Category: Home

Mark Wiseman, CEO of the Canada Pension Plan Investment Board, has announced that he will be leaving the company for a position at Blackrock. At the moment, there are no details as to when this move will be taking place, but it comes in stark contrast to his predecessor, who gave the company notice three years before he intended to leave.

The Financial Post has more on the topic:

The executive who oversees investments on behalf of Canada’s largest pension fund is leaving in a surprise move that is in marked contrast to the “orderly long-term succession plan” of his predecessor.

Sources told the National Post that Mark Wiseman is departing soon from the Canada Pension Plan Investment Board, where he has been chief executive for almost four years.

The CPPIB announced Thursday that Wiseman is leaving to take a “senior leadership” role at Blackrock next month.

He will be succeeded atop the pension giant on June 13 by Mark Machin, CPPIB’s senior managing director and head of international.

Wiseman, 45, took over from David Denison in June of 2012, a handover that had been planned for months.

[…]

[A] source suggested Wiseman is leaving for another position, but declined to say where he is headed, or who will replace him at the fund, which had $282.6 billion under management at the end of December.

Another source later suggested Wiseman could remain at the pension for a period of time after announcing his planned departure. Wiseman could not be reached for comment, and company officials did not respond to a request for comment.

While the two sources characterized his departure as amicable, and said there was no suggestion of concern in Wiseman’s leadership, another familiar with CPPIB’s inner workings said there was friction on issues including his leadership style and travel.

Wiseman’s extensive travel outside Canada might be explained by the rapid expansion of the fund’s overseas operations on his watch — offices were opened in Sao Paulo, Mumbai and New York. But the source said some questioned whether it was only the CPP’s interests that were being promoted.

Mark Wiseman joined CPPIB in 2005.

After a victory at a special election held on Tuesday, Arizona’s Proposition 124 will be taking effect on January 1, 2017. The proposition will cut public service pension benefits in order to hopefully bolster the public service pension trust, which has about half as much money as it currently needs.

AZ Central has more on the proposition:

Starting Jan. 1, the measure will change the way permanent pension-benefit increases are paid to retirees. Supporters say Prop. 124 over the next 30 years will save $1.5 billion for the retirement trust for first responders. However, an Arizona Supreme Court ruling could throw a wrench in Tuesday’s electoral decision.

Prop. 124 will link retirees’ pension cost-of-living adjustments to the regional Consumer Price Index, with an annual cap of 2 percent. An annual 4 percent compounded increase has been paid out to retirees for the past two decades, significantly cutting into the amount of money remaining to pay future retirement benefits.

Although the measure will reduce pension benefits, first responders urged voters to back the plan in order to provide sustainability to a trust that has about half of the money needed to fund current and future pensions. The rising cost for public employers contributing to the PSPRS has caused some communities to curtail the hiring of additional police officers and firefighters.

The proposition was seen as a compromise after Lesko spent a year working with members and employers in the PSPRS. Opponents such as the Arizona Tax Research Association and the Goldwater Institute, which opposed having the proposition placed before voters, said the measure provides no short-term financial relief for taxpayers. Savings may occur only years down the road, they said.

The ruling on a pension-reform case currently before the Supreme Court will likely alter exactly how Proposition 124 is implemented. The case handles legislation passed in 2011, and could be the difference between tens of millions of dollars for Arizona. For more information about the case, read the full article here.

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

Bruce Johnstone of the Regina Leader-Post reports, Saskatchewan Pension Plan marks 30 years of quiet success:

Since 1986, the Saskatchewan Pension Plan (SPP) has been quietly been going about its business of providing a voluntary, no-frills and inexpensive pension plan for the two out of three people who don’t have access to a company pension.

But this year being its 30th anniversary, the SPP is emerging from its headquarters in the west-central town of Kindersley (pop. 5,400) to toot its own horn, but in a very quiet, understated sort of way.

“Incremental growth” has been the key to our success, said Katherine Strutt, general manager of SPP, in a recent interview with the Leader-Post.

“Growing by new members and members contributing more because they’re allowed to contribute up to $2,500, but also by being able to transfer from existing RRSPs to help their (SPP) balances grow, that’s been a big part of our success story as well.”

From humble beginnings, the SPP has grown to $445 million in assets and 33,000 members.

“We don’t have a lot of bells and whistles. People are just looking for a good investment with a low fee,” said Strutt, who joined SPP in 1990, serving the last 23 years as general manager.

In fact, the SPP is a model for other provinces looking to help people who are looking for a basic pension plan, in addition to Old Age Security.

SPP is a money-purchase, defined-contribution pension plan that in many ways works like an RRSP. In fact, you can transfer up to $10,000 in existing RRSP investments per year to your SPP.

Despite its name, it is not restricted to Saskatchewan residents. Anyone between 18 and 71 with available RRSP room can contribute.

The plan is aimed at the two-thirds of people who do not have the benefit of a workplace pension plan, including self-employed workers or employees of small businesses, farmers, artists, tradespeople, etc.

“For a lot of smaller employers, with fewer than 10 or 20 employees, … maybe they can’t commit to a registered pension plan. Maybe it’s too costly and they can’t afford to make the RPP contributions,” Strutt said.

“We found that the (SPP) resonates with a lot of these small employers,” Strutt said. “Employers like the SPP because it’s locked in, it’s going to be used for the employee’s retirement, it stays with them and follows them (if they change jobs).”

The SPP also allows smaller businesses to compete for employees with larger employers in terms of benefits. “Some employers are putting in the entire $2,500, or matching the employee’s contribution and some are doing it as a bonus, top-up.”

In 2010, the SPP changed its contribution limit from $600 to $2,500 but the contributor has to have earned income. “Social contributions” are also allowed. “For those people who have a lower-earning spouse or stay-at-home spouse and they want to have a pension plan for them, they can do that.”

“It’s like having access to the top money managers with no minimum investment. It really helps people bridge that gap between what they’re going to get from OAS and private savings. This is just a cost-effective way of putting a cap on that.”

It was exactly four years ago that I covered Canada’s secret pension plan in detail. I’m happy to see the contribution limit has been raised to $2500 (it should be raised to a much higher amount) and that the plan is steadily growing offering its 33000 members a safe, low cost pension solution to help them save for retirement.

If you’re a professional with no workplace pension or if you own a small business and want to cover your employees’ pension needs, you should definitely get in touch with the folks at the Saskatchewan Pension Plan (SPP) by clicking here. You can even transfer up to $10,000, in cash, per calendar year into your SPP account from existing RRSPs, RRIFs and unlocked RPPs.

Equally important, if you, your spouse or any of your children suffer from a disability, learn all you can about the Registered Disability Savings Plan and keep this in mind:

Effective July 1, 2011, for deaths occurring after March 3, 2010, the existing registered retirement savings plan (RRSP)rollover rules are extended to allow a rollover of a deceased individual’s RRSP proceeds to the registered disability savings plan (RDSP) of the deceased individual’s financially dependent child or grandchild with an impairment in physical or mental functions. A qualifying beneficiary is referred to as an eligible individual. For more information, see Eligible individual. These rules also apply to registered retirement income fund (RRIF) proceeds, to certain lump sum amounts paid from registered pension plans (RPPs) and, under proposed changes, to the Saskatchewan Pension Plan (SPP).

Why is the Saskatchewan Pension Plan the best Canadian pension plan you never heard of? Because absent an enhancement of the Canada Pension Plan which I’ve been arguing for a long time, we need better solutions to cover many hard working Canadians getting fleeced by banks and mutual funds charging them outrageous fees for mediocre returns (they aren’t all bad, as I stated here, I like Calgary-basedMawer Balanced Fund run by Greg Peterson, which gained 10.5% in 2015 and has been performing exceptionally well over the last three, five and ten years ).

And those fees add up over the years, eating away a huge chunk of Canadians’ retirement nest eggs. In fact, as Diane Urquhart stated in my comment on a reality check for pensions: “Canadian mutual fund investors that save regularly over the next 30 years would have close to 25% higher retirement savings if Canadian mutual fund suppliers were charging the world average mutual fund fees rather than Canadian mutual fund fees.”

But Canadians remain oblivious to this reality and that is a function of how illiterate people generally are on constructing a well-balanced retirement portfolio based on fairly easy principles like using ETFs,rebalancing and diversifying their portfolio and using the power of dividends to build long-term wealth. Go read my comment on building on CPPIB’s success and pick up and read classics like William Bernstein’s The Four Pillars of Investing and The Intelligent Asset Allocator, Marc Litchenfeld’s Get Rich With Dividends and my favorite, Peter Lynch’s One Up on Wall Street. 

In my opinion, there should be mandatory high school or college courses covering these principles because most Canadians are clueless and “just go to the bank and deal with some representative which makes them check off boxes” or they get bamboozled by some broker which places them in high fee managed products. If you think hedge funds are a scam, you should dig deeper into the Canadian mutual fund industry, it’s the biggest scam of all, enriching banks, insurance companies and mutual fund companies while impoverishing many hard working Canadians (there are exceptions but in general, this is the sad reality).

But the truth is markets are volatile and with interest rates at historic lows and turning negative all over the word, I expect a lot more volatility in public markets, so it’s best that Canadians focus on their work and let experts focus on their retirement needs. This is why the Saskatchewan Pension Plan (SPP) makes so much sense for many self-employed professionals and small business employees with no workplace pension looking for a low-cost professionally managed pension.

But make no mistake, when it comes to bolstering the country’s retirement policy, Canada’s secret pension plan isn’t the best solution and it pales to enhancing the CPP. Why? The Saskatchewan Pension Plan is great but it’s not a large, well-governed defined-benefit plan,the gold standard of pensions.

The SPP is a large defined-contribution plan which means over a very long period, it cannot compete with Canada’s large well-governed DB plans. Sure like them, it uses its size to lower fees, which is a good thing but unlike them, it cannot attract and retain qualified pension professionals who invest directly across public and private markets and offer the security and stability of defined-benefits. Like defined-contribution plans, it too is subject to the vagaries of public markets.

This is why I keep harping on enhancing the CPP. Despite what those hacks at the Fraser Institute think, CPPIB is cost efficient and you’re not getting less bang for your CPP buck. This is all nonsense financed by Canada’s powerful financial services industry.

Speaking of nonsense, CBC reports that a group representing manufacturers and exporters wants the Ontario government to haltimplementation of its new provincial pension plan until a federal review of the Canada Pension Plan is completed:

The Canadian Manufacturers & Exporters said Tuesday that the costs of administering the Ontario Retirement Pension Plan can be avoided by working with Ottawa on a national approach to retirement income security.

“Manufacturers play a key role in ensuring the strength of the Ontario economy,” said Ian Howcroft, Ontario vice-president at CME. “These changes need to make sense for them.”

Howcroft said mandatory cost increases put manufacturers at a competitive disadvantage.

“Employers already offering pension plans should be exempt from further increases associated with either an ORPP or a CPP change,” he said.

In February, the Ontario government said it was pushing back the rollout dates for the ORPP to give larger businesses more time to enroll.

The new provincial plan would cover some three million Ontarians who don’t have workplace pensions.

Workers at large companies (with 500 or more employees) were scheduled to start contributing in January 2017, but contributions now won’t begin until 2018.

At the same Ontario made that announcement, federal Finance Minister Bill Morneau said he hopes to introduce an enhancement to the CPP before the end of 2016.

I can’t understand groups like the Canadian Manufacturers & Exportersor the Canadian Federation of Independent Business crying foul every time policymakers discuss the ORPP or enhancing the CPP.

They really need to get informed on why ORPP is going ahead despite what happens to enhancing the CPP, and more importantly, they need to understand why these policies will ultimately benefit their members, the Canadian economy and hard working Canadians.

Importantly, enhancing the CPP or introducing the ORPP isn’t a tax, it’s implementing smart long-term economic and retirement policy that will benefit the country for decades to come.

By the way, these trade groups should look at the rules to understand who is exempt and who isn’t and they should contact the Saskatchewan Pension Plan if they want to cover the employees. I doubt this will exempt them from the ORPP or the enhanced CPP but it makes a lot of sense to look into it.

As far as the ORPP, Mitzie Hunter, Ontario’s Associate Minister of Finance, ORPP, Multicultural Minister, tweeted this announcement (click on image):

These are all excellent choices. Eileen Mercier is a professional director and was the Chair of the Ontario Teachers’ Pension Plan from 2007 to 2014. She currently serves on many boards, including Intact Financial Corporation. She is one great board member to have on this nominating board.

Carol Hansell is the is Senior Partner of Hansell LLP. Over her more than 25 years in practice, she has led major transactions for public and private corporations and governments and has served on many boards of organizations across a variety of sectors. She was a board member at PSP Investments for many years where she oversaw governance and human resources and other activities and was recently named to serve on the advisory council to update Ontario business law.

Susan Wolburgh Jenah is President and Chief Executive Officer of the Investment Industry Regulatory Organization of Canada (IIROC), a position she has held since the regulator was established in June of 2008.

These are all very accomplished professionals with great experience and lots of wisdom and knowledge which will serve them well as they take part in ORPP’s Board Nominating Committee.

Below, Katherine Strutt, general manager of SPP, goes over how the Saskatchewan Pension Plan is celebrating 30 years in 2016. I also embedded a clip on how to become a member of the SPP.

Get informed, absent and enhanced CPP or ORPP, for many of you, this may be the best Canadian pension option you never head of.

Lastly, another option for incorporated professionals and business owners with no workplace pension is to set up a Personal Pension Plan (PPP) offered by INTEGRIS. Jean-Pierre Laporte, its CEO and founder, sent me an INTEGRIS white paper to go over what his company offers, so do your due diligence and look into what they have to offer. I embedded a short clip below explaining their approach.

Jean-Pierre also shared this with me:

The SPP is a stunted DC arrangement. The contribution limits are too low to allow for a meaningful pension in the long run, no matter how prudently it is managed.  Just like you can’t truly retire on a TFSA (unless you are Warren Beatty, I guess).

He’s right the contribution limits are too low and that is something which needs to be addressed in the future, but for now, this plan does offer many Canadians without a workplace pension another option.

Queen Elizabeth II’s Queen’s Speech promised a reform for the British pension system. The reform focuses on how to keep pension collectors from being victims of large-scale scams, and other protective measures for people of pension-collecting age.

Mirror has more about the speech:

Savers into workplace pensions will get more protection under measures announced in the Queen’s Speech.

The Government has tightened the rules for master trusts – the pension schemes holding millions of pounds from workplace pension schemes.

Nine million Brits are expected to be saving into a pension for the first time or saving significantly more by 2017.

But MPs had raised concerns that master trusts were not carefully vetted , and that workers’ hard-earned savings could be at risk if one went bust.

The Work and Pensions Committee warned: “Should one of these trusts collapse, there is a very real danger that ordinary scheme members could lose retirement savings.”

[…]

The Government is introducing tighter rules to make sure only the most responsible master trusts win approval.

It is capping early exit charges, meaning savers old enough to cash in can do so without getting stung by high fees. At present, nearly 700,000 savers could be forced to pay a fee.

And it is creating a new pensions guidance service designed to help savers make decisions about how to use their pension.

Critics of the new measures say that despite the proposed guidance service, British citizens who are saving for pensions may not have enough information to make fully informed decisions.

 

Arizona held a special election on Tuesday, and included on the ballot were various Propositions. Among those was Proposition 124, which aims to change the pension system in Arizona for public officials. The proposition would change the contributions, timing, and payout of Arizona pensions for fire fighters and police officers.

The Daily Miner has more on the election:

Meanwhile, Proposition 124 changing the state’s pension plan for emergency workers was winning with 70 percent of the early ballots cast, and the head of the state’s largest firefighters union called it a landslide victory. The proposal would ratify a major part of an overhaul of the police and firefighter pension system that was enacted by the Arizona Legislature earlier this year.

[…]

The pension plan changes voters must ratify include lower cost-of-living increases for current and future retirees and are designed to help fix the system’s finances. The funding level has sunk to just 50 percent of its expected liabilities while employers have seen their contribution rates soar.

The larger overhaul of the pension system establishes a new tier for newly hired officers, limiting maximum pension payments and equalizing employer and employee contribution rates.

“This measure means firefighters and police officers will need to work longer before retirement, contribute more and accept lower cost of living increases down the line, but we agreed to these sacrifices because we understood the seriousness of this emergency,” said Bryan Jeffries, president of the Professional Fire Fighters of Arizona. “We saw a crisis and we took action to fix it.”

Ann Ridenour, 80, said she supported Proposition 124, but wished that new public safety employees could receive the same benefits as their more experienced colleagues.

“It doesn’t seem quite fair,” she said.

This election went smoothly due to the opening of almost 60 more polling places in Maricopa County. Voters did not have to wait in long lines, unlike during the March presidential primary.

Federal Judge Louis Guirola is attempting to find a solution for the Singing River Health System pension plan. The SRHS stopped pension payments in 2009. The new plan aims to pay back all of the money owed over a 35 year period.

WDAM has more on the topic:

The $150 million settlement, paid over 35 years, would give retirees 100% of the money they’re owed and shore up the plan moving forward.

In 2014 it was revealed that SRHS stopped contributing to the fund in 2009.

Guirola stressed that this is a fairness hearing. “I’m here to decide if the settlement is reasonable, adequate and fair.” he said.

The courtroom was filled with concerned retirees, many of whom support the plan. Others are expressing uncertainty.

“It’s not that I don’t approve the settlement, it’s just the repayment schedule. No one has been able to tell me what the schedule will do to retirees. I agree the hospital owes money, but 35 years from now what does that mean for me?,” said David Gress.

Plaintiffs attorney Jim Reeves, who helped engineer the deal, said the settlement provides safeguards.

“No one can change the plan unless three things happen. A Chancery Court has to approve any change. The Special Fiduciary has to approve of any changes and all members will be given 60 days written notice and given a chance to appear and reject the change,” said Reeves.

Attorney Harvey Barton represents some of the retirees who don’t support the settlement. Barton questioned Singing River Health System Chief Financial Officer Lee Bond about the health systems ability to meet its obligations.

Under oath, Bond said he believes SRHS is capable of making the payments over the 35 year time frame.

Guirola stated multiple times during the case that the goal was to achieve fairness, and not to point out past wrongdoings.

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

Andy Blatchford of the Canadian Press reports, Will big pension funds and Ottawa partner to build tomorrow’s infrastructure?:

The Trudeau government’s newfound enthusiasm about a big Montreal transit proposal has given Canadians a glimpse at one way Ottawa could fund billions in public infrastructure, like roads, bridges and rail, over the long haul.

In recent days, senior Liberals have been talking up an unusual funding model for the $5.5-billion light-rail plan for Montreal, calling for a partnership that includes Ottawa and a public pension fund.

The idea was put forward by Quebec’s massive public pension fund manager, which recently announced its proposal to build a large electric rail network connecting Montreal to its suburbs.

The fund, the Caisse de depot et placement du Quebec, is prepared to pump $3 billion into the project — and it wants the provincial and federal governments to kick in the rest.

A subsidiary of the Caisse would operate the rail network and gradually recoup the pension plan’s investment through user fees. Eventual profits would be funnelled into Quebecers’ public nest egg — the Quebec Pension Plan — which is managed by the Caisse.

The idea was made public after the Liberal government signalled in its March budget that it would like to engage deep-pocketed pension funds and other “innovative sources of funding” to help raise much-needed cash for long-term infrastructure projects — when it’s in the public interest.

So far, this first example of a potential federal partnership with a major pension plan appears to have stoked excitement among senior Liberal cabinet ministers.

“I salute the innovative efforts of the Caisse de depot et placement du Quebec, which, through its metropolitan electric network, is proposing a new business model to implement major infrastructure projects,” Finance Minister Bill Morneau told a business crowd late last week in Montreal.

“We have the chance in Canada to count on pension funds that have developed an expertise in infrastructure that is recognized around the world.”

Morneau added that Ottawa is studying the Caisse’s plan with “lots of interest.”

His inaugural budget followed through on a Liberal election pledge to double infrastructure spending over the next 10 years, raising the overall federal investment to $120 billion.

The party has argued boosting infrastructure spending will increase productivity, generate more long-term growth and create jobs.

The plan, however, comes at a cost.

Infrastructure spending is expected to contribute to a string of five-straight budgetary deficits that could add more than $110 billion to Canada’s public debt.

Seeking out other sources of cash for infrastructure could increase the number of new investments while helping prevent the country from sliding even deeper into the red.

The first phase of the Liberal plan calls for $11.9 billion of spending over five years. It’s focused on projects such as repairing aging water and public transit infrastructure as well as providing cash for smaller projects that can be completed by 2019.

There’s also money available for planning larger, more-ambitious projects that would be part of the program’s second phase, the details of which have yet to be unveiled.

That’s where the Caisse’s light-rail plan comes in — it features a type of funding model the government could increasingly tap into.

Infrastructure Minister Amarjeet Sohi told the Senate’s question period last week that the timing of the government’s second phase aligns with the Montreal proposal. He added that the government is working “very closely” with the Caisse.

“This is one of the most innovative and creative projects that I have seen in my short while in this portfolio, and it will be transformative for the region of Montreal,” Sohi said.

“I see this as a great opportunity for us to support innovation in delivery of infrastructure, because we do need to engage public sector pension funds, as well as private sector funds, to make sure the amount of infrastructure that we build across the country engages other stakeholders and partners.”

In their remarks last week, both Sohi and Morneau complimented Caisse CEO Michael Sabia, whom Morneau has named to his economic advisory council.

The council, tasked with helping the government map out a long-term growth plan, also features another head of a powerful public pension plan: Mark Wiseman, president and CEO of the Canada Pension Plan Investment Board.

The groups will meet for the first time Monday north of Ottawa. Morneau and Sohi will both be among several cabinet ministers present at the meeting.

Large Canadian pension plans, such as the Caisse and CPPIB, have invested billions in infrastructure projects abroad. Funds like these covet access to the reliable, predictable returns that infrastructure offers through revenue streams such as user fees, like tolls.

In its budget, the Liberals also mentioned something called “asset recycling,” a system that could see governments in Canada lease or sell stakes in existing major public assets such as highways, rail lines, and ports.

Wiseman has praised asset recycling as a model Canada could use to attract long-term capital as it deals with its growing infrastructure deficit.

Sabia has argued that opening the door to pension plans to make more infrastructure investments in Canada would create a win-win scenario.

“Every time you take the train, every time you buy a ticket, obviously it is a contribution to your retirement fund,” Sabia said last month after he announced the Montreal rail proposal.

I agree with Michael Sabia, Ottawa’s push to court Canada’s large pensions on infrastructure is a win-win for everyone. I expect to see more projects where Canada’s Top Ten pensions are called to bankroll infrastructure and help manage existing (mature) infrastructure assets like bridges, rail lines, airports, highways, and ports or to develop new (greenfield) infrastructure projects.

In order to understand why this push for “asset recycling”  makes so much sense for the federal government, pensions and the economy, you need to think like a large Canadian pension fund, meaning you need to take a very long-term view of things:

• Governments around the world are cash-strapped at a time when the world is in a serious economic rut. From where I’m standing, the deflation dog is barking very loudly and Harvard economist Larry Summers is right, monetary policy alone isn’t going to pull the global economy out of its rut. We need more fiscal stimulus in the form of massive infrastructure spending.
• Summers has warned that pushing off repairs of America’s crumbling infrastructure to future generations creates the “worst and most toxic” debts. He’s absolutely right. America will fall $1.44 trillion short of what it needs to spend on infrastructure through the next decade, a gap that could strip 2.5 million jobs and $4 trillion of gross domestic product from the economy, a report from a society of professional engineers said last week.
• In Canada, the situation isn’t any better. The 2016 Infrastructure Report Card shows that Canada’s critical infrastructure is in dire straits with over a third of municipal infrastructure in either fair, poor or very poor condition.
• Spending on infrastructure is desperately needed not only to modernize it but also to boost the economy, making the country much more competitive for future growth. Investing in infrastructure means investing in good jobs that pay decent wages (good multiplier effect) but also investing in the future prosperity of the country to meet the challenges of an increasingly more competitive global economy.
• Where do Canada’s large pension funds come into the picture? It turns out Canada’s Top Ten pensions know a thing or two about investing in infrastructure. They own prize infrastructure assets in Australia, Britain, Europe, and around the world and unlike private equity or hedge funds, they invest huge sums directly in infrastructure, making this the asset class of choice in terms of finding stable, recurring cash flows and decent yield at a time when most public and private assets are over-valued.
• Investing in domestic infrastructure carries the added benefit of not taking any foreign exchange risk and not dealing with regulatory risks that can come if a foreign government changes the rules of the game. Canadian pensions have Canadian dollar denominated liabilities, so it makes much more sense for them to invest in domestic infrastructure.
• But why infrastructure? Why not stocks, bonds, private equity, real estate, and hedge funds? Again, think like a large Canadian pension fund, which means take a total portfolio approach to allocate risk in the best, most cost efficient manner to maximize returns without taking undue risk.
• In a world where ultra low and negative rates are here to stay and where the Governor of the Bank of Canada is warning pensions to brace for lower rates, where are Canada’s large pensions going to obtain the yield to meet their long-dated liabilities which go out 75+ years? Stocks and corporate bonds are over-valued and very volatile and government bonds offer historic low yields. Hedge funds and private equity funds? Turns out those investments have run their course and overwhelmingly enrich hedge fund and private equity gurus, not so much pension beneficiaries. Sure, if you select the right funds, you’ll make money but you’ll pay big fees for those returns and you won’t be able to invest large sums directly like you can with infrastructure (and to a lesser extent real estate).In terms of scalability, costs and stable and predictable returns over a very long horizon, investing large sums in infrastructure makes perfect long-term sense for Canada’s large pensions.
• The key difference between Canada’s large pensions and their US counterparts is a world class governance model which allows them to attract and retain talent which can invest directly across public and private investments all around the world, foregoing external manager fees. Canada’s large pensions a world renowned infrastructure investors who have the expertise required to invest and develop domestic infrastructure assets much better than any government organization can. Unlike government bureaucrats, Canada’s large pension fund managers are compensated based on their long-term returns so it’s in their best interests to see these investments flourish over a long period. In other words, their alignment of interests are better than civil servants managing infrastructure projects.

Now, after going through all this, if you’re still not convinced that “asset recycling” makes sense for all stakeholders, including Canadian taxpayers, then I don’t know what to tell you.

I don’t want to make it sound like investing in infrastructure is the end all and be all of economic policy (it isn’t going to make a huge dent, especially if Canada’s real estate bubble bursts), but it makes really good sense and if it’s done properly using the expertise of Canada’s large public pensions, it will pay long-term dividends to the economy and help fund these large pensions over many years.

What about smaller Canadian pension plans that can’t invest directly in infrastructure? Well, they can seek advice from experts like David Rogers and Stephen Dowd at Caledon Capital Management or invest in private infrastructure funds like the one at Fiera Infrastructure or invest in shares of publicly traded Brookfield Infrastructure Partners (BIP). Or they can talk to OMERS to provide them with solutions to meet their infrastructure needs.

But it’s going to be hard to compete with the big boys when it comes to infrastructure. They have the funds and the expertise to invest large sums directly into domestic and international infrastructure. 

By the way, if your kid wants enter finance, steer him or her toward a career in infrastructure. Ideally, they will obtain a degree in mechanical engineering and then go on to do an MBA and go work at some private infrastructure company like SNC-Lavalin Group or at a European giant like Vinci, Hochtief or Ferrovial. I would recommend anyone looking for a career in infrastructure to gain operational, not just financial transaction experience in this asset class.

However, it’s not just engineers with MBAs that are needed. Law firms need to develop in-house expertise in infrastructure investments as they too can benefit from this secular push into infrastructure. Start planning and start thinking long-term when it comes to how more infrastructure investing is going to change our economy. 

Finally, the rumor mills in Montreal are that Michael Sabia, who wentfrom outsider to rainmaker, is preparing for a career in politics after he leaves the Caisse. He has publicly denied any speculation that he’s preparing for a career in politics but you never know, Premier Sabia or Minister Sabia has a nice ring to it (we need more qualified people entering public office). 

Last week in Montreal, Michael Sabia and Ron Mock gave a presentation on Best Practices in Fund Management: Lessons from the Canadian Public Pension Model at the 69th CFA Institute Annual Conference. My former Caisse colleague Miville Tremblay who now works at the Bank of Canada moderated this panel discussion which also featured University of Michigan law professor Dana Muir and he told me it was a success and well attended by participants from all over the world.

Unfortunately, this discussion is not publicly available as of now. Miville told me that is entirely up to the CFA Institute. Below, you can watch a panel discussion on The Changing Global Bond Market and its Implications featuring Carolyn Wilkins, Senior Deputy Governor of the Bank of Canada.

I also embedded a short clip from CDPQ Infra, the infrastructure group led by Macky Tall which the Caisse recently spun off as an independent subsidiary (just like they did for real estate which isIvanhoé Cambridge). The clip shows you the benefits of the newRéseau électrique métropolitain (our city desperately needs it and more initiatives like it!).

The Caisse recently changed its organizational model to face anticipated volatility, modest returns and ‘anemic growth’, consolidating investments in public and private companies under chief investment officer Roland Lescure, who had held the no. 2 position since 2009.

It is also creating a new division, Depositors and Total Portfolio Construction, which will be led by Jean Michel (former head of Air Canada Pension Fund), who was appointed as VP of Advisory Services to Depositors and Strategic Analysis just over a month ago.

All these are great moves which Sabia initiated. Jean Michel brings a wealth of experience from Air Canada Pension Fund where he and his small team performed miracles to bring that pension plan back to fully funded status (using the same strategies that HOOPP and OTPP use) and Roland Lescure is a class act who should be CIO of Public and Private markets like his counterparts at Teachers and elsewhere.

A recent study performed by researchers at Standford University revealed that California’s pension debt is markedly higher than once thought. The researchers calculated the deficit using two different sets of data, and came up with equally staggering amount.

The Sacramento Bee has more on the research:

California’s state and local governments face billions of dollars in debt – the official term is “unfunded liabilities” – for employee pensions not now covered by pension fund assets.

But how many billions?

It could be about $300 billion, according to new calculations by Stanford University researchers, but that assumes that projections of future investment earnings used by pension trust funds, around 7.5 percent a year, are accurate.

Or the debt could be three-plus times as much, close to $1 trillion, if the earnings assumptions track federal treasury notes, according to Pension Tracker, a research project headed by former Democratic Assemblyman Joe Nation.

If nothing else, the newly released Pension Tracker data demonstrate that an earnings assumption – the “discount rate” – is the most important factor in judging whether pension debt can be reasonably managed, or a crisis that could drive government agencies into insolvency.

Three cities have been forced into bankruptcy, largely due to soaring pension costs, and others are feeling the pinch as costs rise.

The tendency among California politicians, both state and local, is to acknowledge that there is debt, but accept the optimistic earnings

[…]

If, in fact, California’s pension debt is closer to $1 trillion than $200 billion, the real-world impact on taxpayers and other public spending will be massive and unsustainable.

But, one might wonder, how does California compare to other states? That’s also covered in the research. It reveals that on the official “actuarial” basis, California’s pension debt is the ninth highest at about $5,100 per Californian, but using the lower discount rate tied to treasury notes, the “market” basis, it’s fourth highest at $25,325 per capita.

For more about where California’s debt stands, read the full article here.

 

 

 

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 Calpensions.com.

A city of San Jose request to repeal a pension reform approved by voters in 2012 was granted by a superior court in March, allowing a more generous plan negotiated with unions to attract police to a long-depleted force now working mandatory overtime.

Superior Court Judge Beth McGowen ruled that Measure B, approved by 69 percent of voters, is invalid because the city council resolution that placed the measure on the ballot is “null and void due to a procedural defect in bargaining.”

Then last week at the request of opponents, who want voter approval of any changes in Measure B, an appeals court put the lower court action on hold, pending a review of arguments in the case.

The intervention was filed by Pete Constant, a former San Jose police officer and city councilman, and the Silicon Valley Taxpayers Association, backed by Charles Munger Jr., a wealthy Republican campaign donor.

“I and Charles have committed to not giving up until we have exhausted every option,” Constant said in an interview before the 6th District Court of Appeal granted a temporary stay of McGowen’s ruling.

San Jose is another example of how the need to be competitive in the job market for police is an obstacle to — or safeguard against, depending on your view — cost-cutting pension reform. (See previous post: “Why bankrupt San Bernardino didn’t cut pensions.”)

In the view of some critics, a CalPERS-sponsored bill, SB 400 in 1999, gave the Highway Patrol a major pension increase that became the standard for local police and firefighters and a major factor in “unsustainable” pension costs.

The battle over the San Jose reform has been heated. The police union president at the time, Jim Unland, reportedly urged a class of police recruits to quit to aid the campaign against Measure B advanced by the mayor then, Chuck Reed.

A key part of the measure would have given current workers the option of paying more to continue earning the same pension (up to 16 percent of pay) or earn a smaller pension for future work.

A superior court upheld most of Measure B, but overturned the current worker option as a violation of “vested rights.” Under state court decisions known as the “California rule,” the pension offered at hire can’t be cut unless offset by a new benefit.

So, most pension reforms are limited to new hires. But the watchdog Little Hoover Commission and others argue that to control costs, governments need the ability, like private-sector pensions, to cut pensions earned in the future by current workers.

Whether San Jose would appeal the Measure B “vested rights” ruling and get a high court review of the “California rule” decisions, a key one in 1955, seemed to be an issue in the race to succeed the termed-out Reed as mayor in November 2014.

Local, state and national public employee unions reportedly spent $800,000 to defeat Sam Liccardo, a councilman and Reed ally, warning that pension cuts were causing the city to lose police officers, endangering public safety.

Liccardo narrowly defeated a county supervisor, Dave Cortese, who advocated settling union lawsuits against Measure B. Last August, Mayor Liccardo announced a settlement with police and fire unions, followed in December by other unions.

The settlement of nine lawsuits included dropping an appeal of the “vested rights” ruling. The agreement expected to save the city $3 billion over 30 years was endorsed by Reed.

Liccardo and Reed said in a San Mercury News article that pursuing the attempt to cut the cost of pensions earned by current workers in the future would be a “long and perilous” road that could jeopardize savings and cause longtime employees to resign.

Last month, the San Jose city manager, Norberto Duenas, said in a court filing that “Measure B, though well-intended, had negative consequences for the City,” including recruitment and retention of police resulting in a recent mandatory overtime plan.

“The settlement framework negotiated by the parties in July is a key component to the City’s attempt to stabilize hiring and retention in the Police Department and delays in its implementation will jeopardize our ability to recruit and retain police officers,” Duenas said.

The police force lost several hundred members in the budget crunch that led to Measure B, and losses have continued since then. Last week, said the city, the number of “actual street ready sworn” was 894 and “actual full duty sworn” 827.

A recent police academy graduated nine, and the current academy has seven. So far this year, there have been 10 resignations and 15 retirements. Under mandatory overtime, officers that have worked a full10-hour shift are held over into the next shift.

In the move opposed by Constant and others, the city used a “quo warranto” court process to repeal Measure B based on a suit filed by the police union in April 2013, which alleged that defective bargaining on the measure violated state law.

The city and the police and firefighter unions agreed they reached impasse on Oct. 31, 2011, after five different city proposals. When mediation in November failed, the city made two more proposals, placing the last one on the ballot without negotiating.

“Continued modification of the proposed ballot language after impasse — including concessions made by the City — created a further obligation to meet and confer before placing Measure B on the ballot,” Judge McGowen said in her ruling.

Similar rulings that the city failed to bargain in good faith have been made by the state Public Employment Relations Board. If the settlement is completed as envisioned, the unions are expected to withdraw their complaints to the powerful board.

Though not asking voters to repeal Measure B or approve its replacement, the city does plan to put a measure on the November to protect taxpayers: no retirement benefit increase without voter approval, no retroactive benefit increases, and actuarial safeguards.

The ballot measure for November was posted on the city website last week after bargaining with unions was completed. One provision would “approve the continuation of current pension benefits for employees.”

That’s aimed at a statewide initiative proposed by Reed and others that could give new hires a 401(k)-style plan unless voters approve a pension. The group dropped a drive to put the initiative on the ballot this year, but plans to try again in 2018.

Meanwhile, to advocate for fair and sustainable public pensions, Reed, Utah pension reformer Dan Liljenquist, former New York Lt. Gov. Richard Ravitch and others have formed a new national group,Retirement Security Initiative.

Constant, an ally of Reed and Liccardo while on the San Jose city council, has been working with a Reason Foundation project that helped develop a pension reform on the Arizona state ballot Tuesday, Proposition 124.

Last week, Constant presented a Reason analysis of Brea’s CalPERS pensions to a group in the Orange County city, Brea First. He also has talked to California legislators about forming a pension stakeholder group like one that led to broad support of the Arizona measure, including police and firefighter groups.

“We will see if that happens,” Constant said. “Time will tell. California is bigger than an aircraft carrier, and it’s going to take a long time to turn around.”

 

Henrique Meirelles, Brazil’s new finance minister, explained his intention to overhaul the country’s pension system in order to combat the national deficit. Meirelles stepped into his office after the suspension and possible impeachment of President Dilma Rousseff.

Nasdaq has more on the topic:

Brazil’s new finance minister, Henrique Meirelles, said Friday the government needs to reduce spending and overhaul the country’s pension system and labor laws.

Mr. Meirelles said during a news conference that he will name his economic team and the heads of the central bank and state-controlled banks on Monday, and will reveal economic measures as they are ready. He added that the heads of the state banks won’t be chosen based on their political affiliation.

“We need to have concrete measures to turn things around,” he said. “Even if those measures won’t have immediate effects, they will have an effect in the future.”

Mr. Meirelles was appointed finance minister on Thursday by acting President Michel Temer, who is sitting in for President Dilma Rousseff.

Ms. Rousseff was temporarily suspended on Thursday to face an impeachment trial in the Senate. She accused Mr. Temer of plotting her dismissal.

[…]

The minister will also be charged with fixing the country’s broke public pension system. For decades Brazilians have been able to retire after up to 35 years of work, resulting in a relatively low retirement age, now averaging 54 years.

Mr. Meirelles said Brazil should move toward a minimum retirement age, without giving specifics. Pension payments amount to almost half of the national budget and fixing the system is key to restoring confidence in Brazil’s future, he said.

If Rousseff is impeached, Brazil’s voters are expected to allow Meirelles to enact the reforms he proposes with little resistance.