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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.

CalPERS has asked four San Gabriel Valley cities that formed a job-training agency 40 years ago, the now-disbanded LA Works, to begin paying down an 18-month-old pension debt totaling $3.37 million.

A rejection of the request, for which replies were due last Friday, could lead to a 63 percent cut in the pensions of 62 retirees. CalPERS cut pensions for the first time last November, a 60 percent reduction for five former employees of Loyalton, a tiny Sierra town.

The CalPERS board was told last week that LA Works is an unusual problem. Under the CalPERS contract, only the disbanded joint powers authority is liable for the pension debt, not the founding cities of Covina, West Covina, Glendora, and Azusa.

“Whether or not they have a legal obligation, our view is they have a moral and ethical obligation,” Matthew Jacobs, CalPERS general counsel, told the board. “They’re the folks who put this thing together, and it’s their employees, essentially.

“And just like they need to take care of their own employees who happen to have been lucky enough to have worked directly for that city, they ought to be taking care of these folks who they have sent over to the JPA. That’s why we sent the letter.”

The joint powers authority, the East San Gabriel Valley Humans Services Consortium, doing business as LA Works, has not made a monthly payment to the California Public Employees Retirement System since June 2015.

“They are an inactive JPA, and they have basically closed their headquarters office, laid off their staff, and they lost their funding,” Arnita Paige, CalPERS contract management chief, told the board.

Los Angeles County supervisors voted in May 2014 to stop contracting with LA Works. Auditors found the consortium had overbilled the county by nearly $1 million for job training for jail inmates and the unemployed.

LA Works had submitted the low bid for a new contract, $32 million over six years, the Los Angeles Times reported. But after the audits the supervisors decided to give the contract to another bidder.

The consortium formed by the four cities in 1976 grew to have a staff of 125 with a $12 million annual budget while also representing Claremont, Diamond Bar, Irwindale, La Puente, La Verne, San Dimas and Walnut, a San Gabriel Valley Tribune editorial said in June 2014.

A “big part of the problem” was the chief executive, Salvador Velasquez, who had been with the agency since the beginning, said the Tribune. He was out of the country on vacation when audit questions arose.

“For pension reasons, he is technically retired and retained by the board as a consultant,” the Tribune said. “The board dragged its feet on finding a replacement who could have ferreted out the problems, which obviously were myriad.”

Velasquez received an annual pension of $120,777 in 2015, according to Transparent California, a website that lists the annual pay and pension of individual state and local government employees.

Another East San Gabriel Valley Human Services Consortium employee, Kathryn Ford, received a $100,240 pension. The other 42 listed pensions ranged from $51,919 to $1,832.

A CalPERS staff report said the consortium’s pension plan has 191 members — 62 retired, 36 transferred, and 93 separated. The annual pension debt payment expected next fiscal year is $365,419, but it’s a long-term commitment. A termination payment is $19.4 million.

CalPERS sent a final collection notice to the consortium last Nov. 1, followed by a final demand letter on Jan. 6, before sending a letter seeking payment from the four founding cities on Feb. 2, with a response date of Feb. 17.

“If payment is not received from East San Gabriel or the founding cities the next step is for CalPERS staff to recommend to the Board involuntary termination,” Brad Pacheco, CalPERS spokesman, said via email. “If the Board approved then benefits would be cut.”

The number of local government agencies that are falling behind on their monthly payments to CalPERS, mainly very small ones, is increasing during a decade-long phase in of a series of four rate hikes that began five years ago.

“Yes, we are starting to see more,” Paige replied last week when asked by board member Theresa Taylor if the number of monthly payment delinquencies is increasing.

Paige said she could not give the board the number of delinquent employers and contracts with joint power authorities, including those solely liable, but it’s being researched. CalPERS provides pensions for 3,000 local governments, nearly half of them school districts.

The historic decision to cut Loyalton pensions last November, coming nearly four years after the city stopped making monthly payments to CalPERS in March 2013, seemed to be a clear signal of a crackdown on unpaid pension bills, followed by new attention from the board.

In the first quarterly collections and termination report last week, the interim CalPERS chief financial officer, Marlene Timberlake D’Adamo, outlined a number of improvements, including a new “team approach” using members of several departments.

Copies of pay-up letters will be sent to employees, making them aware of the problem and giving them a chance to apply what pressure they can. Legislation may be proposed to shorten a one-year delay in contract termination.

To set a termination fee, CalPERS drops the earnings forecast used to discount future pension debt (now 7 percent) to a risk-free bond rate (now 2 percent), saying a lump sum large enough to pay all future pensions is needed because employer-employee contributions stop.

Several cities have considered leaving CalPERS (Villa Park, Pacific Grove, Canyon Lake) but did not due to the large fee. A federal judge in the Stockton Bankruptcy called the fee a “poison pill.” Others say of CalPERS: “You can check in, but you can’t check out.”

The report last week said four local governments left CalPERS, paying the termination fee to avoid pension cuts:

Citrus Pest Control District No. 2 of Riverside County, seven members, $447,041 termination fee; Newport Beach City Employee Federal Credit Union, six, $1,207,695; Metro Gold Line Foothill Extension Construction Authority, 23, $10,109,618, and San Diego Rural Fire Protection District, 40, $3,567,318.

Since February 2015, two local governments adopted resolutions to terminate contracts, Niland Sanitary District and Trinity County Waterworks District No. 1, and four sent a notice of intent to terminate: Alhambra Redevelopment Agency, California Redevelopment Association Foundation, Herald Fire Protection District, and Exposition Metro Line Construction Authority.

In the last four months, four delinquent local governments paid up and avoided termination, including the Central Sierra Planning Council.

At Loyalton, which faced a $1.7 million termination fee, Mayor Patricia Whitley was unavailable. But a city hall spokeswoman confirmed a report that the city, on a month-to-month basis, is paying retirees the amount of the 60 percent pension cut.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

CaPERS and a consortium of other investors last week called on the banks financing the Dakota Access Pipeline to address local tribes’ concerns around the route and safety of the project.

Earlier in the week, protestors had camped in front of the CalPERS building, calling for the powerful investor to divest from the pipeline.

CalPERS’ stance was that it could wield more influence if it remained an investor in the project. Now, it is doing just that.

From the Sacramento Bee:

The California Public Employees’ Retirement System cited its concerns that construction would lead to an “escalation of conflict and unrest as well as possible contamination of the water supply” that could in turn tarnish the banks’ reputations and cause them to lose customers.

Neil is a great guy, I’ve been critical of PSP’s silly real estate benchmark which his predecessor implemented (with the full backing of André’s predecessor and PSP’s board back then) but there’s no denying he’s one of the best institutional real estate investors in the world (and woud outperform even with a tougher RE benchmark).

On that note, let me thank Neil, André Bourbonnais, Miville Tremblay (did a great job) and the rest of the CFA Montreal members who did an outstanding job organizing this luncheon (everything was perfect).

CalPERS’ allocation changes in the final months of 2016 have caused the pension fund to miss out on $900 million in potential investment return, according to remarks made by the CIO at a board meeting on Monday.

The pension fund moved away from stocks and private equity in September, opting for a less volatile asset allocation that is project to return around 6 percent annually.

However, CIO Ted Eliopoulos cautioned board members to keep the long-view.

From Reuters:

CalPERS Chief Investment Officer Ted Eliopoulos said during a board meeting on Monday that he wanted to “allay some of the anxiety and fears” by reminding the board that “our practice require us to take much longer periods of time into account.”

CalPERS decided in September to reduce some volatile stocks and private equity from its portfolio. Over the four months following until Dec. 31, the fund made more than $12 billion in net equity sales, according to fund documents. During that time, it experienced a lower return of approximately $900 million.

[…]

CalPERS expects a 5.8 percent annual investment return under its new portfolio asset allocation, significantly lower than the fund’s assumed rate of return of 7 percent by 2020.

The fund plans to make up for lower returns expected in the coming decade over the next 30 years or more.

One board member wondered if CalPERS could devise a method to retain its less volatile allocation while still capturing rallies. From the Sacramento Bee:

Board member Theresa Taylor questioned whether CalPERS could devise a different policy that might allow it act faster if trends change.

“I just want to make sure you are exploring all options so we are not leaving money on the table,” she said. “I know we are risk adverse and I get that but I also think that we leave ourselves open to not being able to do what we could be doing.”

 

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

The Canadian Press reports, Liberals tap former pension fund CEO to help build new infrastructure bank:

The former head of one of the country’s largest pension funds is being tapped to help build a new federal infrastructure bank.

The Liberals are naming Jim Leech as a special adviser to help design the proposed arm’s-length lending machine that could leverage billions in public money and turn it into new highways, bridges and transit projects.

The Liberals plan to infuse the bank with $35 billion in funding to financially backstop projects, with the details of how it will work to be outlined in this year’s federal budget.

The government says Leech will guide the bank’s implementation team and help recruit board members.

The former head of the Ontario Teachers’ Pension Plan has experience investing pension money in profit-generating infrastructure projects.

The Liberals hope that large pension funds like the teachers’ plan will invest in the bank, which will use federal funds to attract private- sector dollars for major projects, possibly generating $4 to $5 in private funding for every $1 of federal money.

Matt Scuffham of Reuters also reports, Canada may fund some infrastructure entirely from private funds:

Canada could finance some future infrastructure projects entirely through private sources, without using government funds, the special advisor for its new infrastructure bank said after his appointment on Friday.

Canada’s Liberal government announced last November it would set up the agency to supplement government investment in projects like new roads and bridges with funding from private investors such as pension and sovereign wealth funds.

The government advisory panel that recommended its creation had said it could look to raise C$4 to C$5 of private funding for every C$1 provided by taxpayers to fund projects.

However, Jim Leech, the pension executive recruited on Friday to advise the government on the bank, said it could go further with private investment on some projects.

“I’m sure that there are many projects that won’t need any investment from taxpayer money. They can be totally funded by the private sector,” Leech said.

New U.S. President Donald Trump has said he would launch a $1 trillion infrastructure spending program financed entirely by private sources. Infrastructure products are traditionally funded by a mix of private and public investment.

Leech said one of the challenges for the infrastructure bank will be that institutional investors such as pension funds traditionally prefer to invest in ‘brownfield’ assets which have already been built, while the greatest infrastructure need is for ‘greenfield’ assets which have yet to be built.

“I think that’s where the logjam is. You have, on the one hand, on a global basis, a lot of money looking for infrastructure to invest in but it doesn’t have the talent within those institutions to be able to assume greenfield.”

The Caisse de depot et placement du Quebec is the only Canadian pension fund making large-scale ‘greenfield’ investments, having agreed to construct one of the world’s largest light rail networks in Montreal, a project which could become a test case.

“I think what the Caisse is doing is very encouraging. I was impressed to see they are building a team within the Caisse which knows how to assess some of this risk. I think that’s good innovation and there are things we can learn from it,” Leech said.

He said the bank would look at ways to make projects “risk tolerable” for financial institutions but declined to specify how they might do that. Infrastructure experts say they could provide guarantees on future returns or backstop some construction risk.

And Janyce McGregor of the CBC reports, Ex-Teachers CEO Jim Leech named special advisor for new Canada Infrastructure Bank:

Prime Minister Justin Trudeau has named Jim Leech special advisor for the new Canada Infrastructure Bank.

Leech is a former CEO of one of the world’s largest pension funds, the Ontario Teachers’ Pension Plan. Since his retirement in 2014, he’s been an adviser to the Ontario Liberal government, leading a review of the sustainability of the province’s electricity sector pension.

In a release from the Prime Minister’s Office Friday, Trudeau referred to Leech’s “immense knowledge and experience,” saying he was “confident that he will help ensure a smooth and successful launch of the Canada Infrastructure Bank.”

The release said Leech will work with the Privy Council Office and the offices of Infrastructure Minister Amarjeet Sohi and Finance Minister Bill Morneau to build an implementation team and get the new organization off the ground. It promises an “open and transparent process” to recruit future board members.

Leech said in a statement Friday he was honoured to be asked to contribute to moving the bank from concept to reality.

“I believe that, if done right, an infrastructure bank will give Canada a competitive advantage in the global quest for infrastructure funding and development,” he said in a release issued by Queen’s University in Kingston, Ont., where he currently serves as chancellor.

The creation of the infrastructure bank was announced in Morneau’s fall economic statement as part of the government’s overall infrastructure investment plans.

Although touted as an effective way to ensure more projects get built quickly across Canada, very little about the new entity has been revealed in the months since.

Bank may manage up to $35B

Legislation to create the bank will come after the federal budget, expected in the coming few weeks.

The bank is intended to work with other levels of government to “further the reach” of federal infrastructure spending using a broad range of financial instruments, including loans and equity investments.

Last fall, the government suggested the bank would manage up to $35 billion: $15 billion from the federal infrastructure funding announced last year and an estimated $20 billion sought from private investors.

The public money, the government said, would fund projects that wouldn’t normally be able to provide a return for private investors.

For other more profitable projects, the bank may attract “as much as four or five dollars in private capital for every tax dollar invested,” Morneau said last fall.

“Potential investors have said projects need to be worth $500 million or more for them to invest,” said Conservative infrastructure critic Dianne Watts Friday. “That’s a lot of risk to put on taxpayers for something that will only benefit the large urban centres.”

The Liberals have touted the new bank as an innovative way to put private capital to work building much-needed infrastructure.

Leech was credited with innovative decision-making during his tenure at Teachers, a highly-influential public pension manager because of its large size and investment scope. He eliminated the plan’s funding deficit and its returns performed among the top-ranked funds of its kind internationally during his tenure.

You can read this press release from the Prime Minister’s Office announcing the appointment of Jim Leech as a special advisor to the newly created federal infrastructure bank.

Over the weekend, I emailed Jim Leech to get his views on this new role. Jim sent me this:

My role is as advisor (pro bono) to help “stand up” the bank. Will focus on governance (board, management), talent (org structure, skill sets, hiring Chair and top management), and process (how projects prioritized/evaluated). Lots to do like what G/L to adopt, risk management, location etc.

When I asked him what he meant by G/L he said:”General Ledger – mundane but remember we are creating a major financial institution from scratch.”

Jim Leech is an excellent choice to gets things going on this new federal infrastructure bank. Apart from Leo de Bever, another retired pension veteran who worked at Ontario Teachers’ and AIMCo and is widely considered as the godfather of direct infrastructure investments in Canada, I don’t think the federal government could have picked a better special advisor.

Jim has tremendous experience and knows all the key people in the pension industry in Canada and abroad. He will make recommendations for the board (I would nominate Leo de Bever as the chair) and will get to work setting up the governance, hiring top management, and focusing on the process and how to quickly and efficiently get things rolling so that these projects can get underway as soon as possible.

Who should lead the new federal infrastructure bank? Good question. Again, I would place Leo de Bever high on the list if he’s interested in that job or chairman of the board, but there are others as well like Michael Sabia and Mark Wiseman who co-authored an article for the Globe and Mail last October on why the private infrastructure bank will put Canada on a path to growth.

Jim Leech hired Mark Wiseman at Ontario Teachers’ to run the fund investments and co-investments before he moved on to head CPPIB. Mark is now working at BlackRock so I’m not sure if he’d give up that high profile job to come back to head up the federal infrastructure bank.

Michael Sabia is the president and CEO of the Caisse but his term is coming to an end, so along with Leo de Bever and Mark Wiseman, I wouldn’t be surprised if he’s high on the list of likely candidates to head up the federal infrastructure bank. Sabia’s baby at the Caisse is the Montreal REM project which he recently defended publicly and he’s a huge believer in developing infrastructure to kick-start and sustain economic growth over the long run.

Who else is a potential candidate to run the new federal infrastructure bank? Neil Petroff, the former CIO of Ontario Teachers’, someone else who Jim Leech knows well and worked closely with in the past. After retiring from Teachers, Neil joined Northwater Capital Management back in 2015 as a Vice Chair and he knows infrastructure investments very well and is plugged in to the key players all over the world.

There are other candidates as well, like Wayne Kozun who was up until recently the senior VP of Public Equities at Ontario Teachers’ and Bruno Guilmette, the former head of infrastructure investments at PSP Investments and someone I worked with in the past when he was putting together his business plan to introduce infrastructure as an asset class at PSP back in 2005.

Another name that was mentioned to me to head up this new federal infrastructure bank is Larry Blain, Senior Director, Global Infrastructure at KPMG and advisor and corporate director of the Canada West Foundation:

Previously, Mr. Blain served as Partnerships BC’s President and CEO, and subsequently as Chair of the Board of Directors. Under Mr. Blain’s leadership, Partnerships BC participated in more than 45 partnership projects with an investment value of $15 billion. Mr. Blain has also been a Director of BC Hydro, the Chair of Powerex, a Director of the Transportation Investment Corporation, and a Director of the UBC Investment Management Trust.

And thus far I’ve only mentioned men. Some women I would strongly consider to be chair of the board or to serve on the board are Eileen Mercier, the former chair at Ontario Teachers’ who is now the new chancellor of Wilfrid Laurier University and Carol Hansell, a former board of director at PSP Investments who was recently awarded the Hennick medal for career achievement. I would certainly tap their expertise for this new federal infrastructure bank.

Now, I am merely speculating here, I have no idea if any of these people are interested in heading the new federal infrastructure bank or taking any role on the board of directors, but the point I am making is there is no shortage of qualified individuals to consider for potential roles.

I’ll leave those decisions up to Jim Leech, he’s more than qualified and much better plugged in than I am to pick the right people for the board of directors and senior management.

One infrastructure expert shared this with me:

It is absolutely essential that they hire the right mix of people from both the pension fund industry and from infrastructure.

They also need to hire Canadians who have experience working with institutions in different geographic markets. The Europeans and Japanese are light years ahead of us in this respect.  We need to learn from some of their models, transform the models to make them uniquely Canadian, and then execute.

There are quite a few infrastructure experts in Canada. One of them is Andrew Claerhout, Senior Vice President at Teachers‘ Infrastructure Group, who shared these great comments with me back in November when the federal government started courting big funds for their infrastructure projects:

• 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.

Basically Andrew Claerhout explains why pensions are not competing with DBFM/ PPPs and are looking instead to invest alongside the federal government in much larger, more ambitious greenfield infrastructure projects where they can help it make them economical and profitable over the long run.

Andrew added this: “Most infrastructure investors focus on brownfield opportunities while the government is most interested in seeing more infrastructure built (i.e., greenfield). The infrastructure development bank is meant to help bridge this divide – hopefully it is successful.”

I certainly hope this new federal infrastructure bank is successful in bridging this divide and I’m happy the government appointed Jim Leech as a special advisor to get things rolling. He has a big job ahead of him when he starts working in March but till then, I hope he enjoys his ski vacation with his family on top of mountain in Okanagan (can’t ask for better ski conditions).

One final note, I recently reported that GPIF is making America great again by investing billions in Trump’s infrastructure project. I updated that comment to state GPIF and Prime Minister Shinzo Abe denied these reports. I think the Japanese would be far wiser to invest in Canada’s infrastructure projects once this new federal infrastructure bank is set up.

As far as US infrastructure, Bloomberg reports that Blackstone is targeting as much as $40 billion for infrastructure deals if the world’s biggest private equity firm re-enters the sector. Interestingly, President Trump and Prime Minister Shinzo Abe both attended Blackstone CEO Stephen Schwarzman’s 70th birthday party in Palm Beach over the weekend where there was a ‘frantic rush to change ‘Chinese decorations to Japanese’.

Care to hazard a guess as to who will be the biggest investor in Blackstone’s new infrastructure fund once it re-enters the sector? Happy birthday Mr. Schwarzman, you and your Blackstone colleagues are about to become a whole lot richer under the Trump administration.

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, Volatile markets shake CPPIB results:

The Canada Pension Plan Investment Board reported a decline in Canada Pension Plan assets to $298.1-billion in its third fiscal quarter, as a major drop in North American fixed income markets hampered investment results.

CPPIB, which manages the Canada Pension Plan investment portfolio, said Friday that the $2.4-billion decrease in assets through the quarter ended Dec. 31 was caused by a swell in CPP payments made to cover benefits at the end of the calendar year that exceeded the $1.7-billion in investment income the fund produced. The investment portfolio’s return in the quarter was 0.56 per cent, after factoring in all costs.

“The fund’s modest return this quarter reflects the largest quarterly decline in North American fixed income markets since CPPIB’s inception coupled with the Canadian dollar strengthening against most major currencies except for the U.S. dollar, partially offsetting gains in our public equity portfolio,” said Mark Machin, CEO of the CPPIB, in a statement.

The end of 2016 and the election of U.S. president Donald Trump brought broad declines to the bond market, projecting investor expectation of inflation and economic growth in the U.S. CPPIB also takes the strategic position not to not to hedge its investment portfolio against currency fluctuations, which means foreign exchange changes can generate big gains or losses.

Mr. Machin has cautioned in recent months to expect more short-term volatility in the fund’s investment results, as the pension fund adjusts its approach to risk in a way it expects will lead to higher long-term gains. So far, in the nine months of CPPIB’s current fiscal year, the fund has produced a 6.9 per cent investment return, after factoring costs.

The CPPIB said that it expects to see more CPP contributions flow into the CPP Fund during the first part of the 2017 calendar year, which will help to make up payments exceeding contributions at the end of 2016. The fund noted that it receives more contributions annually than it pays out.

On the investment front, the pension fund was highly active in the quarter, particularly in real estate. CPPIB invested in student housing, office buildings and retail. The fund also sold a large stake in a Manhattan office tower.

“Income was generated across investment programs and our teams continue to invest in assets in line with our long-term objectives to deliver solid results,” Mr. Machin added.

The breakdown of CPPIB’s investment portfolio shifted only slightly in the quarter. Equity investments made up 56 per cent of assets at the end of December, and 22.1 per cent of assets are in fixed-income investments such as bonds. Infrastructure and real estate assets made up the remaining 21.9 per cent.

CPPIB reported a 10-year annualized return of 4.8 per cent after factoring inflation, which exceeds the standard set by Canada’s Chief Actuary.

Barbara Shecter of the National Post also reports, CPP Fund assets fall below $300 billion, hit by the biggest decline in fixed income markets in its history:

A decline in North American fixed income markets and seasonal cash outflows cause net assets of the CPP Fund to dip below $300 billion.

The fund, which had assets of $300.5 billion at the close of the second quarter, ended the third quarter on Dec. 31 with assets of $298.1 billion.

The investment portfolio delivered a net investment return of $1.7 billion, or 0.56 per cent after all costs, while Canada Pension Plan cash outflows in the quarter were $4.1 billion.

“The Fund’s modest return this quarter reflects the largest quarterly decline in North American fixed income markets since CPPIB’s inception coupled with the Canadian dollar strengthening against most major currencies except for the U.S. dollar,” said Mark Machin, chief executive of the Canada Pension Plan Investment Board.

He said those factors partially offset gains in the public equity portfolio.

In an interview, Machin said the CPP Investment Board is watching the bond market to try to gauge what the ultimate impact will be of the election of Donald Trump as president of the United States.

“It’s always difficult to tell” what the longer-term direction of the bond market will be, he said. “The received wisdom a few months ago was that we were in a lower for longer (period) and negative rates would continue for as far as you can see, but I think the market took a very different view on the elections in the U.S. and the new administration’s policies being very pro-growth.”

The immediate assumption of an inflationary environment took the wind out the bond markets, but Machin said it remains to be seen what policies will ultimately be put in place, how quickly that will happen, and what the knock-on effects will be around the world.

“The big protection for us ultimately is diversification and finding diversification across asset classes, across geographies, across strategies, and that’s what we’re focused on overall so we create a portfolio that will weather the stresses in any individual market anywhere,” he said.

Investing in the United States will remain an important part of the strategy for CPP Investment Board, which invests funds not needed to pay current CPP benefits.

“The U.S. is the biggest destination for our capital… We’re active across just about every one of our strategies” there, he said.

Machin said CPPIB is seeking out “selective opportunities” in markets that could be characterized as stable and even somewhat buoyant.

“There’s no market that’s distressed right now. Volatility is, if anything, at all-time lows in the equity markets,” he said.

For the first nine months of the year, the CPP Fund increased by $19.2 billion and posted an investment return of 6.9 per cent after all costs. Investment income was $19.4 billion, and CPP cash outflows were $0.2 billion.

The CPP Fund routinely receives more contributions than are required to pay benefits during the first part of the calendar year. This is partially offset by payments exceeding contributions in the final months of the year.

Keith Ambachtsheer, a pension expert and co-founder of KPA Advisory Services, said quarterly changes in capital value of an investment fund “are noise…not signal” – regardless of whether they are positive or negative.

“That’s why most of the content of the quarterly CPPIB reports deal with more important longer term issues,” he said.

These are good articles but I normally don’t discuss quarterly results from CPPIB or even semi-annual results from the Caisse. Why? Because, unless there is a big bomb I’m unaware of, I honestly couldn’t care less about short-term results of any pension, they are totally irrelevant in the longer scheme.

In fact, please repeat after me: “I will stop paying attention to CPPIB’s quarterly results.” Period, end of story. Critics of the Canada Pension Plan and CPPIB will harp all over these articles, trying to put a negative spin on them, I simply ignore them.

So, if quarterly results are so immaterial, why does CPPIB report them? Short answer is they have to by law, all part of good governance, full transparency and regular communication.

Now, truth is last quarter was full of action following Trump’s victory. US long bonds sold off and stocks took off, so a lot of pensions experienced some pretty big losses in their fixed income portfolio last quarter.

Some pensions like HOOPP and Ontario Teachers’ were up huge in their fixed income portfolio going into Q4 (CPPIB’s fiscal Q3), then experienced losses in the last quarter. The Caisse has been short bonds for a long time and they probably made decent money in Q4, but over the last four years, their short duration bet (including carry and roll down) has cost them big returns in their fixed income portfolio.

Looking forward, you know my thoughts on US long bonds. Back in November, I explained why Trump will not trump the bond market, urging institutional investors to load up on long bonds after the backup in yields.

At the beginning of the year, I warned my readers to beware of the reflation chimera and that it most certainly isn’t the beginning of the end for bonds:

I just got off the phone with the president of a major Canadian pension fund who told me that they had another solid year last year. He said they sold US Treasuries in mid-year when the 10-year yield approached 1% “because we didn’t see any more upside” and right before Christmas were itching to buy some 30-year Treasuries when yields popped back over 3.3%. He added: “If yields on the 10-year Treasuries rise back to 3%, we’ll be buying.”

What else did he share with me? Stocks are somewhat over-valued here by a factor of seven on their scale, with ten being significantly over-valued. “This silliness can last a little while longer but people forget the same thing happened back when Ronald Reagan won the elections. Stocks took off then too but after the inauguration, they sank 20% that year.”

No kidding! As I’ve repeatedly stated, most recently in my Outlook 2017: The Reflation Chimera, the best risk-reward in these markets is US Treasuries. I don’t care what Bill Gross, Ray Dalio, Paul Singer, Jeffrey Gundlach say in public, in a deflationary environment, I would be jumping on US long bonds (TLT) every time yields back up violently.

Also, take the time to read my comment on the 2017 US dollar crisis where I painstakingly go over the main macro trends and why all that is happening right now is the US is temporarily shouldering the world’s deflation problems through a higher dollar. There is nothing structural going on in terms of solid long-term growth.

What else? The global pension crisis is alive and well which is why I don’t see yields on the 10-year Treasuries rising anywhere near 3%. Most smart institutional fund managers took my advice and jumped on US long bonds when they yield on the 10-year hit 2.5%.

I started my career at BCA Research back in 1998 after a short stint for the Canada Revenue Agency writing a special report on white collar crime in Canada. At BCA, I helped Mark McClellan write the monthly Fixed Income Analyst (Mark is now the Global Strategist at BCA). Two things I know well: bonds and white collar crooks (Tom Naylor, the combative economist at McGill, taught me everything I need to know on hot money and the politics of debt and bankers, bagmen and bandits).

Speaking of BCA Research, a former colleague of mine from there and later at the Caisse, Brian Romanchuk, wrote a nice comment on his blog explaining why the cyclical situation in the US is still mediocre, stating:

The latest labour market data from the United States remain consistent with my view that the rate of growth is not enough to greatly reduce the mass underemployment that is the reality of the labour market. That said, the market implications are limited, as this is already priced into the curve. The Fed may wish to step up its anemic pace of rate hikes, but they will remain dependent upon the data.

I urge you to read his entire comment here. I think the Fed will raise rates more than once and may even (foolishly) raise three times this year, fueling the US dollar crisis I warned of late last year. That’s when things get sticky for emerging markets and financial markets.

Another BCA Research alumnus, François Trahan of Cornerstone Macro, was recently in Montreal at a CFA luncheon to explain why he is bearish and thinks the yield on the 10-year Treasury note will fall back below 1.3% later this year. I happen to agree with him and think a lot of people aren’t reading these markets right (if you’re an institutional investor, make sure you subscribe to Cornerstone Macro‘s research, it’s truly excellent).

And yet another BCA alumnus and bond guru who later went on to become Steve Cohen’s economist at SAC Capital, Gerard MacDonell, wrote a nice short comment in his blog last night, Ug, Trump rally, which you should all read even if his anti-Trump views are all over it (give it a rest old chap, breathe in, breathe out!!).

I will end my comment here, think a lot of people reading too much into CPPIB’s latest quarterly results should “breathe in, breathe out”. There really isn’t anything to worry about here.

When Mark Machin came to Montreal last fall and was nice enough to meet with me, I told him there will be challenging times ahead but to keep hammering the point that CPPIB will typically outperform in a bear market environment and under-perform in roaring bull markets. And to always focus on the long-term, these short-term results are totally irrelevant.

Of course, just like his predecessor, Mark knows all that, he’s a very smart and nice guy with tremendous experience and knowledge and he’s surrounded by a great group of professionals who are busy investing assets in public and private markets all over the world.

So relax, CPPIB is just fine and so are all of Canada’s large pensions!

The CIO of Danika, the $200 billion wealth management arm of Danske Bank A/S, doesn’t see hedge funds as part of his portfolio in the near future.

The reason? Hedge funds have forgotten how to hedge.

But he’s still open to investing in the right funds.

More comments from Anders Svennesen, via Bloomberg:

“If you look back over time, there are a lot of hedge funds that were really exposed to the market,” Anders Svennesen, the chief investment officer of Danske’s pension arm, Danica, who was recently made CIO at the bank’s wealth unit, said in an interview at his office outside Copenhagen.

“A real hedge fund ought to be market neutral, but an awful lot of them have been riding the wave of falling rates and rising stock prices,” Svennesen said. He doesn’t see outsourcing to hedge funds as a model that suits his goals here and now.

[…]

Svennesen says the trick is to identify hedge funds that actually live up to their mandate of being market neutral, so that they don’t start bleeding money when a sudden shock upends a price trend. He rejects speculation that today’s low-rate environment has undermined the logic of hedge funds, which traditionally charge high fees for their services.

“Those that really manage to be market neutral, and go in and operate in the right way, deliver a positive return, and there’s absolutely still a need for that,” he said. “Especially in the current environment.”

CalPERS expects to see an annual return of 5.8 percent under its new, more cautious allocation strategy, according to documents posted online by the pension fund this week.

The pension fund implemented the new allocation in September in anticipation of slower market growth over the next few years.

Notably, the expected return figure falls short of both CalPERS’ discount rate, which currently sits at 7.5 percent but will be lowered to 7 percent by 2020.

More from Reuters:

CalPERS’ caution mirrors outlooks from public pension funds across the United States as they try to grapple with investment forecasts of slow market growth over the next decade.

The new CalPERS allocation reduces the portfolio’s more volatile stock and private equity sectors and increases allocations of more stable investments such as real estate and infrastructure. The board expects to review the allocation again in 2018.

In December, CalPERS staff said the fund’s 10-year expected return was 6.2 percent. They expected annual returns to jump to 7.83 percent in the decades to follow. As a result, the fund’s long-term average would more closely align with CalPERS’s new discount rate, which the board voted in December to lower from 7.5 percent to 7 percent by 2020.

CalPERS spokeswoman Megan White told Reuters in an email on Tuesday that the 6.2 percent expectation is “more reflective of the desired allocation, and what we expect will emerge from the [asset liability management] meetings over the coming year.”