life of purpose-built student housing, it’s performed really well in good and bad times.”

That’s because kids keep going to college, and schools have run out of places to put them. Consider these striking data from the U.S. Department of Housing and Urban Development: 17.7 million students were enrolled in post-secondary, degree-granting institutions in 2012, up from 12 million in 1990. Over the same period, the number of students living in on-campus dorms increased by a bit more than 600,000.

In the late 1990s, an industry grew up to absorb demand from the roughly 85 percent of students who don’t live on campus, building off-campus apartments specifically for students, offering leases by the bed, and luring renters with choice enticements. The amenities at some of the more upscale student housing complexes have drawn scorn from those who wonder: Is there a good argument for racking up student debt to watch moving screenings from your swimming pool or eat meals prepared by a James Beard-award-winning chef?

But plenty of more pedestrian complexes offer things that students want, such as barbecue pits and tanning beds, and in addition to the two publicly traded landlords, a deep roster of private property managers is getting in on the act. In March, the private equity firm Harrison Street Real Estate Capital took a publicly traded landlord private in a $1.9 billion deal.

Part of the reason to own student housing is that, in a period of low interest rates, collecting rent has looked like a good way to earn good returns, whether you’re renting out a shopping mall, an office sky-rise, or a self-storage unit.

Student housing has a slightly different appeal, according to one theory. Landlords should suffer when the economy tanks, as renters lose jobs or see wages stagnate. But college enrollment has increased in recent recessions, making student housing landlords an interesting hedge against an economic downturn.

That doesn’t mean developers won’t eventually overbuild. College enrollment has been declining in the years since the Great Recession, even as investment in off-campus student housing has soared. At some point, there will be so many student apartments that the industry will lose its appeal as a safe haven, Burke said.

In the meantime, landlords won’t mind the occasional pool party or all-night kegger, as long as the rent is in the mail.

Yeah, let the rich kids party it up in US college housing, as long as mommy and daddy are paying the rent, the landlords don’t care.

As you can see, investing in student housing is a hot sector, especially if investors are worried of an economic downturn.

CPPIB and GIC are investing directly in this market alongside their partner, the Scion Group, to avoid market beta. Very smart move and it shows you how the best real estate investors are always thinking of portfolio construction and diversification, especially now that interest rates and cap rates are at historic lows and real estate valuations are at historic highs.

Are there risks investing in US student housing? Of course, most US students are not rich, they pay their college tuition and expenses via student loans. And many of them are struggling, which is why more than 1.1 million borrowers defaulted on their federal student loans last year.

Quite shockingly, a staggering number of college kids are using their student loans for wild Spring Break trips, which goes to show you we are not dealing with the wisest and most prudent segment of the population (after my recent vacation in Florida, I’m actually shocked that any of these college students can obtain a degree after seeing the way they behave on Spring Break).

But the reality is the demands of an increasingly competitive economy means these students need a college degree at a bare minimum or they risk never getting a job. So rich, poor or middle class, they have to go to college to be able to compete and get a decent job (most of them need to in order to pay off their student loans for the rest of their life).

This entire discussion  on US college housing reminds me of my good old McGill University days when I was part of the United Nations club going to Ivy League universities in the United States to take part in mock UN debates.

Back then, I saw students from all backgrounds living on and off campus. I remember the dorms at Harvard and Princeton, two universities I loved visiting, and the pictures some of the students had on their wall really opened my eyes (like pictures of them with President Clinton).

But most students weren’t rich and highly connected, they were poor or middle class and they needed affordable, safe student housing near the campus. The same goes for other universities I visited like Yale, UPENN, and Columbia.

If you broaden it out to include all US colleges, you’ll understand why student housing is so popular. Parents want to know their kids are safe and secure, eating and sleeping properly, exercising and living nearby so they don’t miss their classes even if they’ve been drinking too much the night before.

Whatever, you catch my drift. As far as Canada, student housing is a relatively small but growing niche.

Last year I was introduced to Centurion Asset Management, a leader in this space up here, and even got to chat with its President and CEO, Greg Romundt. You can read all about Centurion’s success here but I found Greg’s background — he was a fixed income derivatives trader for many years prior to setting up this shop — particularly interesting. He’s sharp and shared my views on inequality and long-term deflation.

For a lot of reasons — affordability (low tuition and low loonie), great education, proximity to the US — I expect the student housing market to blossom in Canada over the next decade, but it’s still a relatively small market.

Another factor that may help the Canadian student housing and hurt US student housing demand is how foreign students perceive US immigration policy as many are now questioning whether to attend US universities. That all remains to be seen however as it’s too soon to tell whether this is the start of a big trend from foreigners to shun US universities.

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

Kirk Falconer of PE Hub Network reports, OPTrust punches above its weight with private equity strategy:

OPTrust has greatly expanded its private equity program, deploying a strategy that gives the mid-sized pension fund access to opportunities usually available only to larger institutions.

OPTrust, which invests on behalf of OPSEU Pension Plan, the retirement system for about 90,000 Ontario public employees, this week reported a net return of 6 percent for 2016. Net assets grew to more than $19 billion from $18.4 billion in 2015.

Overall numbers were boosted by a strong performance in the PE portfolio. PE investments returned a net 20.6 percent last year, up from 14.4 percent in 2015.

These results cap a major five-year increase in OPTrust’s PE allocation. At the end of 2016, the portfolio held nearly $1.6 billion in assets, more than triple the amount in 2012. Private equity’s share of total assets rose in this period to 9 percent from 4 percent. OPTrust’s notional target is 15 percent.

OPTrust Managing Director Sandra Bosela, who heads the global PE group, told Buyouts that most of the growth owes to a strategic shift favouring direct deals and co-investments.

Prior to 2012, the main focus of OPTrust’s PE portfolio was funds and secondaries, with direct activity accounting for 20 percent of assets, Bosela noted. By 2016, the direct share was 48 percent.

Bosela, formerly a general partner with 15 years of experience, joined OPTrust Private Markets Group in 2012 to develop the PE strategy and ramp up direct investing. She says the result is an ability to “punch above our weight.”

“I’m pleased with the progress,” Bosela said. “Our strategy has been designed to carve out a niche that leverages our size and includes more direct, actively managed investments. It has opened doors for us and created access to deal flow that’s typically available only to our much larger peers.”

Deals plus funds

OPTrust is targeting a 50:50 balance between the portfolio’s direct and fund sides, Bosela said. That’s because many of the best opportunities for co-underwriting deals come from a core group of fund partners.

Opportunities are also sourced with “like-minded partners,” Bosela said. They include a range of market players, such as PE firms, strategic investors, financial players and business owners.

Drawing on these sources, OPTrust has increased both the pace and range of its mid-market buyouts and other PE transactions in North America, Europe and developed Asia.

Disclosed examples include OPTrust’s 2014 investments alongside Altas Partners in St. George’s University, a Grenada medical school, and alongside CDCM in Skybus, an Australian airport transit service.

Over 2014-2015 it also joined Imperial Capital Group in backing U.S. home-alarm monitor Ackerman Security Systems and Canadian dental network Dental Corp.
John Groenewegen, Partner, Osler, Hoskin & Harcourt LLP.

In-house resources

OPTrust’s experience may provide a model to some other small and mid-sized pension funds looking to expand their PE allocations.

John Groenewegen, a partner at law firm Osler, Hoskin & Harcourt, says OPTrust’s private equity program has “put them in a position they would not otherwise be in.”

Groenewegen, who advises pension-fund clients, says a central factor in OPTrust’s approach is in-house resources that include “professional deal-makers.”

“OPTrust has invested in the right funds, and an experienced team has ensured it can act quickly and make decisions quickly,” he said. “That’s key to being a good deal partner, to being invited back.”

Bosela agrees, noting that OPTrust’s ability to be “a value-adding partner, one that can execute shoulder-to-shoulder, even on complex transactions” is essential to its direct investing. “We’re not the big elephant in the room,” she says. “We must offer something other than our money.”

Not standing still

OPTrust aims to place more capital in the months ahead, Bosela said. She is mindful, however, of an “overheated” market environment, fuelled by high values and “heightened levels of dry powder.”

Market frothiness has reinforced a disciplined, selective focus to investments, Bosela said. OPTrust also will give more emphasis to private debt and long-term equities to help balance the portfolio and reduce volatility.

Bosela says OPTrust is not “standing still” with the PE program, but will instead continue to add to its capabilities. For example, it is exploring “proactive origination,” intended to accelerate independent sourcing of direct opportunities.

OPTrust PMG has a team of 18 located in offices in Toronto, London and Sydney, Australia. Overseeing nearly $4 billion in assets, it is co-led by Bosela and Gavin Ingram, a managing director and head of the global infrastructure group.

I recently covered how OPTrust is changing the conversation, emphasizing its funded status first and foremost instead of its annual results.

In that comment, I covered a conversation with OPTrust’s President and CEO, Hugh O’Reilly, and its CIO, James Davis, where we spoke at length about the funded status and shift in investment philosophy.

When I went over some of their private market investments, I noted the following:

In private equity, they invest and co-invest with funds but as James told me, “they’re not looking to fill buckets” and will use liquid markets to fulfill their allocation to illiquids if they’re not fully invested.

In infrastructure, they have done extremely well by investing primarily directly through co-sponsored deals with their strategic partners. Their focus is on the mid-market, with cheque sizes of $100M to $150M and where there is less competition.

After reading the article above, I noted the following on LinkedIn (click on image):

If you can’t read it, here it is again:

Agreed, Sandra Bosela has done a great job expanding co-investments at OPTrust. As far as “proactive origination”, that gets tricky because a) it’s hard to source great deals and b) you don’t want to compete with your GPs because they will end up seeing you as a competitor and cut you out of co-investment opportunities. Still, Mrs. Bosela should be commended for her work at OPTrust and she has the right game plan and strategic thinking.

The truth is OPTrust is punching above its weight in private equity and other activities but just like everyone else, there are limits to what Canada’s mighty PE investors can do in terms of “proactive origination” in direct private equity deals.

Most direct investing at Canada’s large pensions is done via co-investment opportunities the general partners (GPs) offer their limited partners (LPs, ie. pensions and other institutional investors).

Even though LPs pay big fees for comingled funds, co-investments have little or no fees but they require expertise from the pension staff that needs to quickly evaluate these larger transactions before investing in them.

In fact, John Groenewegen alluded to this: “OPTrust has invested in the right funds, and an experienced team has ensured it can act quickly and make decisions quickly,” he said. “That’s key to being a good deal partner, to being invited back.”

And Bosela is right, OPTrust’s ability to be “a value-adding partner, one that can execute shoulder-to-shoulder, even on complex transactions” is essential to its direct investing. “We’re not the big elephant in the room,” she says. “We must offer something other than our money.”

In order to expand your co-investments to lower the overall fees you pay in private equity, you need to a) invest in the right funds and b) have an experienced team to quickly evaluate co-investment opportunities.

It sounds easy and straightforward but it isn’t. If your pension fund doesn’t have the right governance to attract and retain qualified staff, you can forget all about expanding direct investments in private equity by gaining access to more co-investment opportunities.

So, first you need to choose the right funds and second you need to have very qualified people on your team to evaluate co-investment opportunities relatively quickly.

And judging by the outstanding long-term returns, Bosela and her team are good at both. She’s also right to fret about the current conditions in private equity which I alluded to on Friday when I discussed why there’s no luck in Alpha Land:

[…] it’s not just hedge funds. The same thing is going on in private equity where there’s a mountain of dry powder and the market return differential over public markets is narrowing:

Private equity firms had as much as $1.47 trillion in funds available to invest at the end of 2016, and debt capital was also readily available to bolster their investments. Still, a situation of rising asset prices, together with fierce competition for these assets in an environment overcast with a possibility of an upcoming recession that could drive down prices, made it difficult to close deals, according to an annual global private equity report from Bain & Company. These firms are cautious about whether today’s deals will bring them to their targeted returns. Banks are also wary of financing big deals.

According to Hugh MacArthur, head of global private equity with the Boston management consulting firm, “Capital superabundance and the tide of recent exits drove dry powder to yet another record high in 2016. Shadow capital in the form of co-investment and co-sponsorship could add another 15% to 20% to that number. While caution about interest rates remains, there is a general expectation that debt will remain affordable. As a result, deals won’t be getting any cheaper.”

Investors continued to show interest in private equity in 2016, and these firms raised $589 billion globally, just 2% shy of the 2015 total. One 2016 trend to note is the rise in “megabuyout” funds that raised more than $5 billion each, with 11 such funds raising a total of $90 billion. These funds appear particularly appealing to institutional investors who want to deploy large amounts of money into private equity, the management consulting firm reports.

And an overall decline in the net asset values of buyout firms, as their distributions to investors outpaced their new investments plus the value of their existing holdings, meant that some investors found themselves short of their targeted private equity allocation. For instance, the Washington State Investment Board pension fund found its private equity allocation down to 21% in 2016, from 26% in 2012. This created a positive environment for private equity fundraising in 2016, but the industry is apprehensive that this strong pace cannot last for too long, as a recession and a stalling stock market, for instance, could upset the strong dynamics.

The buyout market started off slow in 2016, as the Chinese stock market bust, declining oil prices and the uncertainty regarding Brexit in Europe all had an impact. In North America, the market did not recover momentum and the total number of deals for the year was down 24%, with deal value off 16%. In Europe, there was a more moderate drop off.

Bain finds that there is a potential for almost 800 public companies to be taken private in buyouts, but expects a much lower level of actual public-to-private buyouts going by historical activity. While returns on private equity buyouts continue to outshine the returns on public markets, the gap is closing, as it is getting harder for private equity to find outsize returns on undervalued assets in today’s more benign economic environment.

Private equity investors have also settled into longer holding periods of about five years for their investments, and this state of affairs is likely to endure for the near term. Historically, these firms have held on to assets for three to five years, but this period was pushed up in the aftermath of the financial crisis as firms had to nurse their assets over a slow recovery period, the management consulting firm reports.

In fact, deals that private equity firms were able to quickly flip over, holding onto them for less than three years, made up a mere 18% of private equity buyouts in 2016, compared to a 44% share in 2008.

No doubt, these are treacherous times for private equity and there is a misalignment of interests there too. Just ask CalPERS, it’s experiencing a PE disaster even if it’s been completely misconstrued in the popular blog naked capitalism.

I recently had a chance to talk to Réal Desrochers, the head of CalPERS’s PE program, and he told me he was concerned about the wall of money coming into private equity from super large sovereign wealth funds, many of which aren’t staffed adequately but just write “huge cheques” to private equity funds (and hedge funds).

It’s a recipe for disaster and it all reminds me of what Tom Barrack said in October 2005 when he cashed out before the crisis hit:

“There’s too much money chasing too few good deals, with too much debt and too few brains.” The amateurs are going to get trampled, he explains, taking seasoned horsemen, who should get off the turf, down with them. Says Barrack: “That’s why I’m getting out.”

Every large and small  institutional investor playing the cheque writing game should post this quote in their office along with my favorite market quote by Gary Shilling often attributed to Keynes: “The market can stay irrational longer than you can stay solvent.”

As far as private debt, it’s an increasingly popular asset class among Canada’s large pensions, including PSP which is “playing catch-up” to its large peers in this activity.

I will end it there and just say that it’s refreshing to see how OPTrust is punching above its weight in private equity and other activities. It’s not always size that matters, you can differentiate yourself in other ways as long as the governance is right.

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

Geoff Cutmore and Nyshka Chandran of CNBC report, Canada Pension Plan looks to raise its bet on China:

China’s gradual market liberalization may be good news for Canadian pensioners.

Canada Pension Plan Investment Board (CPPIB), the country’s largest pension fund, currently has 4 percent of its portfolio in the mainland — a figure that president and CEO Mark Machin said is too low for a globally diversified portfolio such as his.

But he plans to increase that share as the world’s second-largest economy opens itself up.

“We want to significantly increase our investment here over the long term,” he said, explaining that his fund is “substantially” underweight relative to GDP, but not necessarily relative to available market cap.

Last month, the People’s Bank of China allowed foreign investors to hedge bond positions in the foreign exchange derivatives market — a move that many strategists deemed significant to overall market reform.

“China is now by many measures the third-biggest bond market in the world at around $7 trillion, so allowing that to be more accessible to capital is yet another aspect of making this a more investable place,” Machin told CNBC at the China Development Forum in Beijing.

“We’re value investors and we’re super long term. We like to say a quarter for us is 25 years, not three months,” Machin said. “We don’t necessarily need our money back for immediate use, so I think we’re seen as relatively friendly capital, and therefore our access is reasonably good here.”

CPPIB is particularly big on Chinese e-commerce and despite the dominance of giants such as Alibaba and Tencent, Machin said he believes the sector remains exciting.

Below those large behemoths is an ecosystem of start-ups, Machin explained: “The ecosystem around these large companies is part of the secret source of innovation in this country…China’s been very thoughtful about creating the ingredients of innovation, which is creating more opportunities for all types of companies, whether it’s e-commerce or others, to bloom.”

As a long-term investor in a fast-changing market, it’s key for CPPIB to speedily identify early-stage trends, he continued.

“It now takes very little money to develop a company given the amount of cloud computing capacity…you can get a company some market for very little money, very very quickly and have a very disruptive impact.”

Last week I discussed why the Caisse and CPPIB are investing in Asian warehouses in Singapore and Indonesia noting the following:

I think it’s pretty self-explanatory. The Caisse and CPPIB are betting on the demand from the rise of e-commerce and a burgeoning middle class in southeast Asia. This is a long-term bet and if you’ve been paying attention to e-commerce trends in North America, you can bet the exact same thing will happen in Asia but with exponential growth.

Canada’s large pension funds are competing with large private equity firms for these logistic warehouses. They not only provide great growth potential, they are pretty much all leased up and will provide stable cash flows (rents) over a very long period.

As a burgeoning middle class develops in China and Southeast Asia and their service economy picks up, it will present long-term growth opportunities in many areas, especially e-commerce.

Let me remind you in public markets, CPPIB made a huge windfall off the Alibaba IPO a few years ago but that decision didn’t happen overnight. It took years and boots on the ground to nurture that investment.

The article above quotes CPPIB’s CEO Mark Machin as stating: “China’s been very thoughtful about creating the ingredients of innovation, which is creating more opportunities for all types of companies, whether it’s e-commerce or others, to bloom.”

I will trust Mark’s judgment on this but my own personal money is all invested in US stocks and I think it will only be invested in US stocks for the rest of my life, especially if the new Canadian federal budget announces higher taxes on capital gains and dividends. In my opinion, there is no other country that competes with the US when it comes to real innovation.

And let’s not forget, China is a communist country experimenting with “controlled capitalism”. This means capital isn’t allocated efficiently across various sectors and there is way too much government interference at all levels of the economy.

What the Chinese have managed to do is create a massive overinvestment bubble which  threatens economic growth there. In fact, the OECD recently warned that China should urgently address rising levels of corporate debt to contain financial risks as it tries rebalance the nation’s economy:

Beijing should also step up efforts to retire “zombie” state firms in ailing industries to help channel funds to more efficient sectors and enhance the contribution of innovation in the economy, the organisation said its latest survey of China’s economy.

“Orderly rebalancing requires addressing corporate over-leveraging, overcapacity in real estate and heavy industries and debt-financed overinvestment in asset markets,” the report said.

It forecast China’s economy would grow 6.5 per cent this year and 6.3 per cent in 2018.

The report warned of mounting financial risks as enterprises are heavily indebted, while housing prices have become “bubbly”.

Corporate debt is estimated at 175 per cent of GDP, among the highest in emerging economies, climbing from under 100 per cent of GDP at the end of 2008, the report said.

“Soaring property prices in the largest cities and leveraged investment in asset markets magnify vulnerability and the risk of disorderly defaults,” it said. “Excessive leverage and mounting debt in the corporate sector compound financial stability problems, even though a number of tax cuts are being implemented to reduce the burden on enterprises.

Alvaro Santos Pereira, director of the country studies division at the OECD’s economics department, said at a briefing on the report: “Although the risks are rising, the firepower in the Chinese government is big enough and if there’s a problem, it’s able to sort it out.”

The report called for better and more timely fiscal data releases and to expand funding in health and education. Monetary policy should rely more on market-oriented tools and less on targeted government policy, it said.

China is trying to boost the services sector and encourage greater innovation in the economy, partly through promoting greater entrepreneurship and the commercial use of the internet.

Official data shows more than 100,000 new firms were registered each day last year in China, but the report said there were too many unviable firms and the progress on scrapping zombie state-run companies was modest.

It cited a research report published last year saying that nearly half of steel mills and half of developers were making losses, but could still obtain loans. Zombie companies, mainly state-owned enterprises in industries plagued by excess capacity, have aggravated credit misallocation and dragged down productivity, the report said.

The State-owned Asset Supervision and Administration Commission said last year it aimed to close 345 zombie firms in the coming three years. The report said the number was “rather modest” given that the commission controls about 40,000 companies.

It added that the government should remove implicit guarantees to state firms as a way to stop corporate debt from piling up and that bankruptcy laws should be improved to help phase out zombie state firms.

China is increasing spending on research and development, but innovation does not significantly contribute to growth, the report said. Despite the soaring number of patents, “only a small share are genuine inventions”. The utilisation rate of university patents is only about five per cent compared to 27 per cent in Japan.

“Only a fraction of Chinese patents are registered in the United States, the European Union and Japan and Chinese researchers are weakly linked to global networks,” the report said. Margit Molnar, chief China economist and lead author of the report, added: “The internet should be faster and cheaper.”

The report suggested government support for innovation should extend to more sectors rather than strategically important projects and high-tech industries.

The OECD has 35 member countries, with China a strategic partner.

The organisation has a stringent set of criteria for membership based on data transparency and other factors including oil reserve levels.

The attraction of membership for China has waned as it favours involvement with other international organisations, including the International Money Fund and the G20 group of industrialised nations.

“The OECD is no longer a rich men’s club. It is important the OECD is becoming more and more global because the world has been changing dramatically over the past years,” said Pereira. “China is looking at the OECD, hopefully, with increasing interest.”

He added the organisation had close cooperation with the Chinese authorities. “We welcome that,” he said.

As you can see, even though China is still “officially” growing at a 6.5% clip, most of this growth is increasingly financed by debt to support thousands of zombie companies that should be shut down.

Also, innovation in China is not a meaningful contributor to economic growth because the Chinese don’t excel in innovation and have very few patents on any genuine inventions.

Having said this, China has managed its growth admirably thus far and we can debate whether a country like China can thrive on laissez-faire American capitalism (I personally don’t think so, not that there has been much laissez-faire capitalism going on in the US either).

In my last comment on the $3 trillion shift in investing, I stated the following:

Given my views on the reflation chimera and the risks of a US dollar crisis developing this year, I would be actively shorting emerging markets (EEM), Chinese (FXI), Industrials (XLI), Metal & Mining (XME), Energy (XLE)  and Financial (XLF) shares on any strength here (book your profits while you still can). The only sector I trade now, and it’s very volatile, is biotech (XBI) but technology (XLK) is also doing well, for now.

I still maintain that if you want to sleep well, buy US long bonds (TLT) and thank me later this year. In this deflationary environment, bonds remain the ultimate diversifier.

Now,  this morning I read that Asian shares are at 21-month highs and the US dollar is soft on Fed views which are less hawkish than previously anticipated.

Great, so am I wrong on my macro call? Nope, I am rarely wrong on my macro calls but the story I’m describing won’t hit us till the second half of the year and perhaps even in the last quarter of the year.

Yes, Chinese (FXI) shares have been breaking out on the weekly chart, propelling emerging market (EEM) shares higher too (click on images):

 

These are bullish weekly breakouts that augur well for these shares in the short run, but given my global deflation view, I wouldn’t be investing here and I’m pretty sure once global leading indicators start heading south, these markets are in big trouble (keep shorting them on any strength).

What does this have to do with CPPIB raising its stakes in China over the long term? Nothing except I would be more like PSP and remain very cautious on emerging markets including China over the near term. If there is a massive downturn in China, then reevaluate and go in and raise your stakes.

Having said this, I realize that CPPIB is a super long term investor and doesn’t need to perfectly time its entry in public and private markets, but all this bullishness on China at this particular time makes me very nervous.

Still, CPPIB is helping China fix its pension future  (they need all the help they can get) and it has developed solid relationships there, including high level government relationships it can leverage off of to make smart investments over the long run.

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

Reuters reports, Canada pension funds to invest in Singapore, Indonesia warehouses:

Canada’s two biggest pension funds have agreed to partner with LOGOS, a real estate logistics operator, to invest in warehouses in Singapore and Indonesia, betting on demand from the rise of e-commerce and a burgeoning middle class in southeast Asia.

Canada Pension Plan Investment Board (CPPIB), the top pension fund of the country, said in a statement it will initially commit S$200 million ($142 million) for an about 48 percent stake in LOGOS Singapore Logistics Venture. It will also commit $100 million for a stake of about 48 percent in LOGOS Indonesia Logistics Venture.

CPPIB and Ivanhoé Cambridge, which is the real estate arm of Canada’s second-largest pension fund manager Caisse de depot et placement du Quebec, will be equal partners in both joint ventures, the statement said.

LOGOS, which operates in Australia, China, Indonesia and Singapore, will hold the remaining stake in the ventures.

CPPIB said the deals would pave the way for its first direct real estate investments in Singapore and Indonesia.

Private equity firms and institutional investors are pouring billions of dollars into warehousing and logistics investments in Asia in recent years betting on a boom in demand from e-commerce in the region.

Warburg Pincus, Blackstone Group LP and Hopu Investments were among bidders short-listed to present a potential offer for Singapore-listed Global Logistic Properties , sources told Reuters late last month.

And in January, Warburg Pincus-backed warehouse operator e-Shang Redwood agreed to buy an 80 percent indirect stake in the manager of Singapore-listed Cambridge Industrial Trust (CIT).

CPPIB put out this press release to announce the deal:

Canada Pension Plan Investment Board (CPPIB) announced today that it has entered into two agreements to invest alongside Ivanhoé Cambridge with real estate logistics specialist LOGOS in the LOGOS Singapore Logistics Venture (LSLV) and LOGOS Indonesia Logistics Venture (LILV), which will focus on developing and acquiring modern logistics facilities in Singapore and Indonesia, respectively.

In Singapore, a key global logistics hub, CPPIB will initially commit S$200 million for an approximate 48% stake in the LSLV, which will be seeded by two fully-leased existing multi-storey logistics warehouse facilities as well as one development opportunity. All the seed assets are very well located in established industrial submarkets of Singapore.

Additionally, CPPIB will initially commit US$100 million in equity for an approximate 48% stake in LILV, which has an identified strong pipeline of development opportunities in Greater Jakarta, Indonesia. LILV will develop assets to meet the increasing demand for modern logistics facilities on the back of Indonesia’s compelling macroeconomic fundamentals, rapid e-commerce growth and a growing logistics sector.

“The logistics sector in Southeast Asia continues to grow as a result of the burgeoning middle class and the rise of e-commerce, and presents an excellent opportunity for a long-term investor like CPPIB,” said Jimmy Phua, Managing Director, Head of Real Estate Investments – Asia, CPPIB. “We are looking forward to making our first direct real estate investments in Singapore and Indonesia through well-established, like-minded partners like LOGOS and Ivanhoé Cambridge.”

CPPIB and Ivanhoé Cambridge will be equal partners in both joint ventures, with LOGOS, as the operating partner, holding the remaining stake in the ventures.

“Both Ivanhoé Cambridge and CPPIB are recognised as leading real estate investors around the world, and we are excited to expand our relationship with Ivanhoé Cambridge as well as attracting CPPIB into both our Singapore and Indonesia ventures,” said Stephen Hawkins, Managing Director of LOGOS South East Asia.

“Ivanhoé Cambridge welcomes CPPIB as our co-investment partner with LOGOS in Singapore and Indonesia,” said Rita-Rose Gagné, President, Growth Markets, at Ivanhoé Cambridge. “Increasing our allocation reaffirms our view of the growth potential in Southeast Asia and our confidence in LOGOS as a best-in-class logistics real estate specialist in Asia-Pacific.”

Ivanhoé Cambridge put out this press release on the deal:

For the Singapore venture, LOGOS will continue with its strategy of acquiring and developing high-quality, modern industrial and logistics properties in Singapore with over S$800M in investment capacity. To date LOGOS has acquired interests in three properties, consisting of two multi-storey logistics warehouse facilities and one development site, all of which are fully leased.

For the Indonesia venture, the strategy is to focus on developing and owning high quality, modern logistics properties in Greater Jakarta, Indonesia. The commitments will provide LOGOS with over US$400M in investment capacity. LOGOS has identified a strong pipeline of development opportunities to meet the increasing demand for modern logistics facilities on the back of Indonesia’s compelling macroeconomic fundamentals, rapid e-commerce growth and growing logistics sector.

Concurrent with the establishment of the Indonesia venture, LOGOS is pleased to announce the establishment of an office in Jakarta, expanding LOGOS offices to four countries (Australia, China, Indonesia, and Singapore).

“LOGOS has subsequently established ventures in Singapore and Indonesia which is testament to the growth being experienced in both of these markets and LOGOS’ ability to secure an attractive pipeline of opportunities,” commented John Marsh, Joint Managing Director of LOGOS. “We are also excited that LOGOS is increasingly able to offer its customers a high quality solution across Asia Pacific.”

Stephen Hawkins, Managing Director of LOGOS South East Asia added, “Expanding our relationship with Ivanhoé Cambridge as well as attracting CPPIB into both our Singapore and Indonesia ventures is very exciting. Both Ivanhoé Cambridge and CPPIB are recognised as leading real estate investors around the world.”

“Ivanhoé Cambridge welcomes CPPIB as our co-investment partner with LOGOS in Singapore and Indonesia,” said Rita-Rose Gagné, President, Growth Markets, for Ivanhoé Cambridge. “Increasing our allocation reaffirms our view of the growth potential in Southeast Asia and our confidence in LOGOS as a best-in-class logistics real estate specialist in Asia-Pacific.

“The logistics sector in Southeast Asia continues to grow as a result of the burgeoning middle class and the rise of e-commerce, and presents an excellent opportunity for a long-term investor like CPPIB,” said Jimmy Phua, Managing Director & Head of Real Estate Investments – Asia. “We are looking forward to making our first direct real estate investments in Singapore and Indonesia through well-established, like-minded partners like LOGOS and Ivanhoe Cambridge.

Macquarie Capital (Australia) Limited (together and through its affiliates, Macquarie Capital) acted as exclusive financial adviser to LOGOS for the transaction and as sole lead manager and arranger for both the LSLV and LILV capital raisings.

About LOGOS

LOGOS is an integrated investment and development logistics real estate specialist with operations in Australia, China, Indonesia and Singapore. LOGOS currently has approximately AUD$3.0 billion in assets under management including end values for projects under development. For further information: www.logosproperty.com

So what is this deal all about and why are Canada’s pension giants teaming up with LOGOS to make investments in warehouses in Singapore and Indonesia?

I think it’s pretty self-explanatory. The Caisse and CPPIB are betting on the demand from the rise of e-commerce and a burgeoning middle class in southeast Asia. This is a long-term bet and if you’ve been paying attention to e-commerce trends in North America, you can bet the exact same thing will happen in Asia but with exponential growth.

Canada’s large pension funds are competing with large private equity firms for these logistic warehouses. They not only provide great growth potential, they are pretty much all leased up and will provide stable cash flows (rents) over a very long period.

When I went over HOOPP’s 2015 results last year, Jim Keohane told me that HOOPP is building industrial warehouses in the UK and Amazon will be one of its tenants. I asked Jim back then why Amazon wouldn’t simply invest its own money to build these warehouses and he told me “because it can get a better return on investment elsewhere.”

Other large Canadian pensions (PSP, bcIMC, OTPP, etc.) have also been investing heavily in these industrial warehouses in North America, Europe and Asia typically alongside strategic partners.

Remember, pensions are all about managing assets and long duration liabilities. Real estate and infrastructure are long duration assets. They do carry risks, like illiquidity, currency and political/ regulatory risk in the case of infrastructure, so they’re not a perfect substitute for ultra long bonds, but they generally provide stable yields in between stocks and bonds over a very long period.

And since pension funds are not in the business of flipping real estate and infrastructure assets and have a very long investment horizon, they can easily hold these assets on their books over an economic cycle and ride out any rough patch along the way.

Are there short-term risks to investing in Asia? Of course, I’m worried the Fed might make a policy error and hike rates more often than what the market anticipates, fueling the 2017 US dollar crisis I warned of late last year. This can unleash another Asian financial crisis.

In a CFA luncheon I attended last month, PSP Investment’s President and CEO André Bourbonnais said PSP was “underweight emerging markets” and taking a more cautious stance in both public and private investments there. I agree with Mr. Bourbonnais’s cautious stance on emerging markets.

More locally, Singapore’s growth shock is masking a duller economy and the government recently eased its property rules, diverging path from Hong Kong, a move that was applauded by businesses but shows that policymakers are still concerned about property bubbles there.

Having said this, there are always macro and financial risks involved in these transactions but it’s also important to note the secular trends behind the decision to invest in these industrial warehouses. Even if CPPIB and the Caisse take a short-term hit — a real possibility — over the long run these investments will prove to be very profitable and provide both these large pensions with stable cash flows. And like the Ivanhoé Cambridge press release states, all these warehouses are already fully leased, which shows you demand for these logistical warehouses is extremely strong.

Update: In another mega real estate deal, CPPIB, Singapore’s GIC and The Scion Group LLC (Scion) announced on Thursday that their student housing joint venture entity, Scion Student Communities LP (together with its subsidiaries, “the Joint Venture”), has acquired three US student housing portfolios for approximately US$1.6 billion. Details on this deal can be found here.

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

Ginger Adams Otis of the New York Daily News reports, Pension Benefit Guaranty Corporation running out of cash to cover union pension funds (h/t, Suzanne Bishopric):

The clock is ticking for 71 penniless union pension funds that rely on a federal insurance company to support their retirees — because the agency itself is also running out of cash, its director said Wednesday.

The Pension Benefit Guaranty Corporation’s limited liquidity is part of the spiraling U.S. pension crisis that threatens to wipe out the retirement savings of more than a million Americans.

The PBGC talked about its reduced circumstances Wednesday as it announced that it is now officially making pension payouts for Teamsters Local 707.

The New York union’s pension fund — covering 4,000 retired truckers across the city and Long Island — hit rock bottom in February.

The PBGC stepped in, as it has with 70 other bankrupt union pensions.

But PBGC only has about a decade’s worth of cash in its coffers, director Tom Reeder warned.

“This is a big issue for us. It’s a big issue for Local 707 and it’s a big issue for others in the same situation across the country,” Reeder said.

“We’re projected to run out of money in eight to 10 years. Many union pension plans are projected to run out in 20 years,” he explained.

“There are going to be people in plans who run out of money after we do, and there will be no water in the well.”

Right now, PBGC has $2 billion in assets built up over 42 years, Reeder said.

The company makes its money through premiums charged to unionized multi-employer pension funds — many of which are caught in an unprecedented financial crunch that’s decimated thousands of union retirees.

Last year, when PBGC was supporting 65 bankrupt plans, it paid out $113 million a month, agency officials said.

In 2017, with even more insolvent plans on its books, PBGC is shelling out even more.

Local 707 alone, with its 4,000 retirees, costs PBGC $1.7 million a month, agency officials said.

In order to keep afloat, PBGC doesn’t try to match a retiree’s union pension. The payouts are cut, often down to about one-third of what the worker is due.

Ex-truckers with Local 707 shared their new financial reality with the Daily News last week.

Ray Narvaez, 77, retired in 2003 after more than 30 years as a Teamster with a $3,400 monthly pension.

Now his monthly take home is $1,100 before taxes.

Narvaez is actually one of the luckier ones in 707.

According to PBGC officials, the average 707 retiree was getting $1,313 a month from the union pension fund.

Now that the fund is broke and dependent on PBGC’s insurance payouts, the average monthly take home is $570, agency officials said.

But that’s nothing compared to the cuts that would hit union retirees if the PBGC went under, said Reeder.

If that were to happen, PBGC would have to rely solely on what it earned from incoming premium payments.

Retirees could expect to see their benefits slashed by 80% . In other words, less than one-eighth of the $570 average check PBGC is able to give Local 707 retirees now.

“The amounts would be negligible. Their retirement payouts would be very low,” a PBGC official said.

The disaster that’s struck Local 707 is looming for several other, much larger Teamster pension funds.

Retirees in construction, mining and the retail and service industries have been hard-hit too.

All of the critically underfunded pensions are multi-employers plans — meaning they were created by various companies that all employed union workers across the same industry. The Teamsters, predominantly a trucking union, has seen its pension funds devastated by stock market crashes and a shrinking employer base.

Two of the largest union pension funds teetering on the brink of insolvency — the Central States Pension Fund and the New York State Teamsters Pension Fund in the Albany region — cover Teamsters.

If the Central States Pension fund goes broke, it could swamp PBGC — if it hasn’t gone broke first.

The majority of union multi-employer pension funds are doing well, as are single-employer union pension funds, Reeder said.

“It’s a minority, but a significant minority, of the multi-employer plans that are in trouble,” he said.

Reeder and many of the union pension funds are pinning their hopes on Congress.

The PBGC is looking for an increase in the premiums it can charge the union funds, which requires Congressional approval.

“It won’t be painless” to shore up the insurance fund, Reeder said.

But it will be far cheaper to do it now than to wait until the last minute, he said.

“We are fairly confident that we will be insolvent on the multi-employer side by 2022 or 2028 barring a legislative change,” he said.

For Edward Hernandez, 67, a retired Local 707 trucker whose monthly pension just got slashed $2,422 to $902 before taxes, the time to sound the alarm was nearly two decades ago.

“I was saying back then to Local 707, ‘Why don’t we do something about it now, let’s go to Washington,’” he said. “Even 15 years ago we were getting letters that our fund was becoming insolvent. Why couldn’t anyone find a way to fix this then?”

Edward Hernandez is right, the time to have done something about this was 20 years ago or even before then, now it’s too late, these Teamsters pensions are hanging on by a thread.

And so is the Pension Benefit Guaranty Corporation (PBGC), the federal agency tasked to backstop these pensions should they become insolvent. Its director, Tom Reeder, is sounding the alarm, unless the agency gets Congressional approval to raise the premiums ii charges union pension funds, it will be insolvent on the multi-employer side, which effectively means pension payout will be slashed even more than they already have been.

I have long warned of the risks of the PBGC so none of this surprises me in the least. I’ve also warned of how the PBGC was making increasingly riskier investments in illiquid alternatives to meet its soaring obligations.

In my last comment, I covered America’s crumbling pension future, explaining in detail why these multi-employer pension plans were designed to fail. Their governance was all wrong to begin with, leaving them exposed to the sharks on Wall Street who raked them on fees while they invested them in stocks and other more illiquid and riskier assets.

And now that catastrophe has struck and there is not enough money to cover even reduced payouts, people are sounding the alarm.

Here is something else to ponder. The PBGC backstops private pension plans, not state, local and city public pensions plans. What happens when they become insolvent? And don’t kid yourselves, many of them are also hanging on by a thread.

What will politicians do then? Emit more pension obligation bonds? Increase property taxes more than they’ve already have? Good luck with both those strategies, it’s like placing a Band-Aid over a metastasized tumor.

The time has come for the United States of America to come to grips with its pension crisis once and for all, to bolster the governance at state pension funds following the Canadian governance model and more importantly, to reform and enhance Social Security and base it on the Canada Pension Plan and the Canada Pension Plan Investment Board which successfully manages the money on behalf of Canadians, investing it across public and private markets all over the world.

As I stated in my last comment, the ongoing pension crisis is deflationary, it’s not good for the economy over the long run because all these millions of Americans will end up retiring penniless, which effectively means less spending from them and less sales and personal income taxes for all governments (too many people underestimate the benefits of defined-benefit plans).

So, if you ask me, part of me wants the PBGC to go broke because only then will it force Congress to implement the radical changes that the country needs to effectively deal with the ongoing pension crisis.

The problem is behind every pension lies a person, someone who contributed to it thinking they would one day be able to retire in dignity ad security. That is what it’s all about folks, keeping a pension promise to hard working people looking to retire with a modest pension. And when that promise is broken, it’s the worst form of betrayal of the social contract.

It also sends the signal to everyone that you cannot rely on your pension to retire so keep saving more and more if you want to avoid pension poverty. More saving means less money spent on goods and services, ie. more deflationary headwinds.

Do you get it? I hope US politicians reading this get it because it’s much bigger than the PBGC going broke, the pension crisis threatens the US economy over the long run and unless it’s dealt with appropriately, it will get worse, and only ensure more inequality and long-term economic stagnation.

Update: After reading this comment, Bernard Dussault, Canada’s former Chief Actuary, shared this with me:

Amidst my crusade for the protection of Defined Benefit (DB) pension plans, I opine that contingency funds are more harmful than helpful for both plan members and sponsors because:

1. they unduly increase the pension expenditures of all concerned DB plans with the objective of safeguarding the pensions accrued through only the small proportion of plan sponsors eventually going bankrupt;
2. not only do contingency funds protect the concerned plans against a risk that improperly relates to business (i.e. bankruptcy) as opposed to pension (i.e. mainly insufficient investment returns),
3. but human nature being what it is, I surmise that the protection provided by a contingency fund might, in order to contain current estimates of pension costs and liabilities, induce the concerned:

• valuation actuaries, colluding or not with their plan sponsors, to be complacent about the soundness of valuation assumptions, e.g. by assuming an aggressive (i.e. too liberal) rate of return on investments;
• investment officers, colluding or not with the plan sponsor, to take undue risks in the selection of investments.

This does not mean that I do not care about the protection of pensions lost pursuant to a bankruptcy. Indeed, as stated in my attached proposed financing policy for DB plans, in such cases:

1. DB plan members shall have priority over secured creditors to amounts covered by a deemed trust, no matter when the security was granted to the lender;
2. The outstanding investment fund shall be maintained of rather than used to buy annuities because:

• the cost of future benefit payments if less expensive if paid from the pension fund;
• after the sponsor’s bankruptcy, the market value of the deficient fund would normally improve.

I thank Bernard for sharing his wise insights with my blog readers.

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

Ginger Adams Otis of the New York Daily News reports, Pension Benefit Guaranty Corporation running out of cash to cover union pension funds (h/t, Suzanne Bishopric):

The clock is ticking for 71 penniless union pension funds that rely on a federal insurance company to support their retirees — because the agency itself is also running out of cash, its director said Wednesday.

The Pension Benefit Guaranty Corporation’s limited liquidity is part of the spiraling U.S. pension crisis that threatens to wipe out the retirement savings of more than a million Americans.

The PBGC talked about its reduced circumstances Wednesday as it announced that it is now officially making pension payouts for Teamsters Local 707.

The New York union’s pension fund — covering 4,000 retired truckers across the city and Long Island — hit rock bottom in February.

The PBGC stepped in, as it has with 70 other bankrupt union pensions.

But PBGC only has about a decade’s worth of cash in its coffers, director Tom Reeder warned.

“This is a big issue for us. It’s a big issue for Local 707 and it’s a big issue for others in the same situation across the country,” Reeder said.

“We’re projected to run out of money in eight to 10 years. Many union pension plans are projected to run out in 20 years,” he explained.

“There are going to be people in plans who run out of money after we do, and there will be no water in the well.”

Right now, PBGC has $2 billion in assets built up over 42 years, Reeder said.

The company makes its money through premiums charged to unionized multi-employer pension funds — many of which are caught in an unprecedented financial crunch that’s decimated thousands of union retirees.

Last year, when PBGC was supporting 65 bankrupt plans, it paid out $113 million a month, agency officials said.

In 2017, with even more insolvent plans on its books, PBGC is shelling out even more.

Local 707 alone, with its 4,000 retirees, costs PBGC $1.7 million a month, agency officials said.

In order to keep afloat, PBGC doesn’t try to match a retiree’s union pension. The payouts are cut, often down to about one-third of what the worker is due.

Ex-truckers with Local 707 shared their new financial reality with the Daily News last week.

Ray Narvaez, 77, retired in 2003 after more than 30 years as a Teamster with a $3,400 monthly pension.

Now his monthly take home is $1,100 before taxes.

Narvaez is actually one of the luckier ones in 707.

According to PBGC officials, the average 707 retiree was getting $1,313 a month from the union pension fund.

Now that the fund is broke and dependent on PBGC’s insurance payouts, the average monthly take home is $570, agency officials said.

But that’s nothing compared to the cuts that would hit union retirees if the PBGC went under, said Reeder.

If that were to happen, PBGC would have to rely solely on what it earned from incoming premium payments.

Retirees could expect to see their benefits slashed by 80% . In other words, less than one-eighth of the $570 average check PBGC is able to give Local 707 retirees now.

“The amounts would be negligible. Their retirement payouts would be very low,” a PBGC official said.

The disaster that’s struck Local 707 is looming for several other, much larger Teamster pension funds.

Retirees in construction, mining and the retail and service industries have been hard-hit too.

All of the critically underfunded pensions are multi-employers plans — meaning they were created by various companies that all employed union workers across the same industry. The Teamsters, predominantly a trucking union, has seen its pension funds devastated by stock market crashes and a shrinking employer base.

Two of the largest union pension funds teetering on the brink of insolvency — the Central States Pension Fund and the New York State Teamsters Pension Fund in the Albany region — cover Teamsters.

If the Central States Pension fund goes broke, it could swamp PBGC — if it hasn’t gone broke first.

The majority of union multi-employer pension funds are doing well, as are single-employer union pension funds, Reeder said.

“It’s a minority, but a significant minority, of the multi-employer plans that are in trouble,” he said.

Reeder and many of the union pension funds are pinning their hopes on Congress.

The PBGC is looking for an increase in the premiums it can charge the union funds, which requires Congressional approval.

“It won’t be painless” to shore up the insurance fund, Reeder said.

But it will be far cheaper to do it now than to wait until the last minute, he said.

“We are fairly confident that we will be insolvent on the multi-employer side by 2022 or 2028 barring a legislative change,” he said.

For Edward Hernandez, 67, a retired Local 707 trucker whose monthly pension just got slashed $2,422 to $902 before taxes, the time to sound the alarm was nearly two decades ago.

“I was saying back then to Local 707, ‘Why don’t we do something about it now, let’s go to Washington,’” he said. “Even 15 years ago we were getting letters that our fund was becoming insolvent. Why couldn’t anyone find a way to fix this then?”

Edward Hernandez is right, the time to have done something about this was 20 years ago or even before then, now it’s too late, these Teamsters pensions are hanging on by a thread.

And so is the Pension Benefit Guaranty Corporation (PBGC), the federal agency tasked to backstop these pensions should they become insolvent. Its director, Tom Reeder, is sounding the alarm, unless the agency gets Congressional approval to raise the premiums ii charges union pension funds, it will be insolvent on the multi-employer side, which effectively means pension payout will be slashed even more than they already have been.

I have long warned of the risks of the PBGC so none of this surprises me in the least. I’ve also warned of how the PBGC was making increasingly riskier investments in illiquid alternatives to meet its soaring obligations.

In my last comment, I covered America’s crumbling pension future, explaining in detail why these multi-employer pension plans were designed to fail. Their governance was all wrong to begin with, leaving them exposed to the sharks on Wall Street who raked them on fees while they invested them in stocks and other more illiquid and riskier assets.

And now that catastrophe has struck and there is not enough money to cover even reduced payouts, people are sounding the alarm.

Here is something else to ponder. The PBGC backstops private pension plans, not state, local and city public pensions plans. What happens when they become insolvent? And don’t kid yourselves, many of them are also hanging on by a thread.

What will politicians do then? Emit more pension obligation bonds? Increase property taxes more than they’ve already have? Good luck with both those strategies, it’s like placing a Band-Aid over a metastasized tumor.

The time has come for the United States of America to come to grips with its pension crisis once and for all, to bolster the governance at state pension funds following the Canadian governance model and more importantly, to reform and enhance Social Security and base it on the Canada Pension Plan and the Canada Pension Plan Investment Board which successfully manages the money on behalf of Canadians, investing it across public and private markets all over the world.

As I stated in my last comment, the ongoing pension crisis is deflationary, it’s not good for the economy over the long run because all these millions of Americans will end up retiring penniless, which effectively means less spending from them and less sales and personal income taxes for all governments (too many people underestimate the benefits of defined-benefit plans).

So, if you ask me, part of me wants the PBGC to go broke because only then will it force Congress to implement the radical changes that the country needs to effectively deal with the ongoing pension crisis.

The problem is behind every pension lies a person, someone who contributed to it thinking they would one day be able to retire in dignity ad security. That is what it’s all about folks, keeping a pension promise to hard working people looking to retire with a modest pension. And when that promise is broken, it’s the worst form of betrayal of the social contract.

It also sends the signal to everyone that you cannot rely on your pension to retire so keep saving more and more if you want to avoid pension poverty. More saving means less money spent on goods and services, ie. more deflationary headwinds.

Do you get it? I hope US politicians reading this get it because it’s much bigger than the PBGC going broke, the pension crisis threatens the US economy over the long run and unless it’s dealt with appropriately, it will get worse, and only ensure more inequality and long-term economic stagnation.

Update: After reading this comment, Bernard Dussault, Canada’s former Chief Actuary, shared this with me:

Amidst my crusade for the protection of Defined Benefit (DB) pension plans, I opine that contingency funds are more harmful than helpful for both plan members and sponsors because:

1. they unduly increase the pension expenditures of all concerned DB plans with the objective of safeguarding the pensions accrued through only the small proportion of plan sponsors eventually going bankrupt;
2. not only do contingency funds protect the concerned plans against a risk that improperly relates to business (i.e. bankruptcy) as opposed to pension (i.e. mainly insufficient investment returns),
3. but human nature being what it is, I surmise that the protection provided by a contingency fund might, in order to contain current estimates of pension costs and liabilities, induce the concerned:

• valuation actuaries, colluding or not with their plan sponsors, to be complacent about the soundness of valuation assumptions, e.g. by assuming an aggressive (i.e. too liberal) rate of return on investments;
• investment officers, colluding or not with the plan sponsor, to take undue risks in the selection of investments.

This does not mean that I do not care about the protection of pensions lost pursuant to a bankruptcy. Indeed, as stated in my attached proposed financing policy for DB plans, in such cases:

1. DB plan members shall have priority over secured creditors to amounts covered by a deemed trust, no matter when the security was granted to the lender;
2. The outstanding investment fund shall be maintained of rather than used to buy annuities because:

• the cost of future benefit payments if less expensive if paid from the pension fund;
• after the sponsor’s bankruptcy, the market value of the deficient fund would normally improve.

I thank Bernard for sharing his wise insights with my blog readers.

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

The Caisse de dépôt et placement du Québec today released its financial results for calendar year 2016, posting a 10.2% five-year annualized return:

La Caisse de dépôt et placement du Québec today released its financial results for the year ended December 31, 2016. The annualized weighted average return on its clients’ funds reached 10.2% over five years and 7.6% in 2016.

Net assets totalled $270.7 billion, increasing by $111.7 billion over five years, with net investment results of $100 billion and $11.7 billion in net deposits from its clients. In 2016, net investment results reached $18.4 billion and net deposits totalled $4.3 billion.

Over five years, the difference between la Caisse’s return and that of its benchmark portfolio represents more than $12.3 billion of value added for its clients. In 2016, the difference was equivalent to $4.4 billion of value added.

Caisse and benchmark portfolio returns

“Our strategy, focused on rigorous asset selection, continues to deliver solid results,” said Michael Sabia, President and Chief Executive Officer of la Caisse. “Over five years, despite substantially different market conditions from year to year, we generated an annualized return of 10.2%.”

“On the economic front, the fundamental issue remains the same: slow global growth, exacerbated by low business investment. At the same time, there are also significant geopolitical risks. Given the relative complacency of markets, we need to adopt a prudent approach.”

“However, taking a prudent approach does not mean inaction, because there are opportunities to be seized in this environment. Through our global exposure, our presence in Québec, and the rigour of our analyses and processes, we’re well-positioned to seize the best opportunities in the world and face any headwinds,” added Mr. Sabia.

RETURNS BY ASSET CLASS

HIGHLIGHTS OF THE ACCOMPLISHMENTS

The strategy that la Caisse has been implementing for seven years focuses on an absolute-return management approach in order to select the highest-quality securities and assets, based on fundamental analysis. La Caisse’s strategy also aims to enhance its exposure to global markets and strengthen its impact in Québec. The result is a well-diversified portfolio that generates value beyond the markets and brings long-term stability.

Bonds: performance in corporate credit stands out

The Bonds portfolio, totalling more than $68 billion, posted a 3.9% return over five years, higher than that of its benchmark. The difference is equivalent to value added of $1.6 billion. Securities of public and private companies and the active management of credit spreads in particular contributed to the portfolio’s return.

In 2016, despite an increase in interest rates at year-end, the portfolio posted a 3.1% return. It benefited from continued investment in growth market debt and from the solid performance of corporate debt, particularly in the industrial sector.

Public equity: sustained returns over five years and the Canadian market rebound in 2016

Over the five-year period, the annualized return of the entire Public Equity portfolio reached 14.1%. In addition to demonstrating solid market growth over the period, the return exceeded that of the benchmark, reflecting the portfolio’s broad diversification, its focus on quality securities and well-selected partners in growth markets. The Global Quality, Canada and Growth Markets mandates generated, respectively, annualized returns of 18.6%, 10.6% and 8.1%, creating $5.8 billion of value added.

For 2016, the 4.0% return on the Global Quality mandate reflects the depreciation of international currencies against the Canadian dollar. The mandate continued to be much less volatile than the market. The Canada mandate, with a 22.7% return, benefited from a robust Canadian market, driven by the recovery in oil and commodity prices and the financial sector’s solid performance, particularly in the second half of the year.

Less-liquid assets: globalization well underway and a solid performance

The three portfolios of less-liquid assets – Real Estate, Infrastructure and Private Equity – posted a 12.3% annualized return over five years, demonstrating solid and stable results over time. During this period, investments reached more than $60.1 billion. In 2016, $2.4 billion were invested in growth markets, including $1.3 billion in India, where growth prospects are favourable and structural reforms are well underway. The less-liquid asset portfolios are central to la Caisse’s globalization strategy, with their exposure outside Canada today reaching 70%.

More specifically, in Real Estate, Ivanhoé Cambridge invested $5.8 billion and its geographic and sector-based diversification strategy continued to perform. In the United States, the Caisse subsidiary acquired the remaining interests in 330 Hudson Street and 1211 Avenue of the Americas in New York and completed construction of the River Point office tower in Chicago. In the residential sector, the strategy in cities such as London, San Francisco and New York and the steady demand for residential rental properties generated solid returns. In Europe, Ivanhoé Cambridge and its partner TPG also completed the sale of P3 Logistic Parks, one of the largest real estate transactions on the continent in 2016. In Asia-Pacific, Ivanhoé Cambridge acquired an interest in the company LOGOS, its investment partner in the logistics sector, alongside which it continues to invest in Shanghai, Singapore and Melbourne.

In Private Equity, la Caisse invested $7.8 billion over the past year, in well-diversified markets and industries. Through the transactions carried out in 2016, la Caisse developed strategic partnerships with founders, families of entrepreneurs and operators that share its long-term vision. In the United States, it acquired a significant ownership stake in AlixPartners, a global advisory firm. La Caisse also acquired a 44% interest in the Australian insurance company Greenstone and invested in the European company Eurofins, a world leader in analytical laboratory testing of food, environmental and pharmaceutical products. In India, la Caisse became a partner of Edelweiss, a leader in stressed assets and specialized corporate credit. It also invested in TVS Logistics Services, an Indian multinational provider of third-party logistics services.

In Infrastructure, la Caisse partnered with DP World, one of the world’s largest port operators, to create a $5-billion investment platform intended for ports and terminals globally. The platform, in which la Caisse holds a 45% share, includes two Canadian container terminals located in Vancouver and Prince Rupert. In India’s energy sector, la Caisse acquired a 21% interest in Azure Power Global, one of India’s largest solar power producers. Over the year, la Caisse also strengthened its long-standing partnership with Australia’s Plenary Group by acquiring a 20% interest in the company. Together, la Caisse and Plenary Group have already invested in seven social infrastructure projects in Australia.

Impact in Québec: a focus on the private sector

In Québec, la Caisse focuses on the private sector, which drives economic growth. La Caisse’s strategy is built around three main priorities: growth and globalization, impactful projects, and innovation and the next generation.

Growth and globalization

In 2016, la Caisse worked closely with Groupe Marcelle’s management team when it acquired Lise Watier Cosmétiques to create the leading Canadian company in the beauty industry. It also supported Moment Factory’s creation of a new entity dedicated to permanent multimedia infrastructure projects, and worked with Lasik MD during an acquisition in the U.S. market. Furthermore, by providing Fix Auto with access to its networks, la Caisse facilitated Fix Auto’s expansion into China and Australia where the company now has around 100 body shops.

Impactful projects

In spring 2016, CDPQ Infra, a subsidiary of la Caisse, announced its integrated, electric public transit network project to link downtown Montréal, the South Shore, the West Island, the North Shore and the airport. Since then, several major steps have been completed on the Réseau électrique métropolitain (REM) project, with construction scheduled to begin in 2017.

In real estate, Ivanhoé Cambridge and its partner Claridge announced their intention to invest $100 million in real estate projects in the Greater Montréal area. La Caisse’s real estate subsidiary also continued with various construction and revitalization projects in Québec, including those underway at Carrefour de l’Estrie in Sherbrooke, Maison Manuvie and Fairmont The Queen Elizabeth hotel in Montréal, as well as at Place Ste-Foy and Quartier QB in Québec City.

Innovation and the next generation

In the new media industry, la Caisse made investments in Triotech, which designs, manufactures and markets rides based on a multi-sensorial experience; in Felix & Paul Studios, specialized in the creation of cinematic virtual reality experiences; and in Stingray, a leading multi-platform musical services provider. La Caisse also invested in Hopper, ranked among the top 10 mobile applications in the travel industry. Within the electric ecosystem, la Caisse reinvested in AddÉnergie to support the company’s deployment plan, aimed at adding 8,000 new charging stations across Canada in the next five years.

In the past five years, la Caisse’s new investments and commitments in Québec reached $13.7 billion, with $2.5 billion in 2016. These figures do not include the investment in Bombardier Transportation and the $3.1-billion planned commitment by la Caisse to carry out the REM project. As at December 31, Caisse assets in Québec totalled $58.8 billion, of which $36.9 billion were in the private sector, which is an increase in private assets compared to 2015.

FINANCIAL REPORTING

La Caisse’s operating expenses, including external management fees, totalled $501 million in 2016. The ratio of expenses was 20.0 cents per $100 of average net assets, a level that compares favourably to that of its industry.

The credit rating agencies reaffirmed la Caisse’s investment-grade ratings with a stable outlook, namely AAA (DBRS), AAA (S&P) et Aaa (Moody’s).
ABOUT CAISSE DE DÉPÔT ET PLACEMENT DU QUÉBEC

Caisse de dépôt et placement du Québec (CDPQ) is a long-term institutional investor that manages funds primarily for public and parapublic pension and insurance plans. As at December 31, 2016, it held $270.7 billion in net assets. As one of Canada’s leading institutional fund managers, CDPQ invests globally in major financial markets, private equity, infrastructure and real estate. For more information, visit cdpq.com, follow us on Twitter @LaCDPQ or consult our Facebook or LinkedIn pages.

You can view this press release and other attachments here at the bottom of the page. You can also read articles on the results here.

I think the overall results speak for themselves. The Caisse outperformed its benchmark by 180 basis points in 2016, and more importantly, 110 basis points over the last five years, generating $12.3 billion of value added over its benchmark for its clients.

There is no Annual Report available yet (comes out in April), but the Caisse provides returns for the specialized portfolios for 2016 and annualized five-year returns (click on image):

As you can see, Fixed Income generated 2.9% in 2016, beating its benchmark by 110 basis points, and 3.7% annualized over the last five years, 60 basis points over the benchmark.

The press release states:

The Bonds portfolio, totalling more than $68 billion, posted a 3.9% return over five years, higher than that of its benchmark. The difference is equivalent to value added of $1.6 billion. Securities of public and private companies and the active management of credit spreads in particular contributed to the portfolio’s return.

In 2016, despite an increase in interest rates at year-end, the portfolio posted a 3.1% return. It benefited from continued investment in growth market debt and from the solid performance of corporate debt, particularly in the industrial sector.

In other words, Bonds returned 3.1% or 140 basis points over its index, accounting for $1.6 billion of the $4.4 billion of value added in 2016, or 36% of the value added over the total fund’s benchmark last year.

That is extremely impressive for a bond portfolio but I would be careful interpreting these results because they suggest the benchmark being used to evaluate the underlying portfolio doesn’t reflect the credit risk being taken (ie. loading up on emerging market debt and corporate bonds and having a government bond index as a benchmark).

I mention this because this type of outperformance in bonds is unheard of unless of course the managers are gaming their benchmark by taking a lot more credit risk relative to that benchmark.

Also worth noting how the outperformance in real estate debt over the last year and five years helped the overall Fixed Income returns. Again, this is just taking on more credit risk to beat a benchmark and anyone managing a fixed income portfolio knows exactly what I am talking about.

It’s also no secret the Caisse’s Fixed Income team has been shorting long bonds over the last few years, and losing money on carry and rolldown, so maybe they decided to take on more emerging market and corporate debt risk to make up for these losses and that paid off handsomely. Also, the backup in US long bond yields last year also helped them if they were short.

Now, before I get Marc Cormier and the entire Fixed Income team at the Caisse hopping mad (don’t want to get on anyone’s bad side), I’m not saying these results are terrible — far from it, they are excellent — but let’s call as spade a spade, the Caisse Fixed Income team took huge credit risk to outperform its benchmark last year, and this needs to be discussed in detail in the Annual Report when it comes out in April.

Going forward, the Caisse thinks the party is over for bonds:

Caisse de Depot et Placement du Quebec, Canada’s second-largest pension fund manager, is reducing its bond holdings and devoting more resources to corporate credit and real estate debt.

“The party is over, that’s why we are going to restructure this portfolio to lower investment in traditional bonds and increase and diversify our investment in credit,” Chief Executive Officer Michael Sabia said in Montreal Friday.

He said the Caisse will reduce the amount of fixed income in its portfolio and increase over the next few years the share of less liquid assets. The fixed-income portfolio will be broken into two portions: traditional fixed income — federal and provincial Canadian bonds — which will become “significantly smaller,” and another section based on credit, such as corporate credit and real estate debt, he said.

“We’re going to put more priority on building that portfolio because we think that can offer us still a relatively low level of risk but somewhat higher returns,” he said of the credit-focused plan. Investment in Canadian provincial and federal bonds will shrink “not dramatically, but bit by bit,” he said.

[Note: I like private debt as an asset class but disagree, it’s not the beginning of the end for bonds]

Apart from Bonds, what else did I notice? Very briefly, excellent results in Real Estate, outperforming its benchmark by 320 basis in 2016. Over the last five years, however, Real Estate has slightly underperformed its benchmark by only 40 basis points.

Again, a word of caution for most people that do not understand how to read these results correctly. The benchmark the Caisse uses to evaluate its Real Estate portfolio is much harder to beat than any of its large peers in Canada.

I’ve said it before and I’ll say it again, the Caisse’s Real Estate subsidiary, Ivanhoé Cambridge, is doing a truly excellent job and it is one of the best real estate investors in the world.

As far as Infrastructure, CDPQ Infra marginally beat its benchmark in 2016 by 30 basis points, but it’s trailing its benchmark by 250 basis points over the last five years.

Again, the benchmark in Infrastructure is very hard to beat (infrastructure benchmark has lots of beta in it which makes it much tougher to beat when markets are surging), so I don’t worry about this underperformance over the last five years. Just like in Real Estate, the people working at CDPQ Infra are literally a breed apart, infrastructure experts in brownfield and greenfield projects.

When Michael Sabia recently came out to defend the Montreal REM project, he was being way too polite. I set the record straight on my blog and didn’t hold back, but it amazes me how many cockroaches are still lurking out there questioning the “Caisse’s governance” on this project (what a joke, they have a blatant agenda against the Caisse and this unique project but Michael Sabia’s mandate was renewed for four more years so he will have the last laugh once it’s completed and operational).

In Private Equity, the outperformance over the index in 2016 was spectacular (520 basis points or 5.2%) but over the last five years, it’s a more modest outperformance (120 basis points). Like other large Canadian pensions, the Caisse invests in top private equity funds all over the world and does a lot of co-investments to reduce overall fees.

[Note: Andreas Beroutsos who formerly oversaw all of La Caisse’s private equity and infrastructure investment activities outside Quebec is no longer there (heard some unsubstantiated and interesting stories). In April, the Caisse reorganized infrastructure and private equity units under new leaders.]

In Public Equities, a very impressive performance in Canada, outperforming the benchmark by 260 basis points in 2016 and by 160 basis points over the last five years. The Global Quality portfolio edged out its benchmark by 30 basis points in 2016 but it still up outperforming it by almost 500 basis points over the last five years.

Again, I question this Global Quality portfolio and the benchmark they use to evaluate it and I’ve openly stated if it’s that good, why aren’t other large Canadian pension funds doing the exact same thing? (Answer: it doesn’t pass their board’s smell test. If these guys are that good, they should be working for Warren Buffet, not the Caisse)

That is it from me, I’ve already covered enough. Take the time to go over the 2015 Annual Report as you wait for the 2016 one to appear in April. There you will find all sorts of details like the benchmarks governing the specialized portfolios (click on image):

Like I said, there are no free lunches in Real Estate and Infrastructure benchmarks but there are issues with other benchmarks that do not reflect the risks being taken in the underlying portfolios (Bonds and Global Quality portfolios, for example).

Net, net, however, I would say the benchmarks the Caisse uses are still among the toughest in Canada and it has delivered solid short-term and more importantly, long-term results.

It’s a tough job managing these portfolios and beating these benchmarks, I know, I’ve been there and people don’t realize how hard it is, especially over any given year. This is why I primarily emphasize long-term results, the only ones that truly count.

And long-term results are what counts in terms of compensating the Caisse’s senior managers (from 2015 Annual Report, click on image):

Again, Mr. Beroutsos is no longer with the Caisse and neither is Bernard Morency. You can see the members of the Caisse’s Executive Committee here (one notable addition last year was Jean Michel, Executive Vice-President, Depositors and Total Portfolio; he has a stellar reputation and helped Air Canada’s pension rise from the ashes to become fully funded again).

The other thing worth mentioning is the Caisse’s executives are paid fairly but are still underpaid relative to their peers at large Canadian funds (fuzzy benchmarks at other shops play a role here but also the culture in Quebec where people get jealous and mad if senior pension fund executives managing billions get paid million dollar plus packages even if that’s what they are really worth).

Lastly, one analyst told me that the Caisse’s ABCP portfolio has contributed roughly 0.5% annualized to the overall results since 2010 stating “this paper was sold at 45 cents to the dollar and now trades at $1 to the dollar”. No doubt ABCP has come back strongly after the crisis, but I cannot verify his figures (will leave that up to you!).

I will embed clips from the Caisse’s press conference as they become available so come back to revisit this comment. If you have anything to add, please email me at LKolivakis@gmail.com.

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

The Canada News Wire reports, Canadian pensioners not living as long as expected:

New research finds longevity for Canadian pensioners is lower than anticipated – which may actually be costing defined benefit (DB) plan sponsors.

Canadian male pensioners are living about 1.5 years less than expected from age 65, according to the latest data from Club Vita Canada Inc. – the first dedicated longevity analytics firm for Canadian pension plans and a subsidiary of Eckler Ltd. Female pensioners are living about half a year less than expected.

“Based on our data, some DB plans are overestimating how long their members are currently living and are therefore taking an overly conservative approach to funding their liabilities,” explains Ian Edelist, CEO of Club Vita Canada. “Correcting that overestimation could reduce actuarial reserves by as much as 6% – improving Canadian pension funds’ and their plan sponsors’ balance sheets just by using more accurate, granular and up-to-date longevity assumptions.”

The data comes from Club Vita Canada’s first annual and highly successful longevity study completed in 2016 – one of the largest, most rigorous research studies on the impact of longevity on defined benefit pension and post-retirement health plans.

The newly created “VitaBank” pool of longevity data (provided by Club Vita Canada members) spans a wide range of industries and geographic regions in both the public and private sectors. VitaBank is currently tracking more than 500,000 Canadian pensioners from over 40 pension plans. Unlike the most widely used study to set longevity expectations – the Canadian Pensioners’ Mortality (CPM) study, which relies on data up to 2008 – VitaBank includes fully cleaned and validated data up to 2014.

The Club Vita Canada study brings to the Canadian pension market leading-edge modelling techniques already used by the insurance industry and in other countries. Club Vita U.K. recently released similar results, noting £25 billion could be wiped off the collective U.K. DB deficit by using more accurate longevity assumptions.

“Naturally, the ultimate cost of a pension plan will be determined by how long its members actually live. But assumptions made today really do matter for such long-duration commitments,” explains Douglas Anderson, founder of Club Vita in the U.K. “Club Vita’s data gives DB plan sponsors the tools they need to evaluate their willingness to maintain their longevity risk or offload that risk to insurers.”

About Club Vita Canada Inc. (clubvita.ca)

Club Vita Canada Inc. was created by Eckler Ltd. It is an extension of Club Vita LLP, a longevity centre of excellence launched in the U.K. in 2008 by Hymans Robertson LLP. By pooling robust data from a wide range of pension plans, Club Vita provides its members with leading-edge longevity analytics helping them better measure and manage their retirement plan.

About Eckler Ltd. (eckler.ca)

Eckler is a leading consulting and actuarial firm with offices across Canada and the Caribbean. Owned and operated by active Principals, the company has earned a reputation for service continuity and high professional standards. Our select group of advisers offers excellence in a wide range of areas, including financial services, pensions, benefits, communication, investment management, pension administration, change management and technology. Eckler Ltd. is a founding member of Abelica Global – an international alliance of independent actuarial and consulting firms operating in over 20 countries.

I recently discussed life expectancy in Canada and the United States when I went over statistics on gender and other diversity in the workplace, noting this:

Statistics are a funny thing, they can be used in all sorts of ways, to inform and disinform people by stretching the truth. Let me give you an example. Over the weekend, I went to Indigo bookstore to buy Michael Lewis’s new book, The Undoing Project, and skim through other books.

One of the books on the shelf that caught my attention was Daniel J. Levitin’s book, A Field Guide to Lies: Critical Thinking in the Information Age. Dr. Levitin is a professor of neuroscience at McGill University’s Department of Psychology and he has written a very accessible and entertaining book on critical thinking, a subject that should be required reading for high school and university students.

Anyways, there is a passage in the book where he discusses the often used statistic that the average life expectancy of people living in the 1850s was 38 years old for men and 40 years old for women, and now it’s 76 years old for men and 81 for women (these are the latest US statistics which show life expectancy declining for the first time since 1993. In Canada, the latest figures from 2009 show the life expectancy for men is 79 and for women 83, but bad habits are sure to impact these figures).

You read that statistic and what’s the first thing that comes to your mind? Wow, people didn’t live long back then and now that we are all eating organic foods, exercising and have the benefits of modern medical science, we are living much longer.

The problem is this is total and utter nonsense! The reason why the life expectancy was much lower in 1850 was that children were dying a lot more often back then. In other words, the child mortality rate heavily skewed the statistics but according to Dr. Levitin, a man or woman reaching the age of 50 back then went on to live past 70. Yes, modern science has increased life expectancy somewhat but not nearly as much as we are led to believe.

Here is another statistic that my close friend, a radiologist who sees all sorts of diseases told me: all men will get prostate cancer if they live long enough. He tells me a 70 year old man has a 70% chance of being diagnosed with prostate cancer, an 80 year old man has an 80% chance and a 90 year old man has a 90% chance.”

Scary stuff, right? Not really because as my buddy tells me: “The reason prostate cancer isn’t a massive health concern is that it typically strikes older men and moves very, very slowly, so by the time men are diagnosed with it, chances are they will die from something else.”

Of course, the key word here is “typically” because if you’re a 50 year old male with high PSA levels and are then diagnosed with prostate cancer after a biopsy confirms you have it, you need to undergo surgery as soon as possible because you might be one of the unlucky few with an aggressive form of the disease (luckily, it can be treated and cured if caught in time).

So, much like the US, it seems the recent statistics on life expectancy in Canada are not that good. Again, you need to be very careful interpreting the data because the heroin epidemic has really skewed the numbers in both countries (much more in the US).

But let’s say the folks at Club Vita Canada and Eckler are doing their job well and Canadian pensioners are living less than previously thought. Does that mean that Canadian DB plans are overestimating their liabilities?

Yes and no. Go read an older comment of mine on whether longevity risk will doom pensions where I stated:

I actually forwarded [John] Mauldin’s comment to my pension contacts yesterday to get some feedback. First, Bernard Dussault, Canada’s former Chief Actuary, shared this with me:

True, longevity is a scary risk, but not as much as most think, the reason being that the calculations of pension costs and liabilities in actuarial reports take into account future improvements in longevity.

For example, as per the demographic assumptions of the latest (March 31, 2011) actuarial report on the federal public service superannuation plan (http://www.osfi-bsif.gc.ca/Eng/Docs/pssa2011.pdf), the longevity at age 75 in 2011 is projected to gradually increase by about 1 year in 10 years (2021). For example, if longevity at age 75 was 12.5 in 2011, it is projected as per the PSSA actuarial report to be about 13.5 in 2021

This 1 year increase at age 75 over 10 years is much less than the average 1year increase at birth every 4 years over the 20th century reported by the Society of Actuaries (SOA). However, this is an apple/orange comparison because longevity improvements are always larger at birth than at any later age and were much larger in the first half of the 20th century than thereafter than at any later age.

Bernard added this in another email correspondence where he clarified the above statement:

Annual longevity improvement rates are assumed to apply for the whole duration of the projection period under any of the periodical actuarial reports on the PSSA, i.e. for all current and future contributors and pensioners.

Moreover, the federal public service superannuation plan is actuarially funded, which means that each generation/cohort of contributors pays for the whole value of all of its accrued benefits. In other words, the financing of the plan is such that there is essentially no inter-generational transfer of pension debt from any cohort to the next.

Second, Jim Keohane, President and CEO of the Healthcare of Ontario Pension Plan (HOOPP), sent me his thoughts:

I am not sure how longevity improvements will play out over the coming decades and neither does anyone else. I wouldn’t dispute the facts being quoted in this article, but what I would point out is that these issues are not exclusive to DB plans. They are problems for anyone saving for retirement whether they are part of a DB plan a DC plan or not in any plan. DB plans get benchmarked against their ability to replace a portion of plan members pre-retirement income (typically 60%). If you measured DC plans on the same basis they are in much worse shape, in fact, they only have about 20 to 25% of the assets needed to produce that level of income.

I would also add that Canadian public sector pension plans are in much better shape than their U.S. Counterparts. We use realistic return assumptions and are in a much stronger funded position.

Third, Jim Leech, the former CEO of Ontario Teachers’ Pension Plan (OTPP) and co-author of The Third Rail, sent me this:

Very consistent with my thoughts/observations. It is a shame that “short term” motivations (masking reality by manipulating valuations, migration from DB to DC, elimination of workplace plans altogether, kicking the can down the road, etc) have taken over what is supposed to be a “long horizon” instrument (pension plan).

But Jim Keohane makes a good point – this applies ONLY to DB valuations. Anyone with DC (RRSP), ie. most Canadians, is really jiggered by longevity increases.

No doubt about it, the Oracle of Ontario, HOOPP and other Canadian pensions use much more realistic return assumptions to discount their future liabilities. In fact, Neil Petroff, CIO at Ontario Teachers once told me bluntly: “If U.S. public pensions were using our discount rate, they’d be insolvent.”

Mauldin raises issues I’ve discussed extensively on my blog, including what if 8% is really 0%, the pension rate-of-return fantasy, how useless investment consultants have hijacked U.S. pension funds, how longevity risk is adding to the pressures of corporate and public defined-benefit (DB) pensions.

Mauldin isn’t the first to sound the alarm and he won’t be the last. Warren Buffett’s dire warning on pensions fell largely on deaf ears as did Bridgewater’s. I knew a long time ago that the pension crisis and jobs crisis were going to be the two main issues plaguing policymakers around the world.

And I’ve got some very bad news for you, when global deflation hits us, it will decimate pensions. That’s where I part ways with Mauldin because longevity risk, while important, is nothing compared to a substantial decline in real interest rates.

Importantly, a decline in real rates, especially now when rates are at historic lows, is far more detrimental to pension deficits than people living longer.

What else did Mauldin conveniently miss? He ignores the brutal truth on DC pensions and misses how the ‘inexorable’ shift to DC pensions will exacerbate inequality and pretty much condemn millions of Americans to more pension poverty.

The important point is that last one, a decline in interest rates is far, far more damaging to pension liabilities than an increase in longevity risk.

Last year, I wrote a comment on why ultra low rates are here to stay, and San Francisco Fed President John Williams penned a note today that pretty much agrees with me:

The decline in the natural rate of interest, or r-star, over the past decade raises three important questions. First, is this low level for the real short-term interest rate unique to the U.S. economy? Second, is the natural rate likely to remain low in the future? And third, is this low level confined to “safe” assets? In answer to these questions, evidence suggests that low r-star is a global phenomenon, is likely to be very persistent, and is not confined only to safe assets.

So, if you ask me, I wouldn’t read too much into this latest study stating Canadian pensioners are living less than previously thought and Canadian DB plans are “overestimating” their liabilities (persistent low rates = persistent pension deficits).

Worse still, the stakeholders of these DB plans might take this data and twist it to their advantage by asking to lower the contribution rate of their plans. This would be a grave mistake.

Lastly, I want to bring something to your attention. Last week, after I wrote my comment on a lunch with PSP’s André Bourbonnais, where I stated that the Chief Actuary of Canada is rightly looking into whether PSP’s 4.1% real return target is too high, I received an email from Bernard Dussault, Canada’s former Chief Actuary, stating he didn’t agree with me or others that PSP’s target rate of return needs to be lowered.

Specifically, Bernard shared this with me:

I still do not understand why “suddenly” investment experts (including Keith Ambachtsheer) think that the expected/assumed long term real rate of return will decrease compared to what it has been expected/assumed for so many years in the past.

I look forward to Bourbonnais’ and the Chief Actuary’s rationale if they were to reduce the 4.1% rate below 4.0%.

The rationale I used for the 4% I assumed for the CPP and the PSPP when I was the Chief Actuary is briefly described as follows in the 16th actuarial report on the CPP:

The CPP Account is made of two components: the Operating Balance, which corresponds in size to the benefit payments expected over the next three months, and the Fund, which represents the excess of all CPP assets over the Operating Balance.

In accordance with the new policy of investing the Fund in a diversified portfolio, the ultimate real interest rate assumed on future net cash flows to the Account is 3.8%. This rate is a constant weighted average of the real unchanged rate of 1.5% assumed on the Operating Balance and of the real rate of 4% which replaces the rate of 2.5% assumed on the Fund in previous actuarial reports.

The long term real rate of interest of 4% on the Fund was assumed taking into account the following factors:

• from 1966 to 1995, the average real yield on the Québec Pension Plan (QPP) account, which has always been invested in a diversified portfolio, is close to 4%;
• as reported in the Canadian Institute of Actuaries’ (CIA) annual report on Canadian Economic Statistics, the average real yield over the period of 25 years ending in 1996 on the funds of a sample of the largest private pension plans in Canada is close to 5%, resulting from a nominal yield of about 11.0% reduced by the average increase of about 6% in the Consumer Price Index;
• using historical results published by the CIA in the Report on Canadian Economic Statistics, the real average yield over the 50-year (43 in the case of mortgages) period ending in 1994 is 4.03% in respect of an hypothetical portfolio invested equally in each of the following five areas: conventional mortgages, long term federal bonds (Government of Canada bonds with a term to maturity of at least 20 years), Government of Canada 91-day Treasury Bills, domestic equities (Canadian common stocks) and non‑domestic equities (U.S. common stocks). The assumed real rate of 4% retained for the Fund is therefore deemed realistic but erring on the safe side, especially considering that:

Ø replacing federal bonds by provincial bonds in this model portfolio would increase the average yield to the extent that provincial bonds carry a higher return than federal bonds; and

Ø the 3-month Treasury Bills, which bear lower returns, would normally be invested for the Operating Balance rather than the Fund.

From a larger perspective, assuming a real yield of 4% on the CPP Fund means that the CPP Investment Board would be expected to achieve investment returns comparable to those of the QPP and of large private pension plans.

On the other hand, I think I heard Bourbonnais saying last year at a presentation of the PSP annual report to the Public Service Pension advisory Committee (and I could well have misheard or misinterpreted what he said) that he was reducing the proportion of equities in the PSP fund in order to reduce the volatility/fluctuation of the returns.

If he is really doing this, then that would be a valid reason for reducing the expected 4.1% return. Besides, if he is doing this, I opine that this is not consistent with the PSP objective to maximize returns. Indeed, a more risky investment portfolio carries higher volatility though BUT it is coupled with a higher long term average return (which both the CPP and the PSP funds have achieved on average over at least the last 15 years).

As I explained to Bernard, PSP Investments and other large Canadian pensions are indeed reducing their proportion in public equities precisely because in a historically low rate environment, the returns on public equities will be lower and more importantly, the volatility will be much higher.

I also told him that given my long-term forecast of global deflation, I think more and more US and Canadian pensions should lower their target rate and that the contribution rates should rise.

Of course, someone may claim the only reason PSP and others want to lower their actuarial target rate of return is because it lowers their bar to attain their bogey and collect millions in compensation.

I’m not that cynical, I think there are legitimate reasons to review this target rate of return and I look forward to seeing the Chief Actuary’s report to understand his logic and why he thinks it needs to be lowered.

I would also warn all of you to take GMO’s 7-year asset class return projections with a shaker of salt (click on image below):

GMO may be right but I never bought into this nonsense and I’m not about to begin now. I guarantee you seven years from now, they will be way off once more!

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

The Canadian Press reports, Canada, China to share pension expertise:

The top executive at Canada’s largest retirement fund is in Beijing today to help grow the fund’s relationship with Chinese pension officials.

Mark Machin was on hand for the official launch of a Chinese translation of “Fixing the Future” — a book tracing the political and financial hurdles that were overcome when the Canada Pension Plan Investment Board was created in the 1990s.

Machin says the translation of the 380-page book was a Chinese initiative that complements a previously announced “pooling of resources” planned by the CPP Investment Board and China’s National Development and Reform Commission.

He says Canada and China face similar challenges as the number of retired people grows faster than the number of working people paying into the retirement system.

Machin says CPP Investment Board will be leading efforts to co-ordinate Canadian pension expertise and share it with Chinese government officials and other pension experts.

He anticipates the book — written by a former Globe and Mail reporter under a commission from CPPIB — will be used as a textbook in China to help teach about pension reform.

David Paddon of the Waterloo Chronicle also reports, Canada, China to share pension expertise:

China sees Canada as a valuable source of expertise as both countries grapple with the needs of an aging population that’s increasingly retired, according to the head of the Canada Pension Plan Investment Board.

“China faces very similar demographic issues and pension challenges that Canada has faced and continues to face. When you put the demographics side-by-side, there are some striking similarities,” Mark Machin said in a phone interview Monday from Beijing.

He said the most important similarity is that each country will have only about 2-1/2 working-age people per retired person by 2046.

“That’s the crux of the challenge for pension systems.”

As recently as September, the Chief Actuary of Canada’s latest three-year projection said the Canada Pension Plan will remain sustainable at current contribution rates if the CPP Fund managed by Machin’s organization can produce inflation-adjusted rates of return averaging 3.9 per cent over 75 years.

As of Dec. 31, the CPP Funds inflation-adjusted rate of return over the past 10 years was 4.8 per cent and about $300 billion of assets around the world — with more than half in North America.

While CPP Investment Board has had an office in Hong Kong that looks for suitable deals in China and the surrounding region, Machin said that its new collaboration with Chinese officials has a more general purpose.

“I think part of this is making sure that, when we’re investing in markets, we’re not just looking for things that we can get but offering a little bit back — offering a little bit of advice and insights.”

Machin was in China’s capital for the launch of a Chinese translation of “Fixing the Future,” a book tracing the political and financial hurdles that were overcome when the Canada Pension Plan Investment Board was created in the 1990s.

He anticipates the book — written by a former Globe and Mail reporter under a commission from CPPIB — will be used as a textbook in China to help teach about pension reform.

Machin says the translation of the 380-page book was a Chinese initiative that complements a previously announced “pooling of resources” planned by the CPP Investment Board and China’s National Development and Reform Commission under a memorandum of understanding signed in September.

The memorandum was one of the agreements signed in Ottawa during an official visit by China’s Premier Li Keqiang.

While the CPP Investment Board is designed to be politically independent from all levels of government, Machin said there’s a common interest with the Canadian federal government’s efforts to build economic and trade ties with China.

“Those two things are definitely aligned. I wouldn’t say they’re co-ordinated, but they’re aligned.”

CPPIB put out a press release providing more details on this exchange, Canada Pension Plan Investment Board Launches the Chinese Edition of “Fixing the Future”:

Canada Pension Plan Investment Board (CPPIB) today launched the Chinese edition of “Fixing the Future: How Canada’s Usually Fractious Governments Worked Together to Rescue the Canada Pension Plan.” Written by Bruce Little, Fixing the Future describes how Canada addressed the looming demographic crunch and its impact on the Canadian pension system in the mid-1990s. Today, the CPP Fund totals $300 billion and is projected to be sustainable for the next 75 Years. CPPIB, the manager of the Fund, is a leading global institutional investor and invests in more than 45 countries through eight offices around the world.

In the mid-1990s, the Canada Pension Plan (CPP) was underfunded and faced an uncertain future. Experts predicted that the CPP Fund would be exhausted by today, and a major overhaul was urgently needed to ensure the sustainability of the CPP for future generations of Canadian retirees. Canada’s federal and provincial finance ministers made some difficult decisions and introduced a set of reforms to the CPP, including the creation of CPPIB, which effectively ended the funding crisis.

“We are honoured to share Fixing the Future, the story of Canada’s pension reform, with China,” said Mark Machin, President & Chief Executive Officer, CPPIB. “Many of the issues that Canada faced in reforming their pension system are shared between our two countries. With China’s pension reform now well under way, we hope that some of the lessons learned in Canada are of value to policymakers in China as they work to secure the pension system for many generations to come.”

On September 22, 2016, during the visit of Premier Li Keqiang to Canada, CPPIB’s CEO, Mark Machin, signed a Memorandum of Understanding with Xu Shaoshi, Chairman of the National Development and Reform Commission. Through this memorandum, CPPIB has agreed to assist Chinese policymakers in addressing the challenges of China’s ageing population. The translation of Fixing the Future into Chinese is just one way CPPIB is delivering on this agreement.

“Fixing the Future is inspiring to policy makers and academia in thinking about establishing a coordinated policy-making mechanism for the pension reform currently taking place in China. Demographics and pension management is an important subject for China’s future, and we believe CPPIB’s successful model will set a precedent for the academia and policy makers in China as they are striving to build a sustainable social security system,” said Professor Zheng Bingwen, the translator of the book and Director of Center for International Social Security Studies, Chinese Academy of Social Sciences (CASS).

The new edition of Fixing the Future includes a foreword by the Right Honourable Paul Martin, former Prime Minister of Canada and federal Finance Minister, who was intimately involved in the reforms, and an afterword by renowned pension expert Keith Ambachtsheer. The Chinese edition also includes a foreword from Mr. Lou Jiwei, former Finance Minister of China and now Chairman of National Council for Social Security Fund, highlighting the relevance of the book to Chinese readers.

The translated version of the book was launched at an event in Beijing, co-hosted by CPPIB, the Embassy of Canada to China, CASS Center for International Social Security Studies, China Human Resources and Social Security Publishing Group and China Council for the Promotion of International Trade.

Back in September, I explained why CPPIB is aiding China with its pension reform. In short, the global pension storm is hitting China particularly hard and I’ve been talking about the need to overhaul China’s pension system for a few years now.

But I’m not sure a textbook translated in Chinese will help China address many structural weaknesses in its pension system and economy. First and foremost, the Chinese need to adopt CPPIB’s governance model which unfortunately runs contra to the country’s communist doctrine where the government has a say on everything, including the way state pensions invest assets.

Moreover, China, much like Japan, has a huge problem, namely an aging demographic which will require some form of pension safety net to make sure these people don’t die from pension poverty and starvation. In other words, bolstering China’s pension system is critically important for all sorts of socio-economic reasons.

By the way, bolstering pensions is critically important all over the world, not just China. A friend of mine is in town from San Francisco this long US weekend and we had an interesting discussion on technological disruption going on in Silicon Valley and all over the United States.

My friend, a senior VP at a top software company, knows all about this topic. He told me flat out that in 20 years “there will be over 100 million people unemployed in the US” as computers take over jobs and make other jobs obsolete at a frightening and alarming rate (Mark Cuban also thinks robots will cause mass unemployment and Bill Gates recently recommended that robots who took over human jobs should pay taxes).

“It’s already happening now and for years I’ve been warning many software engineers to evolve or risk losing their job. Most didn’t listen to me and they lost their job” (however, he doesn’t buy the “nonsense” of hedge fund quants taking over the world. Told me flat out: “If people only knew the truth about these algorithms and their limitations, they wouldn’t be as enamored by them”).

He agreed with me that rising inequality is hampering aggregate demand and will ensure deflation for a long time, but he has a more cynical view of things. “Peter Thiel, Trump’s tech pal, is pure evil. He wants to cut Social Security and Medicare and have all these people die and just allow highly trained engineers from all over the world come to the US to replace them.”

He also gave me a very grim assessment of the United States still very divided along racial lines. “Dude, I am a white Greek Christian and there are places in the country where I don’t feel welcomed at all because my skin is too dark and my name has too many vowels in it. I have Muslim friends of mine that have been beaten and harassed because of the way they look. If you live in the big cities, it’s obviously not as bad but it’s still very tense.”

We both agreed that Trump’s immigration executive order was a huge fail (“even Peter Thiel came out against it”) but I told him he will personally prosper under Trump in a “bigly” way.

He said: “No doubt, I’m getting a huge tax cut which will make me a lot richer but I’ve already decided to donate whatever I gain in tax cuts to Planned Parenthood, the ACLU and other organizations that Trump is trying to weaken.”

He told me there is “massive, widespread poverty in the US” and “the only way to effectively combat growing inequality in the US is to tax the rich, just like President Roosevelt did in the 30s when he implemented the New Deal.”

He also told me that the reason Trump wants to be close to Russia is because “racist white supremacists like Steve Bannon and others want to destroy Islam and they see Russia as a critical player to help them with their anti-Islamic agenda.”

I told him Bannon won’t survive a year in Trump’s administration and I wouldn’t worry too much about America and Russia joining alliances to “destroy Islam.”

Both my buddies out in California — this software engineer and a cardiologist — are very smart, successful left-wing bleeding heart liberals who hate Trump with a passion so we engage in some spirited email chats as to why Trump was elected and whether he’s as dangerous as they both claim (we all agree he’s a bit unhinged and a huge megalomaniac but I see this as more of a show to distract people and I tend to agree with Trump, the mainstream media in the US is completely biased and out to get him).

Anyways, why am I bringing all this up again? Oh yeah, pensions and why a good pension system is critical to ensure people retire in dignity and security and don’t succumb to pension poverty. A good pension system fights growing inequality and allows people to spend money during their retirement years, allowing governments to collect sales and income taxes from these people after they retire.”

China is nowhere near the US or Canada when it comes to its pension system but if it’s one country that can get its act together in a hurry, it’s China. Will there ever be a Chinese CPPIB? I strongly doubt it but as long as they drastically improve the current pension system by implementing some key reforms, it will be a vast improvement over what they have now.

Lastly, you should all take the time to read Mark Machin’s remarks to the Canadian House of Commons Finance Committee when he testified back in June:

Thank you for having me here today to discuss and answer questions regarding the Canada Pension Plan Investment Board and how we are helping ensure the CPP remains sustainable for future generations of Canadians.

To my right is Michel Leduc, our Senior Managing Director of Public Affairs and Communications, and to my left is Ed Cass, our Chief Investment Strategist.

I joined CPPIB four and a half years ago as the first President of Asia and then became Head of International in 2013. Prior to that, I worked for Goldman Sachs for twenty years in Europe and Asia. While I am a new resident to Canada, so far I’ve had the pleasure of travelling across the country meeting with finance ministers, the stewards of the CPP and some of our contributors.

I was enormously honoured to be chosen by CPPIB’s Board of Directors to lead such an important professional investment organization with a compelling public purpose. International organizations such as the OECD, the World Bank, Harvard Business School and The Economist, have all praised the ‘Canadian model’ of pension management due to its strong governance and internal investment management capabilities.

Our governance structure is a careful balance of independence and accountability, enabling professional management of the CPP Fund while ensuring that we are accountable to the federal and provincial governments, and ultimately the Canadian public. We know that contributions are compulsory and so we are motivated to work even harder to earn that trust.

You can the full speech here and it goes over a lot of key elements behind CPPIB’s long-term success.

By the way, when I recently told you to ignore CPPIB’s quarterly results,  I forgot to mention that those results do not include private market assets which are valued only once a year when CPPIB releases its annual report, so don’t read too much into quarterly results of any pension, especially CPPIB.