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The First Consequence of Illinois’ Pension Put-Off

Last week, Illinois announced that it was putting its required $560 million pension payment for November on hold; December’s payment is also in jeopardy.

Benefits will still be paid, but there are still consequences for the delay. This week, the state’s Employees Retirement System requested from its investment board the two largest cash withdrawals in the system’s history, totaling $225 million.

In absence of the states monthly payment, SERS needs that money to pay out benefits. It also means that the $225 million isn’t being put to work in the market.

A Solution to America’s Retirement Crisis?

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

Tom DiChristopher of CNBC reports, Millennials face ‘Great Depression’ in retirement: Blackstone COO:

Americans in their 20s and 30s are facing a retirement crisis that could plunge them back into the Great Depression, Blackstone President and Chief Operating Officer Tony James said Wednesday.

“Social Security alone cannot provide enough for these people to retain their standard of living in retirement, and 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,” he told CNBC’s “Squawk Box.”

The solution is to help young people save more by mandating savings through a Guaranteed Retirement Account system, he said. Right now, young people cannot save enough on their own because they face stagnant incomes and heavy student-debt burdens.

The Guaranteed Retirement Account was proposed by labor economist Teresa Ghilarducci in 2007 as a solution to the problem of retirement shortfalls that inevitably arise when contributions are voluntary.

A GSA system would require workers to make recurring retirement contributions, which would be deducted from paychecks. Employers would be mandated to match the contribution, and the federal government would administer the plan through the Social Security Administration.

Ghilarducci has proposed a mandatory 5 percent contribution, but James said a 3 percent requirement rolled into GRAs could outperform retirement savings vehicles like IRAs and 401(k)s.

He noted that a 401(k) typically earns 3 to 4 percent, while a pension plan yields 7 to 8 percent. The average American pension plan has a 25 percent allocation to alternative investments — including real estate, private equity and hedge funds — with the remainder invested in markets, he said.

“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,” he said.

A 25-year-old who earns 3 to 4 percent per year would retire with $75,000, not nearly enough to annuitize and live on, James said. A 7-percent-per-year investment would yield $200,000 at retirement, he said.

Under the plan James is proposing, the government would offer a 2 percent guarantee on GRAs.

“The key to it is taking that capital, setting up the Guaranteed Retirement Accounts and investing it well for the very long term,” he said. “We have to do that and we have to do that professionally.”

James spoke ahead of the Center for American Progress’s conference on creating more inclusive prosperity and promoting long-term planning in the private sector.

Hazel Bradford of Pensions & Investments also reports, Blackstone’s James calls for national retirement savings plan:

Blackstone Group President and Chief Operating Officer Hamilton “Tony” James called for a national retirement savings plan to address inadequate retirement preparedness that will hit the next generation of Americans particularly hard.

“We absolutely have to start now,” Mr. James said at a Center for American Progress conference in Washington on Wednesday. “It has to be mandated. Nothing short of a mandate will provide future generations a secure retirement.”

Mr. James recommended a proposal by Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at The New School in New York, to create a retirement savings plan for everyone based on 3% annual salary contributions shared equally among employees and employers. The federal government would guarantee a 2% return, through a modest insurance premium on such accounts. “With corporate profits at an all-time high, this should be a manageable burden,” he said, adding that the approach “is going to require us to look beyond the next election cycle.”

Mr. James also called for redirecting $120 billion in annual retirement tax deductions to give every worker a $600 annual tax credit to save for retirement.

Speaking at the same event on creating long-term value, Treasury Secretary Jacob Lew said the corporate tax system “is broken” and that capital gains rates should be higher. “But we also have to realize that that is not the whole answer,” Mr. Lew said.

So Tony James and the folks at Blackstone are finally realizing the United States of pension poverty is heading down the wrong road when it comes to its national retirement policy? And now they want to help those poor Millennials avoid a Great Retirement Depression?

How noble of them. Unfortunately their prescription is worse than the disease and if you ever heard of that old expression “beware of Greeks bearing gifts” then you should also beware of private equity sharks promoting a retirement policy which will help them garner ever more assets to manage so they can keep charging insane fees.

Please repeat after me, when it comes to hedge funds, private equity funds and real estate funds, the name of the game is asset gathering. Period. Sure, Blackstone is a great alternative asset manager but the private equity industry is changing, times are a lot tougher and regulators are scrutinizing these funds a lot more closely.

It’s not that I disagree with Tony James, Millennials are most definitely going to experience a retirement depression, just like baby boomers are experiencing right now. But when he starts spewing nonsense about having these Guaranteed Retirement Accounts invest like pension plans which invest in alternative investments like hedge funds, private equity and real estate, and enjoy 7-8 percent annualized returns, he’s blatantly lying and talking up his industry.

Folks, I’ve been warning you forever that global deflation will continue to wreak havoc on all economies and you’d better prepare for a protracted period of lower returns ahead. This will impact retail and institutional investors, especially all those U.S. public pension funds chasing a rate-of-return fantasy.

With the 10-year Treasury bond yielding 2%, the era of 7-8% annualized returns is a pipe dream and all the hedge funds, private equity funds and real estate funds in the world won’t help you achieve an unrealistic bogey (but it will enrich these overpaid alternatives managers and their buddies on Wall Street which get paid huge fees from these alternative investment funds).

Having said this, something needs to be done. I like Teresa Ghilarducci, an economics professor at the New School for Social Research. She has been on the forefront stating that America’s retirement crisis needs new thinking. The poor lady even received death threats for her novel ideas which goes to show you how pathetically polarized and divisive American politics has become.

What is my solution to America’s great retirement crisis? I discussed my ideas in a recent comment on Teamsters’ pension fund:

Let be clear here, I don’t like multiemployer pension plans because they are poorly governed which is why many risk insolvency unless comprehensive reforms are implemented. But the problem here is much bigger than multiemployer plans. U.S. retirement policy needs a drastic overhaul to properly cover all Americans, most of which have little or no savings whatsoever.

I’ve shared some of my thoughts on what needs to be done when I examined whether Social Security is on the fritz:

…politics aside, I’m definitely not for privatizing Social Security to offer individuals savings accounts. The United States of pension poverty has to face up to the brutal reality of defined-contribution plans, they simply don’t work. Instead, U.S. policymakers need to understand the benefits of defined-benefit plans and get on to enhancing Social Security for all Americans.

One model Social Security can follow is that of the Canada Pension Plan whose assets are managed by the CPPIB. Of course, to do this properly, you need to get the governance right and have the assets managed at arms-length from the federal government. And the big problem with U.S. public pensions is they’re incapable of getting the governance right.

So let the academics and actuaries debate on whether the assumptions underlying Social Security are right or wrong. I think a much bigger debate is how are they going to revamp Social Security to bolster the retirement security of millions of Americans. That’s the real challenge that lies ahead.

Yes folks, 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).

I know, for Americans, these are all “socialist” countries with heavy government involvement and there is no way in hell the U.S. will ever tinker with Social Security to bolster it. Well, that’s too bad because take it from me, there is nothing socialist about providing solid public education, healthcare and pensions to your citizens. Good policies in all three pillars of democracy will bolster the American economy over the very long-run and lower debt and social welfare costs.

If U.S. policymakers stay the course, they will have a much bigger problem down the road. Already, massive inequality is wiping out the middle class. Companies are hoarding record cash levels — over $2 trillion in offshore banks — and the guys and gals on Wall Street are making off like bandits as profits hit $11.3 billion in the last six months.

Good times for everyone, right? Wrong! Capitalism cannot sustain massive inequality over a long period and while some think labor will rise again as the deflationary supercycle (supposedly) ends, I worry that things will get much worse before they get better.

In another recent comment of mine looking at pension fund heroes, I stated the following:

So after reading all my comments, let’s go back to Dan McCrum’s question above, where are the pension fund heroes? I’d say most of them are in Canada where plans like OTPP and HOOPP keep delivering stellar returns as they match assets and liabilities with or without external hedge funds and pension funds like CPPIB bringing good things to life on a massive scale, which is why it’s also posting great returns.

In fact, all of Canada’s top ten are performing well and providing great benefits to the Canadian economy which is why I’m a stickler for enhancing the CPP here. If the U.S. got its governance right, I would also recommend it enhances Social Security for all Americans.

And a couple of days ago looking at real change to Canada’s pension plan, I shared this with you:

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.

The central problem with U.S. public pension funds is the lack of proper governance which leaves them open to undue political interference. In fact, unlike in Canada, the entire investment process at U.S. public pension funds has been hijacked by useless investment consultants which typically recommend the same brand name funds institutional investors should be avoiding.

This is why I’m not surprised to see so many top hedge funds are underperforming this year (but still collecting 2% management fee on the multibillions they manage!). When the pension herd chases yield with little or no regard to the macro environment and the underlying structure of the investment environment, this is what happens.

So forgive me if I’m more than a bit cynical on Tony James’s solution to America’s retirement crisis. What the U.S. needs is to accept the brutal truth on DC plans, go Dutch on pensions, enhance Social Security for all Americans and adopt Canadian-style pension governance and even improve on it.

In other words, U.S. public pension funds have to stop farming assets out to be managed by high fee hedge funds, private equity and real estate funds and have to adopt the right governance which would allow them to attract talented pension fund managers and pay them properly so they can manage pension assets internally at a fraction of the cost (Don’t worry, the Blackstones of this world will still make a killing).

Photo by TaxCredits.net

NYC Pensions Ask External Managers For Full Fee Disclosure; No More “Business As Usual”

New York City’s five pension funds on Wednesday sent a letter to many of their external investment managers, requesting “full transparency” on fees – both historical and current – or risk being shut out of future pension investments.

The letter was sent to about 200 managers, according to the Wall Street Journal, which reviewed the letter.

Managers who don’t comply could get the cold shoulder from the city’s pension funds in the future, according to the letter.

Scrutiny Distracts Staffers at Korean Pension Giant: Report

South Korea’s National Pension Service (NPS) is the third-largest pension fund in the world, but the work culture is very different from other large funds, according to a report from Reuters.

Insiders who spoke to Reuters paint a picture of a workplace where portfolio managers walk on eggshells, and staffers are sometimes paralyzed by fear of criticism from auditors and politicians.

The tension stems partially from the fact that the fund’s CIO is annually brought in front of numerous government panels that dissect his decision-making process.

Moody’s: Christie’s Pension Proposal Comes With Risk For Schools

A plan to overhaul the New Jersey pension system – first proposed in February by the Pension and Health Benefit Study Commission, and later endorsed by Gov. Christie – could put undue burden on the state’s school districts, according to a new report from Moody’s.

Details on the reform proposal, from NJ.com:

[The reform] proposal […] would freeze the existing pension plan and shift workers onto less generous retirement and health care plans. While the state, which pays for school employees pension and health benefits, would continue to pay for the current system’s existing debts, school districts would have to assume the costs of the new system and retirees’ health care.

Under that proposal, the districts’ new costs would be offset by the billions of dollars saved from reducing public employee health benefits paid by school districts and municipalities from “Cadillac” plans to plans on par with the private sector.

And here’s what Moody’s had to say, from NJ.com:

If the savings doesn’t pan out, the proposal could burden school districts that have few options but to raise taxes, cut costs, borrow money or spend their reserves to pay the tab for teacher pensions, Moody’s said.

“According to the proposal, districts would not be financially affected because any tax increases necessary on their side would be more than offset by tax reductions at the local government level, thus making it at least cost neutral,” the report said. “There is, however, no mechanism currently in place or proposed to compel municipalities and counties to either share the savings or reduce their budgets in step with the savings.”

Moody’s said it’s also unclear “how the various local government entities would rebalance these shared savings over time as health care and pension costs rise.”

Read the Moody’s press release here.

Photo By Walter Burns [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

Report: NYC Pension Funds’ Investment Boards Could Soon Be Merged

New York City Comptroller Scott Stringer is planning on proposing an overhaul to the way the city’s pension funds select outside investment managers, according to a report in the New York Daily News.

The proposal involves merging the investment committees of the city’s five major pension funds into one “umbrella” board.

Stringer will make the proposal next week, according to the report.

Details from NY Daily News:

Stringer’s plan, according to several people briefed on it, will call for consolidating separate investment committees of the police, fire, teachers and other municipal union pension funds into a single combined umbrella group. That group would meet only four times a year, thus doing away with the current system, where the five major pension funds each hold their own separate monthly meetings to select investment managers.

The trustees of each fund, however, would still vote separately on whether to park their money with a particular firm.

Stringer declined to comment on his proposal until he releases it in the next few days.

But he has told trustees of the funds that it will streamline an archaic and bureaucratic process that requires his staff to attend five separate investment meetings every month — 55 meetings a year — even though 95% of the investment decisions are the same for each fund. The change will give the controller’s staff more time to spend on monitoring funds and reducing fees, Stringer has claimed.

Labor leaders who sit on all the pensions’ boards have lined up in recent days behind the proposal, as has Mayor de Blasio, thus assuring its passage.

Collectively, the city’s five pension systems manage about $160 billion in assets.

Photo by Tim (Timothy) Pearce via Flickr CC License

Real Change to Canada’s Pension Plan?

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

Last week, Keith Leslie of the Globe and Mail reported, Wynne says Ontario may drop pension plan if Liberals win election:

Ontario Premier Kathleen Wynne suggested Tuesday that her government would drop the idea of a provincial pension plan if Liberal Leader Justin Trudeau becomes the next prime minister.

Wynne couldn’t convince the Harper government to enhance the Canada Pension Plan, so her Liberal government introduced an Ontario Retirement Pension Plan that would mirror the CPP, essentially doubling deductions and benefits.

If Trudeau wins the Oct. 19 election and is willing to improve the CPP, that would address her concerns about people without a workplace pension plan not having enough money to live on when they retire, said Wynne.

“If we have a partner in Justin Trudeau to sit down and work out what they’re looking at as an enhancement to CPP, that was always my starting point, that was the solution,” she said.

Trudeau is campaigning on a promise to expand the CPP and to return the age of eligibility for old age security to 65 from 67, and said he’d begin talks with the provinces on improving the CPP within three months of taking office.

New Democrat Leader Tom Mulcair also promises to enhance the CPP, and says he’d convene a First Ministers’ meeting on improving the pension plan within six months of forming government. Like the Liberals, the NDP would also return the age for OAS eligibility to 65.

Ontario’s pension plan, scheduled to begin Jan. 1, 2017, will require mandatory contributions of 1.9 per cent of pay from employers and a matching amount from workers — up to $1,643 a year — at any company that does not offer a pension.

As Wynne campaigned with federal Liberal candidates in the Toronto area Tuesday, she insisted she was not worried her attacks on Stephen Harper’s Conservatives will make it hard to work with them if they’re re-elected.

“Well, you know, it seems to me that before the federal election campaign started there was a little bit of a challenge working with Stephen Harper, but obviously I will continue to try to do that if Stephen Harper is the prime minister,” she said to cheers and laughter from Liberal supporters.

Wynne, who has been the most vocal premier in the federal campaign and has clashed repeatedly with Harper over the Ontario pension plan, said the provinces need a government in Ottawa that will work with them on retirement security, climate change, infrastructure and the Syrian refugee crisis.

“I will work with whomever is the prime minister, but I really believe that in this country, at this moment, we have an opportunity to elect a prime minister who understands that working with the provinces and territories is in the best interests of the country,” she said.

Ontario voters historically have supported different parties in government at the federal and provincial levels, but Wynne isn’t worried about campaigning herself out of a job in the next provincial election.

“I think the opportunity we have right now is to have a federal government and a provincial government that are on the same page, that are actually pulling in the same direction, and that’s exactly what I’m looking forward to,” she said.

Wynne also defended her decision to campaign heavily for her Liberal cousins in the federal election as “standing up for the people of Ontario,” and said she didn’t need to take a vacation day from her duties as premier to do it.

“I work seven days a week, so this is part of the work that I do.”

Well, Ontario Premier Kathleen Wynne can breathe a lot easier now that the Liberals have swept into power. After winning a decisive majority in a stunning comeback, Liberal Leader Justin Trudeau will turn his attention Tuesday to forming a cabinet and grappling with the host of urgent challenges that await him.

One of the biggest challenges that awaits Mr. Trudeau is the lackluster Canadian economy. Norman Mogil wrote a guest post for Sober Look on Canada and the oil price shock. In his excellent comment, Canada’s Recession Debate Misses the Point, Ted Carmichael notes the following:

The problem for politicians and policymakers is that the negative terms of trade shock comes from outside Canada, not from changes in the behaviour of domestic consumers, corporations or governments. The current terms of trade shock has many causes, including the development of new technologies that have lowered the cost of producing oil; the decision by Saudi Arabia and other OPEC countries to continue to pump oil at a high rate rather than cut production to support the oil price; and the slowdown in China’s economy which has lowered demand and prices for a broad range of commodities.

Whether or not the downturn in the global commodity super-cycle causes a business-cycle recession measured by GDP and employment is not the most important issue. The most important point to grasp is that Canada is facing a period in which the combined real income of households, corporations and governments are declining and are unlikely to rebound quickly. Even if real GDP resumes growing in the second half of 2015 and employment continues to rise, we will be producing and working more but receiving less real income for our efforts.

What the Economic Debate Should be About

The real economic issue that politicians should be facing is not whether Canada has slipped into a modest business cycle recession, but rather what is the appropriate economic policy response to a lasting negative shock to our national income caused by the fall in the prices of the commodities that we produce.

The Conservative Party wants to stay the course, keeping taxes low, encouraging home-ownership, and pursuing a balanced budget. That is a reasonable start, but does not go far enough in providing incentives to boost growth outside the resource industries.

The Liberal Party wants to raise taxes on high income earners including high-income small business owners, reshuffle child benefits to favour the “middle class”, and incur deficits to fund infrastructure projects. The difficulty in this approach will be to maintain business confidence and to control deficit spending in an environment of weak GDP growth.

The New Democratic Party (NDP) wants to raise corporate taxes, impose carbon taxes, expand government’s role in child care, and pursue a balanced budget. This is a difficult if not impossible set of promises to deliver on during a period of weak commodity prices.

The worst election outcome, but perhaps the most likely according to current polls, would be a coalition government of the NDP and Liberals. Coalition economic policies would likely result in higher taxes on high income earners, small businesses and corporations, increased spending on government provided child-care and infrastructure, and an early loss of control of budget deficits.

All three political parties and all Canadian voters would be well advised start thinking about what kind of pro-investment, pro-growth policies Canada needs to pursue in a period when the main economic engine and source of national prosperity has stalled and shifted into reverse.

Luckily, there is no coalition government of the NDP and Liberals. With a clear majority victory pretty much from coast to coast, the Liberals can implement the policies they have been arguing for.

This also means that the buck now stops with the Liberals their leader Justin Trudeau who will be under pressure to perform. And they better heed Ted Carmichael’s advice and really think hard about about what kind of pro-investment, pro-growth policies Canada needs to pursue in a very difficult global economic environment where deflationary headwinds are picking up steam.

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 was 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 enhance 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.

But I understand why some people are concerned about enhancing the CPP now that the economy is weak. In fact, Ted Carmichael shared this with me after reading my comment:

“I agree with you on TFSAs. My concern is that in the lower commodity price environment that we find ourselves, the new government should be focused on creating a business environment that generates stronger private sector real income growth. The election campaign really saw none of the parties addressing this issue, but rather they focused how they would divide up the existing stagnant or shrinking pie. Increasing payroll taxes to fund future retirement benefits is a good long-term policy idea, but perhaps not the most important priority at the present point in the cycle.“

Ted is right, increasing payroll contributions is not the most important priority at the present point in the cycle but my fear is that the longer the federal government puts this off, the worse it will be down the road. And if the Liberals squander their majority and don’t implement major reforms to our retirement system, who will do it in the future?

Let me end this comment by congratulating our next prime minister, Justin Trudeau. Justin went to high school with my younger brother at Brébeuf. He wasn’t a top student but he worked hard and managed to do well in a brutal academic environment. He’s a very nice guy, a family man, and even though he’s relatively young and inexperienced, he’s smart and has a very experienced team backing him up.

I will also praise Stephen Harper and Tom Mulcair who lost but remained gracious. Politics is a thankless and tough job. I know, I saw my stepfather go through many ups and downs as he fought and won a few elections in the riding of Laurier-Dorion. Anyone who tells you politics is easy doesn’t have a clue of what they’re talking about, especially in the age of social media where public officials are scrutinized 24/7.

But now the tough work begins and I will do my part and help the Liberals introduce ‘real change’ to our retirement system, one that bolsters our economy. The challenges that lie ahead are huge but if they implement the right policies, they will hopefully mitigate the fallout from continued global economic weakness and meaningfully bolster our retirement system once and for all.

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 – http://commons.wikimedia.org/wiki/File:Canada_blank_map.svg#mediaviewer/File:Canada_blank_map.svg

CalPERS Consultant: Divestment Has Cost Fund Billions

CalPERS on Monday began the process of divesting from its thermal coal holdings, as required by a law signed this month by California Gov. Jerry Brown.

There is much debate over whether divestment is effective – both in terms of the battle against climate change, and the maximization of investment returns.

When it comes to the latter, one of CalPERS’ consultants says divestment has hurt the fund over the years.

From Reuters:

A consultant warned on Monday that past efforts to divert CalPERS’ money away from investments deemed unethical have cost the largest U.S. public pension fund between $4 billion and $8 billion.

In the past, CalPERS has pulled cash out of tobacco and firearm-related companies as well as from investments in South Africa, Iran, Sudan and some emerging markets on political grounds.

Five of the six divestments campaigns undertaken by CalPers so far have hurt its returns, Andrew Junkin president of Wilshire Consulting, told a meeting of the CalPERS Investment Committee in Sacramento.

Junkin said that while divestment does not necessarily have to weigh down returns, it does require financial transaction costs that can add up.

He also expressed doubts about the effectiveness of divestment, seen by environmentalists as an important front in the battle against climate change.

“By divesting you are really giving up your voice, your ability to influence change,” Junkin said. “And you’ve just sold it to somebody else. Those shares are going to get voted by somebody else now instead of by you, and you don’t get to advance your goals.”

Divestment proponents also hope the California law will send a message that the United States is serious about combating climate change, ahead of international climate change talks in Paris later this year.

A document by CalPERS staff said coal companies have “significantly underperformed” a benchmark over the last year but have slightly outperformed over the last 10 years.

Coal represents only a small fraction – $83 million – of the fund’s $300 billion portfolio.

Photo by Paul Falardeau via Flickr CC License

Fitch: Illinois’ Delayed Pension Payment Could Contribute to Future Downgrades

Fitch downgraded Illinois’ bond rating this week to BBB-, and the state’s recent decision to delay its November pension payment is a credit negative and could contribute to further downgrades, according to the ratings agency.

The state’s “exceptionally high” unfunded pension liabilities played a role in the downgrade, but the primary catalyst was the state budget crisis.

Still, Fitch noted that the state’s decision to delay November’s $560 million pension payment could contribute to future credit downgrades.

From Crain’s Chicago Business:

Fitch Ratings on Monday downgraded Illinois’ rating on $26 billion in outstanding bonds because of the [budget] crisis, and Moody’s Investors Service warned that the state’s inability to make its November pension payment could further hurt its already dismal credit rating.

[…]

Fitch cited lawmakers’ budget failure, Illinois’ above-average debt and “exceptionally high” unfunded pension liabilities in lowering the rating on general obligation bonds to BBB-, a few levels above what’s considered “junk” status.

Last week, Munger said Illinois won’t be able to make a scheduled $560 million payment to its pension funds because of cash flow problems. While Moody’s statement doesn’t indicate a change in Illinois’ rating, the agency said the missed payment could be a factor in future action.

Illinois currently has the worst-funded pension systems and lowest credit rating of any state.

Illinois has the lowest credit rating in the country.

CalPERS Gears Up To Drop Coal

Last week, California Gov. Jerry Brown signed a law requiring the state’s two pension funds to divest from their thermal coal holdings by mid-2017.

That process begins today at a CalPERS board meeting. From the LA Times:

The CalPERS Investment Committee will have a new task at its regular meeting Monday along with its main job of trying to boost flagging investment returns: dumping its coal holdings.

The immediate financial effect of the bill on the funds is negligible. The total CalPERS fund, $293.4 billion as of last week, holds stakes in 24 thermal-coal related companies representing a mere 0.03% of the fund, or about $83 million. CalSTRS said its coal-related holdings are even smaller, about $6.7 million in 11 firms across its $184-billion fund.

[…]

Divestiture will be one of the items on the agenda when Ted Eliopoulos, CalPERS chief investment officer, testifies before the board’s investment committee Monday.

In a statement, CalPERS said it was prepared to implement the law, including a provision that requires that it “constructively engage” with thermal-coal companies to determine whether they are “transitioning their business models to adapt to clean energy generation.”

Finance experts are skeptical of the benefits of using investment policy to advance social goals.

There’s a heated debate over whether divestment actually accomplishes its desired social and economic goals – and, even if it does, if the process is worth the ensuing cost.

One CalPERS consultant, Wilshire Associates, says divestment has cost CalPERS at least $3.8 billion to date.

Photo by rocor via Flickr CC License

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