Pension360

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

CalPERS is focusing on avoiding another big loss, not risky attempts to maximize investment earnings.

A shift from stocks and growth investments in September to lower the risk of losses had reduced CalPERS gains by $900 million, the CalPERS board was told on Feb. 13. The post-election market surge has continued since then, increasing the Dow blue-chip average Friday for the 11th day in a row.

CalPERS also sped up its “risk mitigation” policy this month, lowering the trigger for tiny cuts of .05 to .25 percent in the earnings forecast used to discount future pension obligations. Now cuts will occur when annual earnings are 2 percent above the forecast, not 4 percent.

Reflecting a major change of outlook, CalPERS lowered its discount rate from 7.5 percent to 7 percent in December, causing a large increase in employer rates to help fill the projected gap created by a lower investment earnings forecast.

The lower discount rate will be phased in over three years, easing the strain on local government budgets from the fourth CalPERS employer rate increase since 2012. The risk mitigation policy was delayed until fiscal 2020, when the discount rate phase-in is complete.

The policy could gradually lower the discount rate by 1 percentage point over several decades. Whether even the smallest incremental rate decrease, .05 percent, would be enough to cause an employer rate increase is “unique to each individual employer,” Scott Terando, CalPERS chief actuary, told the board.

The lower discount rate adopted in December was mainly a response to Wilshire consultants’ view that CalPERS investments were likely to earn 6.2 percent during the next decade, before rebounding to 7.8 percent in the following two decades.

Critics contend that CalPERS and other public pensions have overly optimistic earnings forecasts that conceal massive debt, avoid needed contribution increases, and encourage risky higher-yielding investments that increase the chances of big losses.

The shift to investments with less risk of loss adopted by the California Public Employees Retirement System in September dropped the earnings forecast to 5.8 percent. It looks like a rare attempt at market timing by an extremely long-term investor.

The new short-term investment allocation is intended to remain in place only until CalPERS completes its usual lengthy review, done every four years, and adopts a new allocation next February, taking effect in July 2018.

Ted Eliopoulos, CalPERS chief investment officer, told the board on Feb. 13 that the investment fund had earned about $900 million less than would have been earned under the previous allocation.

After a dispute with Eliopoulos about the link between the lower discount rate and the short-term investment shift, board member Theresa Taylor said: “I just want to make sure that you guys are exploring all options so that we are not leaving money on the table.”

The CalPERS investment fund, valued at $300.7 billion on Nov. 10, was worth $311.3 billion last week. Some attribute the market rally to the election of President Trump and a Republican-controlled Congress that is expected to cut taxes and roll back business regulation.

Eliopoulos reminded the board that the short-term investment allocation was a response to factors such as uncertain market conditions, the size of the negative cash flow gap, and a greater “downside” risk to the CalPERS funding level.

“That is our primary concern and our primary portfolio priority right now — to try and lower the risk of falling to a lower funding status,” he said.

Rob Feckner, CalPERS board president, made a similar point in a news release when the original risk management policy was adopted in November 2015 with a 4 percent above the earnings forecast trigger, taking effect without delay.

“Ensuring the long-term sustainability of the fund is a priority for everyone on this board, and this policy helps do that,” Feckner said. “It makes significant strides in lowering risk and volatility in the system, and helps lessen the impacts of another financial downturn.”

After a long bull market nearing eight years, CalPERS only has 63 percent of the projected assets needed to pay future pension obligations, little changed from its 61 percent funding level at the market bottom.

You might think that CalPERS would be trying to maximize investment earnings, which are expected to cover two-thirds of the cost of future pensions. Most of the rest is expected from employers, who are on the hook for pension debt, and a smaller share from employees.

But CalPERS is still suffering from a massive $100 billion investment loss during the financial crisis and stock market crash. Its investments plunged from $260 billion to $160 billion, dropping the funding level from 101 percent in 2007 to 61 percent in March 2009.

Now CalPERS has no cushion if the market plunges again. Experts have told the CalPERS board that a funding level that drops below 40 percent, or perhaps even 50 percent, could be a crippling blow.

Raising employer contribution rates (already at an all-time high) and the discount rate (still criticized as too optimistic) high enough to project 100 percent funding could become impractical.

Rising CalPERS employer rates for police and firefighters have already reached 60 percent of pay in cities like Costa Mesa, 50 percent for the Highway Patrol, and 40 percent for Richmond, where a CALmatters/Los Angeles Times project reported some fear bankruptcy.

CalPERS employer rates for the non-teaching employees of school districts are expected to double from 13.9 percent of pay this fiscal year to 28.2 percent of pay in fiscal 2023-24.

With CalSTRS teacher rates that also are more than doubling, the school district pension cost increase next fiscal year, $1 billion, is more than the $744 million funding increase proposed by Gov. Brown’s new budget, the Legislative Analyst’s Office said this month.

While adopting the risk mitigation policy two years ago, the CalPERS board rejected a proposal from a Brown administration board member, Richard Gillihan, to lower the discount rate from 7.5 to 6.5 percent, which would have resulted in a major employer rate increase.

Brown said the incremental lowering of the discount rate was “irresponsible” and would “expose the fund to an acceptable level of risk.” Feckner replied that the policy emerged from concern about putting more strain on cities “still recovering from the financial crisis.”

As a maturing pension system, CalPERS faces new structural problems. The number of retirees will exceed the number of active workers. “Negative cash flow” means some investment funds must be used to help pay annual pension costs.

Last year, CalPERS said, about $5 billion in investment funds was added to $14 billion in employer and employee contributions to pay the $19 billion in pensions received by retirees.

But perhaps the main structural change that made avoiding another major investment loss a top CalPERS priority is what actuaries call the “asset ratio volatility.” In board discussions it’s often referred to as the “volatility level” and quantified. (See risk mitigation staff report)

The investment fund in a maturing pension system becomes much larger than the active worker payroll, which means that replacing an investment loss requires a much larger employer contribution increase.

The California State Teachers Retirement System board was given this example last November:

Replacing a 10 percent investment loss below the earnings forecast in 1975, when the teacher payroll and investment fund were about equal, would have required a contribution increase of 0.5 percent of payroll.

Replacing a 10 percent investment loss today, when the investment fund is six times greater than the payroll, requires a contribution increase of 3 percent of pay.

The Illinois Teacher Retirement System this week said it will commit $140 million to two emerging managers, nearly doubling the amount of money the fund had previously committed to emerging manager real estate funds.

The funds are Oak Street Capital and Exeter Property Group — the latter of which is already oversubscribed. TRS will be jockeying with several other pension funds — including the Texas Permanent School Fund and the New York State Teachers fund — to have their commitment accepted.

More from IPE Real Estate:

The pension fund is committing $100m (€95.2m) to Oak Street Capital Real Estate Fund IV and $40m to Exeter Industrial Value Fund IV.

The commitments represent a significant expansion of the programme. The pension fund currently has $79.4m invested with emerging real estate managers.

Oak Street Capital invests in net-lease real estate, a part of the market that US pension funds rarely invest in, according to industry sources.

[…]

There is some uncertainty as to whether the commitment to Exeter Industrial Value Fund IV will be accepted, since it has been oversubscribed for its $1.15bn targeted capital raise.

Illinois Teachers considers Exeter to be an emerging manager. The pension fund told IPE Real Estate that the company “fits within the TRS definition of emerging manager”.

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

The Canada News Wire reports, Canadian pensioners not living as long as expected:

New research finds longevity for Canadian pensioners is lower than anticipated – which may actually be costing defined benefit (DB) plan sponsors.

Canadian male pensioners are living about 1.5 years less than expected from age 65, according to the latest data from Club Vita Canada Inc. – the first dedicated longevity analytics firm for Canadian pension plans and a subsidiary of Eckler Ltd. Female pensioners are living about half a year less than expected.

“Based on our data, some DB plans are overestimating how long their members are currently living and are therefore taking an overly conservative approach to funding their liabilities,” explains Ian Edelist, CEO of Club Vita Canada. “Correcting that overestimation could reduce actuarial reserves by as much as 6% – improving Canadian pension funds’ and their plan sponsors’ balance sheets just by using more accurate, granular and up-to-date longevity assumptions.”

The data comes from Club Vita Canada’s first annual and highly successful longevity study completed in 2016 – one of the largest, most rigorous research studies on the impact of longevity on defined benefit pension and post-retirement health plans.

The newly created “VitaBank” pool of longevity data (provided by Club Vita Canada members) spans a wide range of industries and geographic regions in both the public and private sectors. VitaBank is currently tracking more than 500,000 Canadian pensioners from over 40 pension plans. Unlike the most widely used study to set longevity expectations – the Canadian Pensioners’ Mortality (CPM) study, which relies on data up to 2008 – VitaBank includes fully cleaned and validated data up to 2014.

The Club Vita Canada study brings to the Canadian pension market leading-edge modelling techniques already used by the insurance industry and in other countries. Club Vita U.K. recently released similar results, noting £25 billion could be wiped off the collective U.K. DB deficit by using more accurate longevity assumptions.

“Naturally, the ultimate cost of a pension plan will be determined by how long its members actually live. But assumptions made today really do matter for such long-duration commitments,” explains Douglas Anderson, founder of Club Vita in the U.K. “Club Vita’s data gives DB plan sponsors the tools they need to evaluate their willingness to maintain their longevity risk or offload that risk to insurers.”

About Club Vita Canada Inc. (clubvita.ca)

Club Vita Canada Inc. was created by Eckler Ltd. It is an extension of Club Vita LLP, a longevity centre of excellence launched in the U.K. in 2008 by Hymans Robertson LLP. By pooling robust data from a wide range of pension plans, Club Vita provides its members with leading-edge longevity analytics helping them better measure and manage their retirement plan.

About Eckler Ltd. (eckler.ca)

Eckler is a leading consulting and actuarial firm with offices across Canada and the Caribbean. Owned and operated by active Principals, the company has earned a reputation for service continuity and high professional standards. Our select group of advisers offers excellence in a wide range of areas, including financial services, pensions, benefits, communication, investment management, pension administration, change management and technology. Eckler Ltd. is a founding member of Abelica Global – an international alliance of independent actuarial and consulting firms operating in over 20 countries.

I recently discussed life expectancy in Canada and the United States when I went over statistics on gender and other diversity in the workplace, noting this:

Statistics are a funny thing, they can be used in all sorts of ways, to inform and disinform people by stretching the truth. Let me give you an example. Over the weekend, I went to Indigo bookstore to buy Michael Lewis’s new book, The Undoing Project, and skim through other books.

One of the books on the shelf that caught my attention was Daniel J. Levitin’s book, A Field Guide to Lies: Critical Thinking in the Information Age. Dr. Levitin is a professor of neuroscience at McGill University’s Department of Psychology and he has written a very accessible and entertaining book on critical thinking, a subject that should be required reading for high school and university students.

Anyways, there is a passage in the book where he discusses the often used statistic that the average life expectancy of people living in the 1850s was 38 years old for men and 40 years old for women, and now it’s 76 years old for men and 81 for women (these are the latest US statistics which show life expectancy declining for the first time since 1993. In Canada, the latest figures from 2009 show the life expectancy for men is 79 and for women 83, but bad habits are sure to impact these figures).

You read that statistic and what’s the first thing that comes to your mind? Wow, people didn’t live long back then and now that we are all eating organic foods, exercising and have the benefits of modern medical science, we are living much longer.

The problem is this is total and utter nonsense! The reason why the life expectancy was much lower in 1850 was that children were dying a lot more often back then. In other words, the child mortality rate heavily skewed the statistics but according to Dr. Levitin, a man or woman reaching the age of 50 back then went on to live past 70. Yes, modern science has increased life expectancy somewhat but not nearly as much as we are led to believe.

Here is another statistic that my close friend, a radiologist who sees all sorts of diseases told me: all men will get prostate cancer if they live long enough. He tells me a 70 year old man has a 70% chance of being diagnosed with prostate cancer, an 80 year old man has an 80% chance and a 90 year old man has a 90% chance.”

Scary stuff, right? Not really because as my buddy tells me: “The reason prostate cancer isn’t a massive health concern is that it typically strikes older men and moves very, very slowly, so by the time men are diagnosed with it, chances are they will die from something else.”

Of course, the key word here is “typically” because if you’re a 50 year old male with high PSA levels and are then diagnosed with prostate cancer after a biopsy confirms you have it, you need to undergo surgery as soon as possible because you might be one of the unlucky few with an aggressive form of the disease (luckily, it can be treated and cured if caught in time).

So, much like the US, it seems the recent statistics on life expectancy in Canada are not that good. Again, you need to be very careful interpreting the data because the heroin epidemic has really skewed the numbers in both countries (much more in the US).

But let’s say the folks at Club Vita Canada and Eckler are doing their job well and Canadian pensioners are living less than previously thought. Does that mean that Canadian DB plans are overestimating their liabilities?

Yes and no. Go read an older comment of mine on whether longevity risk will doom pensions where I stated:

I actually forwarded [John] Mauldin’s comment to my pension contacts yesterday to get some feedback. First, Bernard Dussault, Canada’s former Chief Actuary, shared this with me:

True, longevity is a scary risk, but not as much as most think, the reason being that the calculations of pension costs and liabilities in actuarial reports take into account future improvements in longevity.

For example, as per the demographic assumptions of the latest (March 31, 2011) actuarial report on the federal public service superannuation plan (http://www.osfi-bsif.gc.ca/Eng/Docs/pssa2011.pdf), the longevity at age 75 in 2011 is projected to gradually increase by about 1 year in 10 years (2021). For example, if longevity at age 75 was 12.5 in 2011, it is projected as per the PSSA actuarial report to be about 13.5 in 2021

This 1 year increase at age 75 over 10 years is much less than the average 1year increase at birth every 4 years over the 20th century reported by the Society of Actuaries (SOA). However, this is an apple/orange comparison because longevity improvements are always larger at birth than at any later age and were much larger in the first half of the 20th century than thereafter than at any later age.

Bernard added this in another email correspondence where he clarified the above statement:

Annual longevity improvement rates are assumed to apply for the whole duration of the projection period under any of the periodical actuarial reports on the PSSA, i.e. for all current and future contributors and pensioners.

Moreover, the federal public service superannuation plan is actuarially funded, which means that each generation/cohort of contributors pays for the whole value of all of its accrued benefits. In other words, the financing of the plan is such that there is essentially no inter-generational transfer of pension debt from any cohort to the next.

Second, Jim Keohane, President and CEO of the Healthcare of Ontario Pension Plan (HOOPP), sent me his thoughts:

I am not sure how longevity improvements will play out over the coming decades and neither does anyone else. I wouldn’t dispute the facts being quoted in this article, but what I would point out is that these issues are not exclusive to DB plans. They are problems for anyone saving for retirement whether they are part of a DB plan a DC plan or not in any plan. DB plans get benchmarked against their ability to replace a portion of plan members pre-retirement income (typically 60%). If you measured DC plans on the same basis they are in much worse shape, in fact, they only have about 20 to 25% of the assets needed to produce that level of income.

I would also add that Canadian public sector pension plans are in much better shape than their U.S. Counterparts. We use realistic return assumptions and are in a much stronger funded position.

Third, Jim Leech, the former CEO of Ontario Teachers’ Pension Plan (OTPP) and co-author of The Third Rail, sent me this:

Very consistent with my thoughts/observations. It is a shame that “short term” motivations (masking reality by manipulating valuations, migration from DB to DC, elimination of workplace plans altogether, kicking the can down the road, etc) have taken over what is supposed to be a “long horizon” instrument (pension plan).

But Jim Keohane makes a good point – this applies ONLY to DB valuations. Anyone with DC (RRSP), ie. most Canadians, is really jiggered by longevity increases.

No doubt about it, the Oracle of Ontario, HOOPP and other Canadian pensions use much more realistic return assumptions to discount their future liabilities. In fact, Neil Petroff, CIO at Ontario Teachers once told me bluntly: “If U.S. public pensions were using our discount rate, they’d be insolvent.”

Mauldin raises issues I’ve discussed extensively on my blog, including what if 8% is really 0%, the pension rate-of-return fantasy, how useless investment consultants have hijacked U.S. pension funds, how longevity risk is adding to the pressures of corporate and public defined-benefit (DB) pensions.

Mauldin isn’t the first to sound the alarm and he won’t be the last. Warren Buffett’s dire warning on pensions fell largely on deaf ears as did Bridgewater’s. I knew a long time ago that the pension crisis and jobs crisis were going to be the two main issues plaguing policymakers around the world.

And I’ve got some very bad news for you, when global deflation hits us, it will decimate pensions. That’s where I part ways with Mauldin because longevity risk, while important, is nothing compared to a substantial decline in real interest rates.

Importantly, a decline in real rates, especially now when rates are at historic lows, is far more detrimental to pension deficits than people living longer.

What else did Mauldin conveniently miss? He ignores the brutal truth on DC pensions and misses how the ‘inexorable’ shift to DC pensions will exacerbate inequality and pretty much condemn millions of Americans to more pension poverty.

The important point is that last one, a decline in interest rates is far, far more damaging to pension liabilities than an increase in longevity risk.

Last year, I wrote a comment on why ultra low rates are here to stay, and San Francisco Fed President John Williams penned a note today that pretty much agrees with me:

The decline in the natural rate of interest, or r-star, over the past decade raises three important questions. First, is this low level for the real short-term interest rate unique to the U.S. economy? Second, is the natural rate likely to remain low in the future? And third, is this low level confined to “safe” assets? In answer to these questions, evidence suggests that low r-star is a global phenomenon, is likely to be very persistent, and is not confined only to safe assets.

So, if you ask me, I wouldn’t read too much into this latest study stating Canadian pensioners are living less than previously thought and Canadian DB plans are “overestimating” their liabilities (persistent low rates = persistent pension deficits).

Worse still, the stakeholders of these DB plans might take this data and twist it to their advantage by asking to lower the contribution rate of their plans. This would be a grave mistake.

Lastly, I want to bring something to your attention. Last week, after I wrote my comment on a lunch with PSP’s André Bourbonnais, where I stated that the Chief Actuary of Canada is rightly looking into whether PSP’s 4.1% real return target is too high, I received an email from Bernard Dussault, Canada’s former Chief Actuary, stating he didn’t agree with me or others that PSP’s target rate of return needs to be lowered.

Specifically, Bernard shared this with me:

I still do not understand why “suddenly” investment experts (including Keith Ambachtsheer) think that the expected/assumed long term real rate of return will decrease compared to what it has been expected/assumed for so many years in the past.

I look forward to Bourbonnais’ and the Chief Actuary’s rationale if they were to reduce the 4.1% rate below 4.0%.

The rationale I used for the 4% I assumed for the CPP and the PSPP when I was the Chief Actuary is briefly described as follows in the 16th actuarial report on the CPP:

The CPP Account is made of two components: the Operating Balance, which corresponds in size to the benefit payments expected over the next three months, and the Fund, which represents the excess of all CPP assets over the Operating Balance.

In accordance with the new policy of investing the Fund in a diversified portfolio, the ultimate real interest rate assumed on future net cash flows to the Account is 3.8%. This rate is a constant weighted average of the real unchanged rate of 1.5% assumed on the Operating Balance and of the real rate of 4% which replaces the rate of 2.5% assumed on the Fund in previous actuarial reports.

The long term real rate of interest of 4% on the Fund was assumed taking into account the following factors:

• from 1966 to 1995, the average real yield on the Québec Pension Plan (QPP) account, which has always been invested in a diversified portfolio, is close to 4%;
• as reported in the Canadian Institute of Actuaries’ (CIA) annual report on Canadian Economic Statistics, the average real yield over the period of 25 years ending in 1996 on the funds of a sample of the largest private pension plans in Canada is close to 5%, resulting from a nominal yield of about 11.0% reduced by the average increase of about 6% in the Consumer Price Index;
• using historical results published by the CIA in the Report on Canadian Economic Statistics, the real average yield over the 50-year (43 in the case of mortgages) period ending in 1994 is 4.03% in respect of an hypothetical portfolio invested equally in each of the following five areas: conventional mortgages, long term federal bonds (Government of Canada bonds with a term to maturity of at least 20 years), Government of Canada 91-day Treasury Bills, domestic equities (Canadian common stocks) and non‑domestic equities (U.S. common stocks). The assumed real rate of 4% retained for the Fund is therefore deemed realistic but erring on the safe side, especially considering that:

Ø replacing federal bonds by provincial bonds in this model portfolio would increase the average yield to the extent that provincial bonds carry a higher return than federal bonds; and

Ø the 3-month Treasury Bills, which bear lower returns, would normally be invested for the Operating Balance rather than the Fund.

From a larger perspective, assuming a real yield of 4% on the CPP Fund means that the CPP Investment Board would be expected to achieve investment returns comparable to those of the QPP and of large private pension plans.

On the other hand, I think I heard Bourbonnais saying last year at a presentation of the PSP annual report to the Public Service Pension advisory Committee (and I could well have misheard or misinterpreted what he said) that he was reducing the proportion of equities in the PSP fund in order to reduce the volatility/fluctuation of the returns.

If he is really doing this, then that would be a valid reason for reducing the expected 4.1% return. Besides, if he is doing this, I opine that this is not consistent with the PSP objective to maximize returns. Indeed, a more risky investment portfolio carries higher volatility though BUT it is coupled with a higher long term average return (which both the CPP and the PSP funds have achieved on average over at least the last 15 years).

As I explained to Bernard, PSP Investments and other large Canadian pensions are indeed reducing their proportion in public equities precisely because in a historically low rate environment, the returns on public equities will be lower and more importantly, the volatility will be much higher.

I also told him that given my long-term forecast of global deflation, I think more and more US and Canadian pensions should lower their target rate and that the contribution rates should rise.

Of course, someone may claim the only reason PSP and others want to lower their actuarial target rate of return is because it lowers their bar to attain their bogey and collect millions in compensation.

I’m not that cynical, I think there are legitimate reasons to review this target rate of return and I look forward to seeing the Chief Actuary’s report to understand his logic and why he thinks it needs to be lowered.

I would also warn all of you to take GMO’s 7-year asset class return projections with a shaker of salt (click on image below):

GMO may be right but I never bought into this nonsense and I’m not about to begin now. I guarantee you seven years from now, they will be way off once more!

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

CalPERS has asked four San Gabriel Valley cities that formed a job-training agency 40 years ago, the now-disbanded LA Works, to begin paying down an 18-month-old pension debt totaling $3.37 million.

A rejection of the request, for which replies were due last Friday, could lead to a 63 percent cut in the pensions of 62 retirees. CalPERS cut pensions for the first time last November, a 60 percent reduction for five former employees of Loyalton, a tiny Sierra town.

The CalPERS board was told last week that LA Works is an unusual problem. Under the CalPERS contract, only the disbanded joint powers authority is liable for the pension debt, not the founding cities of Covina, West Covina, Glendora, and Azusa.

“Whether or not they have a legal obligation, our view is they have a moral and ethical obligation,” Matthew Jacobs, CalPERS general counsel, told the board. “They’re the folks who put this thing together, and it’s their employees, essentially.

“And just like they need to take care of their own employees who happen to have been lucky enough to have worked directly for that city, they ought to be taking care of these folks who they have sent over to the JPA. That’s why we sent the letter.”

The joint powers authority, the East San Gabriel Valley Humans Services Consortium, doing business as LA Works, has not made a monthly payment to the California Public Employees Retirement System since June 2015.

“They are an inactive JPA, and they have basically closed their headquarters office, laid off their staff, and they lost their funding,” Arnita Paige, CalPERS contract management chief, told the board.

Los Angeles County supervisors voted in May 2014 to stop contracting with LA Works. Auditors found the consortium had overbilled the county by nearly $1 million for job training for jail inmates and the unemployed.

LA Works had submitted the low bid for a new contract, $32 million over six years, the Los Angeles Times reported. But after the audits the supervisors decided to give the contract to another bidder.

The consortium formed by the four cities in 1976 grew to have a staff of 125 with a $12 million annual budget while also representing Claremont, Diamond Bar, Irwindale, La Puente, La Verne, San Dimas and Walnut, a San Gabriel Valley Tribune editorial said in June 2014.

A “big part of the problem” was the chief executive, Salvador Velasquez, who had been with the agency since the beginning, said the Tribune. He was out of the country on vacation when audit questions arose.

“For pension reasons, he is technically retired and retained by the board as a consultant,” the Tribune said. “The board dragged its feet on finding a replacement who could have ferreted out the problems, which obviously were myriad.”

Velasquez received an annual pension of $120,777 in 2015, according to Transparent California, a website that lists the annual pay and pension of individual state and local government employees.

Another East San Gabriel Valley Human Services Consortium employee, Kathryn Ford, received a $100,240 pension. The other 42 listed pensions ranged from $51,919 to $1,832.

A CalPERS staff report said the consortium’s pension plan has 191 members — 62 retired, 36 transferred, and 93 separated. The annual pension debt payment expected next fiscal year is $365,419, but it’s a long-term commitment. A termination payment is $19.4 million.

CalPERS sent a final collection notice to the consortium last Nov. 1, followed by a final demand letter on Jan. 6, before sending a letter seeking payment from the four founding cities on Feb. 2, with a response date of Feb. 17.

“If payment is not received from East San Gabriel or the founding cities the next step is for CalPERS staff to recommend to the Board involuntary termination,” Brad Pacheco, CalPERS spokesman, said via email. “If the Board approved then benefits would be cut.”

The number of local government agencies that are falling behind on their monthly payments to CalPERS, mainly very small ones, is increasing during a decade-long phase in of a series of four rate hikes that began five years ago.

“Yes, we are starting to see more,” Paige replied last week when asked by board member Theresa Taylor if the number of monthly payment delinquencies is increasing.

Paige said she could not give the board the number of delinquent employers and contracts with joint power authorities, including those solely liable, but it’s being researched. CalPERS provides pensions for 3,000 local governments, nearly half of them school districts.

The historic decision to cut Loyalton pensions last November, coming nearly four years after the city stopped making monthly payments to CalPERS in March 2013, seemed to be a clear signal of a crackdown on unpaid pension bills, followed by new attention from the board.

In the first quarterly collections and termination report last week, the interim CalPERS chief financial officer, Marlene Timberlake D’Adamo, outlined a number of improvements, including a new “team approach” using members of several departments.

Copies of pay-up letters will be sent to employees, making them aware of the problem and giving them a chance to apply what pressure they can. Legislation may be proposed to shorten a one-year delay in contract termination.

To set a termination fee, CalPERS drops the earnings forecast used to discount future pension debt (now 7 percent) to a risk-free bond rate (now 2 percent), saying a lump sum large enough to pay all future pensions is needed because employer-employee contributions stop.

Several cities have considered leaving CalPERS (Villa Park, Pacific Grove, Canyon Lake) but did not due to the large fee. A federal judge in the Stockton Bankruptcy called the fee a “poison pill.” Others say of CalPERS: “You can check in, but you can’t check out.”

The report last week said four local governments left CalPERS, paying the termination fee to avoid pension cuts:

Citrus Pest Control District No. 2 of Riverside County, seven members, $447,041 termination fee; Newport Beach City Employee Federal Credit Union, six, $1,207,695; Metro Gold Line Foothill Extension Construction Authority, 23, $10,109,618, and San Diego Rural Fire Protection District, 40, $3,567,318.

Since February 2015, two local governments adopted resolutions to terminate contracts, Niland Sanitary District and Trinity County Waterworks District No. 1, and four sent a notice of intent to terminate: Alhambra Redevelopment Agency, California Redevelopment Association Foundation, Herald Fire Protection District, and Exposition Metro Line Construction Authority.

In the last four months, four delinquent local governments paid up and avoided termination, including the Central Sierra Planning Council.

At Loyalton, which faced a $1.7 million termination fee, Mayor Patricia Whitley was unavailable. But a city hall spokeswoman confirmed a report that the city, on a month-to-month basis, is paying retirees the amount of the 60 percent pension cut.

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

The Canadian Press reports, Canada, China to share pension expertise:

The top executive at Canada’s largest retirement fund is in Beijing today to help grow the fund’s relationship with Chinese pension officials.

Mark Machin was on hand for the official launch of a Chinese translation of “Fixing the Future” — a book tracing the political and financial hurdles that were overcome when the Canada Pension Plan Investment Board was created in the 1990s.

Machin says the translation of the 380-page book was a Chinese initiative that complements a previously announced “pooling of resources” planned by the CPP Investment Board and China’s National Development and Reform Commission.

He says Canada and China face similar challenges as the number of retired people grows faster than the number of working people paying into the retirement system.

Machin says CPP Investment Board will be leading efforts to co-ordinate Canadian pension expertise and share it with Chinese government officials and other pension experts.

He anticipates the book — written by a former Globe and Mail reporter under a commission from CPPIB — will be used as a textbook in China to help teach about pension reform.

David Paddon of the Waterloo Chronicle also reports, Canada, China to share pension expertise:

China sees Canada as a valuable source of expertise as both countries grapple with the needs of an aging population that’s increasingly retired, according to the head of the Canada Pension Plan Investment Board.

“China faces very similar demographic issues and pension challenges that Canada has faced and continues to face. When you put the demographics side-by-side, there are some striking similarities,” Mark Machin said in a phone interview Monday from Beijing.

He said the most important similarity is that each country will have only about 2-1/2 working-age people per retired person by 2046.

“That’s the crux of the challenge for pension systems.”

As recently as September, the Chief Actuary of Canada’s latest three-year projection said the Canada Pension Plan will remain sustainable at current contribution rates if the CPP Fund managed by Machin’s organization can produce inflation-adjusted rates of return averaging 3.9 per cent over 75 years.

As of Dec. 31, the CPP Funds inflation-adjusted rate of return over the past 10 years was 4.8 per cent and about $300 billion of assets around the world — with more than half in North America.

While CPP Investment Board has had an office in Hong Kong that looks for suitable deals in China and the surrounding region, Machin said that its new collaboration with Chinese officials has a more general purpose.

“I think part of this is making sure that, when we’re investing in markets, we’re not just looking for things that we can get but offering a little bit back — offering a little bit of advice and insights.”

Machin was in China’s capital for the launch of a Chinese translation of “Fixing the Future,” a book tracing the political and financial hurdles that were overcome when the Canada Pension Plan Investment Board was created in the 1990s.

He anticipates the book — written by a former Globe and Mail reporter under a commission from CPPIB — will be used as a textbook in China to help teach about pension reform.

Machin says the translation of the 380-page book was a Chinese initiative that complements a previously announced “pooling of resources” planned by the CPP Investment Board and China’s National Development and Reform Commission under a memorandum of understanding signed in September.

The memorandum was one of the agreements signed in Ottawa during an official visit by China’s Premier Li Keqiang.

While the CPP Investment Board is designed to be politically independent from all levels of government, Machin said there’s a common interest with the Canadian federal government’s efforts to build economic and trade ties with China.

“Those two things are definitely aligned. I wouldn’t say they’re co-ordinated, but they’re aligned.”

CPPIB put out a press release providing more details on this exchange, Canada Pension Plan Investment Board Launches the Chinese Edition of “Fixing the Future”:

Canada Pension Plan Investment Board (CPPIB) today launched the Chinese edition of “Fixing the Future: How Canada’s Usually Fractious Governments Worked Together to Rescue the Canada Pension Plan.” Written by Bruce Little, Fixing the Future describes how Canada addressed the looming demographic crunch and its impact on the Canadian pension system in the mid-1990s. Today, the CPP Fund totals $300 billion and is projected to be sustainable for the next 75 Years. CPPIB, the manager of the Fund, is a leading global institutional investor and invests in more than 45 countries through eight offices around the world.

In the mid-1990s, the Canada Pension Plan (CPP) was underfunded and faced an uncertain future. Experts predicted that the CPP Fund would be exhausted by today, and a major overhaul was urgently needed to ensure the sustainability of the CPP for future generations of Canadian retirees. Canada’s federal and provincial finance ministers made some difficult decisions and introduced a set of reforms to the CPP, including the creation of CPPIB, which effectively ended the funding crisis.

“We are honoured to share Fixing the Future, the story of Canada’s pension reform, with China,” said Mark Machin, President & Chief Executive Officer, CPPIB. “Many of the issues that Canada faced in reforming their pension system are shared between our two countries. With China’s pension reform now well under way, we hope that some of the lessons learned in Canada are of value to policymakers in China as they work to secure the pension system for many generations to come.”

On September 22, 2016, during the visit of Premier Li Keqiang to Canada, CPPIB’s CEO, Mark Machin, signed a Memorandum of Understanding with Xu Shaoshi, Chairman of the National Development and Reform Commission. Through this memorandum, CPPIB has agreed to assist Chinese policymakers in addressing the challenges of China’s ageing population. The translation of Fixing the Future into Chinese is just one way CPPIB is delivering on this agreement.

“Fixing the Future is inspiring to policy makers and academia in thinking about establishing a coordinated policy-making mechanism for the pension reform currently taking place in China. Demographics and pension management is an important subject for China’s future, and we believe CPPIB’s successful model will set a precedent for the academia and policy makers in China as they are striving to build a sustainable social security system,” said Professor Zheng Bingwen, the translator of the book and Director of Center for International Social Security Studies, Chinese Academy of Social Sciences (CASS).

The new edition of Fixing the Future includes a foreword by the Right Honourable Paul Martin, former Prime Minister of Canada and federal Finance Minister, who was intimately involved in the reforms, and an afterword by renowned pension expert Keith Ambachtsheer. The Chinese edition also includes a foreword from Mr. Lou Jiwei, former Finance Minister of China and now Chairman of National Council for Social Security Fund, highlighting the relevance of the book to Chinese readers.

The translated version of the book was launched at an event in Beijing, co-hosted by CPPIB, the Embassy of Canada to China, CASS Center for International Social Security Studies, China Human Resources and Social Security Publishing Group and China Council for the Promotion of International Trade.

Back in September, I explained why CPPIB is aiding China with its pension reform. In short, the global pension storm is hitting China particularly hard and I’ve been talking about the need to overhaul China’s pension system for a few years now.

But I’m not sure a textbook translated in Chinese will help China address many structural weaknesses in its pension system and economy. First and foremost, the Chinese need to adopt CPPIB’s governance model which unfortunately runs contra to the country’s communist doctrine where the government has a say on everything, including the way state pensions invest assets.

Moreover, China, much like Japan, has a huge problem, namely an aging demographic which will require some form of pension safety net to make sure these people don’t die from pension poverty and starvation. In other words, bolstering China’s pension system is critically important for all sorts of socio-economic reasons.

By the way, bolstering pensions is critically important all over the world, not just China. A friend of mine is in town from San Francisco this long US weekend and we had an interesting discussion on technological disruption going on in Silicon Valley and all over the United States.

My friend, a senior VP at a top software company, knows all about this topic. He told me flat out that in 20 years “there will be over 100 million people unemployed in the US” as computers take over jobs and make other jobs obsolete at a frightening and alarming rate (Mark Cuban also thinks robots will cause mass unemployment and Bill Gates recently recommended that robots who took over human jobs should pay taxes).

“It’s already happening now and for years I’ve been warning many software engineers to evolve or risk losing their job. Most didn’t listen to me and they lost their job” (however, he doesn’t buy the “nonsense” of hedge fund quants taking over the world. Told me flat out: “If people only knew the truth about these algorithms and their limitations, they wouldn’t be as enamored by them”).

He agreed with me that rising inequality is hampering aggregate demand and will ensure deflation for a long time, but he has a more cynical view of things. “Peter Thiel, Trump’s tech pal, is pure evil. He wants to cut Social Security and Medicare and have all these people die and just allow highly trained engineers from all over the world come to the US to replace them.”

He also gave me a very grim assessment of the United States still very divided along racial lines. “Dude, I am a white Greek Christian and there are places in the country where I don’t feel welcomed at all because my skin is too dark and my name has too many vowels in it. I have Muslim friends of mine that have been beaten and harassed because of the way they look. If you live in the big cities, it’s obviously not as bad but it’s still very tense.”

We both agreed that Trump’s immigration executive order was a huge fail (“even Peter Thiel came out against it”) but I told him he will personally prosper under Trump in a “bigly” way.

He said: “No doubt, I’m getting a huge tax cut which will make me a lot richer but I’ve already decided to donate whatever I gain in tax cuts to Planned Parenthood, the ACLU and other organizations that Trump is trying to weaken.”

He told me there is “massive, widespread poverty in the US” and “the only way to effectively combat growing inequality in the US is to tax the rich, just like President Roosevelt did in the 30s when he implemented the New Deal.”

He also told me that the reason Trump wants to be close to Russia is because “racist white supremacists like Steve Bannon and others want to destroy Islam and they see Russia as a critical player to help them with their anti-Islamic agenda.”

I told him Bannon won’t survive a year in Trump’s administration and I wouldn’t worry too much about America and Russia joining alliances to “destroy Islam.”

Both my buddies out in California — this software engineer and a cardiologist — are very smart, successful left-wing bleeding heart liberals who hate Trump with a passion so we engage in some spirited email chats as to why Trump was elected and whether he’s as dangerous as they both claim (we all agree he’s a bit unhinged and a huge megalomaniac but I see this as more of a show to distract people and I tend to agree with Trump, the mainstream media in the US is completely biased and out to get him).

Anyways, why am I bringing all this up again? Oh yeah, pensions and why a good pension system is critical to ensure people retire in dignity and security and don’t succumb to pension poverty. A good pension system fights growing inequality and allows people to spend money during their retirement years, allowing governments to collect sales and income taxes from these people after they retire.”

China is nowhere near the US or Canada when it comes to its pension system but if it’s one country that can get its act together in a hurry, it’s China. Will there ever be a Chinese CPPIB? I strongly doubt it but as long as they drastically improve the current pension system by implementing some key reforms, it will be a vast improvement over what they have now.

Lastly, you should all take the time to read Mark Machin’s remarks to the Canadian House of Commons Finance Committee when he testified back in June:

Thank you for having me here today to discuss and answer questions regarding the Canada Pension Plan Investment Board and how we are helping ensure the CPP remains sustainable for future generations of Canadians.

To my right is Michel Leduc, our Senior Managing Director of Public Affairs and Communications, and to my left is Ed Cass, our Chief Investment Strategist.

I joined CPPIB four and a half years ago as the first President of Asia and then became Head of International in 2013. Prior to that, I worked for Goldman Sachs for twenty years in Europe and Asia. While I am a new resident to Canada, so far I’ve had the pleasure of travelling across the country meeting with finance ministers, the stewards of the CPP and some of our contributors.

I was enormously honoured to be chosen by CPPIB’s Board of Directors to lead such an important professional investment organization with a compelling public purpose. International organizations such as the OECD, the World Bank, Harvard Business School and The Economist, have all praised the ‘Canadian model’ of pension management due to its strong governance and internal investment management capabilities.

Our governance structure is a careful balance of independence and accountability, enabling professional management of the CPP Fund while ensuring that we are accountable to the federal and provincial governments, and ultimately the Canadian public. We know that contributions are compulsory and so we are motivated to work even harder to earn that trust.

You can the full speech here and it goes over a lot of key elements behind CPPIB’s long-term success.

By the way, when I recently told you to ignore CPPIB’s quarterly results,  I forgot to mention that those results do not include private market assets which are valued only once a year when CPPIB releases its annual report, so don’t read too much into quarterly results of any pension, especially CPPIB.

CaPERS and a consortium of other investors last week called on the banks financing the Dakota Access Pipeline to address local tribes’ concerns around the route and safety of the project.

Earlier in the week, protestors had camped in front of the CalPERS building, calling for the powerful investor to divest from the pipeline.

CalPERS’ stance was that it could wield more influence if it remained an investor in the project. Now, it is doing just that.

From the Sacramento Bee:

The California Public Employees’ Retirement System cited its concerns that construction would lead to an “escalation of conflict and unrest as well as possible contamination of the water supply” that could in turn tarnish the banks’ reputations and cause them to lose customers.

Neil is a great guy, I’ve been critical of PSP’s silly real estate benchmark which his predecessor implemented (with the full backing of André’s predecessor and PSP’s board back then) but there’s no denying he’s one of the best institutional real estate investors in the world (and woud outperform even with a tougher RE benchmark).

On that note, let me thank Neil, André Bourbonnais, Miville Tremblay (did a great job) and the rest of the CFA Montreal members who did an outstanding job organizing this luncheon (everything was perfect).

CalPERS’ allocation changes in the final months of 2016 have caused the pension fund to miss out on $900 million in potential investment return, according to remarks made by the CIO at a board meeting on Monday.

The pension fund moved away from stocks and private equity in September, opting for a less volatile asset allocation that is project to return around 6 percent annually.

However, CIO Ted Eliopoulos cautioned board members to keep the long-view.

From Reuters:

CalPERS Chief Investment Officer Ted Eliopoulos said during a board meeting on Monday that he wanted to “allay some of the anxiety and fears” by reminding the board that “our practice require us to take much longer periods of time into account.”

CalPERS decided in September to reduce some volatile stocks and private equity from its portfolio. Over the four months following until Dec. 31, the fund made more than $12 billion in net equity sales, according to fund documents. During that time, it experienced a lower return of approximately $900 million.

[…]

CalPERS expects a 5.8 percent annual investment return under its new portfolio asset allocation, significantly lower than the fund’s assumed rate of return of 7 percent by 2020.

The fund plans to make up for lower returns expected in the coming decade over the next 30 years or more.

One board member wondered if CalPERS could devise a method to retain its less volatile allocation while still capturing rallies. From the Sacramento Bee:

Board member Theresa Taylor questioned whether CalPERS could devise a different policy that might allow it act faster if trends change.

“I just want to make sure you are exploring all options so we are not leaving money on the table,” she said. “I know we are risk adverse and I get that but I also think that we leave ourselves open to not being able to do what we could be doing.”

 

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

The Canadian Press reports, Liberals tap former pension fund CEO to help build new infrastructure bank:

The former head of one of the country’s largest pension funds is being tapped to help build a new federal infrastructure bank.

The Liberals are naming Jim Leech as a special adviser to help design the proposed arm’s-length lending machine that could leverage billions in public money and turn it into new highways, bridges and transit projects.

The Liberals plan to infuse the bank with $35 billion in funding to financially backstop projects, with the details of how it will work to be outlined in this year’s federal budget.

The government says Leech will guide the bank’s implementation team and help recruit board members.

The former head of the Ontario Teachers’ Pension Plan has experience investing pension money in profit-generating infrastructure projects.

The Liberals hope that large pension funds like the teachers’ plan will invest in the bank, which will use federal funds to attract private- sector dollars for major projects, possibly generating $4 to $5 in private funding for every $1 of federal money.

Matt Scuffham of Reuters also reports, Canada may fund some infrastructure entirely from private funds:

Canada could finance some future infrastructure projects entirely through private sources, without using government funds, the special advisor for its new infrastructure bank said after his appointment on Friday.

Canada’s Liberal government announced last November it would set up the agency to supplement government investment in projects like new roads and bridges with funding from private investors such as pension and sovereign wealth funds.

The government advisory panel that recommended its creation had said it could look to raise C$4 to C$5 of private funding for every C$1 provided by taxpayers to fund projects.

However, Jim Leech, the pension executive recruited on Friday to advise the government on the bank, said it could go further with private investment on some projects.

“I’m sure that there are many projects that won’t need any investment from taxpayer money. They can be totally funded by the private sector,” Leech said.

New U.S. President Donald Trump has said he would launch a $1 trillion infrastructure spending program financed entirely by private sources. Infrastructure products are traditionally funded by a mix of private and public investment.

Leech said one of the challenges for the infrastructure bank will be that institutional investors such as pension funds traditionally prefer to invest in ‘brownfield’ assets which have already been built, while the greatest infrastructure need is for ‘greenfield’ assets which have yet to be built.

“I think that’s where the logjam is. You have, on the one hand, on a global basis, a lot of money looking for infrastructure to invest in but it doesn’t have the talent within those institutions to be able to assume greenfield.”

The Caisse de depot et placement du Quebec is the only Canadian pension fund making large-scale ‘greenfield’ investments, having agreed to construct one of the world’s largest light rail networks in Montreal, a project which could become a test case.

“I think what the Caisse is doing is very encouraging. I was impressed to see they are building a team within the Caisse which knows how to assess some of this risk. I think that’s good innovation and there are things we can learn from it,” Leech said.

He said the bank would look at ways to make projects “risk tolerable” for financial institutions but declined to specify how they might do that. Infrastructure experts say they could provide guarantees on future returns or backstop some construction risk.

And Janyce McGregor of the CBC reports, Ex-Teachers CEO Jim Leech named special advisor for new Canada Infrastructure Bank:

Prime Minister Justin Trudeau has named Jim Leech special advisor for the new Canada Infrastructure Bank.

Leech is a former CEO of one of the world’s largest pension funds, the Ontario Teachers’ Pension Plan. Since his retirement in 2014, he’s been an adviser to the Ontario Liberal government, leading a review of the sustainability of the province’s electricity sector pension.

In a release from the Prime Minister’s Office Friday, Trudeau referred to Leech’s “immense knowledge and experience,” saying he was “confident that he will help ensure a smooth and successful launch of the Canada Infrastructure Bank.”

The release said Leech will work with the Privy Council Office and the offices of Infrastructure Minister Amarjeet Sohi and Finance Minister Bill Morneau to build an implementation team and get the new organization off the ground. It promises an “open and transparent process” to recruit future board members.

Leech said in a statement Friday he was honoured to be asked to contribute to moving the bank from concept to reality.

“I believe that, if done right, an infrastructure bank will give Canada a competitive advantage in the global quest for infrastructure funding and development,” he said in a release issued by Queen’s University in Kingston, Ont., where he currently serves as chancellor.

The creation of the infrastructure bank was announced in Morneau’s fall economic statement as part of the government’s overall infrastructure investment plans.

Although touted as an effective way to ensure more projects get built quickly across Canada, very little about the new entity has been revealed in the months since.

Bank may manage up to $35B

Legislation to create the bank will come after the federal budget, expected in the coming few weeks.

The bank is intended to work with other levels of government to “further the reach” of federal infrastructure spending using a broad range of financial instruments, including loans and equity investments.

Last fall, the government suggested the bank would manage up to $35 billion: $15 billion from the federal infrastructure funding announced last year and an estimated $20 billion sought from private investors.

The public money, the government said, would fund projects that wouldn’t normally be able to provide a return for private investors.

For other more profitable projects, the bank may attract “as much as four or five dollars in private capital for every tax dollar invested,” Morneau said last fall.

“Potential investors have said projects need to be worth $500 million or more for them to invest,” said Conservative infrastructure critic Dianne Watts Friday. “That’s a lot of risk to put on taxpayers for something that will only benefit the large urban centres.”

The Liberals have touted the new bank as an innovative way to put private capital to work building much-needed infrastructure.

Leech was credited with innovative decision-making during his tenure at Teachers, a highly-influential public pension manager because of its large size and investment scope. He eliminated the plan’s funding deficit and its returns performed among the top-ranked funds of its kind internationally during his tenure.

You can read this press release from the Prime Minister’s Office announcing the appointment of Jim Leech as a special advisor to the newly created federal infrastructure bank.

Over the weekend, I emailed Jim Leech to get his views on this new role. Jim sent me this:

My role is as advisor (pro bono) to help “stand up” the bank. Will focus on governance (board, management), talent (org structure, skill sets, hiring Chair and top management), and process (how projects prioritized/evaluated). Lots to do like what G/L to adopt, risk management, location etc.

When I asked him what he meant by G/L he said:”General Ledger – mundane but remember we are creating a major financial institution from scratch.”

Jim Leech is an excellent choice to gets things going on this new federal infrastructure bank. Apart from Leo de Bever, another retired pension veteran who worked at Ontario Teachers’ and AIMCo and is widely considered as the godfather of direct infrastructure investments in Canada, I don’t think the federal government could have picked a better special advisor.

Jim has tremendous experience and knows all the key people in the pension industry in Canada and abroad. He will make recommendations for the board (I would nominate Leo de Bever as the chair) and will get to work setting up the governance, hiring top management, and focusing on the process and how to quickly and efficiently get things rolling so that these projects can get underway as soon as possible.

Who should lead the new federal infrastructure bank? Good question. Again, I would place Leo de Bever high on the list if he’s interested in that job or chairman of the board, but there are others as well like Michael Sabia and Mark Wiseman who co-authored an article for the Globe and Mail last October on why the private infrastructure bank will put Canada on a path to growth.

Jim Leech hired Mark Wiseman at Ontario Teachers’ to run the fund investments and co-investments before he moved on to head CPPIB. Mark is now working at BlackRock so I’m not sure if he’d give up that high profile job to come back to head up the federal infrastructure bank.

Michael Sabia is the president and CEO of the Caisse but his term is coming to an end, so along with Leo de Bever and Mark Wiseman, I wouldn’t be surprised if he’s high on the list of likely candidates to head up the federal infrastructure bank. Sabia’s baby at the Caisse is the Montreal REM project which he recently defended publicly and he’s a huge believer in developing infrastructure to kick-start and sustain economic growth over the long run.

Who else is a potential candidate to run the new federal infrastructure bank? Neil Petroff, the former CIO of Ontario Teachers’, someone else who Jim Leech knows well and worked closely with in the past. After retiring from Teachers, Neil joined Northwater Capital Management back in 2015 as a Vice Chair and he knows infrastructure investments very well and is plugged in to the key players all over the world.

There are other candidates as well, like Wayne Kozun who was up until recently the senior VP of Public Equities at Ontario Teachers’ and Bruno Guilmette, the former head of infrastructure investments at PSP Investments and someone I worked with in the past when he was putting together his business plan to introduce infrastructure as an asset class at PSP back in 2005.

Another name that was mentioned to me to head up this new federal infrastructure bank is Larry Blain, Senior Director, Global Infrastructure at KPMG and advisor and corporate director of the Canada West Foundation:

Previously, Mr. Blain served as Partnerships BC’s President and CEO, and subsequently as Chair of the Board of Directors. Under Mr. Blain’s leadership, Partnerships BC participated in more than 45 partnership projects with an investment value of $15 billion. Mr. Blain has also been a Director of BC Hydro, the Chair of Powerex, a Director of the Transportation Investment Corporation, and a Director of the UBC Investment Management Trust.

And thus far I’ve only mentioned men. Some women I would strongly consider to be chair of the board or to serve on the board are Eileen Mercier, the former chair at Ontario Teachers’ who is now the new chancellor of Wilfrid Laurier University and Carol Hansell, a former board of director at PSP Investments who was recently awarded the Hennick medal for career achievement. I would certainly tap their expertise for this new federal infrastructure bank.

Now, I am merely speculating here, I have no idea if any of these people are interested in heading the new federal infrastructure bank or taking any role on the board of directors, but the point I am making is there is no shortage of qualified individuals to consider for potential roles.

I’ll leave those decisions up to Jim Leech, he’s more than qualified and much better plugged in than I am to pick the right people for the board of directors and senior management.

One infrastructure expert shared this with me:

It is absolutely essential that they hire the right mix of people from both the pension fund industry and from infrastructure.

They also need to hire Canadians who have experience working with institutions in different geographic markets. The Europeans and Japanese are light years ahead of us in this respect.  We need to learn from some of their models, transform the models to make them uniquely Canadian, and then execute.

There are quite a few infrastructure experts in Canada. One of them is Andrew Claerhout, Senior Vice President at Teachers‘ Infrastructure Group, who shared these great comments with me back in November when the federal government started courting big funds for their infrastructure projects:

• Andrew told me that OTPP, CPPIB, OMERS and the rest of Canada’s large pensions are not interested in small DMBF/ PPP projects which are typically social infrastructure like building schools, hospitals or prisons. Why? Because they’re small projects and the returns are too low for them. However, he said these are great projects for construction companies and lenders because you have the government as your counterparty so no risk of a default.
• Instead, he told me they are interested in investing in “larger, more ambitious” infrastructure projects which are economical and make sense for pensions from a risk/ return perspective. In this way he told me that they are not competing with PPPs who typically focus on smaller projects and are complimenting them because they are focusing on much larger projects.
• Here is where our conversation got interesting because we started talking about Australia being the model for privatizing infrastructure to help fund new infrastructure projects. He told me that while Australia took the lead in infrastructure, the Canadian model being proposed here takes it one step further. “In Australia, the government builds infrastructure projects and once they are operational (ie. brownfield), they sell equity stakes to investors and use those proceeds to finance new greenfield projects. In Canada, the government is setting up this infrastructure bank which will provide the bulk of the capital on major infrastructure greenfield projects and asks investors to invest alongside it” (ie. take an equity stake in a big greenfield project).
• Andrew told me this is a truly novel idea and if they get the implementation and governance right, setting up a qualified and independent board to oversee this new infrastructure bank, it will be mutually beneficial for all  parties involved.
• In terms of subsidizing pensions, he said unlike pensions which have a fiduciary duty to maximize returns without taking undue risk, the government has a “financial P&L” and a “social P & L” (profit and loss). The social P & L is investing in infrastructure projects that “benefit society” and the economy over the long run. He went on to share this with me. “No doubt, the government is putting up the bulk of the money in the form of bridge capital for large infrastructure projects and pensions will invest alongside them as long as the risk/ return makes sense. The government is reducing the risk for pensions to invest alongside them and we are providing the expertise to help them run these projects more efficiently. If these projects don’t turn out to be economical, the government will borne most of the risk, however, if they turn out to be good projects, the government will participate in all the upside” (allowing it to collect more revenues to invest in new projects).
• He made it a point to underscore this new model is much better than the government providing grants to subsidize large infrastructure projects because it gets to participate in the upside if these projects turn out to be very good, providing all parties steady long-term revenue streams.

Basically Andrew Claerhout explains why pensions are not competing with DBFM/ PPPs and are looking instead to invest alongside the federal government in much larger, more ambitious greenfield infrastructure projects where they can help it make them economical and profitable over the long run.

Andrew added this: “Most infrastructure investors focus on brownfield opportunities while the government is most interested in seeing more infrastructure built (i.e., greenfield). The infrastructure development bank is meant to help bridge this divide – hopefully it is successful.”

I certainly hope this new federal infrastructure bank is successful in bridging this divide and I’m happy the government appointed Jim Leech as a special advisor to get things rolling. He has a big job ahead of him when he starts working in March but till then, I hope he enjoys his ski vacation with his family on top of mountain in Okanagan (can’t ask for better ski conditions).

One final note, I recently reported that GPIF is making America great again by investing billions in Trump’s infrastructure project. I updated that comment to state GPIF and Prime Minister Shinzo Abe denied these reports. I think the Japanese would be far wiser to invest in Canada’s infrastructure projects once this new federal infrastructure bank is set up.

As far as US infrastructure, Bloomberg reports that Blackstone is targeting as much as $40 billion for infrastructure deals if the world’s biggest private equity firm re-enters the sector. Interestingly, President Trump and Prime Minister Shinzo Abe both attended Blackstone CEO Stephen Schwarzman’s 70th birthday party in Palm Beach over the weekend where there was a ‘frantic rush to change ‘Chinese decorations to Japanese’.

Care to hazard a guess as to who will be the biggest investor in Blackstone’s new infrastructure fund once it re-enters the sector? Happy birthday Mr. Schwarzman, you and your Blackstone colleagues are about to become a whole lot richer under the Trump administration.