Pension360

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

Jennifer Schuessler of the New York Times reports, Canadian Philosopher Wins $1 Million Prize:

The Canadian philosopher Charles Taylor has been named the winner of the first Berggruen Prize, which is to be awarded annually for “a thinker whose ideas are of broad significance for shaping human self-understanding and the advancement of humanity.”

The prize, which carries a cash award of $1 million, will be given in a ceremony in New York City on Dec. 1. It is sponsored by the Berggruen Institute, a research organization based in Los Angeles and dedicated to improving governance and mutual understanding across different cultures, with particular emphasis on intellectual exchange between the West and Asia.

Mr. Taylor, 84, is widely regarded as one of the world’s leading philosophers, and a thinker whose ideas have been influential in the humanities, social sciences and public affairs. His many books include “Sources of the Self,” an exploration of how different ideas of selfhood helped define Western civilization, and “A Secular Age,” a study of the coexistence of religious and nonreligious people in an era dominated by secular ideas.

He was chosen for the prize by an independent nine-member jury, headed by the philosopher Kwame Anthony Appiah. The jury cited Mr. Taylor’s support for “political unity that respects cultural diversity,” and the influence of his work in “demonstrating that Western civilization is not simply unitary, but like all civilizations the product of diverse influences.”

Mr. Taylor’s previous honors include the 2015 John W. Kluge Prize for the Achievement in the Study of Humanity (shared with Jürgen Habermas), the 2007 Templeton Prize for achievement in the advancement in spiritual matters and the 2008 Kyoto Prize, regarded as Japan’s highest private honor. Both the Templeton and Kluge prizes also carry cash awards of more than $1 million.

It’s Canadian Thanksgiving, the US stock market is open (bond market is closed for Columbus Day) but I didn’t want to blog on markets. I beefed up my last comment on bracing for a violent shift in markets for you to read my thoughts on what is going on in the global economy and financial markets.

Instead, I want to take the time and reflect on what I am thankful for, my family, girlfriend, friends, all of whom I love deeply; my health which is remarkably stable after being diagnosed with multiple sclerosis (MS) back in June 1997; my neurologist, Dr. Yves Lapierre and the wonderful nurses and staff at the Montreal Neurological Institute (MNI); my contacts in the pension world and other experts who help me write insightful comments on pensions and investments; and last but not least, all of the institutional and retail investors who support my blog through their generous financial contributions via PayPal on the right-hand side.

But allow me to take a small detour to discuss with you my intellectual mentors, those who helped shape the way I view the world and why pensions are critically important to our society and economy. I was a late bloomer, intellectually speaking, and it wasn’t until I arrived at McGill University back in 1992 when I started really delving deeply into the history of economic, social and political thought where I learned from some great professors about the power of ideas and how to critically examine the world we live in.

At McGill, I was majoring in economics and minoring in mathematics and then went on to obtain a Masters in Economics where I submitted my thesis, a critical review of macroeconomic growth theory (see an older comment of mine on Galton’s Fallacy and the Myth of Decoupling which remains very pertinent today).

Even though I was proud of getting an “A” on my Masters thesis, which was literally smack in the middle of my diagnosis of MS and the toughest period of my life, I wasn’t an “A” student by any means. My academic GPA was 3.3 (B+) and I found all my courses at McGill very challenging.

It didn’t help that I was flirting with the idea of becoming a doctor like my father and took all these difficult pre-med courses (organic chemistry, biochemistry and physiology) as electives which was no picnic (I’m terrible at rogue memorization). Moreover, some of the upper level mathematics courses that I needed to complete my minor in mathematics were brutal (it was me and six foreign students who ate, spoke and breathed mathematics all day long, and I was petrified and very intimidated but managed to pass these courses with decent grades).

But my favorite courses by far were always courses which made me think and these included courses like underground economics by Tom Naylor, the combative economist and one of my mentors at McGill, comparative economic systems by Allen Fenichel, and history of economic thought by Robin Rowley who also taught us about the pros and  “con” in econometrics (he and Sir David Hendry, one of the world’s foremost experts of econometrics, were the only two who obtained a PhD in Econometrics with Distinction from LSE back in 1969).

While I enjoyed all these courses immensely, nothing compared to my electives in political theory. It was there where I was taught by some brilliant professors like the late Sam Noumoff, John Shingler, James Tully who now teaches at the University of Victoria, and of course, Charles (“Chuck”) Taylor. They taught us about the main ideas in political thought, from Aristotle, to Hobbes, Locke, Tocqueville, Machiavelli, Marx and many more great philosophers.

One of the things I still remember till this day is when at the end of the introduction to political theory course which they all taught together, they stood in front of a packed auditorium and asked the students to give their feedback. One student rose his hand and asked Chuck Taylor if he thought the course focused “too much on Aristotle.”

I swear to you, you could hear a pin drop as a deep hush fell over the auditorium as all the students eagerly anticipated professor Taylor’s response. He didn’t attack or denigrate the student in any way (he was too kind and classy to do this). Instead, he paused, reflected and then smacked his forehead and blurted: “Too much Aristotle, how is this even possible?!?“. He took an awkward moment and made us all laugh out loud, it was priceless and vintage Chuck Taylor.

[Note: My older sister shared another funny story from her days at McGill when Taylor saw her and a friend on campus and stopped them to ask: “You, you both take my course, can you direct me as to where it is?”].

In fact, those who know him best are in awe of his sheer brilliance (he could recite passages of major works off the top of his head) but also his humility, empathy and wonderful sense of humor. Charles Taylor is brilliant but he’s also extremely humble (part of his deep Catholic faith), socially engaged and represents the very best of McGill and what truly outstanding professors are all about.

After that initial course in political theory, I was hooked and started auditing some of his other courses in political theory, adding to my already charged academic curriculum. I was obsessed with reading all his books but two of them really struck a chord with me, CBC Massey lecture series, The Malaise of Modernity and his seminal book, Sources of the Self, which remains his Magnum Opus.

It was Charles Taylor who opened my eyes to liberalism and its critics where I delved into the works of Isaiah Berlin, Taylor’s thesis supervisor at Oxford University, as well as many other great political thinkers like John Rawls, Robert Nozick, Ronald Dworkin, Thomas Nagel, Michael Walzer, Richard Rorty, Alasdair MacIntyre, Michael Sandel, Will Kymlicka, Susan Moller Okin and Martha Nussbaum, another brilliant lady and prolific author.

[Note: During my long breaks, I used to go to the McGill bookstore on the corner of Metcalfe and  Sherbrooke and just hang around the second floor reading all their books, many of which I bought and still own.]

Why am I sharing all this with you? What do political philosophers and great thinkers have to do with pensions and investments? Well, quite a bit actually. When I discuss the benefits of defined-benefit pensions or enhancing the CPP for all Canadians, my thinking is deeply shaped by Taylor’s communitarianism (not to be confused with communism) and while it’s important to respect individual freedom and diversity, we also need to promote the collective good of our society.

Quite simply, in a ZIRP & NIRP world where ultra low rates and the new negative normal are here to stay, the pension Titanic will keep sinking, but some pensions, defined-contribution (DC) plans in particular, will sink much further and leave millions struggling with pension poverty while others, like large well-governed defined-benefit (DB) plans, will offer workers the ability to retire in dignity and security.

So, when I expose the brutal truth on defined-contribution plans and explain why Canadians are getting a great bang for their CPP buck, somewhere behind that message lies the influence of Chuck Taylor and a more just society.

And for that, I am very thankful I had the privilege to learn from this brilliant and generous man who in many ways reminds me of my father in terms of their deep faith, insatiable appetite to read about everything and generosity (they are also the same age).

I actually bought my father Taylor’s book, A Secular Age, and he enjoyed reading it but told me it is deeply rooted in Western thought where there is an equally important Eastern Orthodox thought of religion which is ignored (you need to read the works of my father’s friend, Christos Yannaras, a Greek theologian and leading intellectual to understand these nuances).

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.

Three appeals court justices, citing the alarming view of critics that public pensions are headed for the financial cliff, looked for a new way to allow a change in direction and found one.

In a ruling in a Marin County case last August that reformers called a “game changer,” the panel weakened the “California rule” protecting the pensions of current workers. Most cost-cutting reforms have been limited to new hires, which can take decades to yield savings.

One reason unions asked the state Supreme Court to review the new ruling last month is that another three-justice panel, also from the first district appeals court, made an opposite ruling in a San Francisco case last year.

“Not only does the court of appeal opinion conflict with sixty years’ worth of California Supreme Court precedent, it flies in the face of a decision by the same district court of appeal only a year ago,” said the union appeal, arguing that “unanimity of decision” is needed on “vested pension rights doctrine.”

The California rule stems from a state Supreme Court ruling in 1955 (Allen v. City of Long Beach) that the pension offered at hire becomes a vested right, protected by contract law, that can only be cut if offset by a comparable new benefit, erasing employer cost savings.

Pension cuts for current workers in the Marin and San Francisco cases were an attempt to curb employer pension costs that soared after heavy pension fund investment losses during the recession and financial crisis in 2008.

The ruling in the San Francisco case overturned most of a voter-approved cut in a supplemental COLA for pensions, citing the California rule that a pension cut must be offset by a new benefit. The state Supreme Court declined to hear an appeal.

The Marin ruling allows the county, with no offsetting new benefit, to impose “anti-spiking” state legislation enacted in 2012 that prevents current workers from continuing the previously authorized boosting of pensions with standby pay, call-back pay, and other things.

Some suggest the Marin ruling could lead to cuts in pensions current workers earned in the past, even though the ruling is “limited” and the case is about pensions earned in the future. Uncertainty about what could be cut is another reason unions want a high court review.

The California rule, adopted by courts in a dozen other states, is unusal for a number of reasons. Cuts in the pensions that will be earned by current workers in the future are allowed in the dwindling number of private-sector pensions.

Pensions are regarded as deferred salary. Government employers can cut salary, but under the California rule they cannot cut pension amounts current workers will earn in the future, unless there is a comparable new benefit.

“This interpretation is contrary to federal Contract Clause jurisprudence, which holds that prospective changes to a contract should not be considered unconstitutional impairments,” argues Amy Monahan, a legal scholar.

Her 64-page paper, “Statutes as Contracts? The ‘California Rule’ and Its Impact on Public Pension Reform,” is mentioned by reformers such as former San Jose Mayor Chuck Reed, who think cutting pensions not yet earned is the key to curbing runaway pension costs.

Monahan argues, according to an abstract of her article, that California courts have not explained the “basis” for the California rule and have “improperly infringed on legislative power” with “a rule that is inconsistent with both contract and economic theory.”

The state Supreme Court ruling in the 1955 Allen v. Long Beach case gives little or no explanation of why cuts in pensions not yet earned by time on the job should be offset by a comparable new benefit. The main part of the ruling is a single sentence:

“To be sustained as reasonable, alterations of employees’ pension rights must bear some material relation to the theory of a pension system and its successful operation, and changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages.”

Monahan said the court “merely stated the new rule” and as support cited two appellate court rulings that mention the theory of a pension system and note that certain detrimental changes were offset by new advantages.

“It is unclear why the Allen court chose to make these appellate court observations part of a new rule regarding pension modification,” Monahan said. “The Allen case is a bombshell.”

The Marin ruling does not argue that the standard-setting Allen ruling is invalid but, like the San Francisco ruling, follows the common law procedure of citing previous rulings, intended to ensure that similar facts yield similar outcomes.

Still, the Marin and San Francisco rulings cite dozens of previous rulings, though often not the same ones, while following their presumably logical legal paths that take them to opposite conclusions.

“There is no absolute requirement that elimination or reduction of an anticipated retirement benefit ‘must’ be counterbalanced by a ‘comparable new benefit,” said the Marin ruling written by Justice James Richman and concurred in by Justices J. Anthony Kline and Maria Miller.

“This diminution in the supplemental COLA cannot be sustained as reasonable because no comparable advantage was offered to pensioners or employees in return,” said the San Francisco ruling written by Justice Henry Needham and concurred in by Presiding Justice Barbara Jones and Justice Mark Simons.

The San Francisco ruling briefly notes that during the financial crisis the city pension fund plunged from 103 percent funded (market value) in 2008 to 72 percent a year later. A reform approved by 69 percent of voters in 2011 cut costs by limiting a supplemental COLA to years when the system was fully funded.

The supplement adding up to 3.5 percent to the standard cost-of-living adjustment for retirees of up to 2 percent, depending on inflation, had been awarded when pension fund investments during the previous year exceeded expected earnings, then 7.5 percent.

Skimming off “excess” earnings is questionable management, because the excess is needed to offset years with earnings shortfalls or losses. But the San Francisco pension system, which requires voter approval of pension increases, historically has been well funded.

Employers were given a contribution “holiday” from 1996 to 2004, making no payments into the pension fund, another example of questionable management. Measure C in 2011 was supported by all 11 county supervisors and business and labor groups.

A retiree suit to overturn the measure was called “the epitome of greed” by the president of the police union. A superior court ruling upheld the measure, concluding full funding was assumed when voters approved the supplement in 1996, then later increased the supplement and made it permanent.

The appeals court panel found no evidence that full funding had been a condition for the supplement. Following the California rule on vested rights, the panel said the supplement can’t be cut for workers retiring after 1966, but “may” be cut for workers retiring before then.

Last July, the San Francisco retirement board, pointing to the permissive “may,” restored the full supplement for those retiring before 1966. City Controller Ben Rosenfield sued the board for defying the will of voters.

Rosenfield told the San Francisco Chronicle a full supplement for 8,300 workers who retired before November 1966 will cost the city $200 million over the next five years. A superior court enjoined the board action last week.

The Marin ruling, making the case for cost reduction, begins with a look at the “emergence of the unfunded pension liability crisis.” A number of national and state reports on the issue are mentioned in a “background” section.

“In the aftermath of the severe economic downturn of 2008-2009,” said the ruling, “public attention across the nation began to focus on the alarming state of unfunded public pension liabilities.”

(An annual Milliman actuaries report last week said the 100 largest U.S. public pension systems were on average only 70 percent funded as of June 30, with a debt or unfunded liability of $1.38 trillion.

(The giant California Public Employees Retirement System, which does not include the Marin and San Francisco systems, was an estimated 68 percent funded last June with an unfunded liability of $139 billion.)

The longest look in the Marin ruling background section is at a report by the Little Hoover Commission in 2011 warning that “aggressive reforms” are needed to prevent growing pension costs from reducing government services and forcing layoffs.

“To provide immediate savings of the scope needed, state and local governments must have the flexibility to alter future, unaccrued retirement benefits for current workers,” the commission said in its top recommendation.

The Marin ruling cites a number of past court rulings that allowed cuts in the pensions of current workers to give the pension system the flexibility to adjust to changing conditions and preserve “reasonable” pensions in the future.

The previous rulings allowed increases in pension contributions, changes in retirement ages, repeals of COLAs, changes in required service years — even reduction of pensions in 1938 from two-thirds to one-half of salary.

Some public pension lawyers are alarmed by a comment in the Marin ruling on a 1967 appeals court ruling (Santin v. Cranston): “Until retirement, an employee’s entitlement to a pension is subject to change short of actual destruction.”

The Marin ruling said the 1955 Allen v. Long Beach ruling that said pension cuts “should” have a comparable new benefit was changed to “must” in a 1983 state Supreme Court ruling. But all Supreme Court rulings since then say “should” have a new benefit.

“It thus appears unlikely that the Supreme Court’s use of ‘must’ in the 1983 (Allen v. Board of Administration) decision was intended to herald a fundamental doctrinal shift,” the Marin ruling said, citing two rulings that “should” is advisory not compulsory.

In addition, the Marin ruling said the legislative cut in “spiking” gives Marin County employees a new benefit. Employee contributions that helped pay for the “spiking” provisions will no longer be deducted from their paychecks.

“Put simply, the new benefit is an increase in the employee’s net monthly compensation,” said the Marin ruling. “Put even more simply, it is more cash in hand every month.”

A post on the Reason Foundation website by an Emory Law School professor who has studied the California rule, Alexander Volokh, reviews four related cases and suggests the Marin ruling may be reversed.

Volokh argues that some of the previous rulings showing flexibility in the California rule were based on “highly unusual historical circumstance” not present in the Marin case. He said an employee near retirement would only have “more cash in hand” for a short period.

Comparable new benefits were granted in some of the cases cited in the Marin ruling, Volokh said, and other cases refused to make an exception for fiscal emergencies, since they were the government’s own fault and could be remedied by tax increases.

“Anthing can happen on appeal, but it wouldn’t be surprising to see this decision reversed by the Supreme Court,” Volokh said. The Supreme Court has at least 60 days to accept or reject the union appeal for a review of the Marin ruling, received Sept. 28.

Similar consolidated union suits against the Alameda, Contra Costa and Merced county pension systems have been briefed in appeals court but no date for oral arguments has been scheduled.

United Technologies Corp., in a transaction which will shave $1.77 billion in pension liabilities from the corporation’s books, is transferring its pension obligations to Prudential and offering buyouts to retirees.

A top executive called pension liabilities the “single biggest issue” the company is facing.

From Bloomberg:

United Technologies will shift $775 million of those commitments, covering about 36,000 retirees and beneficiaries, to Prudential in a transaction that’s expected to close Oct. 12, the Farmington, Connecticut-based industrial company said Thursday in a statement. Also, 10,000 participants are expected to take lump-sum offers, reducing the company’s obligation by approximately $1 billion by Dec. 31. United Technologies said it expects to take a pretax settlement charge of about $400 million to $530 million in the fourth quarter.

“This transaction is an important part of United Technologies’ long-term strategy to reduce future pension risk and expense,” Chief Investment Officer Robin Diamonte said in the statement. “It will not affect participants remaining in the plans and entrusts the assets leaving the plans to a highly rated insurance company whose core business is retirement security and administration of pension benefits.”

New York City Comptroller Scott Stringer, on behalf of the city’s pension fund, is asking Goldman Sachs, Facebook, and a handful of other giant corporations to disclose data on the diversity of their vendors and suppliers.

New York City’s pension system is a significant shareholder of all the companies.

More from Bloomberg:

The letter campaign, which also targets Starbucks Corp., Google parent Alphabet Inc. and Alcoa Inc., extends a 2014 initiative that asked for similar details from 20 more of the $163 billion city pension funds’ largest investments. Eight of those companies, including Apple Inc and Qualcomm Inc., have since agreed to release the value and percentage of total spending they do with minority vendors, the comptroller’s office said Thursday in a statement.

New York’s letter, which was the same for all recipients, asks companies to disclose the number of their diverse suppliers and their goals for increasing such contracts. Stringer also asks for senior management and board oversight of the process, and suggests compensation-related incentives for employees and managers.

[…]

“A more diverse supply base helps our portfolio companies to create sustainable competitive advantage and long-term shareowner value,” he wrote. The comptroller’s office increased funds managed by minority and women business enterprises to $14.4 billion this year from $5.5 billion in 2010.

Institutional investors also seek boardroom and employee diversity. This year, nine companies in the S&P 500 — the most ever — faced demands from shareholders that they adopt new diversity plans, according to ISS Corporate Solutions, a corporate-governance consultancy. Only 12.8 percent of companies currently giving specific details about directors named in their annual filings, according to a report released last month by researcher Equilar Inc.

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

Josh Wingrove, Greg Quinn and Scott Deveau of Bloomberg report, Canada Pension chief to testify amid trillion-dollar boost:

The head of the Canada Pension Plan Investment Board will face lawmakers for the first time in 14 years as Prime Minister Justin Trudeau’s government finalizes a trillion-dollar cash expansion of one of the world’s largest public pension funds.

Mark Machin, who took over as president and CEO of the arm’s-length investment board in June, will speak to the House of Commons finance committee Nov. 1 at its request. His testimony comes as Trudeau prepares to amend the law governing both the Canada Pension Plan and CPPIB, which manages the $287-billion fund, to formalize a deal to expand benefits.

The new plan, rolled out from 2019 to 2025, will leave the fund on pace to reach $2 trillion by 2045 — doubling the value of the original program. Enacting legislation will be made public “shortly,” Finance Minister Bill Morneau said Tuesday after British Columbia signed on to the deal, clearing the way for the government to move forward.

Morneau has said he and his provincial counterparts are still finalizing pension expansion changes and will meet in December. A departmental official said CPP “policy actions” could still be forthcoming as part of a triennial review, while Morneau spokeswoman Annie Donolo ruled out “major changes.” All modifications must be approved by seven provinces representing two-thirds of Canada’s population.

“We need to make sure we get all the details right,” Morneau said Sept. 6. “We see the CPPIB vehicle as a respected and effective vehicle for managing Canada’s pension assets.”

Lower for longer

The Canada Pension Plan is the mandatory workplace retirement savings program for 19 million Canadians. Its expansion will substantially increase the investment board’s portfolio at a time when pension funds are coping with an era of low global interest rates that threaten returns.

Board officials, excluding Machin, met informally with lawmakers earlier this year, according to finance committee chairman Wayne Easter. “We enthusiastically look forward to engaging with members of the House finance committee based on good dialogue held so far,” CPPIB spokesman Michel Leduc said.

Trudeau’s expansion will, in effect, create a two-stream plan managed by the investment board. Government officials refer colloquially to “CPP 1” and “CPP 2,” each distinct from an accounting perspective. The independent new program is considered to be fully funded and therefore will rely more heavily on future returns. Benefits for each generation will “depend on their own contributions and the associated investment returns,” finance department spokesman Jack Aubry said. That leaves fund directors under pressure to deliver.

‘Strong’ performance

The investment board’s track record is solid. It had a net return of 16 per cent on its investments for the calendar year in 2015, and a 7.5 per cent net return on an annualized basis for the past decade, according to a spokesman.

That compares to a 9.1 per cent net return in 2015 at Canada’s second-largest pension fund, Caisse de Depot et Placement du Quebec, according to its website. The Caisse returned about 5.96 per cent on an annualized basis over the past decade. Ontario Teachers’ Pension Plan had a 13 per cent net return in 2015 and an annualized return of 8.2 per cent over the past decade, according to its website.

CPPIB invests in private and public equities, fixed income products and real assets around the globe. Trudeau’s government isn’t considering “using other vehicles” to manage the new cash influx, Donolo said.

The Office of the Chief Actuary, in a report last month, found the fund’s investment income was nearly 250 per cent higher over the past three years than originally expected due to its “strong investment performance.” The investment board has been concentrated on diversifying across asset classes and geographies in an effort to reduce risk, in effect turning its eye away from Canada.

Political autonomy

The investment board is a world-renowned model, according to Michel St-Germain, a vice-chairman at the Association of Canadian Pension Management. “We have managed to create a governance structure that’s very autonomous, independent of political pressure. I’m quite confident that we will be able to maintain this,” he said. “Having said that there is a challenge. There will be a lot of money there.”

Machin, an Englishman who spent years in Asia for Goldman Sachs Group Inc., may shed light on how CPPIB will handle the cash influx. His appointment was announced in May along with the departure of former president and CEO Mark Wiseman to BlackRock Inc. At the urging of lawmakers, Machin’s hearing date was moved up to Nov. 1 from an initial date later in the month. It will be the first finance committee appearance by the head of the investment board since 2002.

“With the very rapid succession, I think it was important that parliamentarians and Canadians hear from the new CEO of the CPPIB,” Liberal lawmaker and committee member Steven MacKinnon said in an interview. “Ideally it would have been better to have had him earlier, but it’s now very timely with the announced expansion.”

I was busy with an emerging manager conference today but I wanted to quickly cover this story.

First, I think it is a great idea to invite Mark Machin, CPPIB’s new CEO,  to speak to parliamentarians and Canadians on what CPPIB does and why it is well equipped to handle the explosive growth that will come after the provincial and federal governments ratify the law to enhance the Canada  Pension Plan (CPP).

On Monday, I wrote a comment, “Long live the CPP!!” where I stated Canadians are very fortunate to have the Canada Pension Plan, its stewards, and the astounding and highly qualified professionals at the Office of the Chief Actuary, as well as the senior managers and board of directors running and overseeing the Canada Pension Plan Investment Board (CPPIB).

I also stated absent some new public defined-benefit plan which will manage and better protect existing corporate defined-benefit plans that are dwindling, the CPP is really all Canadians can rely on with certitude to retire in dignity and security.

Sadly, as I write this comment, another story appeared in the CBC today on a pension decision looming for thousands of former Nortel workers. Basically, a lot of nervous former Nortel employees are meeting across the country at gatherings meant to help them figure out what to do when the company’s pension plan finally winds down. Decisions have to be made by the end of the year.

The article quotes a 95 year old man, former Nortel executive Dave Stevenson, stating the following: “I thought the pension was good for life, like most pensions should be.”

Unfortunately, most private pensions are not good for life which is why I’ve been arguing all along to enhance the CPP and go even further to make sure we bolster existing private defined-benefit pensions or start offering them with new funds backstopped by the federal ad provincial governments.

Basically, my philosophy is private defined-benefit pensions are dying, being replaced by defined-contribution plans which are not real pensions for life, so we need to rethink this whole business of private companies managing pensions.

In an ideal world, working Canadians pension contributions would be matched by their employers but the retirement assets would be managed by the CPPIB or one or several other large, well-governed public pensions backstopped by the federal or provincial governments.

This way if when a company goes belly-up, like Nortel, the pensions are safe and not impacted in any meaningful way because the money is part of pooled assets of several thousand companies and every employee can be reassured they can still retire in dignity and security.

This is all very logical to me and I really hope Justin Trudeau who was my brother’s classmate in high school and Bill Morneau think long and hard about continuing to improve pension policy once they finish with enhancing the CPP. There is still a lot more work left to be done and as I keep harping on my blog, good pension policy is good economic policy.

On this note, I end with a news release from CARP, CPP Enhancement to Proceed, with BC Reconfirming Support:

Vancouver, BC: CARP members will be pleased to learn that the Province of British Columbia has confirmed their support of the agreement in principal to enhance the Canada Pension Plan, allowing all the provinces and the federal government to proceed with legislation enabling CPP enhancement.

Over the last week CARP members had engaged in an email writing campaign to BC Minister of Finance, Michael de Jong, asking him to support CPP enhancement without delay.

An agreement in principal was signed by the majority of provincial Ministers of Finance on June 20th, but in mid-July, Minister de Jong called for consultations with stakeholders in BC, before proceeding with ratification.

Today, the Government of British Columbia formalized their support of the agreement, citing strong support for CPP enhancement among the over 2000 comments received, with 65% supportive and 32% unsupportive. In contrast, over 90% of CARP members polled were supportive of CPP enhancement, even though they themselves would not benefit from the updated pension plan.

CARP COO & Vice President, Advocacy, Wanda Morris, who is currently in British Columbia meeting with volunteer Chapter leaders and government officials said, “Minister de Jong made the right decision to support CPP enhancement in June and we are glad that he has reiterated that support today, after hearing from British Columbians who are supportive of a strengthened national pension plan for Canadian workers.”

“Increases in CPP contributions from employees and employers are modest and affordable and will be phased in over a period of several years in the proposed plan, but the end result will be of significant benefit to future retirees and Canada will be a better country for it,” said Wade Poziomka, CARP Policy Director.

I agree with Wade Poziomka, the end result will be great for the entire country for years to come.

As far as Mark Machin testifying in Ottawa, all I can say is he is a very nice, smart and transparent leader and I’m sure he looks forward to answering all the questions parliamentarians want him to address.

One question I would ask him is do you think CPPIB can handle the growth which is a direct consequence of enhancing the CPP or should we create another CPPIB, say a CPPIB2 to handle the needs of CPP2?

Anyways, I am not worried about Mark Machin, he’s a consummate professional who will address all their questions in a very direct and open manner. There is a reason why China signed a deal to learn from CPPIB, it’s because its leaders want to emulate its success and that of other large, well-governed Canadian defined-benefit pensions.

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

Mary Childs of the Financial Times reports, Rhode Island cuts its hedge fund programme by two-thirds:

Rhode Island’s pension plan has decided to cut its investment in hedge funds by two-thirds, as retirement systems across the US re-evaluate their strategies for generating the returns they need to pay participants.

Over the next two years, the $7.7bn Employees Retirement System of Rhode Island will cut its allocation to hedge funds to 6.5 per cent from the 15 per cent it set in 2011 — joining a growing list of large investors who are dissatisfied by performance and pulling money from the sector.

“This wasn’t something we woke up one day and decided to do — it wasn’t something we did in response to headlines or political pressure,” said Seth Magaziner, general treasurer for the US state.

“We put a lot of work into this, a lot of modelling, a lot of testing and retesting of assumptions, and this was the result that the process led to,” he said: “We came to the conclusion that Rhode Island and many other states have been doing the process backward by starting with an assumed rate of return and trying to hit it.”

Instead, he said, Rhode Island set a risk tolerance “defined by real economic factors” such as the odds that certain costs may spike or that the fund would drop to less than 50 per cent funded. From there, it chose allocations designed to generate the most money possible at that risk level, and, working with the Pension Consulting Alliance, tested its conclusions against “thousands” of scenarios.

Many pension funds adopted alternative investment managers like hedge funds and private equity as high valuations across markets and low interest rates threatened returns from conventional long-only mutual funds. But hedge funds have struggled to generate returns in volatile markets, and their high fees have prompted some investors including the New Jersey and the New York City retirement systems to scrap or reduce their programmes.

Investors have already pulled more than $50bn from hedge funds this year, according to eVestment.

The total assets under management of the hedge fund industry exploded in size from $500bn at the turn of the millennium to almost $3tn by 2015. As assets have grown performance has suffered, with hedge funds as a whole failing to beat the S&P 500 over the past four years.

Rhode Island — which has less than 60 per cent of the assets it needs to pay its liabilities — is turning to passive trend-following strategies and private equity to help it claw back to a level where it can pay out its obligations. It is boosting its allocation to private equity from 7 to 12 per cent, over five years or more, to spread out exposure across different fund years and to avoid being forced to choose managers in a hurry, Mr Magaziner said.

Rhode Island will jettison its equity-focused hedge funds, but keep strategies categorised as “absolute return” with managers who have demonstrated that they are not correlated to the broader markets, and who will generate positive returns, he said.

“We’re going to stay passive when it comes to long public equity,” Mr Magaziner said. “We just didn’t have faith that active management could consistently achieve equity-like returns, so that’s that.”

Eight per cent of the plan has also been dedicated to a new strategy called “crisis offset” or “crisis protection” — long-duration Treasuries and passive momentum or trend-following strategies, assets that historically have made money in downturns.

“This is the part of our portfolio that we think is going to help us control against risk better than the bulk of our hedge funds have,” Mr Magaziner said. “If there really are strategies out there that will achieve positive performance at a time when everything else is dropping, that can be tremendously valuable.”

Things are not going well in Rhode Island. Edward Siedle recently wrote a comment for Forbes, Rhode Island Politicians’ Billion-Dollar Pension Hedge Fund Gamble Loses $500 Million:

Yesterday Rhode Island General Treasurer Seth Magaziner announced that the state pension would cut its $1 billion hedge fund investments– made under former Treasurer, now-governor Gina Raimondo– after losing big over the past five years. Neither Raimondo nor Magaziner ever heeded warnings that these high-cost, high-risk investments were inappropriate for the pension. A version of this article was published in GoLocal Prov yesterday.

***********

Do Rhode Island Governor Gina Raimondo and General Treasurer Seth Magaziner really believe they are smarter than Warren Buffett, considered to be one of the most successful investors in the world?

Of course not.

How could they?

The wreckage related to Raimondo’s failed stint as a small-time venture capitalist is finally out in the open for all Rhode Islanders to see.  The Point Judith II fund she pitched to the Employees Retirement System of Rhode Island (in which the pension risked $5 million) has returned a pathetic -1.1 percent over the past almost ten years—after paying her rich fees of 2.5 percent. If making money off your investors defines success, then Raimondo’s a superstar.

Magaziner, on the other hand, can boast a summer internship at Raimondo’s Point Judith Capital and two years as a portfolio associate, then research analyst at a small money management firm in Boston. Is this 31-year old qualified to manage $7.7 billion in state pension assets? Hardly.

Ignoring Warren Buffett and Other Questions

So why did Raimondo ignore Warren Buffett’s warning that public pensions should not gamble on hedge funds?

(As I advised Rhode Islanders approximately 4 years ago, Buffett made a million-dollar bet at the start of 2008 that a low-cost S&P 500 index fund would beat hedge funds over the next ten years. After eight years, as Buffett gloated at his company’s recent annual meeting in Omaha, the S&P 500 is crushing it. The fund Buffett picked, Vanguard 500 Index Fund Admiral Shares is up 65.67%; the high-cost, high-risk hedge funds are up, on average, a dismal 21.87%.

Also, when asked by a public pension trustee, Buffett advised that public pensions should avoid hedge funds and should prefer index funds.)

Worse still, why has Kid Magaziner stuck with Raimondo’s billion dollar-plus losing hedge fund bet and only yesterday announced plans to dump half the pension’s hedge fund investments for lower-cost, more traditional assets?

Why is it going to take Magaziner two years to exit hedge funds, even now?

The Answer to the Mystery

The answer to this longstanding mystery: Raimondo and Magaziner’s gambling state pension assets in hedge funds has never been about investing or prudent pension practices. It’s always been about politics.

These Rhode Island elected officials blatantly ignored credible warnings (by Buffett and, yes, me) and used $1 billion of public pension assets for their own political objectives. This week Magaziner even boasted that he gave my dire warnings about the dangers of high-cost, high-risk hedge funds “zero consideration.”

(Kid Magaziner should be sat down and told by a grown-up that when pension fiduciaries gamble and lose hundreds of millions of workers retirement savings, it’s probably not smart to admit having ignored the warnings of experts.)

Steering public monies to Wall Street has dramatically increased Rhode Island politicians’ campaign coffers to unprecedented levels. On the other hand, according to the General Treasurer’s office, the pension has lost 10 percent or approximately $100 million a year by investing in hedge funds. Over five years, that amounts to $500 million.

Any “savings” related to cutting workers’ 3 percent Cost of Living Adjustment (COLA) benefits over the past five years have been squandered. So much for Raimondo’s “pension reform” that was supposed to resolve the underfunding crisis. Further benefit cuts, or taxpayer infusions, will be required to restore funding.

The Bottomline

Workers’ benefits were slashed 3 percent to pay massive 4 percent fees to Wall Street hedge fund billionaires (who lost half a billion in workers’ retirement savings)—all in exchange for a measly few million dollars in political contributions. Talk about a deal with the devil. Was this foreseeable, and indeed foreseen, sleight of hand worth it?

Maybe to Raimondo and Magaziner the $500 million price paid by the pension to further their political ambitions is acceptable, but I doubt any state workers or taxpayers would agree.

That’s precisely the question the SEC, FBI (and, for that matter, Rhode Island’s sleepy Attorney General Peter Kilmartin) should be investigating.

Ted Siedle, the pension proctologist, is definitely not the type to tiptoe around issues. In this short comment, he rips into the former Treasurer of Rhode Island for using public money to invest in hedge funds in exchange for political contributions.

You’ll recall Gina Raimondo, the now governor of Rhode Island, was one of the heroes in Jim Leech and Jacquie McNish’s book, The Third Rail, for having the courage to implement tough pension reforms in that state.

Now we see Mrs. Raimondo may not be such a pension hero after all; she comes off as another cunning and opportunistic politician who went to bed with hedge fund sharks in order to advance her political career.

[Note: To be fair, if you read The Third Rail, you will see Raimondo implemented much needed and tough pension reforms but she’s obviously no angel and used her hedge fund contacts to get elected as governor.]

And who is this 31-year old Seth Magaziner, the current General Treasurer? At 31, he definitely doesn’t have the experience or qualifications to hold such a position. In fact, at 31, nobody should be in charge of $7.7 billion state pension fund, this is a complete travesty and farce.

Siedle is right, pensions and politics are not a good mixture, and he explains why. Hedge funds and private equity funds, many of which are underperforming and have a misalignment of interests with their limited partners, are effectively buying allocations and collecting fees no matter how well or poorly they perform.

But let me take a step back here because while I enjoy reading Ted Siedle’s hard hitting comments, he he too comes off sounding like a self-righteous and arrogant jerk who thinks he has a monopoly of wisdom when it comes to pensions and investments.

Well, he doesn’t, none of us do, and it’s high time I expose some of his blatant and biased nonsense against hedge funds. Yes, Warren Buffett is going to win that famous and silly $1 million bet against hedge funds which he made back in 2008 with Ted Siedes, co-founder of Protégé Partners.

So what? Who cares? I am sick and tired of reading about this epic and dumb bet Warren Buffett made against hedge funds right before markets tanked and came roaring back to make record highs. Buffett can thank Ben Bernanke, Janet Yellen, Mario Draghi, and Haruhiko Kuroda for unleashing a liquidity tsunami (in their misguided and feeble attempt to stop the coming deflationary tsunami) which helped thrust all risk assets much higher as everyone chases yield.

Comparing hedge funds to low cost exchange traded funds (ETFs) is just stupid, period. And by the way, most long only funds charging fees are going through their own epic crisis, and let’s not kid each other, this radical shift into exchange traded funds is one huge beta bubble which is making life miserable for all active managers.

In a recent comment of mine going over why  Ontario Teachers’ Pension Plan is cutting computer-run hedge funds, I stated the following:

[…] we can argue whether we are on the verge of a hedge fund renaissance or whether active managers could be ready to shine again but the point I’m making is most large pensions and sovereign wealth funds are more focused on directly or indirectly investing huge sums in illiquid alternatives and I don’t see this trend ending any time soon.

In fact, I see infrastructure gaining steam and fast becoming the most important asset class, taking over even real estate in the future (depending on how governments tackle their infrastructure needs and entice public pensions to invest).

I will end with a point Ron Mock made to me when I went over Teachers’ 2015 results. He stressed the importance of diversification and said that while privates kicked in last year, three years ago it was bonds and who knows what will kick in the future.

The point he was making is that a large, well-diversified pension needs to explore all sources of returns, including liquid and illiquid alternatives, as well as good old boring bonds.

And unlike other pensions, Ontario Teachers has developed a sophisticated external hedge fund program which it takes seriously as evidenced by the highly trained team there which covers external hedge funds.

Why does Ontario Teachers’ invest roughly $11 billion in external hedge funds through an overlay strategy? Are they dumb as nails? Haven’t they learned anything from Warren Buffett and Charlie Munger about how stupid investing in hedge funds truly is and what a waste of money it is?

I can guarantee you one thing, even though I don’t have the performance figures and fees paid to external hedge funds at Ontario Teachers’, there is no doubt in my mind (none whatsoever) that Ron Mock, Jonathan Hausman and the team covering external hedge funds there know a lot more about alpha managers than the Oracle of Omaha, Munger, Siedle and many other so-called experts of hedge funds who make blanket and often erroneous statements.

Trust me, I am no fan of hedge funds, think the bulk (90%++) of them stink, charging outrageous “alpha” fees for leveraged beta, or worse, sub-beta performance. Moreover, I agree with Steve Cohen and Julian Robertson, there is too much talent in the game, watering down overall returns, but there are also plenty of bozos and charlatans in the industry which have no business calling themselves hedge fund managers.

But all these self-righteous investment experts jumping on the bash the hedge funds bandwagon make me sick and if we get a prolonged deflationary cycle where markets head south of go sideways for a decade or longer, I’d love to see where they will be with their “keep buying low cost ETFs” advice (Buffett, Munger and Bogle will be long gone by then but Siedle and Seides will still be around).

I believe in the Ron Mock school of thought. When it comes to hedge funds and other assets, including boring old long bonds, always diversify as much as possible and pay for alpha that is truly worth paying for (ie. that you cannot replicate cheaply internally).

I will repeat what Ron told me a long time when we first met in 2002: “Beta is cheap. You can swap into any equity or bond index for a few basis points to get beta exposure. Real uncorrelated alpha is worth paying for but it’s very hard to find.”

Unlike other pensions, Ontario Teachers has developed a very sophisticated and elaborate program for investing in external hedge funds. Is it perfect? Are they hedge fund gods? Of course not, they experienced harsh lessons along the way but they were first movers in this area and always staffed this team with talented individuals who properly understand the risks of various hedge fund strategies.

In other words, they got the governance and compensation right and kept politics out of their investment decisions. That is why Ontario Teachers’ Pension Plan is fully funded and why Ontario’s teachers are in a great position when it comes to their retirement security.

I can’t say the same for Rhode Island’s public pension and many other US public pensions which are crumbling and facing disaster as the pension Titanic sinks. As long as they ignore the governance at their plans, they are doomed to fail and will keep succumbing to undue political interference which will only benefit a handful of hedge funds and private equity funds, not their members.

On Wednesday, I am off to cover the first ever emerging managers conference in Montreal which will feature emerging long only and hedge fund managers. I am looking forward to meeting managers I’ve already met in the past and new ones I have yet to meet. I will cover them on my blog.

I also wanted to cover parts of the AIMA Canada Investor Forum 2016 going on tomorrow and Thursday in Montreal but James Burron, AIMA Canada’s chief operating officer, told me that at the request of speakers, no press (I guess bloggers fall into this category) are allowed to cover this conference and only AIMA members can attend (I think this is silly and self-defeating but these are the rules they set).

Let me end by plugging Brian Cyr, Managing Director of bfinance Canada. I typically don’t plug investment consultants on my blog (quite the opposite, think most of them are useless), but over lunch yesterday, Brian explained the bfinance approach and how they get mandates from small to mid sized pensions for manager searches and I came away impressed with him and the approach.

Interestingly, unlike other consultants who put managers in a box, bfinance will take the time to understand its client’s needs, then go cast a wide net asking managers who can fulfill their search for a request for proposal. If the client chooses one of the managers, it’s the investment manager, not the client, that pays a fee to bfinance on assets obtained (a one time fee in the first year).

Amazingly, Brian told me that some clients think there is a conflict of interest in this model but they obviously don’t have a clue of what they’re talking about. The big conflicts of interest happen when consultants recommend funds they invest in or trade with or when they are used as “outsourced CIOs” to invest in funds they do business with.

No matter how big or small your organization is, I highly recommend you take the time to meet Brian Cyr and talk to him about their approach and what they can offer you in your search for traditional and alternative investment managers.

On that note, let me end by plugging yours truly. Please remember to support this blog (PensionPulse.blogspot.ca) via your PayPal contributions on the right hand side under my picture and show your appreciation for the work that goes into reading, researching and writing my comments.

Lastly and importantly, I am actively looking for a new gig, a job that compensates me properly for my knowledge, experience, qualifications and connections. For personal reasons, I am stuck here in Montreal, which is a beautiful city but not exactly a hotbed of financial activity. If you know of someone who is looking for someone with my background, please let me know (my email is LKolivakis@gmail.com).

A federal appeals court this week rejected a lawsuit, brought by a group of Detroit retirees, challenging cuts made to their pension benefits as part of the city’s bankruptcy proceedings last year.

Retirees at the time voted to cut their pensions by 4.5 percent, and have their COLAs eliminated; the alternative, city officials said, would be even deeper cuts.

But not everyone was happy with that deal, and so a group of 160 retirees sued the city over the cuts. But the appeals court ruled 2-1 in favor of Detroit.

To paraphrase one judge: the ruling wasn’t even close.

From the Detroit Free Press:

“This is not a close call,” said Judge Alice Batchelder at the 6th U.S. Circuit Court of Appeals.

The court noted that Detroit’s exit from bankruptcy in 2014 was the result of a series of major deals between the city and creditors, including people who receive a pension or qualify for one.

Altering the pension cuts, the judges said, would be a “drastic action” that “would unavoidably unravel the entire plan, likely force the city back into emergency oversight and require a wholesale recreation of the vast and complex web of negotiated settlements and agreements.”

In dissent, Judge Karen Nelson Moore said retirees at least deserve their day in court. She said Batchelder and Judge David McKeague were citing a “questionable” legal standard to dismiss the case, 2-1.

[…]

Jamie Fields, an attorney for about 160 retirees, said he wanted the court to consider the merits of his argument. He contends that the bankruptcy judge had no authority to override the Michigan Constitution, which protects public pensions.

“A lot of retirees are making choices between groceries and medicine,” he said.

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

Last week, the Department of Finance Canada released a statement, Canadians Can Count on a Stronger, Financially Sustainable Canada Pension Plan:

Helping Canadians achieve a safe, secure and dignified retirement is a core element of the Government of Canada’s plan to help the middle class and those working hard to join it. The Canada Pension Plan (CPP) enhancement agreed to by Canada’s governments on June 20, 2016 will give Canadians a more generous public pension system, which will support the conditions for long-term economic growth in Canada.

Minister of Finance Bill Morneau today tabled in Parliament the 27th Actuarial Report on the Canada Pension Plan. The Report concludes that the existing CPP is on a sustainable financial footing at its current contribution rate of 9.9 per cent for at least the next 75 years. CPP legislation requires that an actuarial report be prepared every three years to support federal and provincial finance ministers in conducting financial state reviews of the CPP as joint stewards of the Plan.

The CPP enhancement will build on this strong record of financial management: The Chief Actuary will conduct an actuarial assessment of the enhancement once legislation implementing the enhancement is introduced in Parliament.

You can read the latest triennial actuarial report on the Canada Pension Plan here. Jean-Claude Ménard, Canada’s Chief Actuary, and his team did a wonderful job explaining the state of the CPP and why its on solid footing.

I agree with Bill Morneau, Canada’s Minister of Finance, who sums it up well in this statement:

“The CPP enhancement agreement that Canada’s governments reached in June means that Canadian retirees will enjoy a more secure retirement and a better quality of life. This Actuarial Report confirms that the agreement will build on a rock solid financial foundation. I would like to thank Chief Actuary Jean-Claude Ménard and his Office on behalf of Canadians for their hard work and dedication, and look forward to their continued efforts in helping to ensure that Canadians can count on a stronger CPP well into the future.”

Let me first publicly thank Michel Leduc, Senior Managing Director & Global Head of Public Affairs and Communications at CPPIB, for bringing this to my attention last week (click on image below to see him):

Unfortunately, I was busy last week covering why Ontario Teachers is cutting computer-run hedge funds, why these are treacherous times for private equity providing a follow-up guest comment from an insider who revealed the industry’s misalignment of interests, and ended the week discussing the ongoing saga at Deutsche Bank.

But I think it’s important Canadians step back and realize how fortunate we are to have the Canada Pension Plan, its stewards, and the astounding and highly qualified professionals at the Office of the Chief Actuary, as well as the senior managers and board of directors running and overseeing the Canada Pension Plan Investment Board (CPPIB).

Michel Leduc’s initial email to me started like this:

If you’re open to topics for your blog, the Chief Actuary of Canada’s report was tabled by the Minister of Finance yesterday – looking into the sustainability of the CPP. This only happens once every three years. It is a deep dive into the program. It is a big deal and no one really places enough attention to it, remarkably.

In any event, it is astounding to see that, since the last report (2012), investment income (CPPIB) is nearly 250% above what the Chief Actuary had projected three years ago. The report indicates that this allows a lower minimum contribution rate. For those detractors of active management – this slams the misguided view that it is mere experiment.

Michel followed up by providing me some key findings from the latest triennial actuarial report:

• Despite the projected substantial increase in benefits paid as a result of an aging population, the Plan is expected to be able to meet its obligations throughout the projection period.
• With the legislated contribution rate of 9.9%, contributions are projected to be more than sufficient to cover the expenditures over the period 2016 to 2020. Thereafter, a portion of investment income is required to make up the difference between contributions and expenditures.
• Total assets are expected to grow from $285 billion at the end of 2015 to $476 billion by the end of 2025.
• The average annual real rate of return on the Plan’s assets over the 75-year projection period 2016 to 2090 is expected to be 3.9%.
• The minimum contribution rate required to finance the Plan over the long term under this report is 9.79%, compared to 9.84% as determined for the 26th CPP Actuarial Report.
• Investment income was 248% higher than anticipated due to the strong investment performance over the period. As a result, the change in assets was $70 billion or 175% higher than expected over the period. The resulting assets as at 31 December 2015 are 33% higher than projected under the 26th CPP Actuarial Report.

A few key points I’d like to mention here:

• Strong investment performance obviously matters for any pension plan. The stronger the investment performance, the better the health of the plan as long as liabilities aren’t soaring faster than assets, and this this translates into less volatility for the contribution rate (ie., less contribution risk).
• Unlike HOOPP or OTPP, however, the Canada Pension Plan is not a fully-funded plan (it is partially funded) and assets are growing very fast, which effectively means the managers at CPPIB can use comparative advantages over most other pensions to take a really long view and invest in highly scalable investments across public and private markets.
• I think it’s critically important that Canadians realize these advantages and why it sets CPPIB apart not only from other (more mature) pensions but more importantly, from long only active managers, hedge funds, and even private equity funds, all of which are struggling to deliver the returns pensions need.
• In particular, the crisis in long only active management is a testament to why the CPPIB is so important to the long-term health of the Canada Pension Plan and more importantly, why large, well-governed defined-benefit plans are far superior to defined-contribution plans or registered retirement and savings plans.
• Not only this, the success of the Canada Pension Plan should make our policymakers rethink why we even allow private defined-benefit plans at all and why we don’t create a new large public defined-benefit plan that amalgamates the few corporate DB plans remaining in Canada to backstop them properly with the full faith and credit of the Canadian federal government.

In other words, I’m happy we finally enhanced the CPP but we need to do a lot more building on its success and that of other large Canadian defined-benefit plans.

I mention this because I read an article from Martin Regg Cohn of the Toronto Star, Death of private pensions puts more pressure on CPP:

It’s human nature to ignore pension tensions. Until the money runs out.

Full credit to our political leaders for coming together to expand the Canada Pension Plan this summer, recognizing that a looming retirement shortfall requires a long-term remedy.

Their historic CPP deal came just in time, for time is running out on conventional pensions in the private sector.

Long live the CPP. Private pensions are on life support, and fading fast.

If anyone still doubts the need for concerted action, or ignored the high stakes negotiations over the summer, here are two bracing wake-up calls from just the past week:

First, unionized autoworkers at GM made an unprecedented concession to relinquish full pensions (which pay a defined benefit upon retirement) for newly hired employees. The agreement, ratified by Unifor members over the weekend, marks the end of an era in retirement security.

Like virtually all other private-sector workers, new hires at car factories will be given a glorified RRSP savings account. These so-called “defined contribution” plans (I prefer not to call them pensions) get matching employer contributions but remain at the mercy of the stock market for decades to come, without the security of annuitized payments upon retirement.

It’s hard to fault Unifor for throwing in the towel after long insisting on pension parity among all workers. They were among the last major private-sector unionists to cling to full-fledged pensions that have been phased out across North America.

Why continue to burden your own employer with legacy pension costs that disadvantage them against competitors? For example, Air Canada has faced major pension liabilities in recent years, while upstart start-up airlines like Porter were free from such legacy costs and financial risks because their newly hired workers weren’t getting “defined benefit” (DB) plans backstopped by the company.

A second development last week tells the story of our pension peril from a different angle: While autoworkers were surrendering full pensions for new hires, steelworkers were fighting to rescue and reclaim their full defined benefit pensions.

But the way in which their pensions are being salvaged portends a losing battle. When U.S. Steel Canada filed for creditor protection, after taking over Stelco’s assets, it revealed a pension shortfall of more than $800 million. Upon insolvency, that liability would land in the lap of the province’s little-known Pension Benefits Guarantee Fund.

It has always been something of a Potemkin pension fund, with little to prop up its facade of protection. Like an undercapitalized bank, the pension fund could not withstand a run on its assets if too many private pensions failed — requiring replenishment by the provincial government and all other employers in the province.

That’s why Queen’s Park has long been loath to see a big bankruptcy deplete the fund. Behind the scenes, it recruited former TD Bank CEO Ed Clark to find a way to rehabilitate what remains of the old Stelco operations so that those pension liabilities could somehow be avoided.

After drawn-out court hearings and closed-door negotiations, a New York investment firm signed a deal last week with the provincial government to invest hundreds of millions of dollars to save 2,500 jobs — and prop up those pensions a little longer. The United Steelworkers union, which had been deeply skeptical of previous bidders, likes this proposal because it provides a pension infusion.

While that may sound like good news for pensioners and workers, it is surely just a stop-gap — neither a sure thing for the former Stelco workers, nor a safe bet for the taxpayers who could be on the line if it all unravels.

We don’t know how the story will end. The only certainty is continued uncertainty for private-sector pensions, no matter how much union muscle is brought to bear. Private DB pensions are dying, and our only recourse is a reliable, diversified public DB pension in the form of the CPP.

All the more reason to herald the CPP expansion agreed to this summer after nearly a decade of drawn-out negotiations and foot-dragging by the previous Conservative government in Ottawa. A strong push by Ontario’s Liberal premier, Kathleen Wynne, and national leadership by the new federal Liberal government, helped persuade other premiers to accept a pan-Canadian compromise.

Details of the CPP reform, announced this month, will take years to phase in. In truth, it is a relatively modest and staged increase after a half-century of virtual stasis since the plan’s creation.

It is a promising start. But decades from now, as more private sector plans die off and today’s young people grow older, Canadians will wake up to the need for a more robust round of CPP expansion to pick up the slack.

It’s only human.

Indeed, it’s only human and I’m glad that our policymakers finally decided to enhance the CPP but a lot more needs to be done.

In particular, the Department of Finance Canada should immediately study a proposal to create a new large, well-governed public pension which will absorb the few remaining Canadian private DB plans and staff this new organization properly using the existing pool of talented pension fund managers in Montreal.

I mention Montreal, not Toronto, because Montreal is where you will find the head offices of CN, Bell and Air Canada, all of which have talented pension fund managers managing legacy and active DB pensions. And this city desperately needs a new large public pension plan (Toronto has the bulk of them).

But absent this initiative, I agree with Cohn, “long live the CPP!!!”, it’s our only hope to bolster Canada’s retirement system and the economy over the long run.

S&P Global Ratings on Friday downgraded Illinois’ credit rating to BBB — two steps above junk — for its “weak financial management” in general, as well as its “lack of ability or willingness” to adopt a long-term plan to deal with pension liabilities.

From CNBC:

“The downgrade reflects our view of continued weak financial management and increased long-term and short-term pressures tied to declining pension funded levels,” said S&P analyst John Sugden in a statement.

S&P said another downgrade could follow “should the state continue to demonstrate a lack of ability or willingness to adopt a long-term structural budget solution that also incorporates a credible approach to its long-term liabilities.”

The credit rating agency added that continued political gridlock could affect Illinois’ ability to pay off its debt.

“Although we don’t foresee this in the immediate future, challenges to the state’s debt payment priority could emerge should liquidity dwindle to the point where it affects the state’s ability to provide essential services,” S&P said.

The downgrade to just two notches above the junk level came as the nation’s fifth-largest state prepares to sell as much as $1.7 billion of new and refunding general obligation (GO) bonds in October despite having to pay a hefty penalty in the U.S. municipal market.

Governor Bruce Rauner’s office said S&P’s report underscores the need for “tangible” pension reform.

“It’s time for the super majority in the legislature to recognize the current pension system is fatally flawed and requires immediate action,” his office said in a statement. “Governor Rauner continues to fight for pension reform and other fundamental, structural reforms that will free up resources to help balance the budget.”