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The Global Pension Storm?

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

Timothy W. Martin, Georgi Kantchev and Kosaku Narioka of the Wall Street Journal report, Era of Low Interest Rates Hammers Millions of Pensions Around World (h/t Ken Akoundi, Investor DNA):

Central bankers lowered interest rates to near zero or below to try to revive their gasping economies. In the process, though, they have put in jeopardy the pensions of more than 100 million government workers and retirees around the globe.

In Costa Mesa, Calif., Mayor Stephen Mensinger is worried retirement payments will soon eat up all the city’s cash. In Amsterdam, language teacher Frans van Leeuwen is angry his pension now will be less than what his father received, despite 30 years of contributions. In Tokyo, ex-government worker Tadakazu Kobayashi no longer has enough income from pension checks to buy new clothes.

Managers handling trillions of dollars in government-run pension funds never expected rates to stay this low for so long. Now, the world is starved for the safe, profitable bonds that pension funds have long needed to survive. That has pulled down investment returns and made it difficult for funds to meet mounting obligations to workers and retirees who are drawing government pensions.

As low interest rates suppress investment gains in the pension plans, it generally means one thing: Standards of living for workers and retirees are decreasing, not increasing.

“Unless ordinary people have money in their pockets, they don’t spend,” the 70-year-old Mr. Kobayashi said during a recent protest of benefit cuts in downtown Tokyo. “Higher interest rates would mean there’d be more money at our disposal, even if slightly.”

The low rates exacerbate cash problems already bedeviling the world’s pension funds. Decades of underfunding, benefit overpromises, government austerity measures and two recessions have left many retirement systems with deep funding holes. A wave of retirees world-wide is leaving fewer active workers left to contribute. The 60-and-older demographic is expected to roughly double between now and 2050, according to the United Nations.

Government-bond yields have risen since Donald Trump was elected U.S. president, though few investors expect a prolonged climb. Regardless, the ultralow bond yields of recent years have already hindered the most straightforward way for retirement funds to recover—through investment gains (click on image).

Pension officials and government leaders are left with vexing choices. As investors, they have to stash away more than they did before or pile into riskier bets in hedge funds, private equity or commodities. Countries, states and cities must decide whether to reduce benefits for existing workers, cut back public services or raise taxes to pay for the bulging obligations.

“Interest rates have never been so low,” said Corien Wortmann-Kool, chairwoman of the Netherlands-based Stichting Pensioenfonds ABP, Europe’s largest pension fund. It manages assets worth €381 billion, or $414 billion. “That has put the whole system under pressure.” Only about 40% of ABP’s 2.8 million members are active employees paying into the fund.

Pension funds around the world pay benefits through a combination of investment gains and contributions from employers and workers. To ensure enough is saved, plans adopt long-term annual return assumptions to project how much of their costs will be paid from earnings. They range from as low as a government bond yield in much of Europe and Asia to 8% or more in the U.S.

The problem is that investment-grade bonds that once churned out 7.5% a year are now barely yielding anything. Global pensions on average have roughly 30% of their money in bonds.

Low rates helped pull down assets of the world’s 300 largest pension funds by $530 billion in 2015, the first decline since the financial crisis, according to a recent Pensions & Investments and Willis Towers Watson report. Funding gaps for the two biggest funds in Europe and the U.S. have ballooned by $300 billion since 2008, according to a Wall Street Journal analysis.

Low rates helped pull down assets of the world’s 300 largest pension funds by $530 billion in 2015, the first decline since the financial crisis, according to a recent Pensions & Investments and Willis Towers Watson report. Funding gaps for the two biggest funds in Europe and the U.S. have ballooned by $300 billion since 2008, according to a Wall Street Journal analysis (click on image).

Few parts of Europe are feeling the pension pain more acutely than the Netherlands, home to 17 million people and part of the eurozone, which introduced negative rates in 2014. Unlike countries such as France and Italy, where pensions are an annual budget item, the Netherlands has several large plans that stockpile assets and invest them. The goal is for profits to grow faster than retiree obligations, allowing the pension to become financially self-sufficient and shrink as an expense to lawmakers.

ABP currently holds 90.7 cents for every euro of obligations, a ratio that would be welcome in other corners of the world. But Dutch regulators demand pension assets exceed liabilities, meaning more cash is required than actually needed.

This spring, ABP officials had to provide government regulators a rescue plan after years of worsening finances. ABP’s members, representing one in six people in the Netherlands, haven’t seen their pension checks increase in a decade. ABP officials have warned payments may be cut 1% next year.

“People are angry, not because pensions are low, but because we failed to deliver what we promised them,” said Gerard Riemen, managing director of the Pensioenfederatie, a federation of 260 Dutch pension funds managing a total of one trillion euros.

Benefit cuts have become such a divisive issue that one party, 50PLUS, plans for parliamentary-election campaigns early next year that demand the end of “pension robbery.”

“Giving certainty has become expensive,” said Ms. Wortmann-Kool, ABP’s chairwoman.

That is tough to swallow for Mr. van Leeuwen, the Amsterdam language teacher. Sitting on a bench near one of the city’s historic canals, he fumed over how he had paid the ABP every month for decades for a pension he now believes will be less than he expected.

Japan is wrestling with the same question of generational inequality. Roughly one-quarter of its 127 million residents are now old enough to collect a pension. More than one-third will be by 2035.

The demographic shift means contributions from active workers aren’t sufficient to cover obligations to retirees. The government has tried to alleviate that pressure. It decided to gradually increase the minimum age to collect a pension to 65, to require greater contributions from workers and employers and to reduce payouts to retirees.

A typical Japanese couple who are both 65 would collect today a monthly pension of ¥218,000 ($2,048). If they live to their early 90s, those payouts, adjusted for inflation, would drop 12% to ¥192,000.

The Japanese government has turned to its $1.3 trillion Government Pension Investment Fund for cash injections six of the past seven years. That fund, the largest of its kind in the world, manages reserves for Japan’s public-pension system and seeks to earn returns that outpace inflation. The more it earns, the more it can shore up the government’s pension system.

In February, Japanese central bankers adopted negative interest rates for the first time on some excess reserves held at the central bank so commercial banks would boost lending. The pension-investment fund raised a political ruckus in August when it said it lost about ¥5.2 trillion ($49 billion) in the space of three months, the result of a foray into volatile global assets as it tried to escape low rates at home.

The fund’s target holdings of low-yielding Japanese bonds were cut to 35% of assets, from 60% two years ago, and it has added heaps of foreign and domestic stocks. It is now considering investing more in private equity.

The government-mandated target is a 1.7% return above wage growth. “We’d like to strive to accomplish that goal,” said Shinichiro Mori, a deputy director-general of the fund’s investment-strategy department.

The fund posted a loss of 3.8% for the year ended in March because of the yen’s surge and global economic uncertainty. It was its worst performance since the 2008 global financial crisis. Mr. Mori said performance “should be evaluated from a long-term perspective,” citing returns of ¥40 trillion ($376 billion) since 2001.

Mr. Kobayashi, the former Tokyo government worker, said the government’s effort to boost returns by making riskier investments was supposed to “increase benefits for everyone, even if only slightly. It didn’t turn out that way…And they are inflicting the loss on us.”

Mr. Kobayashi joined roughly 2,300 people who marched in downtown Tokyo in October to protest government plans to cut pension benefits further.

In the U.S., the country’s largest public-pension plan is struggling with the same bleak outlook. The California Public Employees’ Retirement System, which handles benefits for 1.8 million members, recently posted a 0.6% return for its 2016 fiscal year, its worst annual result since the financial crisis. Its investment consultant recently estimated that annual returns will be closer to 6% over the next decade, shy of its 7.5% annual target.

Calpers investment chief Ted Eliopoulos’s strategy for the era of lower returns is to reduce costs and the complexity in the fund’s $300 billion portfolio. He and the board decided to pull out of hedge funds, shop major chunks of Calpers’ real-estate and forestry portfolios and halve the number of external money managers by 2020.

“Calpers isn’t taking a passive approach to the anticipated lower return rates,” fund spokeswoman Megan White said. “We continue to reassess our strategies to improve performance.”

Yet the Sacramento-based plan still has just 68% of the money needed to meet future retirement obligations. That means cash-strapped cities and counties that make annual payments to Calpers could be forced to pay more.

That is a concern even for cities such as affluent Costa Mesa in Orange County, which has a strong tax base from rising home prices and a bustling, upscale shopping center.

The city has outsourced government services such as park maintenance, street sweeping and the jail, as a way to absorb higher payments to Calpers. Pension payments currently consume about $20 million of the $100 million annual budget, but are expected to rise to $40 million in five years.

The outsourcing and other moves eliminated one-quarter of the city’s workers. The cost of benefits for those remaining will surge to 81 cents of every salary dollar by 2023, from 37 cents in 2013, according to city officials.

The mayor, Mr. Mensinger, is hopeful for a state solution involving new taxes or a benefits overhaul, either from lawmakers in Sacramento or from a California ballot initiative for 2018 that would cap the amount cities pay toward pension benefits for new workers.

Weaker cities across California could face bankruptcy without help, said former San Jose Mayor Chuck Reed, who oversaw a pension overhaul there in 2012 and is backing the 2018 initiative that would shift onto workers any extra cost above the capped levels. “Something is broken,” he said. “The plans are all based on assumptions that have been overly optimistic.”

Costa Mesa resident James Nance, 52, worries the city’s pension burden will affect daily life. “We could use more police,” said the self-employed spa repairman. “I’d like to know the city is safe and well protected, but I know there have been tremendous cutbacks.”

Costa Mesa ended the latest fiscal year with an $11 million surplus, its largest ever. But that will soon disappear, Mr. Mensinger said, as pension costs swallow up $2 of every $5 spent by the city.

“We have this gigantic overhead cliff called pensions.”

This is an excellent article which gives you a little glimpse of what lies ahead as global pensions confront an era of low growth and ultra low rates which are here to stay.

Or are they? Ken Akoundi of Investor DNA (subscribe for free here to receive his daily email with links to interesting articles like the one above) also posted a link to a free Stratfor report, Inflation Makes a Comeback in the Global Economy, which states assuming recent signals in the market are not false alarms, the world’s economies may be in for a big readjustment in 2017.

What I find quite amazing is how Trump’s victory has done more to raise inflation expectations than all the world’s powerful central bankers combined, something John Graham of Arrow Capital Management noted on LinkedIn last week after the election (click on image):

You’ll notice my comment to his post and that of Glenn Paradis basically questioning how sustainable the rise in inflation expectations is going forward.

Why is this important? Because as I noted in my recent comments on sell the Trump rally and whether Trump is bullish for emerging markets, it’s far from clear what Trump’s election means for global deflation going forward.

As I keep warning, another crisis in emerging markets is deflationary, and investors need to keep an eye on the surging US dollar index (DXY) which just crossed 100, a key level of resistance (click on image):

I warned my readers to ignore Morgan Stanley’s warning that the greenback was set to tumble back in August and think the trend is continuing in large part due to Trump’s campaign proposal to slash taxes on cash US companies have stashed outside of the country, all part of his corporate repatriation plan.

The key thing to keep in mind is the surging greenback has the potential to disrupt and wreak more deflationary havoc on emerging markets (especially commodity producers) and clobber the earnings of US multinational corporations.

A surging US dollar will also lower US import prices, effectively importing global deflation to the United States, and if it continues, it might jeopardize that much anticipated Fed rate hike in December, especially after October’s Fed game changer which signaled the US central bank is ready to err on the side of inflation, staying accommodative for far longer than markets anticipate.

I think a lot of attention is spent on Trump’s fiscal plan to stimulate the US economy through massive infrastructure program, which is a great idea, especially if he attracts US, Canadian and global pensions into the mix, lowering the cost of this program.

A lot less attention is being placed on what Trump’s presidency means for emerging markets, the US dollar and global deflation going forward. Admittedly, I’m struggling to make sense of all this because it’s not entirely clear to me that President Trump will follow through with a lot of his more contentious campaign proposals regarding trade agreements.

In fact, like millions of others, I watched President-elect Trump on 60 Minutes Sunday evening, and found him a lot more sober, serious, subdued — and dare I say, a lot humbler — than the brash and arrogant candidate we were accustomed to.

At one point, he and his daughter Ivanka emphasized the needs of the country are far more important than the “Trump brand.” I made the mistake of tweeting my thoughts on the interview and got all these die-hard Hillary Clinton supporters on my case (click on image):

Even my mother called from London this morning to tell me “how terrible it is that Trump was elected” and that “Hillary was so much better than him in the debates.”

Like a good son, I listened patiently as she went on and on praising Hillary Clinton but at one point I had enough and politely interjected: “Mom, it’s over, for a lot of reasons Hillary Clinton lost and Trump will be the next US president. Take the time to watch his 60 Minutes interview, you’ll see his focus is on jobs and the economy, not on abortion and other divisive issues” (as I predicted).

[Note: My brother and I believed Bernie Sanders had a much better chance than Hillary Clinton to defeat Trump because he too tapped into voters’ anxieties about jobs and trade deals and he had a full-blown grass roots movement which was gaining momentum. But it will be a day in hell before America’s power elites accept a “socialist” like Bernie as their next leader; they’d rather a “nut” like Trump in power as he will cut taxes and bolster their power hold.]

One thing that is for sure, last week was a great week for savers, 401(k)s and global pensions. The Dow chalked up its best week in five years and stocks in general rallied led by banks and my favorite sector, biotechs which had its best week ever.

More importantly, bond yields are rocketing higher and when it comes to pension deficits, it’s the direction of interest rates that ultimately counts a lot more than any gains in asset values because as I keep reminding everyone, the duration of pension liabilities is a lot bigger than the duration of pension assets, so for any given move in rates, liabilities will rise or decline much faster than assets.

Will the rise in rates and gains in stocks continue indefinitely? A lot of underfunded (and some fully funded) global pensions sure hope so but I have my doubts and think we need to prepare for a long, tough slug ahead.

The 2,826-day-old bull market could be a headache for Trump but the real headache will be for global pensions when rates and risk assets start declining in tandem again. At that point, President Trump will have inherited a long bear market and a potential retirement crisis.

This is why I keep hammering that Trump’s administration needs to include US, Canadian and global pensions into the infrastructure program to truly “make America great again.”

Trump also needs to carefully consider bolstering Social Security for all Americans and modeling it after the (now enhanced) Canada Pension Plan where money is managed by the Canada Pension Plan Investment Board. One thing he should not do is follow lousy advice from Wall Street gurus and academics peddling a revolutionary retirement plan which only benefits Wall Street, not Main Street.

Xerox Sued Over Alleged 401k Pay-to-Play

Three employees have sued Xerox HR Solutions for violating ERISA by inflating fees in cohort with investment adviser Financial Engines.

Read the complaint here.

From Bloomberg BNA:

The lawsuit, filed Nov. 9 in federal court in Michigan, seeks class treatment for thousands of plan participants for which Xerox provided record-keeping services and for which FE served as investment adviser. The workers allege that Xerox HR violated the Employee Retirement Income Security Act by entering a “pay to play” scheme that wrongfully inflated the price of professional investment advice services that were critical to the successful management of the workers’ retirement savings.

Kickback Scheme

Xerox HR contracted with FE to provide professional investment advice services to participants in the retirement plans serviced by Xerox HR through an agreement that dictated and controlled certain terms and conditions on which FE would provide its services.

Because FE was “interested” in securing an arrangement with Xerox to be the exclusive provider of investment advice to participants in plans administered by Xerox, it was “willing” to charge excessive fees to participants in order to meet Xerox’s demand for a kickback, the complaint said.

Xerox allegedly breached its fiduciary duties by requiring FE to charge excessive fees to plan participants. FE is paying Xerox over 30 percent of the fees it receives from the Ford plans, the complaint said.

Canada Speaking to Pensions, SWFs, PE Firms About Infrastructure Investment

The Canadian government is trying to recruit institutional investors to pour money into the country’s infrastructure, according to a Reuters report.

Though Canada’s pension funds rank among the world’s largest infrastructure investors, they typically put their money to work on overseas projects.

World’s Largest Pension Throws Weight Behind Women on Corporate Boards

Japan’s Government Pension Investment Fund (GPIF), the largest pension fund in the world with $1.3 trillion in assets, moved this week to get more women on the corporate boards of portfolio companies.

The GPIF joined the U.S.’ Thirty Percent Coalition, an organization of institutional investors who use their influence to push for women on boards of public companies. CalSTRS is also a member.

Canada Pension Boss Sees “Interesting” Opportunities After Trump Win

The head of the Canada Pension Plan Investment Board (CPPIB) this week told Reuters he sees opportunities in the U.S. after Donald Trump’s win on Tuesday.

Particularly intriguing for CPPIB chief Mark Wiseman was Trump’s promise of massive infrastructure spending.

From Reuters:

He also identified Trump’s commitment to spend big on infrastructure as a potential opportunity for investors.

“There’s a lot of expectation of increased fiscal stimulus, less regulation, more economic activity, that’s getting priced in here and that’s obviously helping the value of the assets that we own in the country and we would expect it will throw up some interesting opportunities over time,” Machin said.

Machin added that the expectation for rising interest rates in the U.S. was something that the CPPIB had been “anticipating for quite a time”.

“The market’s moving towards where we’ve had some positioning,” he said.

Machin said CPPIB, the world’s third biggest infrastructure investor, would be keen to invest in more U.S. infrastructure projects.

“We’d very much welcome more infrastructure opportunities. That’s terrific for us,” he said.

Dallas Voters Approve Pension Cuts

Dallas voters on Tuesday approved a ballot measure that raises the retirement age for new hires into the Dallas Employee Retirement Fund, cuts COLAs for those workers and tweaks the Fund’s benefit formula.

The changes are expected to save $2.15 billion over 30 years. The cuts work out to about $4,500 less in annual benefits (2016 dollars) for the workers to which the changes apply, vs. someone who is already in the Fund.

Will Pensions Make America Great Again?

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

Everett Rosenfeld of CNBC reports, Donald Trump wins the presidency, hails ‘beautiful and important’ win:

Donald John Trump will be the 45th president of the United States, capping a historic and boisterous run by an outsider who captured a loyal following across a swath of America fed up with establishment politics, the news media and elected officials.

His success was only part of a larger, crushing victory for the Republican Party, which retained the House and maintained control of the Senate.

The brash New York businessman will win at least 270 electoral votes, according to NBC News projections, and will take his Republican ticket to the White House in January. Trump had trailed Democrat Hillary Clinton in polling averages for nearly the entire election cycle, but he bucked prognostications by picking up states many pundits deemed out of his reach.

On Twitter, the president-elect called his win “beautiful and important,” while the White House issued a statement that President Obama plans to publicly address the election results, and invite Trump to the White House on Thursday to discuss handing over power.

“Ensuring a smooth transition of power is one of the top priorities the President identified at the beginning of the year and a meeting with the President-elect is the next step,” the White House statement read.

The 70-year-old real estate mogul — who is now the oldest person ever elected to a first presidential term — declared victory early Wednesday, saying Clinton had conceded the election and that it’s time for the nation “to come together as one united people.”

The Republican congratulated his Democratic rival, saying that she waged “a very very hard-fought campaign.” He also commended her for having “worked very long and very hard” over her political career.

“Now it’s time for America to bind the wounds of division — have to get together,” he said. “To all Republicans and Democrats and independents across this nation, I say it is time for us to come together as one united people.”

Trump, who had been criticized by opponents for rhetoric characterized as divisive and racist, pledged, “I will be president for all Americans, and this is so important to me.”

Trump has never before held public office, but he will be joined in the executive branch by Vice President-elect Mike Pence and a host of politicians and business executives who rallied around the GOP nominee.

Although the vast majority of pre-election surveys had indicated a slight advantage for Clinton, Trump’s campaign had frequently predicted that a vein of electoral strength existed beyond the polls, pointing to his massive crowds at his events and online support.

Clinton — who was secretary of state under President Barack Obama, a U.S. senator for New York from 2001 to 2009, and first lady during her husband’s presidency in the 1990s — had been painted as the “establishment” politician, while Trump campaigned as a political neophyte who could “drain the swamp” of government corruption in Washington.

Trump will likely face significant Democratic attempts at opposition after he enters the White House in January. In fact, Trump has elicited strong outcries from liberal and minority groups since he first characterized many Mexican immigrants “rapists” in his June 2015 campaign kickoff.

Trump rose to prominence in a crowded GOP primary field by connecting with voters who felt they had been betrayed by Washington interests. The businessman focused his early pitch on forceful answers to economic issues like trade and immigration, which resonated with those Americans who had stopped believing mainstream Republicans cared about their communities.

Many experts in economics and policy studies have decried Trump’s prescriptions as nearly impossible to implement and unlikely to achieve their desired aims. But supporters, and Trump himself, have contended that his calls for extreme tariffs and mass deportations were opening salvos in forthcoming negotiations.

And Trump, who has been famous for decades as a symbol of wealth and business acumen, channeled the image of a negotiator throughout his campaign. The real estate developer — who co-authored “Trump: The Art of the Deal” — has repeatedly claimed that other countries are taking advantage of the United States, and the White House should work to renegotiate its existing agreements.

Clinton, meanwhile, had campaigned on a set of policy proposals made more liberal for her primary contest against Sen. Bernie Sanders. While Republicans painted Clinton as too liberal — an extension of Obama’s tenure — many on the left expressed discomfort with the former secretary of state, jeering that she was more aligned with right-of-center candidates.

Yet for all of those criticisms, Clinton had appeared ahead in the race, especially after her well-received debate performances. But that lead became more tenuous when the FBI announced just 11 days before the election that it was probing new evidence regarding her use of a private email server while secretary of state. The FBI subsequently said the new probe did not turn up any reason to charge Clinton with a crime, but Democrats, and even some Trump supporters, called foul on the timing of the original announcement: Clinton’s campaign was damaged as voters were reminded of a scandal that had faded from the forefront.

Trump also faced several challenges on his road to the White House, including allegations that he sexually assaulted or harassed multiple women, and several women making such claims came forward after the release of a 2005 video in which he bragged about groping women.

Still, Tuesday’s election results are a strong repudiation of the entire system of Washington politics, not just the Democrats or Clinton. A long list of Republican leaders and luminaries had come out against Trump, or at least refused to endorse their party’s new, de-facto head.

The Trump victory also marks a rejection of the mainstream news media, which extensively covered Trump’s scandals and self-contradictions. Polls showed many of the Republican’s supporters dismissed those reports.

As recently as last week, in fact, pundits on both sides suggested that Trump was not angling to win the election — he was instead interested, they said, in establishing a base of support for profitable post-race enterprises. But after an acrimonious election, Trump will now turn to building a team that can work together to implement his ideas for the country.

Scott Horsely of NPR also reports, Trump Wins. Now What?:

Donald Trump’s presidential campaign, like the business career that preceded it, was unpredictable, undisciplined and unreliable. Despite those qualities — or perhaps, in part, because of them — it was also successful.

So what should we expect from President-elect Trump, mindful that his path to the White House has defied expectations at every turn?

Some of Trump’s ambitions have been clearly telegraphed: He plans to build a wall along the U.S. border with Mexico, deport millions of criminal immigrants, unwind trade deals dating back more than two decades and repeal Obamacare. He has also promised to cut taxes and eliminate numerous government regulations — including power plant rules designed to combat global warming.

With the presidential pen and a friendly Republican Congress, Trump should have little trouble delivering on those promises.

But Trump’s campaign never really revolved around specific policy prescriptions. His agenda is not anchored to ideology but rather shaped by instinct and expedience.

“Trump operates very much from his gut,” said David Cay Johnston, author of The Making of Donald Trump. “The guiding philosophy of Trump is whatever is in it for his interests at the moment.”

When his initial tax plan prompted sticker shock among fiscal watchdogs, Trump readily shaved trillions of dollars off the bottom line. (His new plan is still a budget buster, though.) His impulsive call to ban Muslim immigrants gradually morphed into a vague prescription for “extreme vetting.” And he hastily concocted a plan to help working parents only after his daughter trumpeted a vaporware version at the GOP convention.

That flexibility seems to be just fine with tens of millions of supporters who trust Trump’s instincts and assume his success will boost the country as a whole. The campaign slogan “Make America Great Again,” which Trump trademarked just days after the 2012 election, is both vague and malleable enough to accommodate whatever nostalgic and aspirational vision his followers want to attach to it.

Supporters point to the way Trump rescued a New York skating rink that languished for years in the 1980s under city government supervision.

“What had taken the city over half a decade to botch, my father completed in less than six months, two months ahead of schedule and over a million dollars under budget,” Eric Trump told delegates at the Republican National Convention.

Backers hope the incoming president will bring similar accountability to the federal government.

One of Trump’s first tasks will be staffing up for a new administration. The celebrity businessman who turned “You’re fired!” into a catchphrase will soon be doing a lot of hiring.

“I will harness the creative talents of our people,” Trump told supporters at a victory party early Wednesday. “And we will call upon the best and brightest to leverage their tremendous talent for the benefit of all.”

Friends say assembling high-performing teams is one of the president-elect’s strengths.

“He pushes everybody around him, including you, through comfort barriers that they never thought they could ever shatter,” said Colony Capital CEO Tom Barrack, who delivered a testimonial for Trump at the party convention in July.

Trump’s daughter Ivanka told delegates her father has always promoted on the basis of merit.

“Competence in the building trades is easy to spot,” she said at the convention in July. “And incompetence is impossible to hide.”

In politics and in business, Trump has kept his organizations lean. He had only about one-tenth of the staff Hillary Clinton had, heading into the final months of the campaign.

Trump’s aides are often long on loyalty and short on formal credentials. Politico noted that the chief operating officer of the Trump Organization was initially hired to be a bodyguard, after Trump spotted him working security at the U.S. Open tennis tournament.

Trump may delegate, but there’s no doubt who’s in charge. Even if he fills his Cabinet with big personalities — Newt Gingrich has been floated for secretary of state and Rudy Giuliani for attorney general — Trump is not likely to share the spotlight.

“The only quote that matters is a quote from me!” Trump tweeted this summer, urging journalists to pay no attention to his subordinates. As late as Friday, he boasted that he didn’t need other celebrities to attract large crowds to his rallies.

“I didn’t have to bring JLo or Jay Z,” Trump said, mocking Hillary Clinton’s reliance on big-name warmup acts. “I am here all by myself.”

Trump, who prides himself on being a counter-puncher, can also be expected to use the levers of government to target his political rivals. He has already threatened on live television to appoint a special prosecutor to investigate Clinton.

“Trump’s philosophy, which he’s written and spoken about for many years, is to get revenge,” Johnston said.

Once Trump is in the White House, the news media will remain firmly focused on the new commander in chief.

“Donald is the most masterful manipulator of the conventions of journalism I’ve ever seen,” said Johnston, a Pulitzer Prize-winning former reporter for The New York Times.

Trump has long believed that even bad publicity is better than no publicity. Surprising and provocative statements are both a tool to keep the audience paying attention and a negotiating tactic.

“I always say we have to be unpredictable,” Trump told the Washington Post editorial board.

Everything for Trump is a negotiation. And much of his campaign was based on the idea that the U.S. has been getting a bad bargain.

“You look at what the world is doing to us at every level, whether it’s militarily or in trade or so many other levels, the world is taking advantage of the United States,” Trump told CNN. “And it’s driving us into literally being a third-world nation.”

As a businessman, Trump has a long history of using pressure tactics to drive hard bargains. USA Today found hundreds of examples in which employees and contractors accused Trump of not paying them for their work. They sometimes settled for less than they were owed, rather than face a lengthy legal battle against Trump and his deep pockets.

Similarly, Trump argues that if the U.S. puts pressure on other countries — by imposing import tariffs or demanding payment for military protection — they’ll quickly back down.

Some foreign policy scholars are not convinced this zero-sum mindset is appropriate.

“By threatening to drive harder bargains, he might manage to eke out a slightly larger share of the pie,” said Daniel Drezner of the Fletcher School of Law and Diplomacy at Tufts University. “But he also threatens to blow up that pie in the process.”

The stock market has sent clear signals that investors are worried about the economic fallout from a Trump administration. According to one estimate, the S&P 500 index will be worth 12 percent less under Trump than it would have been had Clinton been elected.

Count on the president-elect to loudly hype any success while downplaying any setback. And if that requires bending the truth a bit, so be it.

“People want to believe that something is the biggest and the greatest and the most spectacular,” Trump wrote in his best-selling 1987 book The Art of the Deal. “It’s an innocent form of exaggeration — and a very effective form of promotion.”

If history is any guide, the new Trump administration will not be overly constrained by facts.

Trump has shamelessly exaggerated the height of his buildings, the size of his profits, and even the number of people who showed up to cheer his presidential bid.

“When you have a huge crowd, and Trump draws huge crowds, there’s no need to exaggerate,” Johnston said. “Except in Donald’s mind where big is never big enough.”

Don’t expect that to stop now that he has achieved the biggest and most powerful office in the land.

Love him or hate him, Donald J. Trump will be the 45th president of the United States. I spent all night watching the US elections, flicking channels from CNN, ABC, CBS, NBC and FOX News, and tweeting on this historic election.

And I’m Canadian but nothing is more exciting to me than watching the actual US election because it can swing either way depending on who captures the swing states.

Last night, when Trump was leading in Florida, I started to believe he was going to pull it off, and when he won Ohio, it was a done deal for me.

People get so emotional when discussing these results but the goal of this post is to look well past the hysteria and understand what is going to happen next when president-elect Trump and his administration take office in the new year.

First, let me begin with something Francois Trahan and Stephen Gregory of Cornerstone Macro put out this morning:

If there is one thing that 2016 has taught us it is to not rule out the unlikely scenario. Indeed, the events surrounding the Brexit vote and now Donald Trump winning the U.S. presidency were unexpected to happen, at least according to the polls and their proponents. So what does all of this mean for the stock market anyway? It’s hard to know exactly what powers congress will convey on the new President but the biggest potential problem as we see things has to do with trade.

At this time, there is already a dynamic for an economic slowdown in place, one that the new president will inherit. Money supply has slowed across the developed world and rates have backed up. All of which will eventually add to a weaker U.S. economy. The real troubles with this story lie overseas where a number of countries have come to rely on the U.S. for trade. If the new President holds true on his promise to tear up trade agreements, then the outlook just got a lot more complicated. Our call for a bear market in 2017 was never about potential U.S. election results. Rather, it is about the consequences that tighter policy will bring to an already fragile world economy. As always, we shall see.

In a recent comment on lessons for Harvard’s endowment, I noted a video update, “A Recipe For Investment Insomnia,” where Francois Trahan and Michael Kantrowicz of Cornerstone Macro cite ten reasons why markets are about to get a lot harder going forward :

Growth Is Likely To Slow … From Already Low Levels
The Risks Of Zero Growth Are Higher Today Than In The Past
The U.S. Consumer No Longer The Buffer Of U.S. Slowdowns
The World Is Battling Lingering Structural Problems
A U.S. Slowdown Has Implications For The World’s Weakest Links
The Excesses Of China’s Investment Bubble Have Yet To Unwind
Demographic Trends In Japan … An Insurmountable Problem?
Central Banks Have Reached The Limits Of Monetary Policy
Slower Growth Is The Enemy Of Portfolio Managers
P/Es Are Hypersensitive To The Economy At This Time

These are all ten factors that President Trump will inherit and need to contend with. You should all subscribe to the high quality research Cornerstone Macro puts out as they do an excellent job covering markets and key economic trends around the world.

I might add the risks of global deflation are not fading, and if there is a severe disruption to global trade under Trump’s watch, this will only intensify global deflationary headwinds.

One area which Trump is definitely committed to is spending on infrastructure. Jim Cramer of CNBC said this morning he sees the Treasury department emitting new 30-year bonds to cover the trillion dollar spending program Trump has outlined to revamp airports, roads, bridges and ports.

Here, I will refer the Trump administration to what the Canadian federal government is doing setting up a new infrastructure bank, allowing Canada’s large pensions and other large global investors, to invest in large greenfield infrastructure projects.

I discussed this new initiative and what Canada’s large pensions are looking for in a recent comment where I also shared insights at the end in an update from Andrew Claerhout, Senior Vice-President of Infrastructure & Natural Resources at Ontario Teachers’ Pension Plan.

Why am I mentioning this? Because if Trump’s administration is really committed to “making America great again” and spending a trillion or more on infrastructure, they will need a plan, a blueprint and they definitely should talk to the leaders of Canada’s large pensions, widely considered to be among the best infrastructure investors in the world.

There is another reason why I mention this. The US has a huge pension problem as many public sector pensions are chronically underfunded. There is a growing appetite for infrastructure assets around the world, including in the United States where large public pensions are looking to increase their allocations.

If a Trump administration sets up the right program on infrastructure, modeled after the Canadian one, and establishes the right governance, it will be able to attract capital from US public pensions starving for yield as well as that from Canadian and global pensions and sovereign wealth funds which would welcome such a program as it fits perfectly with their commitment to infrastructure as an asset class.

The big advantage of integrating US and global pensions as part of the solution to rebuilding America’s infrastructure is that it will limit the amount the US needs to borrow and will make this ambitious infrastructure program more palatable to deficit hawks like Paul Ryan (who might not be the speaker of the House come January).

And if it’s done right, it will allow many US public pensions to invest massively in domestic infrastructure, allowing them to collect stable cash flows over the long run, helping them meet their mounting future liabilities. The same goes for Canadian and global pensions which would also invest in big US infrastructure provided the governance is right.

What else can Trump do to make America great again? He should consider bolstering Social Security for all Americans and modeling it after the (now enhanced) Canada Pension Plan where money is managed by the Canada Pension Plan Investment Board.

One thing Trump should not do is follow lousy advice from Wall Street gurus and academics peddling a revolutionary retirement plan which only benefits Wall Street, not Main Street.

Speaking of Wall Street, I just noticed how the stock market is surging as I end this comment, which goes to show you why you should NEVER listen to big hedge funds, gurus or market strategists warning you of doom and gloom if Trump is elected.

I warned all my readers last week when I went over America’s Brexit or biotech moment to ignore all these doomsayers on Trump and go long healthcare (XLV) and especially biotech stocks (IBB and equally weighted XBI) which are surging today.

Unlike many blowhard prognosticators, I put my money where my mouth is and if you made money on my call to go long biotech stocks last week, please do the right thing and contribute to this blog on the top right-hand side under my picture. Thank you.

As for president-elect Trump, he has the toughest job ahead of him but if he surrounds himself with a truly great team and focuses his attention on fixing the economy (not the divisive crap) using pensions to invest in infrastructure, then he might go down in history as a one of the best presidents ever.

In fact, I’m convinced his huge ego will drive him to fulfill this legacy which is why I take all these doomsayer scenarios with a shaker of salt. Never short the United States of America. Period.

Ontario’s New Pension Leader?

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

Robert Benzie of the Toronto Star reports, Infrastructure Ontario to get new boss after CEO moves to public pension corporation:

The head of Infrastructure Ontario (IO) has quietly left the government agency to run a massive new $50-billion public pension corporation.

Bert Clark, who had been president and CEO of the province’s infrastructure arm for more than four years, departed last month for the fledgling Investment Management Corporation of Ontario (IMCO), which will pool and manage public-sector pension funds.

Its founding members are the Ontario Pension Board (OPB) — which administers pensions for provincial government employees and those at agencies, boards and commissions — and the Workplace Safety and Insurance Board (WSIB).

An executive search has begun for Clark’s permanent replacement.

Toni Rossi, divisional president for real estate and lending, is serving as acting president and CEO of the infrastructure agency that is responsible for overseeing the financing and construction of schools, bridges, hospitals, court houses, and public transit projects.

“Bert has been a driving force at IO and made significant contributions to our success. He has demonstrated the potential for the public and private sectors to work together on infrastructure and real estate, and the benefits of doing so. We wish him all the best in his new role at IMCO,” Linda Robinson, IO’s board chair, said in an email Monday.

A former Scotiabank managing director and one-time aide to former premier Dalton McGuinty, Clark is the son of Ed Clark, Premier Kathleen Wynne’s business guru.

In a statement, the WSIB welcomed his appointment as the first CEO of the new corporation effective Oct. 17.

“The WSIB is confident that Mr. Clark’s experience in both the public and private sectors will prove valuable in his leadership of IMCO,” the board said.

“We anticipate a successful partnership which will allow the WSIB to strengthen its investment performance and asset management capabilities to provide secure benefits for workers and maintain stable premium rates for employers.”

The new investment management corporation, which is not bankrolled by the government or taxpayers, will operate as an arm’s length, member-funded, non-profit corporation.

It is expected that other public-service pension funds may eventually join the corporation which was set up in July and will begin its investment operations next year.

Finance Minister Charles Sousa said last summer that it would “enable public-sector organizations to pool assets and create economies of scale.”

“This will increase efficiency when providing pension support and income for injured workers. OPB and WSIB — and public-sector pension plans that may join in the future — will benefit from IMCO’s ability to deliver enhanced services,” he said.

In July, Ontario’s Ministry of Finance put out a press release, Province Establishes Investment Management Corporation of Ontario:

Ontario is working to improve the management of broader public sector investment funds, including public sector pensions, through the creation of the Investment Management Corporation of Ontario (IMCO), which will provide investment management and advisory services to participating organizations in Ontario’s Broader Public Sector (BPS).

Established July 1, 2016 by proclamation of the Investment Management Corporation of Ontario Act, 2015, IMCO will enable BPS organizations to lessen costs by pooling their assets. The larger fund is expected to lower administrative costs, which will help improve return on investments.

The creation of this entity is another step forward in fulfilling Ontario’s commitment to strengthen the retirement income system for Ontario’s workers. Since 2013, the province has advocated for an enhancement to the Canada Pension Plan. Ontario’s sustained leadership on this critical issue, as well as the collaboration with the federal government, provinces and territories, resulted in the recent agreement-in-principle on a national solution, signed on June 20th in Vancouver. With this consolidated approach and creation of IMCO, Ontario is modernizing workplace pensions by providing a new tool for the investment of retirement savings.

The founding members of the IMCO are the Ontario Pension Board (OPB) and the Workplace Safety and Insurance Board (WSIB). With combined investment assets of approximately $50 billion, these two institutions provide the scale to ensure IMCO’s success. IMCO is designed to accept, through a managed process, the membership application of any BPS organization with an investment fund that is interested in accessing its services.

IMCO will not require financial support from the Ontario government or Ontario taxpayers and will operate at arm’s length from government as a member-based non-profit corporation. The creation of IMCO fulfills a commitment made in the 2015 Ontario Budget. It is expected to be operational by Spring 2017.

Three of the IMCO’s initial Board of Directors were appointed July 1 by the Minister of Finance, including David Leith as Chair. The WSIB and OPB have each appointed two Directors to the initial Board. The new board’s main priority will be to prepare the corporation to manage members’ funds in the spring of 2017.

Strengthening workplace pension plans is part of the government’s economic plan to build Ontario up and deliver on its number-one priority to grow the economy and create jobs. The four-part plan includes helping more people get and create the jobs of the future by expanding access to high-quality college and university education. The plan is making the largest infrastructure investment in hospitals, schools, roads, bridges and transit in Ontario’s history and is investing in a low-carbon economy driven by innovative, high-growth, export-oriented businesses. The plan is also helping working Ontarians achieve a more secure retirement.

Quick Facts

Participation of public sector and broader public sector (BPS) organizations in IMCO will be voluntary.

Members of IMCO will retain ownership of their assets and responsibility to determine how their assets are invested by IMCO.

The Ontario Pension Board (OPB) is the administrator of the Public Service Pension Plan (PSPP), a major defined benefit pension plan sponsored by the Government of Ontario. PSPP membership is made up of employees of the provincial government and its agencies, boards and commissions. At the end of 2015, OPB had $23 billion worth of assets under management.

The Workplace Safety and Insurance Board (WSIB) is an independent agency that administers compensation and no-fault insurance for Ontario workplaces. At the end of 2015, WSIB had $26.3 billion worth of assets under management.

IMCO will be headquartered in Toronto, the second-largest North American financial services centre by employment after New York.

Background Information

Investment Management Corporation of Ontario Board Members

Additional Resources

Read the Investment Management Corporation of Ontario Act (2015)

Read Facilitating Pooled Asset Management for Ontario’s Public-Sector Institutions.

I have not discussed the creation of the Investment Management Corporation of Ontario (IMCO) because truth be told, the details were murky and it’s not even operational yet (suppose to begin operations in the Spring 2017).

But just by reading the details, I can see why this new pension plan is described as “fledgling” in the article above. I have a lot of questions like why is it voluntary, who are the board members, how are they appointed to ensure they are qualified and independent, and who will help Bert Clark at IMCO?

I can make a few recommendations but my number one recommendation for CIO of IMCO is Wayne Kozun, an Investment Management Executive with over twenty years of experience at Ontario Teachers’ Pension Plan, leading several different departments (click on image):

Wayne recently left OTPP (not sure as to exactly why) but he is an outstanding investment professional with years of experience at one of the best pension plans in the world and he lives in Toronto. Not sure what he wants to do next but he would be a great chief investment officer.

As far as IMCO’s board members, I think they should nominate Carol Hansell to the board as she has tremendous experience at PSP Investment’s board during the ramp-up phase and is highly qualified to sit on this board (click on image):

Again, I am assuming she actually wants to sit on this board (have no idea) but if I was advising OPB, WSB and Ontario’s Ministry of Finance, I would highly recommend Wayne Kozun as a CIO of IMCO and nominate Carol Hansell to its board.

As far as Bert Clark, I don’t know him but he is the son of Ed Clark, a titan of finance in Canada’s banking industry (Ed Clark was the former CEO of TD Bank, has a stellar reputation and is now advising Ontario Premier Kathleen Wynne on business issues, including finding other revenue sources for the cash-strapped province).

I’m sure Bert Clark is very qualified to lead this new Ontario pension but the reality is it sure helps that he is the son of one of Canada’s most powerful banking CEOs ever who is now advising Ontario Premier Kathleen Wynne on “business issues”. Don’t tell me that didn’t help Bert Clark get this nomination.

Sure, Bert Clark has excellent experience as the head of Infrastructure Ontario (IO) but there are many people living in Toronto who are far more qualified to head this new pension plan. I’m a little surprised someone with more pension experience was not placed as the head of Investment Management Corporation of Ontario (IMCO).

Please note I made a HUGE mistake in an earlier version of this comment assuming the federal government had named Bert Clark as the leader of the federal government’s new infrastructure bank (that would have made a lot more sense!).

My sincere apologies, this is what happens when you are trading and blogging at the same time, the two don’t mix well and I read the article all wrong. This was my mistake but my recommendations on Wayne Kozun and Carol Hansell still stand.

As far as Bert Clark, he now has a tough job heading up this new pension plan which quite frankly should be mandatory, not voluntary and I don’t know exactly how it will operate going forward but as long as they get the governance right, hire the right people and compensate them properly and nominate an independent and qualified board of directors, it will all work out well.

So, I welcome Bert Clark as the new head of Investment Management Corporation of Ontario (IMCO) and apologize for my earlier goofball mistake of thinking he was named the head of Canada’s new infrastructure bank (even if that would have made more sense).

One thing we can all agree on is that Ontario has taken the lead over every other province in terms of providing safe, secure workplace pensions and this is yet another example of why this province (rightly) takes pensions very seriously.

Kentucky Pensions To Pull Half of Money From Hedge Funds

The Kentucky Retirement Systems, which allocates 10 percent of its assets to hedge funds, said this week it plans to pull $800 million out of the investment vehicles.

That number represents about half of its total, $1.6 billion commitment to hedge funds.

New board members, appointed last year by Gov. Matt Bevin, are the ones making the push.

Pensions Lukewarm on Canadian Infrastructure?

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 head cautious on Canadian infrastructure:

The head of Canada Pension Plan Investment Board is taking a cautious approach to infrastructure investments in Canada as it retools its portfolio to manage the challenging investment environment.

Executives from the country’s largest pension fund spoke to the House of Commons finance committee on Tuesday to explain the fund’s investment strategy, its need for independence and evolving approach to risk. The discussion comes ahead of the planned increase to the Canada Pension Plan contributions that workers and employers will make to fund their retirement years, in order to boost the benefits they will receive. That is set to begin in 2019.

On the topic of infrastructure – a major, multibillion-dollar federal government spending priority – the pension fund said it would need to see investment opportunities that meet its specific criteria in order to participate in the spending boom.

CPPIB, which is set to announce next week that its assets now exceed $300-billion, currently makes equity-driven investments in infrastructure. It buys portions of toll roads, shipping ports and pipelines in may parts of the world and receives a relatively steady flow of fees in return. The fund also needs to write cheques for more than $500-million to make these investments manageable and worthwhile. These are conditions rarely satisfied by the infrastructure assets available in Canada, although the largest infrastructure investment the pension fund owns is in Canada – the Ontario Highway 407 toll road.

“That’s been one of the biggest challenges in Canada, and around the world, is there’s just not been enough of those scale opportunities in size, but also that are prepared for our type of investments,” Mark Machin, CEO of CPPIB, told the committee. He noted that the pension fund likes to by operational assets, rather than investing in constructing new projects from scratch.

When it comes to creating an infrastructure bank, as was proposed in a report to the Minister of Finance by the Advisory Council on Economic Growth two weeks ago, Mr. Machin said that “the devil would be in the details of how everything’s implemented.” The report was penned in part by committee members Mark Wiseman, former CPPIB CEO, and current Caisse de dépôt et placement du Québec CEO Michael Sabia.

When pressed on the stress that changes in government and policies would put on an infrastructure investment years in the future, Mr. Machin said this would be one of the major risks.

“Infrastructure investments are, by nature, very long-term investments. And therefore the stability of regulatory regimes [and tax regimes] around those investments is very important,” Mr. Machin said.

Mr. Machin was also asked extensively about the pension fund’s risk exposure in the rest of its investments, and the expectation that returns will be “lower for longer” –a theme outlined by the Bank of Canada in recent months.

“It’s a challenging investment environment globally, given central banks’ activity, whether in Japan or in the U.S., Canada and other countries,” Mr. Machin said. CPPIB is trying to further diversify the investments of the fund around the world, to different sectors and strategies to combat this pressure. The fund still has 20 per cent of its investment portfolio in Canada, even as the country represents less than 3 per cent of the global market index.

CPPIB is planning to increase its investment risk tolerance over the next three years, equivalent to a portfolio containing 85-per-cent global equities. But the fund would take a more conservative approach with the money set to come from the expanded CPP contributions. That portfolio will have a lower risk tolerance because it relies more on investment income to pay pensions years into the future than contributions from employees.

You can read the Advisory Council on Economic Growth report, Unleashing Productivity Through Infrastructure, by clicking here. The executive summary and other related documents are available here.

Barbara Shecter of the National Post also reports, Federal infrastructure bank is gaining interest from large pensions, but they fall short of committing:

Canada’s large pensions, which have infrastructure investments around the world from shipping and airports in Britain and Europe to toll roads in Mexico, are expressing interest in joining forces with the federal government’s new infrastructure investment bank.

But they stopped short Wednesday of committing their dollars.

“We look forward to seeing the pipeline of infrastructure investments,” Michel Leduc, senior managing director and head of global affairs at the Canada Pension Plan Investment Board, said a day after the Liberal government pledged $81 billion over the next 10 years to fund public infrastructure including public transit and renewable power projects.

The first $15 billion will become available in the spring budget through the newly established Canadian Infrastructure Bank, designed to attract private sector capital to large national and regional projects with revenue-generating potential.

“An infrastructure bank, executed well, has the potential to be a catalyst of the type of infrastructure investment we have witnessed in Australia, United Kingdom, Chile and United States,” Leduc said.

However, while he said infrastructure investments can provide the pension plan’s beneficiaries with value, particular in a “stubbornly” low-interest environment, not all investments are the same and each must fit with CPPIB’s overall strategy.

“Infrastructure is a very broad concept, perhaps just as broad as any reference to investing in stocks. Some stocks are a good fit with our investment portfolio, some less so,” he said.

Leduc said infrastructure investment has worked in markets in which there is a concerted policy aim to attract productive, long-term capital.

“It doesn’t just happen,” he said.

If it is determined that CPPIB, which invests funds not needed to pay current benefits of the Canada Pension Plan, is interested in partnering with the government, the pension giant would be able to exploit a “home market advantage,” he said.

“We know Canada well… the home market advantage is one we would apply fiercely.”

Federal Finance Minister Bill Morneau told the House of Commons finance committee Wednesday the infrastructure bank is needed to spearhead projects because private institutional investors view the dedicated agency as a means to lower political risk.

PPP Canada, a federal Crown corporation that oversees public-private partnerships on infrastructure projects, doesn’t meet all the needs of the private investors, he said.

Ron Mock, chief executive of the Ontario Teachers’ Pension Plan, said a national infrastructure investment strategy in Canada could be “transformative” in terms of productivity, employments, and return on investment — provided it is guided by a long-term vision of commercial viability and independent governance.

The governance structure will be essential to its success to attracting private capital, he said, suggesting the government appoint a strong, professional, and independent board “to ensure it is run like a business.”

Canadian pension plans “have validated the soundness of this model on the global investment stage,” Mock said.

Since entering the infrastructure arena in 2001, Teachers’ has partnered with governments around the world, and used the plan’s governance and management expertise to add value and improve the productivity of these assets, he said.

“In our experience, countries that develop and implement a long-term vision for infrastructure are some of the most economically progressive and productive countries in the world.”

Mock said an infrastructure institution that combines government and institutional investment capital and risk sharing “will significantly improve the Canadian infrastructure landscape.”

Teachers’ was among the first pension plans to invest in infrastructure assets directly and is one of the world’s largest infrastructure investors, with a portfolio of nearly $16 billion as of the end of last year. The portfolio spans market segments including transportation and logistics, water and waste water, gas distribution, and renewable and conventional energy.

Senior advisors at Toronto law firm Bennett Jones LLP said the government has signaled it would be receptive to unsolicited bids for infrastructure projects, which represents a new opportunity for players experienced in project development.

“We think the energy transmission, water, wastewater, and transportation fields are well-suited to this initiative,” David Dodge, former Governor of the Bank of Canada, wrote in a note to clients with senior business advisor Jane Bird.

Ontario Teachers’ Pension Plan expressed support for the federal infrastructure investment plan and put out a press release which you can read here.

Benefits Canada also covered this story in its article, Governance structure ‘essential’ in federal infrastructure investment plan:

Following the federal government’s announcement yesterday of its plans to invest in infrastructure, one of Canada’s largest pension funds is advising the government that the implementation of a governance structure will be essential to its success in attracting private capital.

“We recommend the government appoint a strong, professional and independent board to ensure it is run like a business, as is the case for Canadian pension plans, which have validated the soundness of this model on the global investment stage,” said Ron Mock, president and chief executive officer of the Ontario Teachers’ Pension Plan, in a press release.

In his Fall Economic Statement yesterday, Finance Minister Bill Morneau said the federal government will invest an additional $81 billion in public transit, green and social infrastructure and transportation infrastructure, along with a number of other measures.

Canada’s largest pension funds, including the Ontario Teachers’, were among the first pension plans to invest directly in infrastructure assets, noted Mock.

“We believe that a government-backed Canadian infrastructure institution that partners government and institutional investor capital and risk sharing will significantly improve the Canadian infrastructure landscape,” said Mock. “It will benefit the Canadian government and, ultimately, Canadians.”

Since it began investing in infrastructure in 2001, Ontario Teachers’ has partnered with governments around the world, leveraging the fund’s governance and management expertise. “In our experience, countries that develop and implement a long-term vision for infrastructure are some of the most economically progressive and productive countries in the world,” said Mock.

The Ontario Teachers’ infrastructure portfolio is diversified across the transport/logistics, water and waste water, gas distribution, renewable and conventional energy industry sectors.

The Canada Pension Plan Investment Board also addressed infrastructure investment yesterday before the House of Commons finance committee. Mark Machin, chief executive officer of CPPIB, said the pension fund would need to see investment opportunities that meet its specific criteria in order to participate in the spending boom, according to the Globe and Mail.

CPPIB infrastructure investments include toll roads, shipping ports and pipelines around the world but the conditions are rarely satisfied by the infrastructure assets available in Canada, said Machin, although the pension fund is invested in the Ontario Highway 407 toll road.

“That’s been one of the biggest challenges in Canada, and around the world, is there’s just not been enough of those scale opportunities in size, but also that are prepared for our type of investments,” said Machin before the committee. He noted that the pension fund likes to buy operational assets, rather than investing in constructing new projects from scratch.

Mark Machin is right, pension funds are more likely to buy an equity stake in operational assets rather than investing in constructing new projects from scratch (greenfield projects).

There is however one big exception to this rule coming from the big, bad Caisse which last year announced it was going to handle some of Quebec’s big infrastructure projects through its subsidiary CDPQ Infra.

Some skeptical analysts think the Caisse can’t make money off public transit but I’m more optimistic and think the CDPQ Infra, led by Macky Tall, is rewriting the rules when it comes to large pensions delving into greenfield infrastructure projects.

The key difference is CDPQ Infra has an experienced team, people who worked at construction and engineering companies like SNC-Lavalin and other people with great project management and project finance experience, so they can handle “construction risk” that goes along with greenfield projects.

Sure, there are pros and cons to any greenfield infrastructure project. The risks are that the project runs into delays, goes way over budget and that cash flow projections are way off (this is why you need an experienced team to handle a major greenfield project).

But if done properly, the benefits are huge because the Caisse will be in control of a major infrastructure project from A to Z, something which is unheard of in the institutional world.

I mention this because some guy called Chas left this comment at the end of the Benefits Canada article:

It’s important to make the distinction between operational infrastructure investments and green field ones (specifically ones utilizing the DBFM model, which is being contemplated here).

Quite rightly, Teachers and CPPIB steer clear of the latter because they are far riskier, require specialized legal expertise, and more recently, the application of Lean construction methods to manage successfully to time and dollar budgets. CPPIB and Teachers lack the necessary expertise to assess such infrastructure investment types, which is certainly not a knock against them.

So at the end of the day, Mock’s and Machin’s commentary as it relates to governance of federal government infrastructure projects is irrelevant. Most of the projects will be non-revenue plays and DBFM (i.e. full life cycle) projects and therefore outside of their permitted investment mandates.

These being P3 projects as well, private equity will be the (P)rivate driver, and I would imagine that their risk/reward profile, for those who know how to size them up, will be attractive.

I asked a friend of mine who is an expert in infrastructure to explain all this to me:

DBFM is a type of Public Private Partnership (P3). The acronym describes the risks transferred to the private sector partner. In this case, Design, Build, Finance, and Maintain.

I think that the concept of establishing an infrastructure bank is to expand horizons and getting more projects done. It is not necessarily just about P3s.

In Europe, the European Investment Bank (EIB) has all sorts of tools that help projects to get financed. These tools do not exist in Canada. In the US, tax exempt muni bonds really go a long way to getting things done.

Anyway, just take a drive around Montreal and Ottawa, fairly obvious that the infrastructure is falling apart.

[Note: Andrew Claerhout, Senior Vice-President of Infrastructure & Natural Resources at Ontario Teachers’ Pension Plan, gave me a much more detailed response to Chas’s comment below in my update at the end of the comment.]

I can vouch for that, Montreal’s roads, bridges, sewer and water pipes are falling apart and infrastructure needs are mounting every year.

Of course, all these infrastructure projects are wreaking havoc on the city’s traffic which is why I avoid downtown Montreal as much as possible.

[Note: When urban planners were building highways in the 50s and 60s, they certainly didn’t plan for so many cars on the road, which is why the traffic nightmare keeps getting worse each year. And as my friend rightly notes, it’s high time that people living in Laval or South Shore pay tolls to come into the city and if they don’t want to, let them use public transit.]

Anyways, let’s get back to the federal infrastructure bank and the role Canada’s large pensions or other large global investors are going to play in funding or investing in these projects.

Ian Vandaelle of BNN reports, Ottawa may struggle to attract foreign infrastructure capital:

Former Alberta Investment Management (AIMCo) chief executive Leo de Bever is skeptical the federal government can attract foreign investment in critical Canadian infrastructure projects.

In an interview on BNN, de Bever, who’s now the chairman of energy service company Oak Point Energy, said foreign capital may prove disinterested in investing in many of the projects coveted by the Trudeau government.

“I don’t think that’s the first place that they’d be looking for,” he said. “The kind of people I talk to about foreign investment want to invest in our resources because they want security of supply [for] their own economies. I don’t think you’re going to get too many people excited about building roads in Canada.”

De Bever said Canadian attitudes toward paying for public infrastructure are at times diametrically opposed to the cash-flow needs of private equity.

“The prevailing wisdom in Canada is still that roads and sewage and so on should be free, and unfortunately infrastructure costs, so it has to earn a return,” he said. “The question is how do you allocate the cost of that infrastructure and if you’re not willing to charge for it, or not charge enough, then you’re not going to attract very much private capital: It’s that simple.”

Smart man that Leo de Bever, take the time to watch this BNN panel discussion below, it’s truly excellent (click here to watch it on BNN’s site). As always, if you have anything to add, email me at LKolivakis@gmail.com.

Update: Andrew Claerhout, Senior Vice-President of Infrastructure & Natural Resources at Ontario Teachers’ Pension Plan shared some very interesting insights regarding Chas’s comment at the end of the Benefits Canada article:

Andrew told me that OTPP, CPPIB, OMERS and the rest of Canada’s large pensions are not interested in small DMBF/ PPP projects which are typically social infrastructure like building schools, hospitals or prisons. Why? Because they’re small projects and the returns are too low for them. However, he said these are great projects for construction companies and lenders because you have the government as your counterparty so no risk of a default.
Instead, he told me they are interested in investing in “larger, more ambitious” infrastructure projects which are economical and make sense for pensions from a risk/ return perspective. In this way he told me that they are not competing with PPPs who typically focus on smaller projects and are complimenting them because they are focusing on much larger projects.
Here is where our conversation got interesting because we started talking about Australia being the model for privatizing infrastructure to help fund new infrastructure projects. He told me that while Australia took the lead in infrastructure, the Canadian model being proposed here takes it one step further. “In Australia, the government builds infrastructure projects and once they are operational (ie. brownfield), they sell equity stakes to investors and use those proceeds to finance new greenfield projects. In Canada, the government is setting up this infrastructure bank which will provide the bulk of the capital on major infrastructure greenfield projects and asks investors to invest alongside it” (ie. take an equity stake in a big greenfield project).
Andrew told me this is a truly novel idea and if they get the implementation and governance right, setting up a qualified and independent board to oversee this new infrastructure bank, it will be mutually beneficial for all parties involved.
In terms of subsidizing pensions, he said unlike pensions which have a fiduciary duty to maximize returns without taking undue risk, the government has a “financial P&L” and a “social P & L” (profit and loss). The social P & L is investing in infrastructure projects that “benefit society” and the economy over the long run. He went on to share this with me. “No doubt, the government is putting up the bulk of the money in the form of bridge capital for large infrastructure projects and pensions will invest alongside them as long as the risk/ return makes sense. The government is reducing the risk for pensions to invest alongside them and we are providing the expertise to help them run these projects more efficiently. If these projects don’t turn out to be economical, the government will borne most of the risk, however, if they turn out to be good projects, the government will participate in all the upside” (allowing it to collect more revenues to invest in new projects).
He made it a point to underscore this new model is much better than the government providing grants to subsidize large infrastructure projects because it gets to participate in the upside if these projects turn out to be very good, providing all parties steady long-term revenue streams.

I thank Andrew Claerhout for reaching out to me and sharing these incredible insights on why pensions are not competing with DBFM/ PPPs and are looking instead to invest alongside the federal government in much larger, more ambitious infrastructure projects where they can help it make them economical and profitable over the long run.

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