Category: Pension Newsroom

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

Julia Lurie of Mother Jones reports, 100 CEOs Have More in Retirement Savings Than 41 Percent of Americans Combined (h/t, Suzanne Bishopric):

You’ve heard about income inequality—about how, for example, the top 10 percent of Americans control more than half of all income.

But we’ve heard less about inequality when it comes to retirement savings. According to a report released this week by the Center for Effective Government and the Institute for Policy Studies, just 100 CEOs have retirement accounts that total $4.6 billion—that’s more than the retirement assets of 41 percent of Americans, or 116 million people. The authors used SEC filings to examine the 100 largest retirement accounts among Fortune 500 CEOs, and found that the average CEO has saved up $49.3 million for retirement. By contrast, the median balance in 401(k) accounts at the end of 2013 was $18,433.

Even more than the overall disparity, what caught my eye was the race and gender inequality, both at a CEO level and in the general population. The CEOs with the 10 largest retirement funds were all white men, and their retirement assets dwarfed those of the top 10 CEOs who were women or people of color. (Two women are counted in both of the latter groups: Indra Nooyi of Pepsi, and Ursula Burns of Xerox. Click on image)

And the majority of people of color and female heads of household have no retirement assets. Without a pension, IRA, or 401(k) account, these individuals will be completely dependent on Social Security when they do retire—and the average Social Security benefit is $1,223 per month (click on image).

So, what’s going on here? Nari Rhee, a researcher who studies retirement disparities at the University of California-Berkeley Labor Center, says a number of factors make the retirement gap so big. First, of course, is the income gap: Full-time, working women make 78 percent of what men do; the median wealth of white households is 10 and 13 times that of Latino and black households, respectively. And with less money, there’s less to stow away for the future.

But in addition, people of color are more likely to invest the money that they do save on housing or a business than in stocks, bonds, or mutual funds. The fallout: People of color were hit harder by the collapse of the housing market in 2008.

And finally, says Rhee, people of color are less likely to work in jobs that offer retirement benefits, particularly since so many jobs are concentrated within low-wage or part-time work in the private sector (think food service or manufacturing, construction, manufacturing, or janitorial staff).

All of this together helps create financial disparity during retirement: one in five retired Latino Americans and about one in six retired blacks live under the poverty line, compared with about 1 in 15 whites.

The report calls for a cap on deferred compensation and an expansion of Social Security benefits and public pensions. Without changes, says Anderson, “We’re really looking at a retirement crisis where you’re going to have millions of seniors with unmet basic needs and, on the other hand, a privileged few corporate executives with platinum pensions.”

I touched upon the gross inequity in retirement income in my weekend comment on the quiet screwing of America but this article breaks it down and demonstrates the stark contrast among racial and gender lines.

Not surprisingly, America’s retirement crisis is disproportionately hitting women and people of color but it’s also hitting many hard working white Americans who are unable to save for retirement and even if they do manage to save, they’re living a 401(k) nightmare, all  part of a de facto retirement policy that has failed millions of Americans.

But have no fear, Blackstone is here, and if Tony James gets any traction on his solution to America’s retirement crisis, pretty soon every American will be saving and investing like U.S. public pensions, paying inordinate fees to private equity and hedge funds that are underperforming the market.

Don’t worry folks, this is all part of Wall Street’s license to steal. As long as the “big boys” and the “big banks” that service them make off like bandits, it doesn’t matter if millions of Americans are falling through the cracks, condemned to pension poverty. This is how trickle down economics works: “‘If you feed enough oats to the horse, some will pass through to feed the sparrow.”

And what are U.S. politicians doing to address America’s looming retirement crisis? They’re enabling it, doing everything wrong by weakening Social Security instead of bolstering it and hiking pension premiums for companies making it easier for them to drop defined-benefit plans. No U.S politician is willing to accept the brutal truth on DC plans.

Worse still, you have politicians like Chris Christie who publicly decry government stealing from retirees at GOP debates as his state government funnels hundreds of millions in financial fees to Wall Street.

It’s enough to make you sick. I used to think America’s retirement crisis is a slow motion train wreck. Now I realize, just like the heroin epidemic, it’s more like a speeding train heading off a cliff and for millions, the American dream is turning out to be a living nightmare.

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

Suzanne Woolley of Bloomberg reports, You’re About to Get Too Expensive for Your Pension Plan:

The federal budget deal could speed the long, lingering death of old-fashioned defined-benefit pension plans, in which employers reward years of service by providing a guaranteed stream of income in retirement.

The deal could affect any pre-retiree in a former employer’s pension plan by increasing the per-head premiums that plan sponsors must pay to the Pension Benefit Guaranty Corp. If it goes through as written, every person in a plan will get more expensive at the stroke of a pen.

Employers are already deeply concerned about the extent and uncertainty of future pension liabilities and are trying to shed them. The proposed increase in the budget legislation would push even more pension plans to manage costs any way they can, including reducing participant head count, said Alan Glickstein, a senior retirement consultant with Towers Watson.

The budget deal calls for a 22 percent hike, spread out over three years, in flat-rate, single-employer premiums paid to the PBGC, which acts as a backstop to a company’s pension liability should the company become insolvent. Those premiums will already have risen from $31 in 2007 to $64 in 2016; by 2019 they will reach $78.

An increasingly common way companies get rid of those liabilities is by offering participants a chance to take their pensions all at once, as lump sums based on the present value of their future benefits. After strong years for such offers in 2013 and 2014, the activity rose dramatically in 2015, said Matt McDaniel, who leads Mercer’s U.S. defined-benefit risk practice.

More lump-sum deals aren’t good news for employees, about 40 percent to 60 percent of whom take the deals. Most who take lump sums of less than $50,000 cash those retirement funds out rather than roll them into an IRA, paying income tax and a 10 percent penalty if they aren’t at least 59½. While it depends on individual circumstances, it usually makes more financial sense to leave the money in the plan and have it trickle out during retirement.

Perversely, the premium hikes could wind up hurting, not helping, the Pension Benefit Guaranty Corp., because they may not fully offset shrinking head count in pension plans. Benefit consultants are frustrated. “This has nothing to do with pension policy, but is simply a device to raise revenue,” said Towers Watson’s Glickstein. Higher premiums “would be a factor that causes a move away from these plans, and the whole point of the PBGC is to strengthen the employer pension system, so it’s kind of ironic.”

A statement by the Erisa Industry Committee, an association that advocates for the employee benefit and compensation interests of large employers, said it was “outraged.” Its Oct. 27 statement quoted the committee’s president as saying that “even the PBGC’s own analysis does not call for an increase in premiums on single-employer defined benefit plans. PBGC premium increases like the one announced today do nothing to encourage single-employers to continue defined benefit plans or improve benefits for retirees; in fact, the increases only work to further weaken the private retirement system.”

In response to the criticism, an Obama administration official spoke with Bloomberg BNA‘s Pension & Benefits Daily, telling David Brandolph that with the underfunding in the PBGC’s single-employer program, “the proposed premium increases are necessary to ensure that PBGC will be able to pay retiree benefits when pension plans fail. Even with these changes, premiums would likely remain a relatively small percentage of a company’s annual pension contribution and a tiny fraction of total compensation costs.” The official noted that the increases take effect over three years to allow companies to plan for the new costs.

Last week, I ripped into Blackstone’s Tony James and his solution to America’s retirement crisis and followed up with a comment looking at why there shouldn’t be four or more views on DB vs DC plans but only one view which clearly explains the brutal truth on DC plans.

This week, Congress and the Senate just passed a budget and debt deal that they’ll be sending to President Obama which will make it harder for companies to offer defined-benefit pensions. And this is all happening less than a year after Congress effectively nuked pensions.

What is going on in the United States of pension poverty is a real travesty. I call it the quiet screwing of America where corporations flush with cash buy back their shares to pad the outrageous compensation of their top brass while they put off hiring and much needed investments and now Congress made it easier for them to justify their decision to cut defined-benefit plans for their employees.

Not surprisingly, both Democrats and Republicans joined forces to pass this bill, which goes to show you when it comes to corporate interests, there’s no divisive politics, just a bipartisan, unified front to pander to their corporate and Wall Street masters.

This week I learned that some 8,737 UPS retirees could soon see their pension checks cut as they receive their pensions from the cash-strapped Central States Pension Fund (see my previous comment on Teamsters’ pension fund). A month ago, CBC reported that employees of the decommissioned Hub Meat Packers in Moncton will see their pensions slashed by as much as 25 per cent.

In an equally disturbing example, the Washington Post reports on how military veterans are scrambling to sell their pensions through pension advance schemes in an effort to make ends meet, a huge mistake which will squeeze them into pension poverty.

Meanwhile, according to a new study, the 100 top U.S. CEOs have as much saved for retirement as 50 million Americans, thanks in large part to special savings plans that their employees don’t receive:

The Center for Effective Government found that the 100 biggest nest eggs of corporate chiefs added up to $4.9 billion, or 41 percent of what American families have saved for retirement. David Novak, the former CEO of Yum Brands, the company that owns Taco Bell, Pizza Hut and KFC, had the largest nest egg, worth $234.2 million, or enough money to provide an annuity check of about $1.3 million a month starting at age 65.

By contrast, almost three in 10 Americans approaching their golden years have no retirement savings at all, the study said, and more than half between 50 and 64 will have to depend on Social Security alone, which averages $1,233 per month.

Aside from fatter paychecks, CEOs get two other perks to help them grow their retirement funds faster than their employees can. Companies and business groups argue that CEO retirement packages are tied to executive performance and necessary to be able to attract top executives.

Special Pensions

More than half of Fortune 500 CEOs receive supplemental executive retirement plans (SERPs), a type of tax-deferred defined-benefit plan for the C-suite. These plans have come under heat from shareholders as expensive and unnecessary.

CEOs enjoy these plans even as companies eliminate regular defined-benefit plans for employees. Only 10 percent of companies provide defined-benefit pension plans, covering just 18 percent of private sector workers, according to the Bureau of Labor Statistics. In the early 1990s, more than a third of private sector workers had pension plans.

Executive Tax-Deferred Compensation Plans

Almost three-fourths of Fortune 500 companies offer their senior executives tax-deferred compensation plans. Unlike 401(k) plans offered to regular workers, these special plans have no limits on annual contributions. That allows CEOs to invest a lot more in their retirement than everyday Americans. For example, last year, 198 CEOs running Fortune 500 companies were able to invest $197 million more in these plans because they were not hamstrung by limitations on defined compensation plans, the study found.

American workers over 50 can contribute only $24,000 a year to 401(k) plans, while younger employees have an $18,000 limit.

This is the new pension normal. CEO compensation which includes lavish pensions is soaring to obscene levels while companies are looking to slash pension costs, offloading them to insurers or employees, or if they go belly up, pensions become the problem of some cash-strapped government pension agency which backstops pensions and slashes benefits.

While this is going on pretty much everywhere, at least in Canada there’s talk of enhancing the Canada Pension Plan. In the U.S., there’s a dangerous shift in pension policy which will come back to haunt the country as social welfare costs skyrocket and pension poverty soars, placing more pressure on an ever growing debt problem.

What is the solution to the U.S. retirement crisis? I stated my thoughts last week when looking at the DB vs DC debate:

In short, I believe that now is the time to introduce real change to Canada’s retirement system and enhance the CPP for all Canadians.

I’m also a big believer that the same thing needs to happen in the United States by enhancing the Social Security for all Americans, provided they get the governance right, pay their public pension fund managers properly to manage the bulk of the assets internally and introduce a shared risk pension model in their public pensions.

It’s high time the United States of America goes Dutch on pensions and follows the Canadian model of pension governance. Now more than ever, the U.S. needs to enhance Social Security for all Americans and implement the governance model that has worked so well in Canada, the Netherlands, Denmark and Sweden (and even improve on it).

And some final thoughts for all of you confused between defined-benefit and defined-contribution plans. Nothing, and I mean nothing, compares to a well-governed defined-benefit plan. The very essence of the pension promise is based on what DB, not DC, plans offer. Only a well-governed public DB plan can offer retirees a guaranteed income for the rest of their life.  

What are the main advantages of well-governed DB plans? They pool investment risk, longevity risk, and they significantly lower costs by bringing public and private investments and absolute return strategies internally to be managed by well compensated pension fund managers. DB plans also offer huge benefits to the overall economy, ones that will bolster the economy in tough times and reduce long-term debt.

In short, there shouldn’t be four, five or more views on DB vs DC plans. The sooner policymakers accept the brutal truth on DC plans, the better off hard working people and the entire country will be over the very long run.

You’ll forgive me if I keep beating the same drum on this topic but it’s absolutely crucial that policymakers around the world get their pension policy right.

On Friday morning, I received an email telling me that the Canada Mortgage and Housing Corporation (CMHC), a major Canadian Crown corporation, was reverting back to defined-benefit plans for all their employees after shifting new employees into DC plans back in 2012.

The person who sent me that email is a pension authority who shared this with me: “Hopefully, some others will come to same conclusion that a risk shared DB is the most cost effective way to provide a secure retirement and will follow their example.”

He’s absolutely right which is why I’m hoping to see Canadian and U.S. policymakers move toward enhancing and bolstering defined-benefit plans for all their citizens (see my last comment on breaking Ontario’s pension logjam).

Lastly, I discussed inequality in a recent comment of mine looking at which bond bubbles worry the Fed. I think it’s shameful that our society values overpaid hedge fund managers and CEOs and does little to fight for the rights of our most vulnerable, including the poor, the disabled and the elderly who are increasingly confronting pension poverty.

 

Photo by  Bob Jagendorf via FLickr CC License

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

A board working on a proposal to enroll most small business employees in a state-run retirement savings plan, unless they opt out, was told last week that small technology-focused financial firms could do the job.

The founders of three firms that offer 401(k)s and other retirement plans to small businesses did not object to competition from the state. They offered their services, acknowledging that several small firms may be needed due to the size of the job.

“We’ve got the systems, the people to support this type of an initiative, and we are all excited,” said Pete Kirtland of Aspire Financial Services. “Whether or not we participate, it’s the right thing to do.”

Chad Parks of Ubiquity added: “You are looking at three companies here who have decided to tackle this problem. So, there are people out there who are willing and able to do this.”

Michael Kiley of Plan Administrators Inc. replied when asked about obstacles: “You could do a lot of damage in the design. You could make every one of us run away if you don’t involve us.”

The three firms at a Secure Choice board meeting last week are part of a growing number of small firms using modern computer technology to offer small businesses retirement plans with lower cost and more service, the New York Times reported in September.

Large traditional financial firms are said to often have higher costs because, among other things, they tend to focus on selling investment funds and to have outdated technology designed to serve a few employers with many employees.

The Secure Choice program was created to provide a job-based retirement savings plan for about 6.3 million California workers without access to one. Only 45 percent of workers age 25 to 64 have an employer plan, less than the 53 percent national average.

An “automatic IRA” or payroll deduction that puts money into a tax-deferred account, unless a worker opts out, is said to be a proven way to boost savings. There is growing concern that many private-sector workers have little more than Social Security.

“The lack of plans is fueling a retirement-savings crisis,” a Bloomberg news story said this month. “Few workers save anything outside of employer-sponsored plans. Only 8 percent of taxpayers eligible to set aside money in an IRA or Roth IRA did so in 2010, according to the IRS.”

Even big companies are concerned that employees aren’t saving enough. Google, Credit Suisse, Apache and others have begun automatically diverting more than the standard 3 percent of pay into 401(k) plans, the Wall Street Journal reported last month.

In Washington, D.C., there were two well-publicized meetings last month on the need for more private-sector retirement saving.

The Bipartisan Policy Center held a one-day conference on whether “technology, new business models, and different plan designs” could boost retirement savings, including for workers who have a job-based retirement plan but aren’t saving enough.

The U.S. Chamber of Commerce and other groups told a Congressional panel that “multiple-employer plans,” perhaps offered by state chambers and trade associations, could cut costs and ease administration, allowing more businesses to offer retirement plans.

President Obama made several unheeded calls on Congress to create an “automatic IRA” before launching “MyRA” last year, a paycheck-deduction bond savings program that is off to a slow start.

After years of trying, Sen. Kevin de Leon pushed a Secure Choice bill through the Legislature (SB 1234 in 2012) despite opposition from Republicans and employer, insurer, financial planner and taxpayer groups.

But Secure Choice must run an obstacle course: a legal and market analysis not paid for by the state, approval for IRA-like tax treatment, exemption from a federal pension law (ERISA), a self-sustaining plan, and final legislative approval.

With a $500,000 matching grant from the Laura and John Arnold Foundation (vilified by public unions for pushing pension reform), Secure Choice raised $1 million and hired Overture to do the market analysis and K&L Gates for the legal analysis.

The U.S. Labor department has not yet ruled on the ERISA exemption. Labor Secretary Tom Perez also is working on a contested “fiduciary” rule for brokers and financial advisers requiring them to act in the best interest of small business customers.

State Treasurer John Chiang is aiding Secure Choice with staff support, meetings with business groups around the state, and urging federal action during two trips to Washington, D.C.

De Leon, who became the Senate leader last year, is now in a stronger position to get final approval of a Secure Choice plan. Public employee unions support plans that would help close the gap between private-sector retirement and government pensions.

Yvonne Walker, president of the largest state worker union, SEIU Local 1000, is a member of the Secure Choice board. She joined Jon Hamm, Highway Patrol union executive, in a proposal at a legislative hearing in 2011 on Gov. Brown’s pension reform.

Look at ways to improve retirement security for private-sector workers, the two union officials told lawmakers, instead of only focusing on cutting public employee retirement benefits.

The California Chamber of Commerce and the California Manufacturers and Technology Association reminded the Secure Choice board in September that they only lifted their opposition to allow a feasibility study.

Among a long list of concerns in their four-page memo: The employer cannot bear the risk for employee investments or decisions or for an under-funded program, and the employer should not be given the burden of educating employees about the program.

“The market analysis has revealed that the target market for this program includes individuals who are risk averse and lack basic investment knowledge,” said the business groups. “The research suggests that the biggest challenge to the program will be positioning and explaining the investment options to potential users.”

The Secure Choice board was told last week that when employers with five or more employees are told that they have to offer employees a retirement plan, some may choose an alternative to Secure Choice such as an IRA or Simplified Employee Pension.

The discussion briefly turned to competing with brand names, lower-cost products and “adverse selection” if Secure Choice ends up with only employers ignored by the aggressive marketers.

“If in fact your desire is just to make sure that these 7 million people are covered,” said Kiley of Plan Administrators Inc., “candidly the day you put the mandate out you don’t have to do anything further. They will be covered. The market will see to it.”

Poland’s top court on Wednesday will rule on the constitutionality of the country’s sweeping 2013 pension overhaul.

If the overhaul is reversed, it could drive Poland’s debt beyond legal limits, which automatically triggers austerity measures.

The country’s officials are confident the reforms will be upheld.

More details from Bloomberg:

The Constitutional Tribunal in Warsaw is set to rule on Wednesday on questions relating to the revamp, including one that could lead to the law’s effective reversal. The government took over and canceled 153.2 billion zloty ($39.3 billion) of its bonds held by privately managed pension funds two years ago, lowering public debt and leaving the funds with stock-heavy portfolios.

A ruling making significant parts of the overhaul illegal could force the government to increase bond issuance and push Poland’s public debt over legal limits, triggering austerity measures.

“I’m rather confident about the court’s decision, as the changes in pension funds protect the interests of taxpayers on one hand and those of retirees on the other,” Finance Minister Mateusz Szczurek said in an interview on public radio on Tuesday. “If the whole reform was overturned, a lot of laws will also have to be overturned, not least the debt thresholds.”

The government-sponsored changes to the country’s three-tier pension system have sparked controversy, including concern that canceling bonds would amount to uncompensated expropriation.

The government took over and canceled 51.5 percent of assets held by retirement funds, mostly government bonds. The funds, which are privately managed within Poland’s mandatory pension system, were banned from investing in government debt and forced to keep at least 75 percent of their assets in stocks. Poles also had to declare whether they still wanted to save for their retirement in privately managed funds or save for their future pensions in the state-run system.

 

Photo by  Paul Becker via Flickr CC License

Bank of America on Friday disclosed that it had reached a $335 million settlement with shareholders, ending a lawsuit accusing the bank of misleading shareholders in 2009-10.

The suit, led by the Pennsylvania Public School Employees’ Retirement System, claimed that shareholders would never have bought BoA stock in 2009-10 if the bank had truthfully disclosed its exposure to sour mortgage-backed securities.

More details from Reuters:

Bank of America Corp has reached a $335 million settlement of a federal lawsuit accusing it of misleading shareholders about its exposure to risky mortgage securities and its dependence on an electronic mortgage registry known as MERS.

The second-largest U.S. bank disclosed the accord in its quarterly report filed on Friday with the U.S. Securities and Exchange Commission. It said it set aside enough reserves for the settlement as of June 30, and that final documentation and court approval are still needed.

Shareholders led by the Pennsylvania Public School Employees’ Retirement System claimed they had been misled into buying Bank of America stock in 2009 and 2010, including stock sold to repay $45 billion of federal bailout money.

They said the Charlotte, North Carolina-based lender knew it could not raise enough capital had it revealed it might have to buy back billions of dollars of securities backed by risky loans, including from the former Countrywide Financial Corp.

Shareholders also said the bank knew that record keeping in Merscorp Inc’s private Mortgage Electronic Registration Systems registry was so poor that it would not be able to legally foreclose on thousands of delinquent mortgages.

Neither the pension fund nor BoA had any comment on the settlement as of press time.

 

Photo by Sarath Kuchi via Flickr CC License

 

The Georgia Supreme Court on Monday upheld a series of pension reforms that increased contributions for Atlanta employees.

In a class-action suit, city employees had argued that the increased contribution rate amounted to a benefit cut – but the high court disagreed.

Details from the Atlanta Business Chronicle:

In a class-action lawsuit filed by Atlanta police officers, firefighters and other city employees, Presiding Justice Harris Hines declared three pension reform ordinances “did not alter plaintiffs’ pension benefits, but rather modified their pension obligations, and in no manner divested plaintiffs of their earned pension benefits.”

Lawyers for the workers argued before the court last May that pension reforms pushed through the council by Mayor Kasim Reed illegally increased city employees’ contributions toward retirement.

The ordinances required the workers to contribute 12 percent of their annual salaries toward their pension plan, up from 7 percent. The move was based on recommendations from a committee of business leaders, elected officials and union representatives Reed appointed to look for ways to keep the financially struggling pension plans afloat.

Monday’s 23-page opinion upheld a lower-court ruling, declaring that “where the legislation establishing a pension plan itself provides that the plan may be subject to modification or amendment, the participant does not acquire a vested contractual right in an unchanged plan.”

 

Photo by Joe Gratz via Flickr CC License

Adam Mayers of the Toronto Star reports, How a 30-minute chat with Trudeau broke Ontario’s pension logjam:

Justin Trudeau came to town Tuesday and managed to achieve, in a 30-minute meeting with the premier, what 18 months of effort had previously failed to do.

Trudeau removed one of the biggest obstacles to the progress of Ontario’s retirement pension plan, namely the issue of how to the collect the premiums and keep track of what is owed in payments.

It’s an unexciting piece of bureaucratic process, but it’s also absolutely vital. If the government can’t keep accurate records, the plan will fail.

This missing piece is one reason why there’s been little visible movement in the past year on the Ontario Retirement Pension Plan (ORPP). The plan’s outline is this: The ORPP is coming in 2017, starting with larger employers. The plan is aimed at those Ontarians who lack a company pension plan; at its best, it will replace about 15 per cent of income to maximum earnings of $90,000, or $13,500 a year. It will be in addition to a Canada Pension Plan payment.

The ORPP couldn’t easily move ahead without federal co-operation, and the Harper Conservatives offered none.

Trudeau unlocked the jam Tuesday by making a promise to Wynne. According to Wynne’s spokesperson Zita Astravas, Trudeau said that once he takes office, he will direct the Canada Revenue Agency and departments of finance and national revenue to work with Ontario officials on the registration and administration of the ORPP, The Star’s Robert Benzie reported.

This is the same pension-administration help that Ottawa had extended to Quebec and Saskatchewan, but denied to Ontario.

This week’s news is important because it means the ORPP can move ahead on its own, while Ontario participates in talks to expand the CPP. The Ontario plan hedges against the fact that expanded CPP talks will fail, but if they succeed, the province’s effort isn’t wasted because its plan would be folded into the improved CPP.

Nothing has so far been said about CPP talks. But at a campaign stop in Toronto, Trudeau said he’d get going with the provinces within 90 days of becoming prime minister.

That gives him until Jan. 17 to make good on his promise, a tight schedule given the long list of things on the new government’s plate. But given Trudeau’s nod to Wynne just a week after winning the election, the odds have improved that the CPP will be high on the new finance minister’s list.

Polls show that Canadians are worried about retirement security and support a better national pension plan. They trust the CPP, seeing it as well run and reliable. They often quibble with the amount they are paid, but that’s a political decision, not something the CPP Investment Board controls.

Research carried out by the Gandalf Group for the Healthcare of Ontario Pension Plan (HOOPP) in the middle of the election campaign confirms that Trudeau and Wynne are moving with public opinion.

The research looks at attitudes toward workplace pensions, and in particular defined benefit pension plans. These plans are on the retreat in the private sector, but still widely available in the public sector.

Among the findings:

• 77 per cent support increasing CPP costs and benefits;
• 54 per cent say any contribution changes to the CPP should be mandatory;
• 70 per cent support the idea of the ORPP to increase pension benefits;
• 74 per cent said higher pension contributions are a form of savings, and an investment in the future. Only 20 per cent saw the higher premiums as a tax, which is how the Conservatives painted the cost of a better CPP.

In a world of economic uncertainty and powerful global forces, stronger public pensions protect workers against forces outside their control. After a decade of inaction and small thinking, it seems the will is there to do something. All that remains is finding the way.

ORPP at a glance

• It will be mandatory for 3 million Ontarians without company pensions.
• Contributions begin in 2017, with larger employers going first.
• Modelled after CPP. Has survivor benefit, but is not transportable. There is no opt out.
• Workers and employers each contribute 1.9 per cent of earnings up to a maximum annual income of $90,000.
• At its best, the pension aims to replace 15 per cent of income.
• The fund would collect $3.5 billion a year, which would be invested at arm’s length.

Source: Ontario Ministry of Finance

What are my thoughts on all this? Go back to read last week’s comment on real change to Canada’s pension plan following the Liberals’ sweeping victory. There, I critically examined the Liberals’ pension policy but unequivocally supported any effort to enhance the CPP even if I think the Canadian economy is on the verge of a serious recession:

My regular readers know my thoughts on the Canadian economy. I’ve been short Canada and the loonie for almost two years and I’ve steered clear of energy and commodity shares despite the fact that some investors are now betting big on a global recovery. I think the crisis is just beginning and our country is going to experience a deep and protracted recession. No matter what policies the Liberals implement, it will be tough fighting the global deflationary headwinds which will continue wreaking havoc on our energy and commodity sectors and also hurt our fragile real estate market. When the Canadian housing bubble bursts, it will be the final death knell that plunges us into a deep recession.

Having said this, I don’t want to be all doom and gloom, after all, this blog is called Pension Pulse not Greater Fool or Zero Hedge. I’d like to take some time to discuss why I think the new Liberal government will be implementing some very important changes to our retirement system, ones that will hopefully benefit us all over the very long run regardless of whether the economy experiences a very rough patch ahead.

Unlike the Conservatives led by Stephen Harper who were constantly pandering to Canada’s financial services industry, ignoring the brutal truth on DC plans, both the Liberals and the NDP were clear that they want to enhance the CPP for all Canadians, a retirement policy which will curb pension poverty and bolster our economy providing it with solid long-term benefits.

Of course, as always, the devil is in the details. Even though I agree with the thrust of this retirement policy, I don’t agree with the Liberals and NDP that the retirement age needs to be scaled back to 65 from 67. Why? Because Canadians are living longer and this will introduce more longevity risk to Canada’s pension plan.

But longevity risk isn’t my main concern with the Liberals’ retirement plan. What concerns me more is this notion of voluntary CPP enhancement. I’ve gotten into some heavy exchanges on this topic with Jean-Pierre Laporte, a lawyer who founded Integris, a firm that helps Canadians invest for their future using a smarter approach.

Jean-Pierre is a smart guy and one of the main architects of the Liberals’ retirement policy, but we fundamentally disagree on one point. As far as I’m concerned, in order for a retirement policy to be effective, it has to be mandatory. For me, any retirement policy which is voluntary is doomed to fail. Jean-Pierre feels otherwise and has even written on what forms of voluntary CPP enhancement he’s in favor of.

There are other problems with the Liberals’ retirement policy. I disagree with their stance on limiting the amount in tax-free savings accounts (TFSAs) because while most Canadians aren’t saving enough, TFSAs help a lot of professionals and others with no pensions who do manage to save for retirement (of course, TFSAs are no substitute to enhancing the CPP!).

More importantly, Bernard Dussault, Canada’s former Chief Actuary shared this with me:

“Unfortunately, there is a major flaw in the Liberal Party of Canada’s resolution regarding an expansion of the Canada Pension Plan, which is that their proposal would exclude from coverage the first $30,000 of employment earnings.

Indeed, although the LPC’s proposal would well address the second more important goal of a pension plan, which is to optimize the maintenance into retirement of the pre-retirement standard of living, it would completely fail to address the first most important goal of a pension plan, which is to alleviate poverty among Canadian seniors.”

I thank Bernard for sharing his thoughts with my readers and take his criticism very seriously.

Let me be crystal clear here. I don’t think the Liberals can afford to squander a golden opportunity and not introduce mandatory CPP enhancement for all Canadians. Anything short of this would be a historical travesty and it would dishonor Pierre-Elliott Trudeau’s legacy and set us back decades in terms of retirement and economic policy. 

Why am I so passionate on this topic? Because I’ve worked at the National Bank, Caisse, PSP Investments, the Business Development Bank of Canada, Industry Canada and consulted the Treasury Board of Canada on the governance of the public service pension  plan. I’ve seen first-hand the good, the bad and ugly across the private, public and quasi-public sector. I know what makes sense and what doesn’t when it comes to retirement policy which is why I was invited to speak on pensions at Parliament Hill and why the New York Times asked me to provide my thoughts on the U.S. public pension problem.

I’ve also put my neck on the line with this blog and have criticized and praised our largest public pension funds but one thing I know is that we need more defined-benefit plans covering all Canadians and we’ve got some of the very best public pensions in the world. Our top ten pensions are global trendsetters and they provide huge benefits to our economy. That’s why you’ll find a few pension fund heroes here in Canada.

Are the top ten Canadian pensions perfect? Of course not, far from it. I can recommend many changes to improve on their “world class governance” and make sure they’re not taking excessive and stupid risks like they did in the past. The media covers this up; I don’t and couldn’t care less if it pisses off the pension powers.

But when thinking of ‘real change’ to our retirement policy and economy, we can’t focus on past mistakes. We need to focus on what works and why building on the success of our defined-benefit plans makes sense for bolstering our retirement system, providing Canadians with a safe, secure pension they can count on for the rest of their life regardless of what happens to the company they work for.

In my ideal world, we wouldn’t have company pension plans. That’s right, no more Bell, Bombardier, CN or other company defined-benefit plans which are disappearing fast as companies look to offload retirement risk. The CPP would cover all Canadians regardless of where they work, we would enhance it and bolster its governance. The pension contributions can be managed by the CPPIB or we can follow the Swedish model and create several large “CPPIBs”. We would save huge on administrative costs and make sure everyone has a safe, secure pension they can count on for life.

I stand by my comments and even though I’m happy to see it’s full steam ahead on the ORPP, I would prefer to see full steam ahead on enhancing the CPP (and QPP here in Quebec). Only that will propel Canada to the top spot in the global ranking of pension systems.

It’s important to educate Canadians on the the huge advantages of well-governed defined-benefit (DB) plans. These include pooling investment risk, longevity risk, and significantly lowering costs by bringing public and private investments and absolute return strategies internally to be managed by well compensated pension fund managers who are also able to invest with the very best external managers as they see fit, making sure alignment of interests are there. DB plans also offer huge benefits to the overall economy, ones that will bolster the economy in tough times and reduce long-term debt.

In short, there shouldn’t be four, five or more views on DB vs DC plans. The sooner policymakers accept the brutal truth on DC plans, the better off hard working people and the entire country will be over the very long run.

All this to say that I don’t really care if the Liberals won the federal election and Kathleen Wynne is happy and embracing Justin Trudeau. I take all these political grandstanding photo ops with a grain of salt. It’s time to get down to business and let me assure the Liberals in Ottawa and Queen’s Park in Toronto there’s a hell of a lot work ahead and if they screw up this historic opportunity to significantly bolster our national retirement system, future historians will not be kind to them.

But when discussing enhancing the CPP, there are a lot of issues that need to be properly thought of including whether the federal government wants to give the new pension contributions to CPPIB or direct them to a new entity. There’s also the issue of pension governance and I think it’s high time we stop patting each other on the back here in Canada and get to work on drastically improving pension governance at Canada’s top ten pensions.

In particular, it’s time to remove the Auditor General of Canada from auditing our large public pensions (it’s woefully under-staffed and lacks the expertise) and either have OSFI, which already audits private federally regulated pension plans, or better yet the Bank of Canada audit our large pubic pensions and keep a much closer eye on all their investment and operational activities.

I’ve long argued that we need to perform comprehensive operational, performance and risk management audits at all our large public pensions. These should be performed by independent and qualified third parties to make sure that the governance at these pensions is indeed “world class” and the findings of these audits which can be done once every two or three years must be made public.

Some of Canada’s public pension plutocrats will welcome my suggestion, others won’t. I couldn’t care less as I’m not writing these lengthy blog comments to pander to them or anyone else. I speak my mind and I’ve seen enough shenanigans in the pension fund industry to know that when it comes to pension governance, we can always improve things, even in Canada where we pride ourselves on being leaders on governance. For me, it’s all about transparency and accountability.

If you have anything to add to this debate, feel free to email me at LKolivakis@gmail.com. I don’t pretend to have the monopoly of wisdom when it comes to pensions and investments but I think I’m doing my part in educating people on the real issues that matter most when it comes to their retirement security.

 

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

Two Kentucky lawmakers this week filed two proposals that would give the state legislature significantly more oversight and influence over the Kentucky Retirement Systems.

One proposal would put more lawmakers on the KRS board; another proposal would let lawmakers review investment contracts between the pension system and external money managers.

Details from NPR Louisville:

State Rep. Mike Harmon of Danville and Sen. Joe Bowen of Owensboro want to give four non-voting seats on the KRS board of trustees to members of the General Assembly and to require KRS contracts to undergo legislative review.

[…]

Harmon said the bill proposals were to have been filed Wednesday. One would make two state representatives and two state senators ex-officio members of the 13-member KRS board and the nine-member KTRS board. Another proposal would make all appointments to the KRS board subject to Senate confirmation.

“It will be the first step in transparency, to diagnose so that we can eventually fix, and then once we do the fixes we can, we’ve got to fully fund it,” he said. “If we diagnose it and we fix what we can but don’t fund it, then we’ll be right back where we’re at.”

The other main proposal in the bill would remove the existing exemption of KRS and KTRS contracts from review by the legislature’s Government Contract Review Committee. Such contracts include those with hedge funds and private equity funds that insist on the confidentiality of investment contract terms. As a result of that non-disclosure, state retirees can’t learn the precise holdings of those funds — or what those funds charge in fees. About 20 percent of KRS assets are in hedge funds and private equity funds.

Pension officials had not commented on the proposals as of press time.

 

Photo credit: “Ky With HP Background” by Original uploader was HiB2Bornot2B at en.wikipedia – Transferred from en.wikipedia; transfer was stated to be made by User:Vini 175.. Licensed under CC BY-SA 2.5 via Wikimedia Commons

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

Barbara Shecter of the National Post reports, CPPIB adds Mumbai to list of global offices, commits to stake in Cablevision:

The Canada Pension Plan Investment Board has opened an office in Mumbai to support and expand on $2 billion of investments made in India since 2010.

The new Mumbai office joins a list of seven international hubs including London, Hong Kong, New York and Sao Paulo. As with the others, the office in India will allow the pension giant’s management team to develop local expertise and partnerships, and will provide access to investment opportunities that “may not otherwise have been available,” said chief executive Mark Wiseman.

He noted that Canada’s largest pension has already made investments in the country in segments including infrastructure, real estate and financial services.

These include a 3.9 per cent stake in Kotak Mahindra Bank, India’s third-largest private sector bank by market capitalization, and a US$332-million investment in L&T Infrastructure Development Projects, the unlisted subsidiary of India’s largest engineering and construction company.

On Tuesday, the same day the new Mumbai office was announced, CPPIB issued a separate announcement saying it would take a US$400-million stake in U.S. cable operator Cablevision Systems Corp.

Toronto-based CPPIB is teaming up with a group of investors, including funds advised by BC Partners and BC European Capital IX, to provide 30 per cent of the equity in Altice’s proposed acquisition of Cablevision, one of the largest cable operators in the United States with millions of customers in greater New York.

The transaction is expected to close in the first half of 2016, subject to regulatory approvals.

Euan Rocha of Reuters also reports, Canada’s CPPIB opens office in India to scout for opportunities:

The Canada Pension Plan Investment Board, one of the country’s largest pension fund managers, opened an office in Mumbai on Tuesday as it scouts for investment opportunities on the Indian subcontinent.

CPPIB, which has already committed to invest more than $2 billion in India, sees its long investment horizon aligning with the financing needs of India’s economy.

The Toronto-based fund owns a nearly 4 percent stake in Kotak Mahindra Bank, one of the largest private sector banks in India. It has also committed to investments in infrastructure projects in India, office buildings, and to providing structured debt financing to residential projects in major Indian cities.

“The opening of an office in Mumbai allows CPPIB to develop local expertise, build important partnerships and access investment opportunities that may not otherwise have been available,” CPPIB head Mark Wiseman said in a statement.

You can read CPPIB’s full press release on opening an office in India here. This is all part of CPPIB’s long-term strategy to invest in public and private markets in emerging markets.

Why invest in India? There are plenty of reasons. In June 2010, Goldman Sachs Asset Management put out a nice little white paper, India Revisited, which made a solid case for investing in the country based on an advantageous demographic profile, a growing middle class, a healthy financial system, low levels of private and corporate leverage, conservative regulations and a domestically driven economy which insulated India from the worst effects of the 2008 global economic crisis.

Of course, there are plenty of pitfalls investing in India too. According to a 2008 NRI guide going over the advantages and disadvantages of investing in India, corruption is rampant in that country:

India, despite its enormous manpower, is facing a shortage of qualified skilled professionals due to lack of adequate public education system. The wage rates, hence, are going higher and higher eroding the cost advantage that has served India for a decade now.

Infrastructure is another field where India has to pull up its socks. Foreign investors, in their day-to-day course of business deal with PIO. But when these foreign investors come to India, they witness inadequate and not up-to-the-mark airports, seaports, roads, power grids, communication system and facilities, health care and education.

If India has to become a superpower, her government has to work with full commitment and dedication in all the fields mentioned above. Indirection, uncertainty and revisiting settled issues eternally characterise business negotiations in India.

Corruption is another huge predicament that has to be minimised as much as possible if India is to become an apple of the investors’ eyes. The Indian courts have huge backlog of more than 27 million cases, with many cases taking more than a decade to get solved! Unfriendly labour laws, difficulty in getting patent rights, and various other legal and ethical challenges add to India’s affliction. What officials put forth is not exactly how the true picture is.

India, no doubt, is a tough place to do business. But all said and done, we cannot deny the fact that India is a strong contender for the post of ‘economic superpower of the future’ and its strategic location works in its favour abundantly. We at NriInvestIndia.com believe that the ginnie has been let out of the bottle and soon the world would realize the potential of the Indian financial markets: including both stock markets and mutual funds. And if the challenges are taken care of, then it is a heavenly abode for all investors.

The ginnie has been let out of the bottle which is why CPPIB and other large global investors like Norway’s massive sovereign wealth fund are investing more in India.

In my opinion, however, the real opportunities in India lie in private, not public markets which gives CPPIB a big advantage over other investors. Anyone can invest in iShares MSCI India (INDA) which pretty much tracks the iShares MSCI Emerging Markets ETF (EEM). But a large investor like CPPIB can invest in real estate, infrastructure and private equity deals in that country, opening the door to a lot more lucrative investment opportunities.

Does CPPIB need to open up offices in various regions of the world? There, I’m a little more skeptical. CPPIB, Ontario Teachers and others love opening up offices to have “boots on the ground” but I prefer PSP’s approach of partnering up with the right partners in various countries to find the very best opportunities in public and private markets (I always ask myself a simple question: Do we really need to open up offices around the world or are we better off sourcing opportunities through partners?).

It’s also worth noting that investing in emerging markets via public or private markets carries a whole set of unique risks, including more volatility and currency risk.

Last October, I questioned CPPIB’s risky bet in Brazil and pointed out that while this makes sense over the long run, the fund will deal with volatility and huge currency losses over the short run (the Brazilian economy has gotten clobbered as China’s growth and demand for commodities has slowed and even though CPPIB doesn’t need to sell its Brazilian assets, their valuations are not immune to public market and currency woes).

One area where CPPIB can help India is in bolstering its antiquated pension system which ranks dead last in Mercer’s global ranking of pension systems.

As far as CPPIB’s cable deal, you can read its press release here. It basically partnered up with BC Partners, one of the best private equity funds in the world, to co-invest alongside it and join forces with Altice, in the latter’s acquisition of Cablevision:

Altice, the European cable and telecoms group which last month announced it will buy US cable television company Cablevision for $17.7bn including debt, said on Tuesday that the two would take a 30 per cent stake in the company for around $1bn.

Altice, known for being acquisitive, has previously bought rivals in France, the US and Israel. Following the announcement of the Cablevision deal it announced a new equity capital raising exercise of around €1.8bn.

From the announcement:

Altice N.V. (Euronext: ATC, ATCB) today announced that funds advised by BC Partners (“BCP”) and Canada Pension Plan Investment Board (“CPPIB”) have entered into a definitive agreement to acquire 30% of the equity of Cablevision Systems Corporation (NYSE: CVC) (for approximately $1.0 billion).

Together with the recent Cablevision debt financing and the Altice equity issuance, the acquisition of Cablevision is fully funded.

The cable wars are heating up everywhere, especially in the U.S., and this is a good long term deal as long as they didn’t overpay for it and get regulatory approval.

 

Photo by sandeepachetan.com travel photography via Flickr CC License