How a Former NY Pension Director Hid His Pay-to-Play Scheme

Back in 2016, an investment director at the New York State Common Retirement Fund was indicted on charges of steering pension money towards certain brokers in exchange for monetary bribes and drugs, among other things.

But how did Navnoor Kang, 37, hide his funneling of millions of dollars in business to two brokers?

A report, released by the New York Comptroller’s Office, reveals how he kept his scheme under wraps.

From the Wall Street Journal:

A move from paper tickets to electronic trade confirmations allowed Mr. Kang to avoid listing the broker who executed the trades, according to the report. Under Mr. Kang’s watch, the pension fund also stopped producing weekly trade reports that identified the brokers involved.

Unlike his predecessor or his counterpart who managed the pension fund’s stock investments, Mr. Kang traded himself rather than direct his staff to do so, according to the report. This meant that no one approved his transactions.

Mr. Kang would instruct his brokers to send the electronic confirmations to his subordinates—creating “the false impression that most of these transactions were conducted by the investment staff and then approved by him,” the report said.

“Kang’s manipulation of the electronic trade process had ripple effects that he capitalized on to further conceal his alleged criminal activity,” the comptroller’s office wrote in the report.

Additionally, the report points the finger at top headhunting firm Korn Ferry for finding Kang in the first place. Ferry and pension fund officials both ignored several red flags from his previous employer.

Kang had been previously fired from Guggenheim for unclear reasons; but when Korn Ferry followed his references, they didn’t uncover anything too fishy.

From the Journal:

In December, a pension employee wrote to colleagues noting Korn Ferry officials said they reviewed Mr. Kang’s references and contacted his former employer. One of Mr. Kang’s references, according to the report, was Deborah Kelley, a saleswoman eventually indicted by federal prosecutors for bribing Mr. Kang. Ms. Kelley has pleaded not guilty and her lawyer didn’t respond to a request for comment.

In July 2015, Mr. Kang and the pension’s chief investment officer traveled to California and met with Guggenheim executives, among others, according to the report. The Guggenheim executives greeted Mr. Kang warmly, and a top executive with the firm told the CIO that his firm “may have been too harsh” to Mr. Kang, who had “made a mistake,” the report said.

But the executive wouldn’t expand on what Mr. Kang did wrong and, when confronted by the CIO, Mr. Kang said he had rebuffed the advances of another employee and had lost his job for failing to report a dinner, according to the report. Guggenheim used that infraction, he told the CIO, to “get rid of him.”

The Common Retirement Fund will be changing several policies in the wake of the scandal, including re-instating the weekly and monthly trade reports that list the brokers involved in each transaction. These reports are reviewed by higher-ups, and would have certainly prevented this scandal had Kang not circumvented them.

View the full report here.


Photo by Martin Raab via Flickr CC License

It’s All In The Fine Print: Will Your Fiduciary Insurance Cover You When You Need It?


Carol Buckmann is an attorney who has practiced in the employee benefits field for over 30 years. This post was originally published at Pensions & Benefits Law.

Will that insurer your company has been paying premiums to for all of these years stand behind you if you are sued for ERISA violations?  Have you just been relying on a broker to give you the coverage you need?

I previously wrote about a decision in which CIGNA’s insurer was permitted to deny coverage for fiduciary breach due to a fraud exclusion in its policy.   We have since had another decision from an appeals court in Louisiana in which fiduciaries being sued by the U.S. Department of Labor were denied coverage under each of three separate policies they thought would provide them with legal defense costs and cover any awards assessed against them.  Again, the reason was buried in the policy fine print, which even the brokers didn’t seem to understand, if the facts set out in the decision are any indication.

The facts boil down to the following:  Plaintiffs had three policies: a D&O policy, fiduciary liability insurance and excess fiduciary coverage.  They were sued by the DOL following a formal investigation for selling stock to an ESOP at an inflated price, but the court ruled that the policies didn’t cover the plaintiffs for the following reasons:

  • The policies didn’t cover actions taken before the effective date.
  • The D&O policy didn’t cover ERISA claims at all.
  • Plaintiffs failed to give notice of the claims during the policy period, where the claim was specifically defined as including an investigation by the Department of Labor or the Pension Benefit Guaranty Corporation.
  • The excess coverage didn’t kick in until the policy limits in the basic policies had been reached (which was not possible given the court’s other rulings.)

The plaintiffs were also told that they couldn’t amend their complaint to include the brokers who they claimed were supposed to be providing them with specific coverage, but failed to do so.

No one wants to wade through the details of these policies, but those who fail to have them reviewed by legal counsel may be in for rude surprises later on.  We regularly speak with very competent  employee benefits professionals who confuse the required ERISA bonding coverage (which provides recovery to the plan, not the fiduciaries) with fiduciary liability insurance, or who think D&O policies cover their ERISA plan committee actions (many such policies either don’t cover ERISA claims at all, or don’t cover lower level committee members).  We frequently are told that a plan sponsor maintains fiduciary liability insurance, only to be sent the ERISA bond when we ask to see a copy of the policy.  In many of those cases, we have to deliver the bad news that the fiduciaries have no personal coverage at all.

Clearly, the time to review coverage and obtain any required endorsements is not when the accusations of fiduciary breach are raised.  Just a few among the points to be considered in a thorough review of coverage are the following:

  • Your broker is not a lawyer.  Don’t rely on her to interpret legal clauses in your policy. Get a qualified independent review.
  • Don’t assume that employer indemnification obligations are a substitute for coverage or will cover any gaps in coverage.  There will be legal constraints (for example, under state corporate law) on the company’s ability to provide full indemnification and the commitment may become worthless in the event of bankruptcy or other financial distress.
  • Understand the exclusions in your policy and find out whether endorsements are available to eliminate some of them.
  • Consider whether your policy limits should be increased.  Courts seem to be awarding ever increasing damages in fiduciary breach cases.
  • Understand and follow the notice requirements in your policies.


Photo by Juli via Flickr CC License

All Teachers Deserve Adequate Retirement Benefits. It’s Harder Than You Think To Get Them

Chad Aldeman is an associate partner at Bellwether Education Partners and a former policy advisor at the U.S. Department of Education. This post was originally published on

How many teachers should be eligible for adequate retirement benefits?

My answer is all of them: For every year they work, teachers should accumulate benefits toward a secure retirement.

A reasonable person might say only those who stay for at least three or five years. That would require teachers to show some amount of commitment to the profession, and it would reward teachers for getting through the most challenging early years.

But that’s not the way current teacher retirement systems are designed. Most states require teachers to stay 20, 25, or even 30 years before they qualify for adequate retirement benefits. (The Urban Institute’s Rich Johnson and I calculated these “break-even” points across the country. Find info on your particular state here.)

In other words, today’s teacher pension systems only provide adequate benefits to teachers with extreme longevity. You don’t have to take my word for it. The California State Teachers’ Retirement System (CalSTRS) hired Nari Rhee and William B. Fornia to study whether California teachers were better off under the existing pension system or alternative retirement plans.

The chart below comes directly from their paper. It shows how benefits accumulate for newly hired, 25-year-old females under the current pension system (blue line), a defined contribution plan (red line), a defined contribution plan with no employer contributions (dotted blue line), and a cash balance plan (dotted green line). There are legitimate questions about whether these are perfectly fair comparisons—Rhee and Fornia ignore the large debts accumulated under traditional pension plans—but even in this analysis, it’s clear that the pension system is the most back-loaded benefit structure. Some teachers do better under this arrangement, but most don’t. Depending on the comparison, this group of teachers must stay two or three decades before the pension system offers a better deal.

Rhee and Fornia make a valid point that not all teachers enter the profession at age 25, and their paper also includes the graph below showing the actual distribution of California teachers by the age at which they began teaching. The most common entry ages are 23 and 24, just after candidates complete college (California requires most new teachers to go through a Master’s program before earning a license). The median entry age for current teachers is 29 (meaning half of all teachers enter at age 29 or younger), and the average is 33.

Rhee and Fornia’s point here is that people who begin teaching at older ages have shorter break-even points, and that teachers with shorter break-even points are more likely to benefit. This has a kernel of truth but obscures some key points.

First, it is true pension plans are better for workers who begin their careers at later ages. Pensions are based on a worker’s salary when she leaves the profession, and they don’t adjust for inflation during the interim. If a 35-year-old leaves teaching this year, she may qualify for a pension, but it will be based on her current salary right now. By the time she finally becomes eligible to begin drawing her pension, say in the year 2046, every $1 in pension wealth will be worth far less than it is today. Teachers who go straight from teaching into retirement don’t have this problem.

Consequently, it’s also true that teachers who begin their careers at later ages are comparatively better off than teachers who began at younger ages. They don’t have to wait as long, so the break-even points fall from 31 years for a 25-year-old entrant to just 7 years for a 45-year-old entrant.

But their argument starts to suffer when compared to teacher mobility patterns. Like other states, California sees much higher turnover in early-career teachers than mid- or late-career teachers. The result is that, even for a 45-year-old teacher with a relatively short break-even period of 7 years, only about half will actually reach that point.

The table below pulls together these two data points for teachers of various ages. The middle row illustrates how long the teacher would be required to stay until her pension would finally be worth more than a cash balance plan (Rhee and Fornia calculate slightly shorter break-even points for their defined contribution plans). The last column uses the state’s turnover assumptions to estimate how many California teachers will remain long enough to break even. Remember, the median teacher in California began teaching at age 29. The table below suggests this typical teacher would have had a break-even point of more than 25 years, and the state assumes that only 40.6 percent of this group of teachers will make it that far. Across the entire workforce, the majority of California teachers would be better off in a cash balance plan than the state’s current pension plan.

Age at which the teacher begins teaching How many years does it take for the teacher to break even on her pension plan? What percentage of teachers like her will break even?
















California is a bit of an outlier here compared to other states—it’s a big state and seems to have lower teacher turnover than other states—but it’s still worth asking if this system is working well enough for all teachers. Rhee and Fornia’s main point seems to be that, once you exclude short- and medium-term workers,  the remaining teachers tend to do pretty well under the current system. But that excludes lots of people!

I personally don’t think that’s the right way to look at things. I think it’s worth fighting for retirement systems that treat ALL teachers fairly and equitably. After all, teachers might not know how long they’ll stay in the profession. They might not like teaching as much as they thought, or life might take them on another path. And once we account for this uncertainty, the break-even points become less about raw numbers (do I have to stay 19 or 22 years?) and more about probability (what’s my realistic chance of teaching in this state for 31 years?). Looked at from that perspective, it becomes harder and harder to support pension systems with such extreme back-loading.

Photo by cybrarian77 via Flickr CC License

The Pension vs. 401k Debate Harms Teachers


This post originally appeared on

Each year, around 150,000 new teachers are hired to work in American public schools. Those teachers might not pay much attention to their retirement except to note that they’re enrolled in their state’s pension plan. A “pension plan” sounds good, safe, and secure, much better than “risky” 401k plans typically offered in the private sector.

This is a dangerous and flawed misperception. Of the 150,000 new teachers, slightly more than half won’t stick around long enough to qualify for the pension they were promised. They’ll get their own contributions back, but in most states, they won’t earn any interest on those contributions, and they won’t be eligible for any of the sizable contributions their employers made on their behalf.

These teachers are worse off than if they had been in a 401k plan. The federal government has laws governing private-sector retirement plans to ensure that workers start earning retirement benefits early in their careers, but those laws do not cover state and local governments. Teachers are left exposed to the whims of state legislators, and during tight budget times, states cut benefits for new teachers. Today, nearly every state makes teachers wait longer to qualify for their pension than private-sector workers wait for employer benefits from 401k plans. Four states require seven- or eight-year waiting periods (called “vesting” requirements) and 15 states, including populous ones like Illinois, Maryland, New Jersey, and New York, withhold all employer contributions for teachers until 10 years of service. In these states, teachers could work up to nine years without any form of employer-provided retirement savings. This would be illegal in the private sector.

Teachers are often told they’re trading lower salaries while they work for higher job security and more generous benefits. But that trade only works well for teachers who actually stick around until retirement. Most don’t. Most teachers get the worst of both worlds—they earn lower salaries while they work and they forfeit thousands of dollars in lost retirement savings when they leave. Check out our report, Hidden Penalties, to see how many teachers are affected in your state and how much they’re losing.


Photo by gfpeck via Flickr CC License

OTPP Building New Careers?

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

Rishika Sadam of Reuters reports, Apollo Global-led investor group to buy CareerBuilder:

A group of investors led by U.S. private equity firm Apollo Global Management LLC (APO) and Ontario Teachers’ Pension Plan Board will buy a majority stake in job portal CareerBuilder, the companies said on Monday.

CareerBuilder LLC is owned by Tribune Media Co (TRCO), TV station operator Tegna Inc (TGNA) and newspaper group McClatchy Co (MNI). These current owners will all retain a minority stake, Apollo said.

Apollo did not disclose financial details of the deal.

Reuters reported last month that Apollo was negotiating a deal that would value CareerBuilder at more than $500 million, including debt.

OTPP put out a press release, Apollo Global Management-affiliated Funds and Ontario Teachers’ Agree to Acquire a Controlling Interest in CareerBuilder:

Certain affiliates of investment funds managed by affiliates of Apollo Global Management, LLC (together with its consolidated subsidiaries, “Apollo”) (NYSE: APO), the Ontario Teachers’ Pension Plan Board (“Ontario Teachers'”) and CareerBuilder, LLC (“CareerBuilder”) announced today that they have entered into a definitive agreement, pursuant to which an investor group led by Apollo along with Ontario Teachers’ will acquire a majority of the outstanding equity interests in CareerBuilder. CareerBuilder’s current owners, TEGNA Inc. (“Tegna”), Tribune National Marketing Company, LLC (“Tribune”) and McClatchy Interactive West (“McClatchy”) will retain a minority interest.

“CareerBuilder is a global leader in human capital solutions, and we are excited to work with the Company in the next phase of its growth and development,” said David Sambur, Senior Partner at Apollo. “Matt Ferguson and his team have done an exceptional job capitalizing on CareerBuilder’s iconic brand to create an integrated solutions software-as-a-service (SaaS) platform, and we look forward to working with the team to support the Company’s continued growth and innovation.”

Matt Ferguson, CEO of CareerBuilder, added, “This is an exciting next chapter for CareerBuilder. We are very proud of the work we did during our partnership with Tegna, Tribune and McClatchy, and we look forward to collaborating with Apollo and Ontario Teachers’ to continue the successful transformation of our business.”

The transaction includes committed financing from Credit Suisse, Barclays, Deutsche Bank, Citigroup Global Markets and Goldman Sachs & Co. LLC; all are also acting as financial advisors to Apollo, along with LionTree Advisors and PJT Partners. Morgan Stanley & Co. is acting as financial advisor to CareerBuilder. Akin Gump Strauss Hauer & Feld LLP and Paul, Weiss, Rifkind, Wharton & Garrison LLP are acting as legal advisors to Apollo. Wachtell, Lipton, Rosen & Katz LLP is acting as legal advisor to the sellers.

The proposed transaction is expected to close in the third quarter of 2017, subject to regulatory approvals and customary closing conditions. Apollo’s investment is being made by the Apollo-managed Special Situations I fund.

About CareerBuilder

CareerBuilder is a global, end-to-end human capital solutions company focused on helping employers find, hire and manage great talent. Combining advertising, software and services, CareerBuilder leads the industry in recruiting solutions, employment screening and human capital management. It also operates top job sites around the world. CareerBuilder and its subsidiaries operate in the United States, Europe, South America, Canada and Asia. For more information, visit

About Apollo

Apollo is a leading global alternative investment manager with offices in New York, Los Angeles, Houston, Chicago, St. Louis, Bethesda, Toronto, London, Frankfurt, Madrid, Luxembourg, Mumbai, Delhi, Singapore, Hong Kong and Shanghai. Apollo had assets under management of approximately $197 billion as of March 31, 2017 in private equity, credit and real estate funds invested across a core group of nine industries where Apollo has considerable knowledge and resources. For more information about Apollo, please visit

About Ontario Teachers’

The Ontario Teachers’ Pension Plan (Ontario Teachers’) is Canada’s largest single-profession pension plan, with C$175.6 billion in net assets at December 31, 2016.  It holds a diverse global portfolio of assets, approximately 80% of which is managed in-house, and has earned an average annualized rate of return of 10.1% since the plan’s founding in 1990. Ontario Teachers’ is an independent organization headquartered in Toronto. Its Asia-Pacific region office is located in Hong Kong and its Europe, Middle East & Africa region office is in London. The defined-benefit plan, which is fully funded, invests and administers the pensions of the province of Ontario’s 318,000 active and retired teachers. For more information, visit and follow us on Twitter @OtppInfo.

In other related news, Cision PR Newswire reports, CareerBuilder Teams Up with Google to Help Connect More Americans with Jobs:

CareerBuilder’s evolution into an end-to-end human capital solutions company began with operating leading job boards around the world – something it has done for more than two decades. Today, CareerBuilder is excited to announce a powerful collaboration that will bring even more visibility to its clients’ job listings and help job seekers find those opportunities faster.

CareerBuilder is joining forces with Google to help power a new feature in Search that aggregates millions of jobs from job boards, career sites, social networks and other sources. CareerBuilder is fully integrated with Google to feed content to them, and will include all of its jobs from its job sites and talent networks in this new feature.

“CareerBuilder has been working closely with Google on this from the very beginning when Google was first reaching out to content providers,” said Matt Ferguson, CEO of CareerBuilder. “We saw a big opportunity to increase exposure for our clients’ jobs and today we stand as one of Google’s biggest suppliers of jobs content. Google has enormous reach and excellent search capabilities, so why not leverage these strengths for the benefit of our clients?”

Over the last 20-plus years, CareerBuilder’s model has always been to serve up jobs wherever job seekers are on the Internet, and today CareerBuilder’s job search engine is on more than 1,000 sites. CareerBuilder is embracing this new feature as another distribution channel for its clients that will capture even more potential candidates.

CareerBuilder has been working with Google on different initiatives and is exploring ways in which the two companies can further collaborate.

“CareerBuilder has always had an open ecosystem because it speeds innovation and produces better outcomes,” Ferguson said. “Our product portfolio has expanded so significantly – now covering everything from recruiting and employment screening to managing current employees. We think there is a great opportunity to work with Google as we grow our business.”

Google has been a traffic source for CareerBuilder for several years. Six months ago, CareerBuilder announced plans to use the Google Cloud Jobs API to power searches on its job site. CareerBuilder is pairing its deep knowledge in recruitment with Google’s expertise in machine learning to provide faster, more relevant results for workers looking for jobs on See the announcement here.

I don’t have much to add on this deal. I’m pretty sure the folks at Apollo know how to unlock the value in CareerBuilder. Moreover, if the company is working with Google to improve its products and services, that is a huge vote of confidence in my book.

Of course, if you ask me, Microsoft’s acquisition of LinkedIn will change the job search industry in ways we don’t even know yet, and this represents a major threat to traditional job search companies.

How traditional job search companies respond to this emerging threat remains to be seen. Will Google try to compete head on with Microsoft and potentially acquire CareerBuilder in the future? It certainly wouldn’t surprise me given the two companies are working closely together.

Maverick CalPERS Board Member Won’t Run Again

Reporter Ed Mendel covered the California Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at

CalPERS board member J.J. Jelincic, known for being reprimanded by fellow board members and asking frequent and detailed questions about agenda items, was expected to seek a third four-year term but decided not to run.

A collective sigh of relief from the board majority of the California Public Employees Retirement System may be premature.

A late entry last week in the race for the open seat, Michael Flaherman, a former board member, criticized the CalPERS board for watering down private equity fee reform legislation and has supported Jelincic in his latest board battle, calling it “procedurally atrocious.”

Among the three other candidates for the open seat is the current chairman of the CalPERS finance committee, Richard Costigan, who wants to switch from one-year appointments to an elected four-year term.

Costigan has been annually chosen by the State Personnel Board to fill its seat on the CalPERS board for seven years in a row. His appointment by former Gov. Arnold Schwarzenegger to a 10-year term on the Personnel board expires this year.

The other candidates are David Miller, a state Department of Toxic Substances Control scientist, and Felton Williams, a retired Long Beach Community College dean of business and social sciences.

The major public employee unions have not yet publicly endorsed a candidate. Flaherman said he has the endorsement of two large retiree groups, the Retired Public Employees Association and the California State Retirees.

Jelincic has been at odds with the CalPERS establishment since winning a race for an open board seat in 2009. It was a rare, if not unprecedented, case of a CalPERS employee becoming one of the 13 members of the powerful CalPERS board.

With the backing of the two retiree groups and a $74,812 contribution from the American Federation of State, County and Municipal Employees, the 25-year CalPERS investment officer defeated a candidate backed by the Service Employees International Union.

In his first year on the board, Jelincic was reprimanded by the CalPERS board for sexual harassment of co-workers, with words and suggestive looks. He was stripped of some committee posts and ordered to take sensitivity training.

Jelincic remained on his CalPERS job until being placed on leave with pay early in 2011. Three opinions from the state attorney general said he should not participate in board meetings on personnel, particularly about top management under which he may serve later.

The CalPERS board reprimanded Jelincic again for telling Pensions and Investments in 2014 that the newly promoted chief investment officer, Ted Eliopoulos, “doesn’t have the temperament or the management skills” needed for the job.

Jelincic told the publication he worked under Eliopoulos from 2007 until being placed on leave. Eliopoulos and another CalPERS officer reportedly had warned Jelinicic in 2009 about complaints of sexual harassment.

Two years ago, Jelincic seemed to trigger a committee discusion of “board member behavior” after filing Public Records Act requests to get weekly reports from new federal lobbyists, as specified in the contract, rather than monthly reports approved by the board.

A more serious clash surfaced at a CalPERS board meeting in Monterey last January. Board member Bill Slaton accused Jelincic of leaking confidential information from a closed-door session and urged him to resign.

The confrontation was first reported by Yves Smith on her website, Naked Capitalism. Flaherman said the article was accompanied by his video of the meeting, taken after Jelincic told him a key part might be omitted in the CalPERS video.

The CalPERS board disciplined Jelincic by requiring him to attend special training on open-government laws, the Sacramento Bee reported last month. Jelincic denies that he leaked the information, which remains formally unidentified because it’s confidential.

Jelincic said last week the latest disciplinary action isn’t the reason he decided not to run for re-election — adding if anything, it would motivate him to remain. But he will soon be 69 years old, Jelincic said, and he pointed to the frustration expressed on his website.

“I originally ran for the CalPERS Board because I thought the Board was not doing its job and was too often being manipulated by staff,” Jelincic said on his website. “After eight years on the Board, I can tell you it was even worse than I realized.”

He helped improve the situation, Jelincic wrote, but in doing so “angered some senior management and fellow Board members who are invested in the status quo. It is clear to me that this Board has abdicated its responsibilities to challenge, monitor and supervise the staff.”

Jelincic said the staff controls information given to the board, which routinely rubber stamps staff recommendations. He apparently referred to a closed-door action last September, not revealed until November, that shifted investments to less risky but lower-yielding investments.

“The Board recently changed asset allocations. Why? Secret! What factors were considered? Secret! What costs were evaluated? Secret! Was the impact on beneficiaries and employers considered? Secret!” he said on his website.

As an alternative, Jelincic has suggested CalPERS could look at covering four years of costs with bonds and other nearly risk-free investments, while putting much of the portfolio (valued at $323.3 billion last week) into riskier but potentially higher-yielding investments.

Flaherman also has ideas for change. He was a Bay Area Rapid Transit planner when elected to two four-year terms on the CalPERS board ending in 2002, followed by a decade of work for a private equity firm before becoming a visiting scholar at UC Berkeley.

Last year Flaherman said he got help from Jelincic in persuading state Treasurer John Chiang to seek legislation requiring more disclosure of private equity fees. He said AB 2833 was weakened by CalPERS, which reportedly feared some firms might reject investments.

If Flaherman is elected to the CalPERS board, he might be an advocate of change much like Jelincic. But he would not have the burden of being suddenly promoted from subordinate to superior, while continuing to wear both hats within the bureaucracy.

“We’d like to have a collegial board again, a board that works together,” Rob Feckner, CalPERS board president, told the Bee last month. “Mr. Jelincic can have great value if he puts his efforts in a positive manner.”

Jelincic is scheduled to leave the board in January. Active and retired CalPERS members are eligible to vote in the election for his open seat. Voter turnout often is very low, about 16 percent of 1.3 million eligible voters when Jelincic won in 2009.

In another election for a similar board seat, board member Michael Bilbrey is running for re-election with some union support.

The other candidates are Wisam (Sam) Altowaiji, retired Redondo Beach city engineer; Margaret Brown, Garden Grove Unified School District business services director, and Bruce Jennings, retired Senate Rules Committee principal consultant.

CalPERS on PE Fees: Staff “Can’t Track It”, But Software Can

CalPERS’ pays billions of dollars in fees to external investment managers each year.

But an official admitted last week that the fees are sufficiently complex that staff “can’t track” them by themselves.

It was revealed at last week’s board meeting that the pension fund uses an algorithm — part of software built for the pension fund by a third party – to track investment fees.

From the Wall Street Journal:

As the nation’s largest public pension funds plunge deeper into complicated investments as a way of chasing returns, they are becoming more reliant on machines to make sense of it all. Some executives worry that a greater reliance on databases, coding and other quantitative tools creates the false impression that they have a better handle on their investments than they actually do.


In California, Calpers turned to computer models to understand its private-equity costs. Calpers has roughly $26 billion invested with private-equity firms, which buy companies with the goal of earning more in a later sale or public offering. They typically charge pension-fund clients a management fee of 1% to 2% of assets and a performance fee of as much as 20% of the gains when they sell companies for a profit.

Calpers was long unable to separate one set of fees from the other, relying in part on a set of spreadsheets to keep track of the data. The information was also stored in a range of different formats, making it difficult to aggregate and analyze.

It took five years to develop a new data-collection system that relies on private-equity managers to fill out new templates describing their various fees. A data and accounting firm then compiles the information and feeds it into the software program.

The new quantification is changing the way Calpers operates, one official said. It is “motivating us to explore alternative ways of investing in private equity that might have less of a fee burden,” Mr. Tollette said in an interview.

Of course, the algorithms are only as good as the data you give them. And a continuing problem for CalPERS is the fact that many private equity managers hesitate to turn over all relevant data, if any.

CPPIB Gains 11.8% in Fiscal 2017

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

Jacqueline Nelson of the Globe and Mail reports, CPPIB posts strong gains as push to increase investment diversity continues:

Canada Pension Plan Investment Board posted strong investment gains in its fiscal 2017 year as the fund continues to retool its approach to risk and increase the diversity of its investments.

CPPIB, the largest pension fund in the country and manager of the Canada Pension Plan’s portfolio, said that buoyant equity markets provided a boost last year that helped the fund reach net investment gains of 11.8 per cent in its fiscal 2017 year, which ended March 31. During that period, total assets climbed to $316.7-billion compared with $278.9-billion at the same time last year.

The increase in CPPIB’s assets through the year came from $33.5-billion in net income after all costs and $4.3-billion in net Canada Pension Plan contributions.

Mark Machin, chief executive officer of CPPIB, said the fund is still finding plenty of pockets of investment opportunities, even as valuations have climbed in many asset classes outside the public markets.

“While infrastructure may be really highly priced, and private equity in the U.S. might be really highly priced, and core real estate might be really highly priced – we have teams and capabilities to find the other opportunities,” he said in a press event to discuss the fund’s results.

It has been one year since CPPIB announced the leadership change that Mr. Machin would replace outgoing CEO Mark Wiseman.

Since then, the fund has moved to further extend the range of investments the fund makes, both by asset class and geography. CPPIB did 182 global transactions in 2017, a figure that has been climbing in the last few years. Of those transactions, 19 were worth more than $500-million.

Mr. Machin said this has been one of the most active years for the fund because investment teams are getting more developed and the investment fund is growing.

CPPIB’s thematic investing team, for example, bought a stake in the parent company of river and ocean cruise operator Viking Cruises, while the fund’s private investment team acquired specialty insurance company Ascot Underwriting Holdings Ltd.

The portion of the fund’s investment activities now taking place outside of the country also continued to tick up in the past year, and 83.5 per cent of the fund’s total assets are now located beyond Canada.

Ed Cass, CPPIB’s chief investment strategist, said that diversification in geography and asset class is the “one free lunch in financial markets” that the fund gets. This year, the return profile of private assets lagged public equities, but the fund believes that infrastructure, real estate, private credit and other alternative investment classes will help improve investment results over the long term.

Still, CPPIB is highly exposed to Canada, given the country’s overall contributions to the global economy, says Mr. Machin. “But we’re comfortable being massively overweight Canada because it is our home turf and we really understand it,” he said.

CPPIB reported a 10-year annualized return of 5.1 per cent after factoring in inflation, which exceeds the standard set by Canada’s Chief Actuary.

Barbara Shecter of the Financial Post also reports, CPPIB reaps almost 12% investment return as opportunities beckon in the U.S.:

The CPP Fund, which houses investments for the Canada Pension Plan, rose to $316.7 billion at the end of March on the back of an 11.8-per-cent net annual investment return.

The $37.8-billion increase in assets consisted of $33.5 billion in net income after all CPPIB-related costs, and $4.3 billion in net Canada Pension Plan contributions.

Despite the double-digit results for fiscal 2017 — which far outstripped a 3.4-per-cent return a year earlier — soaring stock markets caused the investment fund to underperform the 14.9-per-cent return of its benchmark reference portfolio, a passive portfolio of public market indexes.

“Given our deliberate choice to build a prudently diversified portfolio beyond just public equities and bonds, we expect to see swings in performance relative to this benchmark, either positive or negative, in any single year,” said Mark Machin, chief executive of the Canada Pension Plan Investment Board, which invests funds not needed to pay current benefits of the Canada Pension Plan.

“Over the longer term, the investment portfolio has outperformed the Reference Portfolio over both the past five- and 10-year periods,” Machin said, noting that the investment portfolio is being built to be “resilient during periods of economic stress” and to add value over the long term.

Four investment departments completed 182 global transactions in fiscal 2017, which Machin said was among the fund’s busiest years. Nineteen of those investments were more than $500 million.

Current stock market volatility and political uncertainty could create opportunities for the fund in the coming year, Machin said, adding that CPPIB continues to hunt for alternative investments such as infrastructure and real estate, despite high prices caused by stiff competition.

While being outbid by other investors in many instances, CPPIB has found success in emerging markets and complex situations that draw fewer bidders, he said. But he added that there would be more opportunities in the United States if U.S. policymakers are able to advance their agenda to increase investment in infrastructure.

“If the U.S. comes on stream, that would be really interesting, because it’s such a massive market and there are pools of capital that are getting ready to invest in it,” Machin said. “If policy (makers) in the U.S. got their act together … that would produce a good home for a lot of capital.”

He declined to weigh in on what current controversies surrounding President Donald Trump will mean in terms of the likelihood of investment-friendly policies on taxes and infrastructure being adopted. But he told the Financial Post he is optimistic there will be “interesting, sizable” investment opportunities in the “not-too-distant” future.”

“It’s a bipartisan view that the U.S. needs … more investment in infrastructure,” Machin said, adding that Canada’s largest pension would be interested in everything from roads, to airports, to energy transmission.

“We would find it interesting and I think other people would as well. At the moment there is much more demand than supply.”

Machin and CPPIB’s chief investment strategist Ed Cass said they would like to find a way to make more infrastructure investments in Canada, even if it means divesting Canadian stocks or other investments here in order to rebalance the fund’s portfolio.

However, details of how such investments would work under the federal government’s new Infrastructure Bank still need to be worked out, they said. Among the challenges is that many of the projects rolled out are expected to be new “greenfield” infrastructure, which carries more risk than the operating assets CPPIB prefers.

“All other things being equal, we prefer to invest in Canada. We understand it better than anywhere else,” Machin said. “It is our home turf.”

On infrastructure, David Paddon of The Canadian Press reports, Canadian infrastructure deals scarce but would be welcome: CPPIB chief executive:

Officials from the country’s largest pension fund said Thursday they’d welcome the opportunity to invest in Canadian infrastructure but there’s been a limited supply of suitable assets available to purchase.

“If the opportunities were there, we’d love to look at them. We’d love to invest in them. It’s just a scarcity of opportunities,” said Mark Machin, CEO of the Canada Pension Plan Investment Board.

He said the CPPIB is constantly on the hunt for purchases around the world but finds itself frequently outbid by rivals when infrastructure comes on the market.

“That’s terrific for governments. It’s terrific for sellers. But when you’re competing to buy, it’s really razor-sharp pricing,” Machin said.

“So we’ve been quite cautious on where we’ve added assets.”

Machin and CPPIB chief investment strategist Ed Cass said they’d prefer to invest in late-stage infrastructure projects or completed projects rather than “green field” developments that need to be approved and built before they generate cash flow.

Cass said that the new federal infrastructure bank, which is being created by the Trudeau government, will be able to “package” opportunities for late-stage investors after going through the early stages.

But Machin said that CPPIB faces no political pressure to invest in Canada, or the infrastructure bank, because the fund has a clear mandate to maximize investment returns and operates at an arms length from all levels of government.

“We’re shielded from anything along those lines,” Machin said.

His comments were made as CPPIB, created in 1999, announced that 2016-17 marked one of its best years for investment returns in a decade. As of March 31, when CPPIB’s financial year ends, it had $316.7 billion in assets — up $37.8 billion from a year before through a combination of market gains and new funds.

That trails only the $45.5 million increase in 2014-15, the biggest in the past 10 years.

For 2016-17, the fund realized a gross return of 12.2 per cent or 11.8 per cent in net return after all costs. For the 10-year period, CPPIB’s annualized gross return was 6.7 per cent or 5.1 per cent on a net basis.

And Matt Scuffham of Reuters also reports, Canada Pension Plan says it’s losing out on infrastructure deals:

The Canada Pension Plan Investment Board (CPPIB), one of the world’s biggest infrastructure investors, is regularly losing out in bidding wars for such assets, its chief executive said, as investors seek alternatives to low-yielding government bonds.

The CPPIB is one of the world’s biggest investors in infrastructure such as roads, bridges and tunnels but its CEO Mark Machin said high valuations were making it harder to do deals in the current environment.

“We are consistently outbid for assets around the world because they are really priced almost to perfection and there’s an enormous amount of capital chasing infrastructure, particularly in developed markets,” Machin told reporters after the fund reported results for its last fiscal year on Thursday.

The CPPIB did acquire a 33 percent stake in Pacific National, one of the largest providers of rail freight services in Australia, for about A$1.7 billion ($1.3 billion) last year but was generally less active in the infrastructure space than it has been in previous years.

Machin said there could be opportunities in the United States if U.S. President Donald Trump proceeds with a $1 trillion infrastructure plan.

“If the U.S. comes on stream that would be really interesting because it’s such a massive market. There are pools of capital that are getting ready to invest in it. If policy (makers) in the U.S. got their act together that would produce a good home for a lot of capital looking for that type of opportunity,” he said.

The fund, which manages Canada’s national pension fund and invests on behalf of 20 million Canadians, reported a net return of 11.8 percent on its investments last year, helped by its strategy of diversifying across asset classes and geographies.

The performance represented a significant improvement on the year before, when the fund achieved a net return of 3.4 percent.

The CPPIB said it ended its fiscal year on March 31 with net assets of C$316.7 billion ($232.2 billion), compared with C$278.9 billion a year ago, one of the largest yearly increases in assets since it was created 20 years ago.

CPPIB put out a press release, CPP Fund Totals $316.7 Billion at 2017 Fiscal Year-End:

The CPP Fund ended its fiscal year on March 31, 2017 with net assets of $316.7 billion compared to $278.9 billion at the end of fiscal 2016. The $37.8 billion increase in assets for the year consisted of $33.5 billion in net income after all CPPIB costs and $4.3 billion in net Canada Pension Plan (CPP) contributions. The portfolio delivered a gross investment return of 12.2% for fiscal 2017, or 11.8% net of all costs.

“This was a strong year for the CPP Fund as we achieved one of the largest yearly increases in assets since the inception of CPPIB,” said Mark Machin, President & Chief Executive Officer, Canada Pension Plan Investment Board (CPPIB). “As always, we continue to focus on longer-term performance. Year-by-year results will swing, but it is noteworthy that our 11.8% five-year return mirrors our annual return. We believe this is a strong indicator of our ability to generate steady, sustainable returns for generations of beneficiaries to come.”

In fiscal 2017, CPPIB continued to prudently execute its long-term investment strategy to diversify the CPP Fund across multiple asset classes and geographies. Through four investment departments, the organization completed 182 global transactions.

“The composition of our highly diversified long-term portfolio continues to position us well, allowing us to take advantage of the strong performance of global stock markets this year, amid significant global geopolitical developments,” said Mr. Machin. “Our diverse investment programs generated strong earnings, while fixed income investments remained relatively flat.”

In the 10-year period up to and including fiscal 2017, CPPIB has now contributed $146.1 billion in cumulative net income to the Fund after all CPPIB costs. Since CPPIB’s inception in 1999, it has contributed $194.1 billion. For the five-year period, the net nominal return was 11.8%, contributing $129.6 billion in cumulative net income to the Fund after all CPPIB costs.

Five and 10-Year Returns
(for the year ending March 31, 2017)

“We are building a portfolio capable of delivering superior performance over multiple generations to help ensure the long-term sustainability of the CPP,” said Mr. Machin. “We remain disciplined in doing this, investing only in assets that we believe will collectively deliver superior risk-adjusted returns over time. Our portfolio is designed to withstand short-term market uncertainty.”

Long-Term Sustainability

CPPIB’s 10-year annualized net nominal rate of return of 6.7%, or 5.1% on a net real rate of return basis, was above the Chief Actuary’s assumption over this same period. The real rate of return is reported net of all CPPIB costs to be consistent with the Chief Actuary’s approach.

In the most recent triennial review released in September 2016, the Chief Actuary of Canada reaffirmed that, as at December 31, 2015, the CPP remains sustainable at the current contribution rate of 9.9% throughout the forward-looking 75-year period covered by his report. The Chief Actuary’s projections are based on the assumption that the Fund’s prospective real rate of return, which takes into account the impact of inflation, will average 3.9% over 75 years.

The Chief Actuary’s report also indicates that CPP contributions are expected to exceed annual benefit payments until 2021, after which a small portion of the investment income from CPPIB will be needed to help pay pensions. In addition, the report confirmed that the Fund’s performance was well ahead of projections for the 2013-2015 period as investment income was 248% or $70 billion higher than anticipated.

The CPP’s multi-generational funding and liabilities give rise to an exceptionally long investment horizon. To meet long-term investment objectives, CPPIB continues to build a portfolio designed to generate and maximize long-term returns at an appropriate risk level. Accordingly, long-term investment returns are a more appropriate measure of CPPIB’s performance than returns in any given quarter or single fiscal year.

Relative Performance Against the Reference Portfolio

CPPIB also measures its performance against a market-based benchmark, the Reference Portfolio, representing a passive portfolio of public market indexes that reflect the level of long-term total risk that we believe is appropriate for the Fund.

To provide a clearer view of CPPIB’s performance given our long-term horizon, we track cumulative value-added returns since the April 1, 2006 inception of the benchmark Reference Portfolio. Cumulative value-added over the past 11 years totals $8.9 billion, after all CPPIB costs.

In fiscal 2017, the Reference Portfolio’s return of 14.9% outperformed the Investment Portfolio’s net return of 11.8% by 3.1% The Reference Portfolio return was $8.2 billion above the Investment Portfolio’s return, after deducting all costs from the Investment Portfolio and CPPIB’s operations. Over the five- and 10-year periods, the Investment Portfolio continued to outperform the Reference Portfolio by $5.6 billion and $6.7 billion, respectively, after all CPPIB costs.

“When public markets soar, as they generally did this year, we expect the public equity-based Reference Portfolio benchmark to perform exceptionally well,” said Mr. Machin. “Over the longer term, the Investment Portfolio has outperformed the Reference Portfolio over both the past five- and 10-year periods. Given our deliberate choice to build a prudently diversified portfolio beyond just public equities and bonds, we expect to see swings in performance relative to this benchmark, either positive or negative, in any single year. Our investment portfolio is designed to deliver value-building growth and be resilient during periods of economic stress while adding value over the long term.”

Total Costs

This fiscal year reflected a decline in the operating expense ratio for the second year in a row, as well as a slowdown in the growth of CPPIB’s operating expenses. We are committed to maintaining cost discipline in the years ahead. Approximately 32% of our personnel expenses are denominated in foreign currencies and that percentage is expected to increase in the coming years as we continue to hire specialized talent and skills where most of our investing activities occur.

To generate the $33.5 billion of net income from operations after all costs, CPPIB incurred total costs of $2,834 million for fiscal 2017, compared to $2,643 million in total costs for the previous year. CPPIB total costs for fiscal 2017 consisted of $923 million, or 31.3 basis points, of operating expenses; $987 million in management fees and $477 million in performance fees paid to external managers; and $447 million of transaction costs. CPPIB reports on these distinct cost categories, as each is materially different in purpose, substance and variability. We report the investment management fees and transaction costs we incur by asset class and report the net investment income our programs generate after deducting these fees and costs. We then report on total Fund performance net of these fees and costs, as well as CPPIB’s overall operating expenses.

Investment management fees increased due in part to the continued growth in the level of commitments and the average level of assets with external managers, and the year-over-year growth in the performance fees paid. Notably, performance fees reflect the strong performance of our external managers.

Transaction costs marginally increased by $10 million compared to the prior year. This year, we completed 19 global transactions valued at over $500 million, in addition to other transactions assessed across the investment groups. Transaction costs vary from year to year as they are directly correlated to the number, size and complexity of our investing activities in any given period.

Portfolio Performance by Asset Class

Portfolio performance by asset class is included in the table below. A more detailed breakdown of performance by investment department is included in the CPPIB Annual Report for fiscal 2017, which is available at

Asset Mix

We continued to diversify the portfolio by the return-risk characteristics of various assets and countries during fiscal 2017. Canadian assets represented 16.5% of the portfolio, and totalled $52.2 billion. Assets outside of Canada represented 83.5% of the portfolio, and totalled $264.7 billion.

Investment Highlights

Highlights for the year included:

Public Market Investments

  • Invested an additional C$400 million for a 1.4% stake in Kotak Mahindra Bank (Kotak). Kotak is a leading private-sector bank holding company in India, with additional lines of business in life insurance, brokerage and asset management. To date, CPPIB has invested a total of C$1.2 billion, representing a 6.3% ownership stake in the company.
  • Invested US$280 million in convertible preferred equity securities of a parent company of Advanced Disposal Services, Inc. (Advanced Disposal), which converted to approximately 20% common equity of Advanced Disposal upon its initial public offering. Based in Ponte Vedra, Florida, Advanced Disposal is the fourth largest solid waste company in the U.S. with operations across 16 states and the Bahamas.
  • Invested A$300 million for a 9.9% ownership in Qube Holdings Limited (Qube), the largest integrated provider of import-export logistics services in Australia. The investment helped fund Qube’s share of the purchase of Asciano Limited, which was acquired by a consortium of global investors including CPPIB.

Investment Partnerships

  • Invested US$137 million in Daesung Industrial Gases Co., Ltd. (Daesung) for an 18% ownership stake, alongside MBK Partners. Headquartered in Seoul, Daesung is the leading industrial gas producer in South Korea servicing a diversified blue-chip customer base with a resilient business model supported by long-term contracts.
  • Acquired a 3.3% direct ownership interest in Bharti Infratel Limited for US$300 million, as part of the purchase of a 10.3% stake alongside funds advised by KKR, from India’s Bharti Airtel Limited. Bharti Infratel deploys, owns and manages telecom towers and communication structures for various mobile operators, and is India’s leading player.
  • Announced a combined investment of US$500 million with TPG Capital for a 17% stake in MISA Investments Limited, the parent company of Viking Cruises. TPG Capital and CPPIB each invested US$250 million to support and accelerate Viking Cruises’ growth initiatives and strengthen the company’s balance sheet. Viking Cruises is a leading provider of worldwide river and ocean cruises, operating more than 60 cruise vessels based in 44 countries.

Private Investments

  • Acquired an approximate 48% stake in GlobalLogic Inc., a global leader in digital product development services, from funds advised by Apax Partners LLP. Based in San Jose, California, GlobalLogic helps clients build innovative digital products to enhance customer engagement, user experience and service capabilities.
  • Acquired 100% of Ascot Underwriting Holdings Ltd. and certain related entities (Ascot), together with Ascot’s management, for a total consideration of US$1.1 billion. Based in London, England, Ascot is a Lloyd’s of London syndicate and a global specialty insurance underwriter with expertise spanning multiple lines of businesses, including property, energy, cargo, casualty and reinsurance.
  • Invested additional equity into Teine Energy Ltd. (Teine) to support Teine’s acquisition of the Southwest Saskatchewan oil-weighted assets of Penn West Petroleum Ltd. for a cash consideration of C$975 million. Since 2010, CPPIB has invested approximately C$1.3 billion in Teine and holds approximately 90% of the company on a fully diluted basis.

Real Assets

  • Acquired three U.S. student housing portfolios for approximately US$1.6 billion through a joint venture entity owned by CPPIB, GIC and The Scion Group LLC (Scion). CPPIB and GIC each own a 45% interest in these portfolios and Scion owns the remaining 10%. The joint venture’s well-diversified US$2.9 billion national portfolio now comprises 48 student housing communities in 36 top-tier university markets, totalling 32,192 beds.
  • Entered into two agreements to invest alongside Ivanhoé Cambridge and LOGOS, an Australian-based real estate logistics specialist, to develop and acquire modern logistics facilities in Singapore and Indonesia. In Singapore, CPPIB will initially commit S$200 million for an approximate 48% stake in the LOGOS Singapore Logistics Venture. CPPIB will also initially commit US$100 million in equity for an approximate 48% stake in LOGOS Indonesia Logistics Venture.
  • Acquired a 50% interest in a portfolio of high-quality office properties in downtown Toronto and Calgary at a gross purchase price of C$1.175 billion from Oxford Properties Group, which will retain the remaining 50% interest. The 4.2-million-square-foot portfolio includes seven office buildings with a broad mix of tenants. The transaction brings the total size of the jointly owned Oxford-CPPIB office portfolio to over 12 million square feet.
  • Acquired a 33% stake in Pacific National for approximately A$1.7 billion, as part of the consortium that acquired Asciano Limited. Pacific National is one of the largest providers of rail freight services in Australia.

Investment highlights following the year end include:

  • Signed an agreement alongside Baring Private Equity Asia to acquire all the outstanding shares of, and to privatize, Nord Anglia Education, Inc. (Nord Anglia) for US$4.3 billion, including the repayment of debt. Nord Anglia operates 43 leading private schools globally in 15 countries in China, Europe, Middle East, North America and South East Asia. The transaction is subject to shareholder approval and customary closing conditions.
  • Signed a definitive agreement to acquire Ascend Learning LLC (Ascend), a leading provider of educational content, software and analytics solutions, in partnership with private equity funds managed by Blackstone and Ascend management. The transaction is subject to customary regulatory approvals and customary closing conditions.
  • Formed a strategic investment platform with The Phoenix Mills Limited (PML) to develop, own and operate retail-led mixed-use developments across India. CPPIB will initially own 30% in the platform, known as Island Star Mall Developers Pvt. Ltd., a PML subsidiary, which owns Phoenix MarketCity Bangalore, for an equity investment of approximately C$149 million. CPPIB’s total commitment to the platform is up to approximately C$330 million, which will increase CPPIB’s stake in the platform up to 49%.

Assets Dispositions

  • Signed an agreement to sell CPPIB’s 25% stake in AWAS, a Dublin-based aircraft lessor, to Dubai Aerospace Enterprise. The sale was made alongside Terra Firma. CPPIB had been an investor in AWAS since 2006.
  • Sold CPPIB’s 45% ownership interest in 1221 Avenue of the Americas, a Midtown Manhattan office property. Net proceeds to CPPIB from the sale were approximately US$950 million. CPPIB acquired the ownership interest in 2010.
  • An affiliate of CPPIB Credit Investments Inc. sold a 16% equity stake in Antares Holdings (Antares) to a private investment fund managed by Northleaf Capital Partners (Northleaf). Northleaf and Antares are forming a broader strategic relationship, which will include developing separately managed accounts and other investment solutions designed specifically for Canadian asset managers, institutional investors and private clients.

Corporate Highlights

  • Welcomed the appointments of three new members to CPPIB’s Board of Directors for three-year terms:
  •  Jackson Tai, appointed in June 2016 as our first non-resident Director, also serves on the       boards of various publicly listed companies, including HSBC Holdings PLC, Eli Lilly & Company and MasterCard Incorporated.
  • Ashleigh Everett, appointed in February 2017, who is President, Corporate Secretary and Director of Royal Canadian Securities Limited and has served on a number of publicly listed companies.
  • John Montalbano, appointed in February 2017, also serves on a number of corporate boards, including Canalyst Financial Modeling Corporation, Wize Monkey Inc. and Eupraxia Pharmaceuticals Inc.
  • Signed a Memorandum of Understanding with the National Development and Reform Commission of the People’s Republic of China to offer CPPIB’s expertise in assisting Chinese policy-makers as they address the challenges of China’s aging population, including pension reform and the promotion of investment in the domestic senior care industry by global investors. Related to this agreement, CPPIB launched the Chinese edition of “Fixing the Future: How Canada’s Usually Fractious Governments Worked Together to Rescue the Canada Pension Plan”.
  • CPPIB Capital Inc. (CPPIB Capital), a wholly owned subsidiary of CPPIB, completed two international debt offerings, comprising three-year term notes totalling US$2 billion, and five-year term notes totalling US$2 billion. CPPIB utilizes a conservative amount of short- and medium-term debt as one of several tools to manage our investment operations. Debt issuance gives CPPIB flexibility to fund investments that may not match our contribution cycle. Net proceeds from the private placement will be used by CPPIB for general corporate purposes.

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 20 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 March 31, 2017, the CPP Fund totalled $316.7 billion. For more information about CPPIB, please visit or follow us on LinkedIn or Twitter.

CPPIB also put out its FY 2017 Annual Report which you should read very carefully here.

In order to understand how CPPIB’s portfolio has shifted over the years, have a look at this image showing the historical comparison of the investment portfolio (click on image):

At the very beginning back in 2000, CPPIB’s portfolio was almost all Canadian bonds and a tiny bit in Canadian equities and now it’s made up of roughly 22% fixed income, 23% real assets, and the rest of it mostly in US and international public and private equities.

In order for CPPIB to invest in private markets all over the world, it needs to find the right partners and hire “boots on the ground” to nurture these relationships and to invest directly where warranted (like infrastructure).

On page 26 of the 2017 Annual Report, there is an interesting discussion on CPPIB’s shift in Reference Portfolio to attain its future funding objectives given the CPP is a partially, not a fully funded plan:

Based on very long-term projections, the Chief Actuary estimates that contributions will finance 65–70% of future Base CPP benefits. Investment returns will finance 30–35%. In other words, contributions will be almost twice as important as investment returns in sustaining future CPP benefits.

This is very different than most fully funded defined benefit pension plans, which are much more dependent on investment returns to finance the larger share of long-term benefits and hence generallymore risk-averse than the CPP Fund needs to be. The funding structure of the CPP means that:

  • Short-term volatility in returns has much less impact on the CPP’s sustainability and minimum required contributions than for conventionally funded plans.
  • A truly long-term perspective can be taken, in which the expected higher returns from undertaking a higher but still prudent investment risk profile tends to increasingly offset the impact of higher short-term volatility as the time horizon lengthens. In fact, it eventually reduces overall risk to the CPP.

Given these key factors, in fiscal 2014, the Board and Management of CPPIB concluded that the risk level of the Fund could and should be increased over time, with a corresponding increase in expected long-term returns. They approved a gradual increase to the equivalent risk level of a portfolio of 85% global equities and 15% Canadian governments’ bonds (click on image)

This shift in the Reference Portfolio makes it that much harder to beat when markets are soaring but over the long term, CPPIB has managed to add considerable value-added with its diversification strategy across public and private markets all over the world.

I explain the above to relate it to this part of CPPIB’s press release:

In fiscal 2017, the Reference Portfolio’s return of 14.9% outperformed the Investment Portfolio’s net return of 11.8% by 3.1%. The Reference Portfolio return was $8.2 billion above the Investment Portfolio’s return, after deducting all costs from the Investment Portfolio and CPPIB’s operations. Over the five- and 10-year periods, the Investment Portfolio continued to outperform the Reference Portfolio by $5.6 billion and $6.7 billion, respectively, after all CPPIB costs.

“When public markets soar, as they generally did this year, we expect the public equity-based Reference Portfolio benchmark to perform exceptionally well,” said Mr. Machin. “Over the longer term, the Investment Portfolio has outperformed the Reference Portfolio over both the past five- and 10-year periods. Given our deliberate choice to build a prudently diversified portfolio beyond just public equities and bonds, we expect to see swings in performance relative to this benchmark, either positive or negative, in any single year. Our investment portfolio is designed to deliver value-building growth and be resilient during periods of economic stress while adding value over the long term.”

This is why I keep stressing you need to evaluate CPPIB’s performance over the last five and ten years, not in any given year. What counts at these large pensions is long-term performance, and here CPPIB has clearly been delivering exceptional results.

In terms of results, one thing I would have liked to have seen is an in-depth discussion on performance attribution on currency hedging — or in the case of CPPIB, non-hedging (CPPIB wisely doesn’t hedge currency exposure).

Go back to read my comment on CPPIB’s FY 2016 results where I stated this:

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

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

Now, as I was writing this comment and got this far late Thursday afternoon, CPPIB’s CEO Mark Machin called me to go over the results. He was boarding a plane and didn’t have a lot of time to spare so I began by asking him about how currency swings helped boost performance in fiscal 2017.

Mark said that while last year currency swings had a material impact on performance, in fiscal 2017, currency swings were “relatively neutral”.

Mark also told me that the percentage of liquid equities in the portfolio is now 35%, which is another reason why CPPIB will underperform its Reference Portfolio when global stocks are soaring in any given year (78% of the Reference Portfolio is liquid global equities).

More importantly, Mark Machin wanted me to flag page 122 of the 2017 Annual Report where there is a discussion on CPPIB’s value at risk (VaR) and how much the Fund can potentially lose in any given year if a crisis occurs (click on image and read carefully):

Basically, VaR estimates how much a set of investments might lose, given normal market conditions, in a set time period such as a day. It is valid under normal market conditions and does not specifically consider losses arising from severe market events. It also assumes that historical market data is a sound basis for estimating potential future losses.

Market VaR calculated by CPP Investment Board is estimated using a historical simulation method, evaluated at a 90% confidence level and scaled to a one-year holding period. Under these assumptions, CPPIB can lose 12% in any given year.

To complement the VaR measures CPP Investment Board examines the potential impact of exceptional but plausible adverse market events. Stress scenarios are based upon either forward-looking predictive views on events of imminent concern, such as the Brexit, or designed to mimic market moves from periods of historical distress, such as the Global Financial Crisis. A committee with representatives from each investment department meets regularly to identify probable market disruptions and to review underlying assumptions adopted in quantifying the impact of the specific stress scenario. Results are used to detect vulnerabilities in the portfolio and presented to senior management and the Board to affirm overall risk appetite.

I think Mark wanted to stress this point because while it’s nice to see CPPIB gain 11.8% in fiscal 2017, it’s well within the risk forecasts to see the Fund experience a 12% or worse drawdown if markets tumble next year.

And as I stressed in a recent comment, CPPIB is preparing for landing, taking a much more defensive approach in its overall portfolio in terms of public and private markets.

What else did I discuss with Mark Machin? I told him I saw his former colleague who is now running PSP Investments, André Bourbonnais, on Bloomberg Markets discussing how valuations in private markets are high and how PSP is selling some real estate holdings (see below).

Mark agreed, telling me everyone is competing for the same private assets, “outbidding CPPIB”, but he prefers to stay disciplined. I asked him where they’re finding opportunities and he told me by having the right partners and diversifying geographically, they are able to find some well-priced deals. He added: “If there is a crisis, CPPIB stands ready to capitalize on market dislocations.”

Lastly, below I embedded a summary of the compensation of the senior executives at CPPIB (click on image from page 83 of the Annual Report):

As you can see, Mark Machin is the highest paid pension CEO in Canada (and the world). But given the level of responsibility he has at the helm of Canada’s largest pension fund, and the long-term results CPPIB has delivered, and the fact he left Goldman Sachs a while ago to join CPPIB, I can assure you his total compensation is fair and well within reason for the position he holds.

On a personal level, I’ve only met Mark once in Montreal last Fall and found him to be extremely nice, very sharp and I’m happy he is leading CPPIB now. He also has a very experienced team of senior executives helping him manage assets and risks at CPPIB and very qualified and dedicated employees across the organization.

New Jersey’s Big Pension Gamble?

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

SNJ Today reports, Underfunded Public Pension Plans Could Hit the Lottery:

Governor Chris Christie is moving forward with his plan to dedicate the state’s lottery revenues to New Jersey’s woefully underfunded public worker pension plans.

The Treasury Department unveiled legislation that the Christie administration wants lawmakers to introduce and approve.

State officials say the plan would immediately reduce unfunded obligations by $13.5 billion for the state’s separate pension funds for teachers, public employees, police, and firefighters.

The state says that would raise the funded ratio of the retirement system from 45 percent to 59 percent.

Democratic Assembly Speaker Vincent Prieto says he continues to question whether it’s an effective plan or a gimmick, but adds that he will review the proposal.

Officials say nothing would change for current state lottery customers.

And Samantha Marcus of NJ Advance Media reports, What you need to know about Christie plan to slash N.J. pension debt with lottery cash:

Gov. Chris Christie’s administration on Thursday released long-awaited details of its proposal to use state lottery proceeds to boost the government worker pension fund.

In a briefing with reporters, the state treasurer emphasized the impact of the proposal, saying it said would take some of the burden off the state budget to come up with more and more money each year and will do more for improve the shaky pension fund than merely contributing the full amount recommended by actuaries.

The strategy is to inject a $13.5 billion asset into the pension fund and give it a guaranteed source of revenue for the next 30 years.

Here’s what you need to know:

How does it work?

Broadly, New Jersey’s lottery will become an asset of the pension fund, just like all of the fund’s stocks, bonds and other investments.

The state hired an outside consultant to determine the value of the fund, and it came back with $13.5 billion. That would immediately slash the state’s pension debt. Treasurer Ford Scudder said the valuation will be updated regularly.

Over the next 30 years, the revenue generated from ticket sales would add $37 billion to the pension fund. The lottery would revert to the state budget after those 30 years.

Who benefits?

While there are seven pension funds, only three are considered eligible. These are the Teachers’ Pension and Annuity Fund, the Public Employees’ Retirement System and the Police and Firemen’s Retirement System.

Under the state Constitution, lottery proceeds must be spent on education and state institutions. These three pension funds qualify, as teacher pensions “constitute state aid for education,” and some members of PERS and PFRS work at state institutions or public universities, according to the governor’s proposed legislation.

But they wouldn’t split it evenly.

The asset would be allocated based on a fund’s share of the liabilities, share of the unfunded liabilities and share of total members.

The teachers’ pension fund is the recipient of about 78 percent. While PERS would receive 21 percent and police and fire, a little more than 1 percent.

What will the impact be on the pension funds?

Overall, the state’s unfunded liabilities — the gap between how much money it has and how much it needs to pay future benefits — will drop from $49 billion to $36.5 billion. The total system will go from 44.7 percent funded to 58.9 percent funded.

The effect on the three pension funds will vary.

TPAF would improve from 47 percent funded to 63.9 percent.

The state portion of PERS would boost from 37.8 percent to 49.6 percent funded.

And the state side of PFRS would increase from 41.2 percent to 44.5 percent.

Both PERS and PFRS receive contributions from the state and local government employers.

What does this mean for the lottery?

Not much, according to the state treasurer.

“There will be absolutely no change in the operations of the lottery. If you like to buy lottery tickets, you’ll notice no difference. If you’re a vendor that sells lottery tickets, you’ll notice no difference … the lottery director will remain in charge of the lottery … the lottery will remain a division of the treasury. It will still be overseen by the state lottery commission,” he said.

According to the draft legislation, the director of investment will join the State Lottery Commission.

“The only thing that will change is rather than net proceeds coming to the general fund, they’ll be going in a new common pension fund.”

Where do lottery revenues go now?

They flow into the state budget. Under the state Constitution, lottery income must be spent on state institutions and state aid for education.

It is expected to bring in $965 million this year, helping fund higher education programs, psychiatric hospitals, centers for people with developmental disabilities and homes for disabled soldiers.

Scudder said those programs won’t be left behind. Once the lottery revenue is rerouted to the pension system, they will be funded out of the state budget.

How, when resources are already stretched thin? That’s more complicated.

Once the lottery is deposited in the pension system, it would dramatically decrease the unfunded liabilities, or debt. That would, in turn, eventually reduce the amount of money that needs to be budgeted for the pension contribution.

It’s like a credit card. Your minimum payment is based on how much you owe. The higher your balance gets, the higher your minimum payment gets. But if you pay down your balance, your minimum monthly payment should drop.

In the state’s case, that will free up some money to do other things, like pay for those programs.

According to an analysis provided by the state, the state budget will be able to absorb those costs without any impact for five years. From 2023 to 2029, there will be a hit of about $160 million to $235 million a year.

Where will the ticket proceeds go?

Proceeds from ticket sales can be used to pay out monthly benefits or invest along with the pension system’s other assets.

The lottery’s monthly cash flows will make it easier for the pension fund to pay benefits without having to sell off investments, Scudder said.

I want to first thank Suzanne Bishopric for bringing this to my attention. It has been two years since I discussed New Jersey’s pension war and three years since I discussed how that state’s pension is GASBing for air.

In my opinion, this latest attempt to shore up its chronically underfunded state pensions by using lottery proceeds is a desperate move which will only kick the can further down the road. It will help at the margin, especially for the state teachers’ pension fund, but it’s doing nothing to address serious structural flaws that continue to hamper the state’s pensions.

Worse still, lotteries are a form of regressive taxation, so here you’ll have New Jersey’s poor and working poor buying lottery tickets to fund chronically underfunded state pensions and the cuts in social programs will mostly affect them.

Sure, if the funded status of these chronically underfunded state pensions improves, it will free up money in the state budget to spend on other programs but the truth is there will be cuts to social programs to fund these pensions, and those projections from 2023 to 2029 look awfully optimistic.

And if something goes wrong, and invariably something always goes wrong, that’s it for New Jersey’s pensions, this last attempt to shore them up using state lottery proceeds will be the final straw.

“Ok Leo, so what would be your solution?” My solution would be to amalgamate these state pensions into one large state pension, adopt better governance to remove any political interference, implement a risk-sharing model, hike the contribution rates and lower the benefits for a period of five to ten years, and introduce a special property tax which is progressive, not regressive, for the same time period and make sure these tax revenues are earmarked only for these state pensions.

But Gov. Chris Christie decided to go for the politically expedient and in my opinion, dangerous route of using state lottery proceeds as the cash cow to fund chronically underfunded state pensions.

Why not? US politicians are like all other politicians, their first goal is to be reelected, so they will keep kicking that can down the road until there are no more cans left to kick.

Chris Christie Unveils Plan to Fund NJ Pensions Through Lottery Cash; Democrats Balk

New Jersey Gov. Chris Christie last week unveiled a plan that would use lottery proceeds to pay down the state’s mounting pension obligations.

The plan would make the state lottery an asset of the pension fund, generating an estimated $37 billion over the next 30 years, according to the state Treasury.

However, some lawmakers — particularly Democrats — balked at the proposal, calling it a distraction and an excuse for Christie to continue to short the pension fund’s annual required contribution. Christie will be shorting the pension system roughly $2.5 billion in required contributions in 2018, according to the state budget.

Additionally, the lottery is essentially a regressive tax — meaning the state’s poor/working class families who are playing the lottery would now be a source of funding for the pension fund.

More from NJ Spotlight:

On paper, the pension system would benefit for the next 30 years by having the Lottery – which generates nearly $1 billion in annual revenue and was recently valued at $13.5 billion – effectively transferred onto its balance sheet.

That shift would create a new and dedicated source of revenue for the pension system. In fact, the Christie administration expects the Lottery transfer will improve the state pension system’s overall funded ratio from a disastrous 45 percent to near 60 percent.

The fiscal maneuver should also have little immediate impact on the state budget because it will reduce an unfunded pension liability that right now measures close to $50 billion, and that figure is used by actuaries each year to determine how much the state should be putting into the pension system out of the budget to help maintain its solvency.

The view of Democrats, via NJ Spotlight:

Phil Murphy, Democratic frontrunner for his party’s gubernatorial nomination, compared it to the boardwalk-arcade game Whac-A-Mole during a gubernatorial debate that was held in Newark last week.

“That’s what this is,” said Murphy, a former Goldman Sachs executive. “You’re going to pile down some source of funding over here, and you’re going to expose another source of expense required over there.”

Democratic hopeful Jim Johnson, a lawyer and former U.S. Treasury official from Montclair, dismissed the scheme as a gimmick intended to distract from Christie’s decision to once again short the full payment.

Other lawmakers and union leaders have not taken positions on the bill.

Deprecated: Function get_magic_quotes_gpc() is deprecated in /home/mhuddelson/public_html/ on line 3712