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NYC Pension Will Hire Consultant for Climate Risk, Measure Carbon Footprint of Portfolio

The New York City Employees’ Retirement System this week approved the hiring of a consultant who will weigh in on the risk that climate change poses to the fund’s portfolio, according to a Bloomberg report.

Additionally, the system has asked the Comptroller’s office to measure the carbon footprint of the fund’s portfolio.

This comes four weeks after New York Mayor Bill de Blasio asked all of the city’s five pension funds to consider dropping all coal holdings.

Alaska Officials Consider Pension Obligation Bonds

Alaska Gov. Bill Walker is considering issuing pension obligation bonds to help pay for future pension contributions, and state Revenue Commissioner Randy Hoffbeck is reportedly studying the strategy.

State lawmakers have already shown a desire to reduce pension costs now by shifting costs to the future; they passed legislation recently to lower the state’s annual pension contributions, which often crept upwards of $1 billion.

The revenue from the pension obligation bonds would be used to make annual pension contributions and reduce the burden of pension costs on the state budget. But as always, the bonds come with risk.

From the Alaska Dispatch:

Gov. Bill Walker is wondering if pension borrowing may be useful in Alaska.

If the state can borrow money at 5 percent interest, and earn an expected 8 percent on the invested money, the difference could bolster state retirement savings.

Borrowing money at a low rate and investing it to earn a higher rate is known as arbitrage, but it comes with risks, Michael O’Leary, a retired state investment adviser, has told the Alaska Retirement Management Board, which oversees the trust funds as it was reviewing such investments.

“There are no free lunches,” O’Leary told the board.

Further, if Alaska or any other government entity uses pension obligation bonds to make annual payments that would have otherwise been made from general funds, it can simply dig itself into a deeper financial hole than it would otherwise have.

While Walker has the authority on his own to issue up to $5 billion of such bonds, Revenue Commissioner Randy Hoffbeck said he would not do so without approval of the Alaska Legislature. He did not say what form that approval might take.

[…]

Fitch Ratings, one of the major bond rating firms, has recently warned of the growing use of pension obligation bonds nationally and the impact on state bond ratings.

“Issuing POBs always exposes the issuer to timing and investment risks to which it otherwise would not be exposed,” Fitch said in August.

The success of POBs hinges on investment returns outweighing the interest rate on the bonds.

According to Fitch, pension bond issuances in the first half of 2015 have already doubled issuances in all of 2014.

Photo credit: “Flag map of Alaska” by 2002_Winter_Olympics_torch_relay_route.svg: User:Mangoman88, using Blank_US_Map.svg by User:Theshibboleth – 2002_Winter_Olympics_torch_relay_route.svgFlag_of_Alaska.svg. Licensed under Public Domain via Wikimedia Commons

CalPERS Shifts Focus to Avoiding Another Big Loss

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.

Still underfunded after a $100 billion loss during the recession, CalPERS plans to slowly shift over decades to more conservative and lower-yielding investments, raising employer rates but reducing the risk of another financial bloodbath.

The Brown administration, repeating a request made in August, again urged the CalPERS board last week to promptly begin phasing in a rate increase over the next five years.

“I think we are missing an opportunity and putting off the day of reckoning, and it may come back to bite us,” said board member Richard Gillihan, Brown’s human resources director.

But the majority of the 13-member board, public employee union members and their allies, support the go-slow “risk mitigation” policy expected to be adopted in November or December after more than 1½ years of study.

“There are public agencies (local governments) that don’t have the money to move forward on a policy to reduce our risk right now,” said board member Theresa Taylor, elected by state workers.

In the fall of 2007, CalPERS had investments worth $260 billion and 101 percent of the projected assets need for future pension obligations. By March 2009, the investments had dropped to about $160 billion and the funding level to 61 percent.

Since then the Standard & Poor’s 500 index of big stocks has nearly tripled. But the California Public Employees Retirement System is only about 74 percent funded now with investments totaling $286 billion at the first of the month.

Experts have told CalPERS that in the maturing system, where retirees are beginning to outnumber active workers, some investment funds are needed to pay pensions, reducing earnings.

“It’s been very challenging to dig out of that hole,” Andrew Junkin, a Wilshire consultant, told the board last August.

CalPERS expects investment earnings to provide about two-thirds of the money needed to pay future pensions, with the rest coming mainly from employer contributions and a lesser amount from employees.

Critics say the CalPERS earnings forecast, now 7.5 percent, is too optimistic and overstates the projected funding level, concealing massive debt. The investments needed to support an optimistic earnings forecast have a higher yield because they are riskier.

For example, government bonds yield a certain amount with little risk of an investment loss. Stocks that can produce much bigger yields than bonds are more risky, because they also can yield big losses.

The risk mitigation policy shifts the focus from whether employer-employee rates are high enough to properly fund the system. The new policy seeks more investments that reduce the risk of another big loss and an even harder-to-dig-out-of hole.

The CalPERS board has been told that experts think if the funding level drops low enough, perhaps around 40 to 50 percent, it becomes impractical to push rate increases and earnings forecasts high enough to project full funding.

“If we have another event similar to ’08-09 then we reach a point where we can’t recover,” board member Bill Slaton, a Brown appointee representing local government elected officials, said at the meeting last week. “That’s what the industry tells us.”

The risk mitigation for a maturing CalPERS is long-term for several reasons. The amount of investments diverted to pay pensions will continue to increase. In two decades, poor investment earnings will require a proportionately larger rate increase than today.

Action now could result in another employer rate increase, putting more strain on local government budgets already facing a total rate increase of roughly 50 percent that is still being phased in.

Last year employer rates intended to get CalPERS to full funding in several decades were at record highs for some plans. Rates exceeded 30 percent of pay for more than 100 miscellaneous plans and 40 percent of pay for more than 150 safety plans.

“Employers are reporting that these contribution levels are putting significant strain on their budgets and limiting their ability to provide services to the people in their jurisdictions,” the annual CalPERS risk and funding report said last November.

The risk mitigation plan avoids a direct employer rate increase. In a year when earnings exceed the 7.5 percent forecast by at least 4 percent, half of the excess would be used to lower the forecast by 0.05 percent, allowing a shift to less risky investments.

The other half of the excess would be used to lower the employer rate, canceling out the rate increase that would otherwise result from lowering the earnings forecast needed to project full funding.

But in the long run, the risk mitigation is expected to indirectly increase employer rates because some of the excess from good years would be skimmed off, leaving less to offset the rate increase needed for years when earnings fall below the forecast.

This technical issue came up last week when Slaton suggested lowering the threshold for risk mitigation from earnings that are 4 percent above the forecast to 2 percent.

Alan Milligan, the CalPERS chief actuary, said lowering the threshold to 2 percent could result in a direct employer rate increase. He said excess earnings of at least 2 percent are needed to offset the rate increase resulting from a lower earnings forecast.

The plan to split the excess earnings, rather than use it all for risk mitigation, reflects the view of some board members who want employers to benefit from good investment years.

A staff report last week said the largest state worker union, SEIU, wants a policy requiring a board vote before risk reduction is triggered in a year with excess earnings. The staff believes the board already has that flexibility.

Among the 3,093 local governments in CalPERS there is a wide range of funding levels and employer rates. Some are contributing more than the required CalPERS rate to pay down their debt or “unfunded liability.”

Milligan said plans that are more than 100 percent funded cannot use the surplus to reduce their “normal cost,” which covers the pension earned during a year but not the debt from previous years.

A pension reform requires employers to contribute at least half of the annual normal cost. Milligan said CalPERS is considering creating a “pension prefunding trust” to help employers with a surplus lower their cost.

Board member J.J. Jelincic, elected by active and retired CalPERS members, is skeptical of the risk mitigation plan. He said earnings averaging 7.5 percent are “highly doable” over a long period.

Jelincic said he knows CalPERS staff is aware of academic work suggesting a more effective way to reduce risk would divide investments into a “hedging” portfolio and a “risk return” portfolio. He asked why the option was not presented to the board.

Ted Eliopoulos, the CalPERS chief investment officer, said the two-portfolio risk reduction method is being explored by the staff for discussion during the next round of asset allocation in about 2½ years.

“It would be a departure from our current asset allocation mix and wasn’t considered as an option for the risk mitigation process we have just gone through,” said Eliopoulos.

Photo by rocor via Flickr CC License

Pension Risk Transfers Boom: Report

Pension risk transfers – the process of a DB plan provider offloading some or all of a plan’s liabilities – have exploded since 2007 to the tune of $260 billion, according to a report by Prudential.

As you can see in the above graphic, the transfers are most popular in the U.K. by a significant margin; but the industry is booming in the U.S., too.

More details from ai-cio.com:

More than $260 billion in pension liabilities have been transferred since 2007, according to a report by Prudential.

At least 40 pension funds in the UK, US, and Canada executed de-risking transactions of over $1 billion in the last eight and a half years, the study found.

Pension risk transfer (PRT) has been most widely adopted in the UK, with nearly $180 billion in de-risking transactions occurring there between 2007 and June 2015. According to the report, momentum in PRT has been driven by “competitive pressure in every industry peer group.”

“Plan sponsors and fiduciaries who proactively manage or transfer pension risk can fund their pension obligations with certainty and gain a considerable advantage over those who don’t,” said William McCloskey, vice president of longevity reinsurance within Prudential Retirement’s PRT business.

The trend was found to be less popular in North America. Canadian plans have transferred just $16 billion in liabilities since 2007, while the US transferred $67 billion—a number heavily boosted by “landmark” General Motors and Verizon PRT deals in 2012.

View the full report here.

Canada Pension Will Open Mumbai Office, Invest $6 Billion in India Over Next 6 Years

The Canada Pension Plan Investment Board is looking to increase its exposure to emerging markets, and India figures to play a big role.

The Board announced this week that it plans to invest $6 billion in India by 2022; the fund will also open an office in Mumbai.

2015 Global Ranking of Top Pensions

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

Chris Flood of the Financial Times reports, Global ranking of top pension funds:

Denmark and the Netherlands are the only two countries with pension systems that could be regarded as “first class”, according to a comprehensive global pensions study.

The two countries rank first and second in the Melbourne Mercer Global Pension Index, which measures the health of the pension systems in 25 countries to assess whether they will be able to deliver adequate future provision.

The report, produced jointly by Mercer, the consultancy, and the Australian Centre for Financial Studies in Melbourne, says that big reforms are required to improve the pension systems of some of the world’s most populous countries, including China, India, Indonesia and Japan.

Japan, Austria and Italy score poorly in the report. They have high levels of government debt, inadequate pension assets and ageing populations, finds the study.

David Knox, senior partner at Mercer, says: “There is no easy solution, but the sooner action is taken, the better. Reforms take time and good transition arrangements are required, as implementing new policies might stretch over 10 or even 20 years.”

Pension systems in other advanced economies including the US, Germany, France and Ireland were also found to face large risks that could endanger their long-term health.

The UK’s score was marked down following the recent removal of the requirement for retirees to buy an annuity that would provide a guaranteed income until death. Even Australia’s highly regarded pension system, ranked third in the report, could be improved by requiring part of any retirement benefit to be taken as an income stream, rather than a single lump sum, the report finds.

The report shows average years in retirement have risen from 16.6 in 2009 to 18.4 in 2015. Mercer forecasts this will increase to 19.2 by 2035.

Only Australia, Germany, Japan, Singapore and the UK have raised their state pension age to counteract increases in life expectancy.

“Living to 90 and beyond will become commonplace. More countries should automatically link changes in life expectancy to the state pension age,” says Mr Knox. The Netherlands has already taken this step.

Amlan Roy, head of pensions research at Credit Suisse, the bank, adds: “It is necessary to get rid of fixed retirement ages.”

Mercer also recommends that governments make greater efforts to ensure older workers remain active. Participation rates among workers aged 55 to 64 differ considerably, from 77 per cent in Sweden to just 40 per cent in Poland. The pace of improvement in activity rates for older workers has also varied significantly over the past five years.

Mr Roy says: “Unsustainable promises on pensions have been made the world over and will have to be renegotiated in response to increasing longevity.”

He points out that pensioners aged 80 and above represent the fastest-growing cohort globally and annual healthcare costs for this group are around four times higher than the rest of the population.

This raises great concerns for younger people. Mr Knox says: “Most civilised governments will offer retirement benefits to the poor and infirm but some young people are asking if there will be any state pension provision by the time they retire.”

You can download and read the 2015 Melbourne Mercer Global Pension Index report here. The overall index value for each country’s pension system represents the weighted average of the three sub-indices below (click on image):

According to the report:

The weightings used are 40 percent for the adequacy sub-index, 35 percent for the sustainability sub-index and 25 percent for the integrity sub-index. The different weightings are used to reflect the primary importance of the adequacy sub-index which represents the benefits that are currently being provided together with some important benefit design features. The sustainability sub-index has a focus on the future and measures various indicators which will influence the likelihood that the current system will be able to provide these benefits into the future. The integrity sub-index considers several items that influence the overall governance and operations of the system which affects the level of confidence that the citizens of each country have in their system.

This study of retirement income systems in 25 countries has confirmed that there is great diversity between the systems around the world with scores ranging from 40.3 for India to 81.7 for Denmark.

Indeed, there is great diversity between countries but it doesn’t surprise me that Denmark and the Netherlands lead the world when it comes to their national pension system. Both ATP and APG went back to basics following the 2008 financial crisis. ATP runs their national pension like a top hedge fund and is actually doing much better than most top hedge funds. The Netherlands has an unbelievable pension system which is why I’ve long argued the world needs to go Dutch on pensions.

What do the Netherlands and Denmark have in common? They have strict laws governing the pension deficits of their public and private pensions and if things go awfully wrong, these pensions are mandated by law to take action to return to solvency. This and the fact that they have long ago introduced a shared risk pension model is why these two countries have the world’s best pension systems.

It is worth noting, however, that while Denmark and the Netherlands have the best pension systems, the world’s best pension plans and pension funds are here in Canada where you will find your fair share of pension fund heroes who get compensated extremely well for delivering outstanding results (some say outrageously well but they are delivering the long term results).

The report raises the issue of longevity risk, a theme I’ve covered in detail on this blog. While I don’t think longevity risk will doom pensions, I do think that common sense dictates if people live longer, the retirement age should be adjusted accordingly to make sure these pensions are sustainable. This is why I don’t agree with the Liberals and NDP proposal to scale back the retirement age in Canada to 65 from 67, but do agree with them that we need to finally introduce real change to Canada’s retirement system and enhance the CPP for all Canadians.

As far as the United States, there are new solutions being discussed to tackle a looming retirement crisis but I’m not impressed as these proposals only benefit large alternative investment shops charging huge fees and Wall Street which makes a killing in fees serving these large funds.

Moreover, there shouldn’t be four views on DB vs DC plans, there should only be one view which clearly explains the brutal truth on DC plans and why well-governed DB plans are far superior in terms of performance and offer big benefits to the overall economy too.

What about Australia and its superannuation schemes which are government mandated DC plans? That country came in third in the global ranking, ahead of Canada. As I’ve stated in the past, while Australia does a great job covering all its citizens, we don’t need pension lessons from Down Under. I would recommend an enhanced CPP over any Australian superannuation scheme any day.

And how about Sweden? It placed high again in the global rankings but there’s a pension battle brewing there. In fact, Chris Newlands of the Financial Times reports, Swedish pension chief executives condemn reforms:

The heads of the four largest pension funds in Sweden have written an open letter to the government condemning proposed changes to the country’s public pension system.

The letter is an embarrassment for the Swedish finance ministry, which said in June it would close one of the country’s five state pension funds and shut down the SKr23.6bn ($2.7bn) private equity-focused fund, known as AP6, to cut costs.

The funds, which were set up to meet potential shortfalls within the state pension system, have long been criticised for producing lacklustre returns and for their expensive management structure.

But the chief executives and chairmen of four of the funds have called the changes “short term” and “politically motivated” and said the overhaul would have a negative impact on investment performance, which would ultimately harm pensioners.

It is the strongest rebuttal yet of the government’s proposals for reform and the first time there has been a public, co-ordinated response from AP1, AP2, AP3, and AP4, which manage $142bn of pension assets.

The group attacked the proposals for lacking a proper assessment of costs.

The heads of the four funds wrote in the letter: “During the reorganisation, planned to start in 2016 and continue for almost two years, there is a risk that the AP funds will lose their focus on long-term asset management, which will have a negative effect on results.

“If this were to lead to even a 0.1 per cent decrease in returns this would amount to about SKr1.2bn.”

Per Bolund, Sweden’s financial markets minister, previously rejected the suggestion that the proposals could jeopardise Sweden’s pension framework. He told FTfm in August: “That is exaggerated. We would never suggest something that would harm the pension system.”

The AP funds were originally split into several smaller groups due to fears that one large scheme would become too dominant an investor in Sweden and too much of a political temptation.

The four funds fear the government’s plan to also create a national pension fund board to determine return targets and the investment strategy of the remaining funds would revive the threat of political interference.

“The proposed governance of the funds is unclear and bureaucratic,” they said. “The proposals to establish a national pension fund board and the ability for the government to have an influence . . . will present the prospect of short-term political micromanagement.”

I’m not sure what exactly is going on in Sweden but if they choose to amalgamate these public pension funds into one national pension fund, they better get the governance right (ie., adopt CPPIB’s governance which is based on Ontario Teachers’ governance and what most of Canada’s top ten use).

In my recent comment on real change to Canada’s pension, I stated the following:

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 am paying close attention to developments out of Sweden to gauge why the Swedish finance ministry is proposing to reform the pension system and to amalgamate these funds (contact me at LKolivakis@gmail.com if you have any information on this).

At the bottom of the global pension ranking, I noticed India and South Korea. Don’t know much about India’s pension system but South Korea’s National Pension Service (NPS), which oversees US$430 billion (RM1.84 trillion) in assets, is understaffed and struggling to generate higher returns.

Lastly, take the time to read the latest Absolute Return Letter, The Real Burden of Low Interest Rates. Niels Jensen explains why low rates are making it more difficult for all pensions to generate the returns they need, placing pressure on many of them which are already chronically underfunded.

Jensen looks at the funded status of UK, US, and German pensions and notes the following:

Some countries have begun to take action. Sweden, Denmark and the Netherlands have all permitted the local pension industry to use a fixed discount factor of 4.2%, and in the U.S. the regulator now allows the industry to use the average rate over the last 25 years when discounting future liabilities back to a present value.

Although initiatives such as these have the effect of reducing the present value of future liabilities and thus the amount of unfunded liabilities overall, they do absolutely nothing
in terms of addressing the core of the problem – low expected returns on financial assets in general and low interest rates in particular.

He’s right, pensions better prepare for an era of low returns and if my forecast of a protracted period of global deflation materializes, it will decimate pensions and all the massaging and tinkering of discount rates won’t make an iota of a difference. In fact, at that point, even central banks won’t save the world.

Photo by Horia Varlan via Flickr CC License

Dutch Pensions Look to Beef Up In-House Private Equity Staff

Dutch pension giant PGGM made waves this summer when it gave its external private equity managers an ultimatum: disclose all fees or face divestment.

The pension systems still want to invest in private equity – but they want to do it internally.

Several Dutch pension systems this week are asking permission to hire private equity staffers to begin making direct PE investments.

From the Financial Times:

PGGM, the Dutch investment giant, wants to bypass paying fees to expensive and opaque private equity firms by hiring more internal staff so that it can take stakes in companies directly.

Ruulke Bagijn, chief investment officer for private markets at the Dutch asset manager, told FTfm she would also request permission from PFZW and the other five pension funds she works for to hire more private equity staff and start making direct private equity investments.

PGGM’s existing private equity team has 18 employees focusing on external manager selection and co-investment opportunities.

She said: “Pension funds can build core private equity expertise directly in-house. This is really something pension funds should do if they are serious [about achieving better returns].

“I think [having this in-house expertise] would be fantastic and would enable us to make further steps towards reducing costs. PGGM has the scale and can attract talent.”

[…]

PGGM began building its internal infrastructure and private real estate teams in 2009 to reduce its reliance on external managers and gain more control over the types of investments made in those areas. The plan is to develop a similar level of expertise in private equity, which represents roughly 5 per cent of PGGM’s total assets.

PGGM manages $208 billion in assets.

All Ohio Pension Systems Comply With State Funding Law For First Time in 15 Years

For the first time in 15 years, all of Ohio’s state-level pension funds are in compliance with a state funding law.

The law has to do with the time frame in which a fund can pay down its accrued liabilities.

More details from the Columbus Dispatch:

State government is experiencing something that hasn’t happened in 15 years:

All its pension funds are in compliance with Ohio law requiring adequate financing to repay all obligations in 30 years or less.

That’s a huge contrast from just a few years ago, when the compliance timetable of a couple of the retirement systems was “infinity.” In the past few years, the funds have redirected billions of dollars by trimming benefits and raising employee contributions to achieve the legal standard.

The last to make the threshold was the Ohio Police & Fire Pension fund, which dropped from 33 years to 30. The repayment period for accrued liabilities at the other funds, per the Ohio Retirement Study Council: Public Employees Retirement System, 21 years; School Employees Retirement System, 28 years; State Teachers Retirement System, 28.4 years; and the State Highway Patrol Retirement System, 29 years.

The state’s five pension systems currently sport funding ratios of between 64 percent and 82 percent.

Photo by www.SeniorLiving.Org

Four Views on DB vs DC Plans?

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

Nick Thornton of Benefitpro reports, DC vs DB: 4 views on new EBRI data (h/t, Pension Tsunami):

This week’s new data from the Employee Benefits Research Institute adds a new dimension to the vital question of the country’s retirement readiness.

In the report, researchers show that often, 401(k) plans can do a better job of replacing income in retirement than defined benefit plans can.

The report simulates savings outcomes for workers currently age 25 to 29, with at least 30 years of eligibility in a 401(k) plan.

It measures how often replacement rates of 60, 70, and 80 percent can be achieved by workers in four income quartiles if they participate in a 401(k) plan, compared to those levels of income replacement rates for participants in defined benefit plans.

When measured against a 60 percent income replacement rate, traditional pensions beat 401(k) for all workers, except those in the highest income quartile.

But as replacement rates are increased, 401(k) participants fare better, according EBRI.

Under the 70 percent replacement rate, workers in the top two income quartiles do resoundingly better than their counterparts in defined benefit pension plans.

Only 46 percent of workers in the second-highest income quartile can expect to replace 70 percent of income from a defined benefit plan, compared to 75 percent who contribute to a 401(k) plan.

When benchmarking against an 80 percent income replacement rate, workers in the top two income quartiles stand little chance of replacing as much income with traditional pension benefits, whereas 61 percent of workers in the second highest income quartile will be able to do so with distributions from a 401(k), and 59 percent of the best-paid workers will be able to do so through 401(k) savings, according to the modeling.

The take away: traditional defined benefit plans seem better for lowest income workers, especially the lower the income replacement rate.

Many 401(k) proponents will no doubt see the new data as supportive of their core argument: that participating in a defined contribution plan throughout the lion’s share of one’s working life will reap sufficient savings for a secure retirement.

Of course, others will disagree. Here is a look at four stakeholder views on the question of 401(k)’s efficacy, or inadequacy, in preparing the country for retirement.

Daniel Bennett, Managing Director, Advanced Pension Strategies

Bennett’s Southern California-based advisory provides specialized pension and tax-advantaged solutions for small employers.

He has real issues with EBRI’s new report. For starters, he says it’s based on generous return assumptions—the study uses an average annual return of 10.9 percent in 401(k) plans, which the institute tracked in plans between 2007 and 2013.

He also questions the validity of a 401(k) assessment that assumes 30 years of contributions, as EBRI’s report does.

Bennett tells BenefitsPro he is not partial to a defined benefit option to a 401(k), or vice versa, but he does admit to having a bias for small businesses.

“My field experience strongly indicates that 401(k)s are very deficient in providing positive retirement outcomes for anyone, owner and worker alike, in all but the largest firms and even then typically only for the higher wage earners,” said Bennett.

Selling 401(k) plans to the small business market is a “loss leader” for firms like Bennett’s.

He says providers are not incentivized to service the market, given the thin margins. He thinks the Department of Labor’s “draconian” fiduciary proposal will only make matters worse.

Defined contribution plans are part of the solution, he says, but don’t expect him to be in the camp that says 401(k)’s superiority is an open and shut case.

“Retirement Income outcomes are really the only thing that matters,” believes Bennett. “So when I read studies assuming 30 years of contributions and 10.9 percent growth rates, I can only sit there and scratch my head wondering what these guys are smoking.”

“They need to get out of the ivory tower and down in the trenches with me to see what is really happening,” he added.

Tony James, President and COO, Blackstone

A leader of one of world’s biggest private equity firms went on CNBC this week and said that the retirement crisis facing savers in their 20s and 30s will ultimately lead to a breakdown of the country’s financial structure.

“If we don’t do something, we’re going to have tens of millions of poor people and poverty rates not seen since the Great Depression,” James told CNBC.

He advocated a government-mandated Guaranteed Retirement Account system, of the kind famously recommended by labor economist Teresa Ghilarducci almost a decade ago.

Private equity firms like Blackstone have been trying to break into the 401(k) market for several years, with little documented success to date.

While James’ comments to CNBC were made outside the context of the EBRI report, he clearly would take issue with its assumptions.

He said 401(k)s typically earn 3 to 4 percent, while pension plans, which James said have an average allocation of 25 percent to alternative investments such as ones his firm manages, yield closer to 7 and 8 percent.

“The trick is to have these accounts invested like pension plans, so the money compounds over decades at 7 to 8 percent, not at 3 to 4,” said James.

Economic Policy Institute

The self-described non-partisan think tank advocates on economic issues affecting low- and moderate-income Americans (Teresa Ghilarducci sits on its board, as do several of the country’s largest labor leaders).

This week it published its own report, claiming in 2014, “distributions from 401(k)s and similar accounts (including Individual Retirement Accounts (IRA), which are mostly rolled over from 401(k)s) came to less than $1,000 per year per person aged 65 and older.”

“On the other hand, seniors received nearly $6,000 annually on average from traditional pensions,” according to EPI’s blog post.

Its post was also independent of EBRI’s new study.

“Though 401(k) and IRA distributions will grow in importance in coming years, the amounts saved to date are inadequate and unequally distributed, and it is unlikely that distributions from these accounts will be enough to replace bygone pensions for most retirees, who will continue to rely on Social Security for the bulk of their incomes,” according to the institute.

Peter Brady, Senior Economist, Investment Company Institute (ICI)

The ICI, a trade group representing the interests of the mutual fund industry (Blackstone is a member), also works with EBRI to coordinate data on 401(k) savings rates.

Brady published a post, also independent of EBRI, calling to question the Economic Policy Institute’s defense of defined benefit plans.

“EPI has it wrong,” writes Brady. Its analysis is “highly misleading” for the following reasons, he argues.

It’s using unreliable data. Its source, the Bureau of Labor Statistics’ Current Population Survey (CPS), has consistently undercounted the income that retirees receive from employer-sponsored retirement plans and IRAs.

It’s backward looking. The people whose income it’s measuring, today’s retirees, haven’t enjoyed the benefits of today’s well-developed 401(k) system.

It’s gotten the math wrong. EPI’s analysts simply mishandled the data in ways that minimized the value of 401(k) plan and IRA distributions.

Unlike Peter Brady who represents the mutual fund industry, I don’t question the non-partisan Economic Policy Institute or its findings that 401(k)s are a negligible source of retirement income for seniors.

In fact, maybe Brady is right for the wrong reasons. I would reckon the EPI has gotten the math wrong by overestimating the retirement income from 401(k)s which have been a monumental failure contributing to the ongoing retirement woes of millions of Americans getting crushed by pension poverty.

That is where I agree with Blackstone’s Tony James. 401(k)s are not the solution to America’s retirement crisis but neither is his idea of a government-mandated Guaranteed Retirement Account system which invests like U.S. pension funds getting eaten alive by hedge fund, private equity fund and real estate fund fees. James’s solution is great for the Blackstones of this world and Wall Street, but it won’t bolster America’s retirement system, which is why I ripped into it in my last comment.

Moreover, Daniel Bennett, Managing Director of Advanced Pension Strategies is right to question the new data from the Employee Benefits Research Institute. It’s based on unrealistic return assumptions which are even worse than the ones U.S. public pension funds use as they chase their rate-of-return fantasy foolishly believing they will achieve a 7-8% bogey in a deflationary supercycle which won’t end any time soon.

Let me add a fifth and sobering view to this debate between DB vs DC plans, one which I’ve already covered in a previous comment of mine on the brutal truth on DC plans. In that comment, I noted the following:

Take the time to read the research report by the Canadian Public Pension Leadership Council. The research paper, Shifting Public Sector DB Plans to DC – The Experience so far and Implications for Canada, examines the claim that converting public sector DB plans to DC is in the best interests of taxpayers and other stakeholders by studying the experience of other jurisdictions, including Australia, Michigan, Nebraska, New York City, Saskatchewan and Texas and applying those lessons here in Canada. I thank Brad Underwood for bringing this paper to my attention.

I’m glad Canada’s large public pension funds got together to fund this new initiative to properly inform the public on why converting public sector defined-benefit plans to private sector defined-contribution plans is a more costly option.

Skeptics will claim that this new association is biased and the findings of this paper support the continuing activities of their organizations. But if you ask me, it’s high time we put a nail in the coffin of defined-contribution plans once and for all. The overwhelming evidence on the benefits of defined-benefit plans is irrefutable, which is why I keep harping on enhancing the CPP for all Canadians regardless of whether they work in the public or private sector.

And while shifting to defined-contribution plans might make perfect rational sense for a private company, the state ends up paying the higher social costs of such a shift. As I recently discussed, trouble is brewing at Canada’s private DB plans, and with the U.S. 10-year Treasury yield sinking to a 16-month low today, I expect public and private pension deficits to swell (if the market crashes, it will be a disaster for all pensions!).

Folks, the next ten years will be very rough. Historic low rates, record inflows into hedge funds, the real possibility of global deflation emanating from Europe, will all impact the returns of public and private assets. In this environment, I can’t underscore how important it will be to be properly diversified and to manage assets and liabilities much more closely.

And if you think defined-contribution plans are the solution, think again. Why? Apart from the fact that they’re more costly because they don’t pool resources and lower fees — or pool investment risk and longevity risk — they are also subject to the vagaries of public markets, which will be very volatile in the decade(s) ahead and won’t offer anything close to the returns of the last 30 years. That much I can guarantee you (just look at the starting point with 10-year U.S. treasury yield at 2.3%, pensions will be lucky to achieve 5 or 6% rate of return objective).

Public pension funds are far from perfect, especially in the United States where the governance is awful and constrains states from properly compensating their public pension fund managers. But if countries are going to get serious about tackling pension poverty once and for all, they will bolster public pensions for all their citizens and introduce proper reforms to ensure the long-term sustainability of these plans.

Finally, if you think shifting public sector DB plans into DC plans will help lower public debt, think again. The social welfare costs of such a shift will completely swamp the short-term reduction in public debt. Only economic imbeciles at right-wing “think tanks” will argue against this but they’re completely and utterly clueless on what we need to improve pension policy for all our citizens.

The brutal truth on defined-contribution plans is they’re more costly and not properly diversified across public and private assets. More importantly, they will exacerbate pension poverty which is why we have to enhance the Canada Pension Plan (CPP) for all Canadians allowing more people to retire in dignity and security. These people will have a guaranteed income during their golden years and thus contribute more to sales taxes, reducing public debt.

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 properly 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.

Photo jjMustang_79 via Flickr CC License

Swedish Pension Funds Give Scathing Review of Proposed Reforms

The Swedish government has released a proposal to overhaul the nation’s retirement system, which includes condensing its four retirement systems into three, and streamlining their collective governance structure.

But top officials from the funds released a letter this week slamming the “ill-defined” proposal.