Category: Pension Newsroom

CalPERS is aiming to reduce corporate “board stagnation” with a proposal, released Thursday, that aims to make corporate boards more diverse and the churn of directors more frequent.

From Bloomberg:

“We’ve got board stagnation,” said Anne Simpson, director of corporate governance at Sacramento-based Calpers. “We’re not going to create an opportunity for new members for diversity to progress unless there’s some space.”

Directors’ independence can be compromised after 10 years, and companies should either classify them as nonindependent or provide an annual explanation why, Calpers said in a set of principles released Thursday. Routine discussions about replacing directors would ensure boards have a “necessary mix of skills, diversity and experience,” Calpers said in the document.

S&P 500 boards replace about 7 percent of their members annually and the average tenure is 8.5 years, according to Spencer Stuart, an executive search consulting firm. Among those boards, only 3 percent set an explicit term limit for directors and 73 percent have a mandatory retirement age, typically age 72 or older.

[…]

Pressure has been building for companies to assess the diversity and tenure of their boards, said Dan Siciliano, law professor and director of the Rock Center for Corporate Governance at Stanford University near Palo Alto, California. Board composition has become easier to track, and high-profile examples of homogeneous boards at Facebook Inc. and Twitter Inc. drew attention to the issue, he said.

White males account for 73 percent of board seats for Fortune 500 companies, according to the advocacy group Alliance for Board Diversity.

 

Photo by  rocor via Flickr CC License

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

Karen Seidman of the Montreal Gazette reports, Pension paid to McGill’s former principal rankles employees:

Amid a climate of austerity on the McGill University campus, new revelations about the pension that former Principal Heather Munroe-Blum recently started collecting has rankled many union groups.

Access to Information documents show that Munroe-Blum, who retired from her position as principal in 2013 and is no longer teaching at McGill, is entitled to a supplementary pension of almost $284,000 a year on top of the almost $87,000 she gets from regular pension plans from McGill and the University of Toronto.

The information also suggests that Munroe-Blum may have been earning much more than has been documented, perhaps as high as $740,000 — which would make it the richest package of any university president in Canada, then or now. That’s based on the fact that her supplementary pension entitlement should represent about 50 per cent of her highest average earnings.

However, Olivier Marcil, vice-principal of communications and external relations for McGill, said in an email that her salary was $369,000 plus benefits as previously reported, but that “adjustments were made to her pension calculation during that time which resulted in the ($284,000 pension payment) amount” (click on image below).

Munroe-Blum’s salary and benefits were often a sore point on campus, especially after it was revealed she was collecting a base salary of $369,000 as Quebec universities were being asked to absorb $124 million in cuts. There were also “contract benefits” of $128,000 to $226,000 a year.

The combined pensions, which she just started collecting on July 1, are bringing her almost $371,000 a year — which is as much as she was allegedly earning during her tenure as principal. Her supplementary pension alone — which was negotiated as part of her 2003 contract confirming her appointment as principal and vice-chancellor — has already paid her more than $96,000 since July 1.

“During her tenure here they reduced the benefits of the pension plan for employees but she has this insane, over and above pension plan which no one else gets,” said Sean Cory, president of the Association of McGill University Research Employees. “The amount that she is getting really caught me off guard.”

He says the fact that her regular pensions from U of T and McGill are $86,850 combined shows “just how good this extra pension plan is,” with Munroe-Blum collecting an additional $284,000 a year for the rest of her life.

It also raises some important questions: Why is Munroe-Blum being credited with years of service at both McGill and U of T for the purpose of calculating her supplemental pension from McGill? With 12 1/2 years of service at U of T, prior to joining McGill, this effectively doubles her pension entitlement and enables her to collect for all of that time at the higher principal’s salary rather than having some of it at the lower professor’s or vice-president’s salary she would have earned at U of T.

Marcil said that was negotiated into her original contract and that “I personally don’t know whether or not this is or was common practice among other university presidents.”

Why did McGill agree to such a lucrative pension package for Munroe-Blum? When she left the principal’s post in 2013, Stuart Cobbett, chair of McGill’s board of governors, defended her departure package in an op-ed in the Montreal Gazette, saying the university had great results to show from her leadership.

But Cory said Munroe-Blum’s pension package makes him wonder how many other former principals are collecting equally lucrative pensions, and how McGill — which has been crying about austerity and cutbacks — can sustain such long-term payments.

Molly Swain, president of McGill’s support employees union, said the revelations about Munroe-Blum’s pension package comes as McGill claims to have no money and is constantly instituting belt-tightening measures.

“That makes this tough to swallow,” she said, adding her union is representing students who were remunerated with only room and board for overseeing first-year students in residence and have been fighting to get what they believe is their rightful monetary compensation.

“It’s extremely hypocritical,” she said. “That’s an absolutely massive pension. It’s appalling.”

She said it also points to a culture at McGill, and other universities, of there being no accountability and quietly providing income and benefits that go well beyond the base salary of their top administrators.

However, that is something that seems to be changing. McGill’s current principal, Suzanne Fortier, made public her contract and the details of her compensation ($390,000 and not a lot of other perks), as did Alan Shepard, the president of Concordia University. The Université de Montréal has had a policy in place since 2009 that determines salaries based on the median of rectors and presidents of Canadian universities.

Still, Swain said, Munroe-Blum’s deal is concerning for employees.

“The university is maintaining austerity for a certain group of people — but not for people at the top,” she said.

Earlier this week, I discussed how some people retire in EU style. And let there be no doubt that Dr. Heather Munroe-Blum who was appointed chairperson of the board of directors of the Canada Pension Plan Investment Board in June 2014 is enjoying a retirement package that most Canadians can only dream of (add to this $160,000 a year compensation she gets for being CPPIB’s chair).

The dispute here is whether her McGill pension was padded by including her years of experience at University of Toronto at a time when she was putting the squeeze on McGill employees’ pensions. She obviously signed a contract where she wisely negotiated her pension as part of her overall compensation (this is what all of Canada’s highly paid senior pension fund managers do for their own compensation as well as what Canadian and American corporate CEOs do when negotiating their outrageous pensions).

Of course, it’s no secret that there’s no love lost between McGill employees and Heather Munroe-Blum. My departed friend, Sam Noumoff, used to criticize her when we would get together for the Men’s club at Alep restaurant to enjoy Montreal’s best Syrian & Armenian cuisine. “She’s a ruthless corporate b*tch,” Sam used to say and his sentiment was shared by other professors at the table (most of which are cynical ex Marxists like he was).

I never met Dr. Munroe-Blum so I won’t criticize her on a personal level or question the way she handled McGill’s finances back then. She has an impressive career but she obviously pissed off many employees with her cost cutting decisions (some of which were needed) and her reportedly confrontational style didn’t help either. But to be fair, it’s the nature of the job and I don’t know many university or hospital administrators who are loved during a period where they’re implementing severe budget cutbacks.

One thing this article does raise, however, is the need to introduce a lot more transparency and accountability to the way Canadian universities report their finances and pension deficits. In March 2012, I discussed my thoughts on offering Canadian universities pension relief and stated the following:

Why will universities with these defined-benefit plans be ‘exempted’ from more stringent tests for pension solvency that apply to businesses? I have friends who are professors and others who work at various universities, including McGill, and they’re not to happy with the way their DB plans have been mismanaged (McGill got sucked into the non-bank asset backed commercial paper –ABCP — scandal that rocked the Caisse and other large Canadian pension funds).

The problem at Canadian universities and other universities is that they hide their pension problems from public scrutiny. Why? Because they’re petrified if the public finds out, it will impact their fundraising as well as their constant cries to increase tuition fees.

Now, I happen to think you can make a case for raising tuition fees marginally, especially here in Quebec where students enjoy the lowest tuition fees in Canada and are asking for “free tuition like in Denmark” (without understanding how the Danish system works). But when I see how Canadian universities are mismanaged — not just their pensions but general mismanagement in their operations — makes me think twice about raising tuition fees.

True, universities are not corporations and shouldn’t be run like corporations. But why should we give their defined-benefit plans less stringent tests for solvency? Who is monitoring their performance and why isn’t this information easily accessible to the public and updated on a regular basis? I can say the same thing about Canadian cities and municipalities, the other pension time bomb which is rarely discussed. Most people haven’t got a clue of what the hell is going on at these city plans.

This is why I think we should consolidate all defined-benefit pension plans — private and public — into larger public DB plans which are operating under more scrutiny and are more transparent and accountable for the decisions they take (not perfect but better than most smaller plans).

If it were up to me, I would either roll up all university pensions to be managed by our large well governed provincial plans or have CAAT pension plan manage all Canadian university pensions since that’s what they specialize in and are doing a great job at it (see CAAT’s 2014 Annual Report here).

Of course, in my ideal world, every Canadian would have their pension managed by CPPIB or several CPPIBs by enhancing the CPP. I’ve discussed my thoughts on this when I went over introducing real change to Canada’s pension plan as well as when I went over breaking Ontario’s pension logjam.

Speaking of CPPIB, its latest quarterly results for fiscal 2016 are available here:

The CPP Fund ended its second quarter of fiscal 2016 on September 30, 2015, with net assets of $272.9 billion, compared to $268.6 billion at the end of the previous quarter. The $4.3 billion increase in assets for the quarter consisted of $4.2 billion in net investment income after all CPPIB costs and $0.1 billion in net CPP contributions. The portfolio delivered a gross investment return of 1.62% for the quarter, or 1.55% on a net basis.

For the six month fiscal year-to-date period, the CPP Fund increased by $8.3 billion from $264.6 billion at March 31, 2015. This included $4.0 billion in net investment income after all CPPIB costs and $4.3 billion in net CPP contributions. The portfolio delivered a gross investment return of 1.6% for this period, or 1.5% on a net basis.

“Despite significant declines across all major global equity markets and mixed results in fixed income markets this quarter, the CPP Fund showed a modest gain. Broad diversification of the investment portfolio across geographies and asset classes contributed to the Fund’s resiliency,” said Mark Wiseman, President & Chief Executive Officer, CPP Investment Board (CPPIB). “As a long-term investor, our five- and 10-year returns are the most important measurements of our performance, and these remain strong.”

CPPIB is performing very well given the difficult investment environment. I don’t pay attention to quarterly results and don’t see trouble at Canada’s biggest pensions.

I’m sure Heather Munroe-Blum has a handful being the chairperson of this mega fund but she’s doing a great job and has a very experienced board of directors backing her up as well as a very experienced and competent senior management team delivering outstanding long-term results.

My only beef with CPPIB’s board and senior management team, as well as that of other large Canadian public pensions is that they lack true diversity at all levels of their organization. Here they can learn a thing or two from Prime Minister Trudeau who nominated Canada’s most diverse cabinet ever (click on image below; they are sitting with the Governor General of Canada, David Johnston, who was the Principal of McGill back in my days of attending that university and was liked by most people and still is):

Nevertheless, critics claim Trudeau’s diverse cabinet is not a true Canadian portrait without referring to the fact that he nominated two ministers with disabilities, two aboriginal ministers, and Canada’s first Muslim minister

Oil giant Petróleos Mexicanos (better known as Pemex) announced this week that it had struck a deal to overhaul its retirement system in a change that will affect a wide swath of the company’s workers – new and veteran employees alike.

From Bloomberg:

Petroleos Mexicanos reached an agreement with its union to create individual retirement accounts for incoming workers and to raise the retirement age, easing the company’s pension liabilities.

Mexico’s state-owned oil producer, which last month reported the biggest quarterly loss in its history, said it increased the retirement age to 60, from 55, for workers that have been with the company for less than 15 years. The agreement was stipulated by the government in exchange for absorbing part of the current $90 billion that Pemex holds in pension obligations.

In September, Pemex and the union agreed to stop linking pension payments to annual salary increases, effective this year. That same month, the company’s capital spending budget for next year was cut by 73 billion pesos ($4.4 billion) to 293 billion pesos, the lowest allocated since 2007.

The company’s pension liabilities have doubled in the last five years.

 

Photo by ezioman via Flickr CC License

One of the central tenets of Pennsylvania Gov. Tom Wolf’s campaign was keeping pension benefits the way they are – no cuts, no adjustments.

But a months-long budget stalemate with his state’s Republican majority has forced Wolf to change his stance.

Now, it’s likely any forthcoming budget deal will contain significant changes to the state’s pension system: including a switch to a hybrid plan for future state hires.

More on the pension proposal currently in the works, from PennLive:

The pension reform department of the final state budget talks is aimed toward producing a new benefit plan for future state and public school employees that’s come to be known as a “side-by-side hybrid.”

That’s side-by-side, as in it’s really two distinct pension plans working for the employee from their first day on the job: one part a traditional defined benefit with payouts based on annual salary and years of service; the other a 401(k)-style plan more dependent on the worker’s contributions in and investment choices.

[…]

One source familiar with proposals being traded this fall said the finished plan still has the potential to meet standard income replacement goals for career public-sector employees.

With Social Security benefits factored in, that source said, a retiree could expect to get to about 85 percent of his or her retirement-year gross income, a figure that would decline gradually from there since Pennsylvania’s state pension systems don’t give cost-of-living adjustments.

Over the course of retirement, the revised plan plus Social Security should average over 70 percent in replacement income. That would be a benefit cut of about 10 percent from current levels available to new hires, the analyst said.

Pennsylvania Republicans have been pushing for two years to shift more risk from the state to the individual worker. But until now, the proposals have gone nowhere.

 

Photo by Governor Tom Wolf via Flickr CC License

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

Chris Witkowsky of PE Hub reports, Canada’s PSP Investments opens NY office for private debt:

Another massive Canadian pension is making a move into the U.S. to directly compete with GPs.

The Public Sector Pension Investment Board, with $112 billion under management, formed PSP Investments Holdings USA LLC, a New York-based private debt investment group. The New York office, at 450 Lexington Avenue, is PSP’s first foreign office.

The group is expected to initially focus on private credit and debt, but will eventually include a small team for private investments, PSP said in a statement.

The private debt group is led by David Scudellari, who recently joined PSP’s U.S. affiliate as senior vice president, head of principal debt and credit investments of PSP Investments. Scudellari has held leadership roles at Goldman Sachs and Barclays Capital, where he was global head of finance and risk — Canada for Barclays in New York.

Scudellari is joined by Ziv Ehrenfeld, senior director, principal debt and credit investments. Prior to PSP, Ehrenfeld was a member of the leveraged finance group at Barclays focusing on natural resources.

“The leveraged finance landscape is currently in transition. With traditional capital providers having lost significant market share in the last few years, there is an attractive opportunity for a long-term investor such as PSP Investments to enter this trillion-dollar plus asset class through its U.S. affiliate,” said André Bourbonnais, president and chief executive officer of PSP Investments.

Scott Deveau of Bloomberg also reports, Canada’s Public Sector Pension Names Scudellari for Debt Unit:

The Public Sector Pension Investment Board, one of Canada’s largest pension plans, has appointed David Scudellari to head a new unit focused on debt and credit investments.

Scudellari will lead PSP Investments Holding USA LLC, based in New York and help build up the firm’s presence in more illiquid and alternative debt securities. He has more than 30 years experience in capital markets, including positions at Barclays Capital Inc. and Goldman Sachs Group Inc., according to a statement from PSP.

“The leveraged finance landscape is currently in transition,” said Andre Bourbonnais, PSP chief executive officer in a statement. “With traditional capital providers having lost significant market share in the last few years, there is an attractive opportunity for a long-term investors such as PSP Investments to enter this trillion-dollar-plus asset class.”

PSP, which oversees the retirement savings of federal public servants, including the Canadian Forces and the Royal Canadian Mounted Police, is Canada’s fifth-largest pension plan with C$112 billion ($85 billion) in assets under management.

André Bourbonnais is right, the leveraged finance landscape has drastically changed following the 2008 crisis. Many banks have exited this market but don’t be fooled, the competition for leveraged finance talent between banks, hedge funds, private equity funds and now Canada’s large public pension funds is fierce.

Still, it’s been a bad year for leveraged loans and while U.S. deal activity remains steady, there are many factors impacting the market:

It is always important for individual investors to know what is going on in the market. This year, one notable change in deal activity is the drop in leveraged finance transactions and the significant increase in corporate M&A activity. Deal activity in the U.S. remains steady, but the landscape has changed. Private equity firms and leveraged finance bankers are unable to raise enough capital in the debt markets to fund their acquisitions and larger, cash rich corporations are filling that void. Due to high stock prices and limited organic growth, corporations are engaging in takeovers in an effort to spur greater revenues.

Accordingly, this year has seen lots of M&A and less leveraged loan issuance than previous years. Retail investors, however, can rest assured that these are signs of a health market, relying on liquidity rather than risk debt issuance.

A disappointing year for leveraged loans

The leveraged loan market is likely to have one of its weakest years since 2012. Leveraged loans, which are typically issued to fund corporate acquisitions in the middle market have declined because cash-rich corporations are buying up all the opportunities, noted Bloomberg.

Since private equity firms and leveraged finance bankers cannot compete with their larger peers, only $235.1 billion of debt has been sold to institutional investors in 2015 – a 40 percent drop over the previous year. Additionally, only $37.5 billion of leveraged loans have been issued stemming from leveraged buyouts this year, versus $58.4 billion in 2014. It is important to point out that is not necessarily bad news for retail investors, although it is for leveraged finance bankers. William Conway, chief investment officer at private-equity firm Carlyle Group pointed out how M&A has eclipsed leveraged loan activity.

“With corporations struggling to find growth, they have turned to M&A to meet revenue targets while private equity activity has remained relatively muted,” said Conway, noted the media outlet. “It’s clearly an easier time to sell than it is to buy.”

Corporate M&A leads the charge in deal activity

Bloomberg reported while leveraged loan activity is lower than in previous years, total deal activity in the U.S. is strong. There have been many corporate takeovers in 2015 amounting to an impressive $1.09 trillion. In comparison, $45.6 billion was attributed to leveraged buyouts managed by private equity firms this year.

The reason that large corporations are funding so many deals this year is because organic growth has been slow, but stock prices are high, providing lots of liquidity. Companies have lots of cash reserves and need to bolster revenues. Accordingly, these corporations have leaned heavily on acquisitions and takeovers to maintain their growth. Barclays Managing Director of leveraged finance Ben Burton explained that executive officers have been confident in their buying activity this year and that the increased M&A has caused leveraged loan opportunities to dry up.

“We’ve been seeing management teams and their boards more willing to go out and do transformative M&A,” said Burton, according to the news source. “That’s taken supply away from the leveraged-loan market.”

Private equity players are edged aside

In a recent article, The Wall Street Journal described private equity firms as “wallflowers at a global deal-making party,” referring to their inability to generate strong deal activity this year. To clearly illustrate how much leveraged loans are in decline, in 2006, private equity deals represented 19 percent of all deals in the U.S. market. In the time before the credit crisis of 2008, private equity firms like KKR, Carlyle, and Blackstone completed many multi-billion dollar acquisitions, thanks to liberal funding from banks and bond investors. Post financial crisis, new regulations and stricter lending practices have made it more difficult for private equity players and leveraged finance bankers to raise enough money to fund their desired opportunities.

Ultimately, because of new regulations and high stock prices, leveraged loan issuance is on the decline, but this may be a good thing for individual investors. Cash rich corporations engaging in heavy M&A activity is likely to keep valuations high. The Wall Street Journal noted transactions such as Royal Dutch Shell’s $69.8 billion purchase of BG Group and Charter Communications’ $56.8 billion purchase of Time Warner Cable. For the everyday investor, high valuations and low debt levels mean a safer economic landscape to invest in for the long term. Leveraged loans are not a common investment vehicle for the common investor, but shares in publicly traded corporations are. As such, the current situation may provide some comfort to those who wish to see stability in their broad market portfolios.

If you read the article above, you might be wondering why PSP or any Canadian pension fund would want to enter the U.S. leveraged loan market. But unlike private equity funds and banks, Canadian pensions aren’t hindered by strict regulations and they have huge funds and a much longer investment horizon than banks, hedge funds and private equity funds.

Moreover, if the Fed does decide to raise rates in December — a big “if” — I expect to see a flurry of M&A activity (it’s already happening) but this won’t last forever. At one point, it will be difficult for companies to finance acquisitions through M&A and that’s when leveraged loans will come back in vogue.

As far as PSP, André Bourbonnais is clearly departing from his predecessor’s global strategy and is not avoiding opening up offices around the world. He is also departing from his predecessor’s strategy of keeping tight lip on all of PSP’s deals.

This deal follows CPPIB’s acquisition of GE’s financing arm and it shows you how Canada’s large public pension funds are positioning themselves and how they are setting up foreign subsidiaries to source deals and to properly compensate the talent they need to operate these ventures (guys like Scudellari don’t come cheap but it’s smarter hiring him than doling out huge fees to PE funds!).

This latest deal follows other global deals PSP has engaged in since Bourbonnais took over the helm in July. Along with the Caisse and CPPIB, PSP is eyeing Indian infrastructure assets. The Australian Financial Review reports PSP Investments is biding for BrisCon’s Brisbane tollroad, AirportLinkM7, joining the bidding group headed by Australian infrastructure investor CP2.

What else? ATL Partners, an aerospace and transportation focused private equity firm, is partnering with the PSP Investments to form SKY Leasing:

As part of the transaction, SKY Leasing will acquire certain assets of Sky Holding Company controlled by leasing industry veteran Richard Wiley. Wiley and other key members of SHC management will form the leadership team of SKY Leasing.

“We are very excited to partner with ATL and PSP Investments, two investors with a deep understanding of the commercial aerospace sector,” said Wiley. “We look forward to building a best-in-class lessor with an initial target of $1 billion of Boeing and Airbus aircraft.”

With headquarters in Dublin, Ireland, and ancillary operations in San Francisco, California, SKY Leasing has over $250 million of initial equity capital available to provide sale/lease-back financing solutions globally to commercial airlines seeking to lease young mid-life Boeing and Airbus aircraft. SKY Leasing will also act as servicer to 54 aircraft on behalf of three securitizations.

“We have admired Richard’s prior ventures at SHC, Pegasus and Jackson Square Aviation and are delighted to partner with him and his management team in establishing SKY Leasing,” said Frank Nash, CEO of ATL. “As a sector-focused private equity fund, ATL is mandated to deploy equity capital into the transportation continuum and we see tremendous opportunity in delivering financial solutions to the global commercial fleet.”

“As a long-term investor, PSP Investments views aviation finance as an attractive sector to deploy significant capital in the years ahead,” said Jim Pittman, managing director of Private Equity for PSP Investments. “This investment is consistent with our direct and co-investment strategy to partner with experienced management teams who have the capability to scale investments over time. We look forward to supporting SKY Leasing as it pursues its ambitious growth plans.”

Glad to see Jim Pittman is still around at PSP as he was one of the few good guys I remember from my time there. Derek Murphy, the former head of PSP’s Private Equity group and the man who hired Jim, departed PSP shortly after André Bourbonnais took over and was replaced by Guthrie Stewart.

Another nice guy who is still around is Neil Cunningham, PSP’s Senior Vice President and Global Head of Real Estate Investments. I’ve openly questioned PSP’s ridiculous real estate benchmark when covering PSP’s fiscal 2015 results but that has nothing to do with Neil. It was a golden handshake between Gordon Fyfe and Neil’s predecessor, André Collin who is now president of Lone Star Funds, that sealed that deal (of course, Neil and the rest of the senior managers at PSP still benefit from this ‘legacy’ RE benchmark).

Anyways, PSP just formed a joint venture with Aviva Investors to invest in central London real estate:

Under the equal partnership, Aviva Investors’ in-house client Aviva Life & Pensions U.K. has agreed to sell 50% of its stake in a central London real estate portfolio to PSP Investments. Aviva previously owned 100% of the portfolio. The portfolio consists of 14 assets across London, made up of existing real estate or those with planning consent.

Aviva Investors will manage the assets and development for the joint venture.

The spokeswoman for PSP Investments said financial details of the transaction are confidential. The net asset value of PSP Investments’ real estate portfolio as of March 31, was C$14.4 billion ($11.4 billion,) she said.

“This investment is consistent with PSP Investments’ real estate strategy to invest in prime and dynamic city centers that we expect will outperform in the future, and is complementary to PSP Investments’ existing portfolio in London,” said Neil Cunningham, senior vice president, global head of real estate investments at PSP Investments, in a news release from Aviva Investors. Further details were not available by press time.

Aviva Investors has more than £31 billion ($47.8 billion) of real estate assets under management. PSP Investments manages C$112 billion of pension fund assets for Canadian federal public service workers, Canadian Forces, Reserve Force and the Royal Canadian Mounted Police.

I don’t know enough details about this deal to state my opinion but I have to wonder why Aviva Investors is looking to unload half its stake and why PSP is buying prime real estate in London at the top of the market (trust me, I know how out of whack London’s real estate prices have become).

But Neil isn’t a dumb guy, far from it, and I have to take his word that he expects these assets to outperform in the future and that they are complementary to PSP’s existing portfolio. I hope so because I’m sure PSP paid top dollar (more like pounds) to acquire these assets.

 

Photo by  Horia Varlan via Flickr CC License

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

Ari Altstedter of Bloomberg reports, Hedge Funds + Leverage Are Hot Formula for Canada Pension Plans:

The words “bold” and “pension fund” don’t always go together easily. Then again, neither do bold and Canada.

But Canadian public pension funds are once again employing bold strategies in a world where interest rates have remained persistently low at the very moment that aging baby boomers are increasingly drawing down their retirement funds.

With traditionally safe pension investments such as bonds no longer yielding enough to cover obligations, a number of Canadian plans are ramping up leverage strategies — approaches intended to squeeze more profit from their investments by doubling down with debt. They are mortgaging some of their swankiest skyscrapers and forming in-house hedge funds that invest in complex derivatives like forwards, swaps and options, accepting more risk in an effort to keep their promises to retirees.

“We have to earn that return somehow,” said Jim Keohane, chief executive of the Healthcare of Ontario Pension Plan, which has been among the most aggressive pursuing the new leveraged strategies. “If I don’t do this, what am I going to do instead?”

It’s not the first time the Canadian funds have pushed the envelope internationally. As early as the 1990s some began establishing private equity arms to take active stakes in businesses, successfully competing with Wall Street giants for such assets as department stores, highways and, recently, pieces of GE Capital.

Hero, Goat

Today, at least seven of Canada’s large pensions have “substantial” in-house hedge fund operations. By comparison, none do in the U.S. and only two do in Europe, according to data from the international pension fund consultancy CEM Benchmarking Inc. CEM, based in Toronto, declined to name the funds, but did say the five that have been at it the longest have beaten their benchmarks by an average of 0.9 percent annually over the last five years while the 10 largest U.S. funds have managed no extra return.

“In a world where safe investments provide unacceptably low returns, they have to move farther out the risk spectrum to get the kinds of returns they need,” said Malcolm Hamilton, a retired pension fund actuary who’s now a senior fellow at Toronto’s C.D. Howe Institute. “At the end of the day, you turn out being a hero or a goat, and there’s not much room in between.”

Poaching Talent

U.S. pension funds have generally addressed the same pressures by retaining the services of Wall Street hedge funds, CEM data shows, but high fees can eat away at gains.

Unlike in Canada, where professional boards tend to oversee public funds, in the U.S. the responsibility lies with elected officials who are hesitant to approve the compensation needed to attract Wall Street talent, according to Tsvetan Beloreshki, a New York-based pension fund consultant at FTI Consulting.

Canada’s public pensions, in contrast, have been poaching top talent off Wall Street for some time. The ranks at the Canada Pension Plan Investment Board, which manages the nation’s primary public retirement fund, includes veterans from hedge fund Golden Tree Asset Management and private equity giant Carlyle Group, as well as investment banks such as Morgan Stanley, JPMorgan Chase & Co. and Goldman Sachs Group Inc., according to the CPPIB website.

Derivatives Magnify

Don Raymond was recruited from Goldman to head up CPPIB’s public markets investments in 2001 and later began luring former colleagues from Wall Street as he set up an in-house hedge fund operation. At the time, leverage on CPPIB’s balance sheet — measured as the difference between total assets and net assets — was less than one percent. By 2011 it stood at 10 percent and by the end of the fiscal year, it had grown to 22 percent, according to publicly available data compiled by Bloomberg.

CPPIB returned 18.3 percent its fiscal year ended March 31 and had C$264.6 billion ($199.2 billion) of assets under management.

“I wouldn’t advise people to follow the Canadian path just because it seems easy; it’s actually not” said Raymond, who departed last year for Alignvest Investment Management. “If things do go wrong in derivatives, they tend to happen a lot faster than unlevered portfolios. A derivative will magnify things.”

Skill Sets

Leverage at Healthcare of Ontario Pension Plan, widely known as HOOPP, now exceeds 100 percent of its net assets, leading to a more than doubling of the total assets at its disposal to invest. Ontario Teachers’ Pension Plan, the nation’s third largest, has leverage equal to half its net assets.

HOOPP earned 17.7 percent in 2014 while Ontario Teachers’ returned 11.8 percent. The Standard & Poor’s/TSX Composite Index, Canada’s benchmark equity gauge, returned 10.5 percent in 2014, including dividends.

“Traditional skill sets in pension funds are much different than what we have,” said HOOPP’s Keohane. “A lot of what we do is more like what you would see in a hedge fund.”

Asked about the leverage on its balance sheet, a spokesman for Ontario Teachers’ said derivatives are a better way to invest in certain assets. A spokesman for CPPIB said its leverage is a form of cash management that keeps the fund “nimble” and boosts returns.

Fund Firepower

In the case of HOOPP, Keohane said the fund needs to earn 3.4 percent above inflation to cover its pension obligations, no small feat given 10-year Canadian government bonds yield half that, U.S. ones are at about 2.3 percent and yields on $1.9 trillion of European debt are actually below zero. “So what we’re trying to do is find things that add incremental return with the least amount of risk,” he said.

The fact derivatives, unlike equities, can eventually expire and provide a payout means that risks from leveraging can be contained by investors with the means to ride out any interim storms, Keohane said. “We have an advantage over hedge funds because we have a balance sheet they don’t,” he said. “Nobody’s going to shake us out of a trade.”

Caisse Study

Yet that’s precisely what happened in the financial crisis to Caisse de depot et placement du Quebec, Canada’s second largest pension plan. The Caisse suffered a 25 percent loss in 2008 following a collapse in Canada’s market for bonds backed by short term corporate loans.

Those losses were compounded by leverage that had grown to 56 percent of assets, according to Roland Lescure, the fund’s current chief investment officer, who joined in a management shake-up made after the crisis.

“Suddenly, a book of derivatives that was not supposed to carry any directional risk started carrying some,” he said. The Caisse has since brought its leverage down to about 20 percent of assets, mostly mortgages on its properties.

Proponents of today’s hedge fund strategies say the Caisse’s 2008 failure didn’t occur from using derivatives themselves, but from devoting too much money to a single market, which happened to freeze up.

C.D. Howe’s Hamilton is understanding of the new strategies but, recalling the financial crisis, still uneasy. “I’m sure there are a lot of banks who thought they knew exactly what they were doing, and they had the risks all covered off — until they didn’t.”

In 2009, I covered the Caisse’s $40 billion train wreck and how the media has completely covered up the ABCP scandal. There were poor decisions that took place at the highest level of the organization and it had nothing to do with derivatives but with greed and beating a ridiculous benchmark by taking the dumbest possible risks.

That’s why Michael Sabia was brought in to clean up the place and he has done a very good job, more or less. Roland Lescure is a very sensible and smart CIO who isn’t a cowboy and sticks to delivering solid results without taking undue risk.

The Caisse wasn’t the only one taking stupid risks back then. In a clear case of abuse of derivatives, PSP was using its AAA balance sheet to sell credit default swaps, something independent financial analyst Diane Urquhart discussed on my blog. This was on top of buying ABCP, albeit not to the scale of the Caisse. All this led to PSP’s disastrous fiscal 2009 results (again, senior managers didn’t take my warnings seriously back then and it ended up costing me my job).

As far as Ontario Teachers’ Pension Plan (OTPP) and the Healthcare of Ontario Pension Plan (HOOPP), they’re in another league when it comes to internal alpha generation which is why they’re the two best pension plans in Canada and the world. You can read more on Teachers’ 2014 results here and HOOPP’s 2014 results here.

Both these pension plans are fully funded, manage their assets and liabilities very closely, and they use derivatives extensively to intelligently leverage up their respective portfolios. Jim Keohane, HOOPP’s president, has always told me that their use of derivatives is done in a way that reduces overall risk. And to be sure, their long investment horizon allows them to take derivative bets that hedge funds can only dream of (like the S&P put strategy which helped them generate huge returns in 2012).

As far as Ontario Teachers’, it allocates risk internally and if it can’t, it will allocate risk to the world’s best hedge funds and squeeze them hard on fees (OTPP is much larger than HOOPP which is why it can’t do it all internally). The folks at Teachers’ also use derivatives extensively to “juice” their returns but again, we’re not talking crazy risk here, more like intelligent risk taking behavior where they can capitalize on their large balance sheet and long investment horizon.

Teachers, HOOPP, the Caisse, CPPIB and all of Canada’s large pensions are also doing direct investments in private equity, real estate and infrastructure, all of which are long-term, illiquid asset classes. In the last few years, most of the added value generated by these funds has come from these asset classes where they can scale up more easily.

This is one reason why Canada’s pension fund was able to knock it out of the park in fiscal 2015. CPPIB is attracting talent from Wall Street, and buying it by bringing good things to life, but I take all this nonsense on poaching talent away from the Street with a shaker of salt. The top guys at Canada’s large pensions get paid extremely well but let’s not kid each other, even their comp doesn’t match that of a top trader at Goldman or an elite hedge fund or what a managing partner of a big private equity fund receives in compensation.

[In a private meeting, Mark Wiseman, president of CPPIB, once told me: “If I could afford to hire David Bonderman I would but I can’t, so unlike infrastructure where we invest directly, in private equity, we will always invest and co-invest with top funds.” But the GE deal proves that CPPIB can also go out and buy talent if it wants to invest in certain segments of private equity directly.]

Now, you might read this and think why can’t U.S. public pension funds do the same thing as their Canadian counterparts? The answer: lack of proper pension governance. U.S. public pensions are plagued by too much political interference and that’s why they will never pay their pension fund managers properly to bring assets internally. It’s not that they don’t have smart people, they do, it’s that the entire investment process has been hijacked by consultants which pretty much shove everyone in the same high fee brand name funds.

I had a very long day, was at a conference all morning meeting with real estate, private equity and VC funds in “speed dating” session that was fun but it drained me (thank god I never tried speed dating for real!).

 

Photo credit: “Canada blank map” by Lokal_Profil image cut to remove USA by Paul Robinson – Vector map BlankMap-USA-states-Canada-provinces.svg.Modified by Lokal_Profil. Licensed under CC BY-SA 2.5 via Wikimedia Commons

Moody’s released a report on Tuesday that analyzed Chicago’s possible paths to pension funding, and the various scenarios the city could face in the wake of a favorable (or unfavorable) ruling on its pension reforms from the state Supreme Court.

The report notes that Chicago’s statutory pension contributions are “insufficient” for heading off the growth of unfunded liabilities, and that unfunded liabilities are likely to continue to grow for at least 10 years.

But in the end, the crux of every scenario, and to the city’s credit outlook, is how the state Supreme Court rules on the city’s pension reforms, according to the report.

From Moody’s:

The scenario that Moody’s views as having the most positive credit impact for Chicago consists of a favorable Illinois Supreme Court decision, as the city’s budget assumes, but state legislative action that does not conform to the city’s adopted plan. Senate Bill 777 has been passed by the Illinois General Assembly, but requires the governor’s approval to become law. The bill lowers Chicago’s current statutory public safety pension contributions relative to existing statute, granting the city more time to meet statutory funding targets. Without Senate Bill 777, the city’s 2016 statutory pension contribution will be much higher than the city has budgeted.

“This scenario is the most credit positive over the long term. Although it would require larger pension contributions than currently budgeted, the higher payments would achieve the slowest and least extensive growth in unfunded liabilities among the four scenarios,” [Moody’s AVP-Analyst Matthew] Butler says.

The city’s adopted budget assumes the governor signs Senate Bill 777 and the Illinois Supreme Court reinstates PA 98-0641, the latter of which would preserve benefit reform of Municipal and Laborer pensions and reduce the plans’ risk of insolvency. While the adopted budget notably increases the city’s pension contributions relative to prior years, the amounts contributed under these assumptions could enable unfunded pension liabilities to grow for up to 20 years.

Two other scenarios assume an unfavorable ruling from the Illinois Supreme Court, which would raise the possibility of substantial cost growth for the city over the next decade, with or without Senate Bill 777.

“This would exert additional negative credit pressure on Chicago’s credit quality because it would likely remove all flexibility to reduce unfunded liabilities through benefit reform and raise the probability of plan insolvency,” Butler says.

Moody’s subscribers can access the report, “Chicago’s Pension Roadmap: A Scenario Analysis”, here.

 

Photo by bitsorf via Flickr CC License

The above graphic, courtesy of Bloomberg, shows how the use of leverage at Canada’s largest pension funds has changed over time.

Three out of the four funds are using more leverage now than at any other point in the last 10 years.

More from the Bloomberg article, which touches on the pressures leading these funds to make bolder investment decisions and the aggressive pursuit of talent that allows them to take those risks:

Canada’s public pensions, in contrast [to the U.S.], have been poaching top talent off Wall Street for some time. The ranks at the Canada Pension Plan Investment Board, which manages the nation’s primary public retirement fund, includes veterans from hedge fund Golden Tree Asset Management and private equity giant Carlyle Group, as well as investment banks such as Morgan Stanley, JPMorgan Chase & Co. and Goldman Sachs Group Inc., according to the CPPIB website.

[…]

Today, at least seven of Canada’s large pensions have “substantial” in-house hedge fund operations. By comparison, none do in the U.S. and only two do in Europe, according to data from the international pension fund consultancy CEM Benchmarking Inc. CEM, based in Toronto, declined to name the funds, but did say the five that have been at it the longest have beaten their benchmarks by an average of 0.9 percent annually over the last five years while the 10 largest U.S. funds have managed no extra return.

“In a world where safe investments provide unacceptably low returns, they have to move farther out the risk spectrum to get the kinds of returns they need,” said Malcolm Hamilton, a retired pension fund actuary who’s now a senior fellow at Toronto’s C.D. Howe Institute. “At the end of the day, you turn out being a hero or a goat, and there’s not much room in between.”

The whole Bloomberg article is worth a read.

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

Jake Burman of the Express reports, Now UK taxpayers forced to contribute billions towards Brussels bureaucrats’ pensions:

The cost of pensions for retired EU civil servants and MEPs has seen the EU’s estimated pension responsibilities soar by more than £8.6billion last year.

UK taxpayers will have to pay a staggering £5billion over the coming decades because of the swelling pensions bill – which also includes an extortionate £4.5billion in private sickness insurance.

European auditors have previously identified the pensions of retired Brussels bureaucrats as a major influence in increasing contributions from national governments towards the EU.

Pawel Swidlicki, from the think tank Open Europe, slammed Brussels for failing to control the rocketing EU pensions bill – despite enforcing brutal cuts on pensioners in EU countries like Greece.

He said: “The spiralling bill for EU officials’ pensions is the legacy of years of inefficient management and overly generous terms and conditions.

“The UK and many other countries have introduced tough reforms to make public sector pensions sustainable. It is high time the EU follows suit.”

David Cameron is aiming to reduce the EU’s administrative bill as part of his renegotiation of the UK’s relationship with Brussels.

However pensions pose a major problem for the Prime Minister.

Last year, the UK hopelessly failed to halt a cut to the contribution paid by Brussels bureaucrats towards their pensions – which reduced from 11.6 per cent to 10.6 per cent.

It came despite the fact the cost of servicing EU pensions will increase by a staggering 5.2 per cent next year.

The number of retired EU staff claiming a pension worth 70 per cent of their final basic salary is also expected to increase by 4 per cent in 2016 – which will take the annual bill to £1.1billion.

A spokeswoman for the European Commission said the dramatic increase was caused by a “significant decrease in the interest rate”.

She said: “This is an estimate of the value of the total liability at a given point in time.”

“It probably will never be paid as it stands.”

Increasing numbers of retired MEPs are also paid under the EU pensions bill – despite of not contributing towards their own pension.

The pension is currently worth £13,760 for each five-year term served as MEP, while the schemes liabilities have grown to more than £230 million over the last five years.

Forget the chocolates, the beer and the moules frites. The most rewarding way to pass the time in Brussels is to sit behind a desk at the commission, the council, the parliament or indeed any of the EU’s principal institutions, accruing years in their extraordinarily generous and expensive pension schemes. These EU bureaucrats sure know how to retire in style.

Unfortunately, the math simply doesn’t add up and deflation will decimate these pensions. Let me share with you a true story. A friend of mine once ran into an older gentleman on the beach outside of Patras, Greece. My friend struck up a conversation with him and asked him how old he was. Much to the surprise of my buddy who didn’t give him more than 70 years of age, the man was 95 years old!

My friend was in awe in how good shape he was so he asked him his secret. The man looked at him and said: “After twenty years of working at the Greek civil service, I retired at the age of 40 and never worked another day in my life.”

So basically this guy worked 20 years and then went on to collect a very decent pension for 55 years. This type of nonsense is why Greece is in the predicament it’s in today. Far from being the exception to the rule, this was commonplace in Greece.

When I stated that longevity risk won’t doom pensions, I certainly wasn’t referring to such egregious abuses. And if you think this is just a Greek or European problem, think again.

Romy Varghese of Bloomberg reports, Lifeguards Get Pensions? At Age 45? They Do in Atlantic City (h/t, Suzanne Bishopric):

Joseph D. Rush, Jr. joined the beach patrol in Atlantic City when qualifying tests were conducted in stormy weather at sea to judge an applicant’s mettle, local Republican leaders signed off on each hire and lifeguards attended movies free by flashing their badge. He retired in 2000 with an annual lifeguard’s pension of $30,000.

Lifeguard pension?

That’s right, lifeguard pension. It’s one of those relics from the lavish and loud Prohibition-era Atlantic City depicted in television and film. Despite just a four-month beach season and a battered casino industry, lifeguards who work 20 years, the last 10 of them consecutively, still qualify at age 45 for pensions equal to half their salaries. When they die, the payments continue to their dependents.

About 100 ex-lifeguards and survivors collected anywhere from $850 to $61,000 from the city’s general fund last year, according to public records. In all, it comes to $1 million this year. That’s a significant chunk of cash for a municipal government with annual revenue of about $262 million and, more importantly, it’s emblematic of the city’s broader struggle to downsize spending and contain a budget deficit that has soared as the local economy collapsed.

Kevin Lavin, the emergency manager appointed by New Jersey Governor Chris Christie to stabilize the finances of the city of 39,000, has cited lifeguard pensions as a possible item for “shared sacrifice” in a community already forced to fire workers and raise taxes. He intends to reveal more about his plans in a report that could come as early as this week.

Retired lifeguards don’t intend to sit idly by and watch their pensions carried away by the political and economic tide.

“We worked under the precept that we were going to get a pension, and that’s a certain amount of money,” said the 84-year-old Rush. “I’m not responsible for the mismanagement of the politicians, and I’m not responsible for the casinos leaving.”

As formerly-bankrupt Detroit was home to auto making, Atlantic City for decades was a one-industry gaming haven, the Las Vegas of the East Coast. Along the marina and beaches, patrolled by lifeguards, casinos shook money loose from their guests, generating a bounty for the city to subsidize the pensions for the part-timers and bankroll a municipal workforce well above the national average.

Budget Deficit

Today, the junk-rated city, where more than a third of its residents live in poverty, is struggling to avoid bankruptcy. Four ocean-side casinos — one in three — shuttered last year. Its tax base has eroded by 64 percent over the past five years. Investors in May demanded a lofty 7.75 percent yield on bonds maturing in 2040 even though the state could divert aid to make the payments if needed. The city closed a $101 million deficit this year partly by plugging in casino revenue it hasn’t received yet.

“Cities on a downward spiral have these legacy costs that are very difficult to eliminate,” said Howard Cure, director of municipal research in New York at Evercore Wealth Management, which oversees $5.9 billion in investments. “There are only so many people you can fire.”

Atlantic City, developed as a resort community in 1854, drew revelers long before its first casino opened in 1978. People eager to escape the stifling summer heat of nearby cities such as Philadelphia thronged its beaches, and drank and gambled illegally in back rooms during the Prohibition era with the complicity of city officials.

Keeping bathers safe was an important enough consideration that nearly from its start the resort city hired “constables of the surf” to watch over them, according to Heather Perez, archivist at the Atlantic City Free Public Library. In 1892, they were organized into the beach patrol.

Golden Era

The pension plan is the product of a 1928 state law sponsored by an Atlantic City Republican legislator named Emerson Richards, who lived in a palatial apartment near the lifeguard headquarters and threw parties, such as an annual Easter eggnog celebration, attended by political wheelers and dealers.

The statute creating the lifeguard pensions hasn’t been changed since 1936, according to state library records. Four percent of pay is deducted to help cover the benefit, which nonetheless needs to be subsidized by city taxpayers.

While many on patrol moved on after stints as high school and college students, others hung on to their positions year after year, particularly teachers who had the summers free, said Democratic state senator Jim Whelan, a former city mayor.

“What we call ‘teach and beach,’” said Whelan, who was also a lifeguard and teacher but fell short of qualifying for the lifeguard pension. “Not a bad life.”

Half Century

Rush was one of the longer lifers, working the beach for 52 years before, during and after a teaching career in Wilmington, Delaware. After retiring from that job in 1985, he extended the lifeguard season by working the winter months repairing boats and re-splicing rescue ropes.

“It’s a rough ocean,” Rush, who estimates he participated in 1,000 rescues, said. “You go save somebody, it’s a hard job. Just ask someone who was saved to see how important the job is.”

As part of his review, Lavin, the emergency manager installed in January, is looking at whether the benefit is in the community’s best interest, said Bill Nowling, his spokesman. “The city has limited resources and needs to make tough decisions about how it funds programs going forward,” he said.

The system wouldn’t be a burden if the city had managed it properly, said Michael Garry, president of the beach patrol union. He said he’s talking to lawmakers and Lavin on how to cut costs for the city.

“Nobody ever sits there and says, ’why do we need the police. Why do we need fire,’” he said. “We’re a little accustomed to having to justify everything about us.”

While ‘teach and beach’ is a great lifestyle, it was only a matter of time before the system crumbled precisely because it was poorly managed as there was no accountability, transparency and shared risk in these lifeguard pensions.

There are a lot of abuses in U.S. public pensions that go unreported until one day municipalities go belly-up and the bond vigilantes swoon in to get their cut of the public pension pie. Jack Dean over at Pension Tsunami has done a great job documenting many cases of public pension abuses going on all over the United States.

Of course, I’m an ardent defender of public and private defined-benefit plans and think that America’s pension justice is rewarding the fat cats on Wall Street and Corporate America while condemning millions of poor and working poor to pension poverty.

Are there abuses in the system? You bet there are but the solution isn’t to cut DB plans and replace them with DC plans, it’s to introduce real reforms in the governance of pensions as well as implement a shared risk pension model that will ensure the sustainability of these plans going forward.

Let me once again recommend a book written by Jim Leech and Jacquie McNish, The Third Rail. I covered it here and while I don’t agree with everything in the book, especially in regards to Rhode Island’s former Treasurer and now Governor Gina Raimondo who has been heavily criticized for mishandling pensions, I agree with the thrust of the book and think it’s required reading for anyone delving into pension policy.

A lot of my thinking on introducing real change to Canada’s pension plan was influenced by this book and my experience working at large pension funds as well as talking to many pension experts through my blog. Unlike some, I consider pensions to be an integral part of public policy which is why I’m concerned when I see Congress introduce pension fixes that could backfire.

But in order to ensure the viability of public pensions, we have to first ensure their governance is right and that the risk of these pensions is equally shared among all the key stakeholders. We simply can’t afford pensions at all cost and we have to start rigorously analyzing all public pensions and make sure they’re on the right track.

Let me end by stating that pension abuses don’t only happen in Brussels and Atlantic City, they also happen in Ottawa. Sherry Noik of Yahoo News reports, Ex-MPs could cost Canadians $220M in pensions, severances:

Giving MPs the pink slip is going to cost Canadians an estimated $220 million, according to figures released this week.

There were 180 MPs who either didn’t run or were defeated in Monday’s election and are now set to collect very generous pensions and severances, the Canadian Taxpayers Federation (CTF) said in its report.

About $5.3 million per year will go out in pension payments to MPs who failed to get re-elected or retired, collectively totalling $209 million by the time they all reach 90 years of age, the report’s author Aaron Wudrick found.

Twenty-one of the former MPs are expected to collect more than $3 million each in lifetime pension earnings thanks, in part, to a plan that had taxpayers contribute $17 for every $1 an MP put in.

At the top of the list is Peter MacKay, who stepped down earlier this year after 18 years and four months in the House of Commons, where he held high-profile posts including Foreign Affairs, National Defence, Justice and Attorney General.

The 50-year-old could collect up to $5.9 million on his total contributions of $254,449.

MP pensions accrue at between 3 and 5 per cent per year — more if they serve as cabinet ministers, party leaders or committee chairs.

The CTF’s lifetime estimates are based on pension payments up to age 90, using a “conservative” annual indexation of 2 per cent.

So Liberal Gerry Byrne, who served as MP for 19 years and six months, contributed $211,504 to his pension. By age 90, he will have collected $5.2 million.

Because they are under the pension kick-in age of 55, MacKay and Byrne also stand to collect severance cheques: $123,750 and $86,650, respectively, or half their annual salary.

In fact, 27 MPs will receive an estimated total of just over $11 million in severance payments even though they chose to leave the job, CTF calculations show.

And perhaps those who were sent packing shouldn’t be compensated with severance either, Wudrick says.

“It isn’t fired without cause, it’s fired with cause — people don’t want you anymore,” he says. “You’re elected — it’s like voters are handing you a four-year fixed-term contract.”

Regardless, he says, the fact they receive a half-year salary seems overly generous, especially when many of the departing MPs only served one term.

But Canadians won’t have to be so generous with the current crop of MPs thanks to pension reforms passed by Parliament in 2012.

MPs’ contributions have been gradually increasing so that by Jan. 1, 2017, they will reach a more equitable ratio, much closer to the type of scheme typical in the private sector: at that point, taxpayers will end up paying about $1.60 for every $1 an elected official contributes. The full-pension age has also been raised to 65 from 55.

For its report, the CTF used information from the Members of Parliament Retiring Allowances Act and from the MPs’ official biographies.

Unlike the CFT, I think departing MPs are entitled to (at least) half a year severance even if they only served one term as the nature of the job is such that these individuals take a big risk going into politics. But when it comes to pensions, MPs had their snouts in the trough, and it was high time to introduce a more equitable arrangement to fund their generous pensions.

As you can see, there are some people who are retiring in EU style but the great majority are struggling and face the very grim prospect of pension poverty. Now more than ever, policymakers around the world need to start implementing the right pension policies to bolster their retirement system.

 

Photo by  @Doug88888 via Flickr CC License