Pension360

CalPERS has released a study that claims that the pension fund, through pension payouts and investments, generated over $30 billion in economic activity in California alone in 2014.

Specifically, the study posits that $9.64 in economic activity was generated for every $1 contributed to the pension fund.

More from Plan Sponsor:

The findings come from the “CalPERS Economic Impacts in California” report for the fiscal year ending June 30, 2014. CalPERS says the report “highlights the vital role” pension funds play in the U.S. and global economies.

According to Anne Stausboll, chief executive officer for CalPERS, retirees spending their pensions returned $9.64 in economic activity for each taxpayer dollar contributed to the system. The total economic activity generated by CalPERS benefits payments was $30.9 billion, while CalPERS benefit payments supported 104,974 jobs throughout California.

Investments in California accounted for $25.7 billion, or approximately 8.5%, of the CalPERS portfolio, the organization notes.

The pension fund is often cited among the largest U.S. retirement plans, serving more than 1.7 million members in the CalPERS retirement system. Another 1.4 million people are served by CalPERS health benefit programs. CalPERS’ holdings stand at approximately $304 billion.

Read the study here.

The world’s largest pension, Japan’s Government Pension Investment Fund, is nearly finished with its massive portfolio overhaul.

Over the last year, the fund has made numerous personnel changes and significantly tilted its investment strategy in favor of equities.

More from Bloomberg:

Japan’s $1.2 trillion Government Pension Investment Fund has shifted its allocations for stocks and bonds at home and abroad to within three percentage points of its targets, investment results for the April-June quarter released Thursday show. The fund returned 1.9 percent in the period as local equities gained and the yen fell. It lost 50 billion yen ($416 million) on its domestic bond holdings.

Investors have been watching GPIF’s mix of holdings to gauge the impact on financial markets. With the pension giant’s main shift in assets done, analysts will be paying more attention to details such as its weighting in passive investments versus actively-managed funds, alternative assets, and how the fund handles corporate governance issues.

GPIF held about 38 percent of its assets in domestic bonds, 23 percent in Japanese stocks, 13 percent in foreign debt and 22 percent in overseas equities at the end of June, the statement shows. It targets 35 percent in JGBs, 25 percent each in domestic and foreign stocks, and 15 percent in overseas bonds. Alternative investments accounted for 0.05 percent out of a possible 5 percent of its assets.

“GPIF has already reshuffled its core portfolio and diversified its passive benchmarks, but it still has work to do in terms of lowering its weighting of passive investments in domestic equities,” Keiichi Ito, chief quantitative analyst at SMBC Nikko Securities Inc. wrote in a report on July 17. He estimated GPIF would have had 23.3 percent of its assets in Japanese stocks by the end of June.

The GPIF is the world’s largest pension fund and manages $1.2 trillion.

 

Photo by Ville Miettinen via FLickr CC License

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

Matthew Cunningham-Cook of the International Business Times reports, At Chicago Pension Fund, Questions Raised On Conflicts of Interest:

Chicago pension officials wanted to know where to deposit the $11 billion that the city’s teachers had saved for their retirement benefits, so they turned in 2014 to the outside consulting firm they’d hired for financial advice. Such consultants are employed to provide guidance that’s expected to be impartial — not shaped by private business relationships that might make its recommendations less than objective.

So when the firm, Callan Associates, told pension trustees at a February meeting to give the cash to a bank called Bank of New York Mellon (BNY), the board’s trustees agreed to follow the advice. What they were not told at that meeting, however, is that BNY pays Callan for both general consulting services and financial education programs.

Those payments, say financial experts, represent an inherent conflict of interest. They effectively strip consultants like Callan of their objectivity by giving them an incentive to push their pension clients to use banks that are paying the consulting firms, the experts say.

Government regulators and auditors have in recent years raised concerns about undisclosed business relationships between financial institutions and consultants who are supposed to provide objective counsel. Auditors have documented lower investment returns at pension funds that rely on consultants with divided loyalties.

In Chicago, the conflicts could prove particularly costly for the city’s taxpayers and 63,000 educators. That’s because the bank Callan recommended, BNY, is a Wall Street behemoth that has repeatedly faced law enforcement action for skimming money from its clients. In fact, just after Chicago handed over teachers’ money to the bank, BNY agreed to pay more than $700 million to settle federal charges against it for defrauding its pension fund clients. Callan had previously faced sanctions from the Securities and Exchange Commission (SEC) for failing to disclose to clients that it was getting payments from BNY Mellon in exchange for referring brokerage business.

Callan did not respond to International Business Times’ questions about its financial relationships. In its marketing material and financial disclosure documents, the firm has said, “We are independently owned and operated with interests that are precisely aligned with those of our clients.”

Ted Siedle, a former SEC attorney, said he sees no alignment of interests for Callan clients.

“It’s clear that Callan has conflicts of interest, and it’s likely those conflicts have an adverse effect on performance,” he told IBTimes.

Feds Taking ‘A Careful Look’

In recent years, conflicts of interest in the shadowy world of finance have drawn increased attention from regulators and policymakers. In the wake of the financial crisis, lawmakers uncovered evidence that banks were pushing clients into investments that the banks themselves were betting against. That prompted deeper concerns about conflicts of interest and ultimately led the U.S. Labor Department to propose a rule mandating that financial advisers to individual investors provide advice that is solely in the interest of their clients.

But while the department has considered a similar rule for those advising pension funds, such an initiative has not moved forward.

In the absence of such a regulation, Rep. George Miller, D-Calif., sent a letter to the Department of Labor in 2014 saying the agency needs to “take a careful look” at conflicts of interest with pension consultants. In response, Phyllis Borzi, the Labor Department official in charge of regulating pensions, said the department was “committed to addressing” such conflicts in regard to pensions.

Evidence of conflicts has been mounting. In 2005, the SEC surveyed 24 major investment consultants and found that 13 had significant conflicts of interests that they had disclosed to investors. One of those firms investigated was Callan Associates. Using the findings of the SEC’s 2005 review, the Government Accountability Office (GAO) later found that pension funds that used conflicted consultants had 1.3 percent lower rates of returns than those that did not. As of 2006, those consultants were helping manage $4.5 trillion of assets.

If the GAO’s estimates are accurate, conflicted consultants cost pension funds $58 billion in unrealized returns every year.

Controversies surrounding financial conflicts of interest have periodically generated headlines.

In 2004 , Mercer, a major consultant, was criticized for receiving money from asset managers it recommended to pension funds, specifically in Santa Clara, California. In 2009, Consulting Services Group was criticized in an investigation for recommending that the pension fund of Shelby County, Tennessee, invest in its own hedge fund, which paid large fees to the company. In 2013, New York’s Superintendent of Financial Services Benjamin Lawsky subpoenaed documents from 20 of the largest investment consulting firms, reportedly to evaluate their potential conflicts of interest (the results of Lawsky’s investigation have not yet been made public).

Most recently, in December 2014, IBTimes reported that the San Francisco pension fund’s consultant, Angeles Investment Advisors, was pushing the city to allocate 10 percent of its portfolio to hedge funds but did not disclose that its own firm reserves the right to collect additional fees from pension clients when those clients invest in hedge funds. Angeles was later fired by the pension fund in favor of a company that claims to have fewer conflicts of interest.

‘The Bank Was Stealing’

In Chicago, where the teachers pension fund trustees are both educators and appointees of Mayor Rahm Emanuel, questions about conflicts of interest were not about investments. Instead, they were about which bank should get the lucrative contract to receive and disburse the pension fund’s $11 billion in assets.

In February 2014, when Callan recommended that pension trustees choose BNY for these so-called custodial services, Callan’s representatives did not explicitly tell pension trustees of their firm’s relationship with BNY or the 2007 SEC enforcement action against the consulting firm. Callan’s 2013 report on Chicago’s private equity investments did briefly mention the firm’s business with BNY, but pension trustees interviewed by IBTimes said they were unaware of the relationship.

At the February meeting, Callan also did not mention any of the ongoing legal issues related to BNY Mellon and its performance as a custodian for pension funds, even though the bank was just then the subject of law enforcement scrutiny. Indeed, one month after Chicago’s gave BNY the deal for custodial services, BNY agreed to pay $714 million to settle claims against it for bilking its pension fund clients by manipulating the rate at which pension funds’ currency holdings are traded internationally.

U.S. Attorney Preet Bharara, who brought the federal charges against BNY, said at the time that public pension funds “trusted the bank to be honest about the financial services it was providing and to deal with them fairly.” But, charged Bharara, BNY “and its executives, motivated by outsized profits and bonuses, breached this trust and repeatedly misled clients” about the currency rates they were charging their clients. Specifically, prosecutors said, the bank got the best currency exchange “rates for itself, gave its customers the worst or close to the worst rates, and kept the difference for itself.”

The federal investigation and lawsuit had been ongoing since 2011 but went unmentioned by Callan in its recommendations. At the time of the settlement, the New York Times reported that a BNY Mellon employee had been quoted in an email asking if it was “time to retire after raping the custodial accounts.”

The $714 million paid by BNY Mellon is negligible, however, compared with estimates provided by investigator Harry Markopolos, who first blew the whistle on the scam in 2011. In an interview with King World News, reported by Business Insider, Markopolos placed the scale of damages far higher — at more than $2 billion. 

IBTimes asked Chicago teachers pension staff members if they had been informed about Callan’s conflict of interest with BNY Mellon and if they are concerned that such a conflict may have encouraged Callan to avoid mentioning the problems surrounding BNY’s custodial services. The fund’s executive director, Charles Burbridge, said that he has “not had the opportunity to look into the issues.”

BNY Mellon declined to comment in response to questions from IBTimes. In a statement in March, the bank declared that it is pleased to put the “matters behind us, which is in the best interest of our company and our constituents.”

Finance experts question whether pension funds should continue to trust their money with BNY Mellon.

“It’s hard to see how any fiduciary can keep doing business with BNY Mellon after these revelations,” Susan Webber, principal of Aurora Advisors, a financial consulting firm, said. “BNY Mellon flagrantly misrepresented its foreign exchange trading practices to customers. Consistently reporting the worst or nearly the worst price of the day to clients means the bank was stealing.”

For Siedle, the former SEC attorney, Chicago’s relationship with its consultant and decision to deposit retirees’ money in BNY is a cautionary tale that should prompt action.

“With the nationwide attack on defined-benefit pensions,” he said, “it is now more urgent than ever that Chicago teachers and other pension funds across the country launch independent investigations into how conflicts of interest have affected their portfolio.”

Ted Seidle, the pension proctologist, is absolutely right, now more than ever U.S. public pension funds need to scrutinize their relationships with external consultants, hedge funds, and of course private equity and real estate funds. They all want a piece of that multibillion dollar public pension pie but trustees need to uphold their fiduciary duty and make sure they’re is proper alignment of interests.

As far as BNY Mellon, they were caught overcharging pension funds on foreign exchange transactions but I’ve got news for you, this type of stuff goes on all the time especially in unregulated currency markets. Big banks and custodians are always trying to screw their clients on F/X trades and to a certain degree, clients know this and allow it (there is a certain give and take in F/X markets but banks and clients need to be reasonable or else they get a very bad reputation and nobody will trade with them).

But as far as Callan Associates, one of the big consulting shops in the U.S., it should have disclosed that BNY pays Callan for both general consulting services and financial education programs. Failure to disclose this is grounds for termination of its contract with Chicago’s pension fund.

When I was investing in hedge funds a long time ago, I’d always use a legal side letter to cover ourselves as much as possible from operational risk or any other negative surprises. Even then, it wasn’t always foolproof.

I’m shocked at how sloppy some contracts are nowadays. It should clearly stipulate that failure to disclose serious conflicts of interest will mean termination of a contract and heavy fines and penalties.

Importantly, these conflicts of interest aren’t just going on in Chicago, they’re going on all over the United States where lack of proper pension governance means the entire public pension fund system is vulnerable to investment consultants fraught with conflicts of interest.

Of course, some consultants are better than others and are offering truly independent and outstanding advice, but for the most part it’s been and continues to be a miserable failure and it’s costing these U.S. public pensions billions in performance and fees.

And Chicago’s pension woes don’t end with consultants’ conflicts. A report recently uncovered that teacher pension perks are not uncommon across Illinois:

Hundreds of school districts across Illinois cover either all or most of their teachers’ retirement contributions.

The issue is in the spotlight as Illinois’ largest district is in the middle of tense contract negotiations and the cash-strapped district is seeking help from legislators.

The Chicago Tribune reports thousands of teachers get a better deal than Chicago teachers.

Some districts, including in suburban Wheeling, say picking up pension costs helps keep them competitive. Some unions have also argued it’s a cost saver because if the money was paid as a salary it would be subject to payroll tax.

Mayor Rahm Emanuel wants teachers to pay the full contribution. The cash-strapped district has paid most of the 9 percent contribution. The Chicago Teachers Union argues that amounts to a pay cut.

I have a question for these public-sector unions: what planet do they live on? Have they not heard of shared risk for their pension plan? They should follow Ontario Teachers’ Pension Plan and implement it immediately along with the governance that has allowed it to become one of the best pension plans in the world.

As far as Illinois, it’s a pension hellhole and I don’t just blame the unions for this sorry state of affairs. Just like in other states, its government has failed to top up its public pensions, which is why pension deficits keep growing. Record low interest rates aren’t helping either and wait till deflation hits pensions and decimates them.

 

Photo by bitsorf via Flickr CC License

August 31 marks the last day of the fiscal year for many corporations and their pension funds – and recent market volatility has them sweating.

More from the Wall Street Journal:

If the market doesn’t recover by the end of the month, then companies whose fiscal years end in August, such as agricultural firm Monsanto Co. and auto-parts retailer AutoZone Inc., could finish the year with a worse-than-expected rate of return on assets.

“There’s been some high volatility, and for companies that have fiscal years that end in August, it’s going to hurt their funded status,” said Zorast Wadia, a principal at actuarial consulting firm Milliman Inc.

“All that really matters is the last day of the year for accounting purposes,” said Alan Glickstein , a senior retirement consultant at Towers Watson, noting companies only have to explain their pension obligations to investors in their year-end annual reports. “If you are at the end of August, you’d be sweating it out,” he said.

Companies facing this predicament might choose to contribute more at the current fiscal year end, or opt make larger-than-expected cash contributions to their pension plans to shore up their funding status.

Major U.S. indices were up around 1.5 – 1.75 percent as of Thursday morning.

 

Photo by Sarath Kuchi via Flickr CC License

CalPERS this week weighed in on a proposal that would increase the transparency and accountability of individual retirement advisors.

The pension fund roundly endorsed the proposal – which would give individual retirement advisors a fiduciary duty to their clients – in an open letter this week to the U.S. Department of Labor.

From Chief Investment Officer:

“CalPERS believes that fiduciaries should be accountable for their actions, and must transparently perform their duties to the highest ethical standards,” Ann Boynton, CalPERS’ deputy executive director of benefits policy, wrote to the federal labor department.

“The proposed rule appears to align with CalPERS’ beliefs on fiduciary responsibility and we support the department’s efforts to ‘safeguard plan participants by imposing trust law standards of care and undivided loyalty on plan fiduciaries,’” Boynton continued, quoting language from the proposed legislation.

The pension official highlighted the more than 40 million American families with assets in individual retirement accounts—their aggregate balance totaling upwards of $7 trillion. This population, she said, continue to be vulnerable to self-serving investment advice as long as the industry does not have to disclose any conflicts of interest.

Failure to implement the rule, according to CalPERS, could cost individual investors up to $1 trillion in retirement savings over the next 20 years.

Read more about the proposal here.

 

Photo by  rocor via Flickr CC License

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

CalPERS took another step last week toward a gradual long-term rate hike, a move to lower the risk of big investment losses as the maturing pension system enters a new era.

Retirees are beginning to outnumber active workers. Pension payments to retirees are no longer covered by employer-employee contributions and investment income. Now “negative cash flow” forces the sale of some investments to cover annual pension costs.

The new need to routinely sell some investments (see two charts at bottom) is one of the reasons the California Public Employees Retirement System is expected to have even more difficulty recovering from investment losses in the future.

After a loss of $100 billion in the recent recession, the CalPERS funding level dropped from 100 percent in 2007 to 61 percent in 2009. It has not recovered, despite a major bull market in which the S&P 500 index of large stocks tripled.

“Even with the dramatic returns we have seen over the past six years, because the demographics of plans in general have changed and plans are now by and large cash-flow negative, it’s been very challenging to dig out of that hole,” Andrew Junkin, a Wilshire consultant, told the CalPERS board last week.

The funding level of CalPERS in fiscal 2013-14 was 77 percent of the projected assets needed to pay pensions promised in the future. But investment returns last fiscal year were below the forecast, 7.5 percent, causing the funding level to fall again.

“With the estimated 2014-15 investment returns of 2.4 percent, that funded status is expected to drop to a range of 73 to 75 percent,” said Cheryl Eason, the CalPERS chief financial officer.

In a loss equaling the state general fund budget at the time, the CalPERS investment fund dropped from about $260 billion in the fall of 2007 to $160 billion in March 2009, before climbing a little above $300 billion early this month.

CalPERS won’t soon run out of money. Its main fund paid $18 billion last year to 594,842 persons, up from $11 billion to 462,370 in 2007. Employers contributed $8.8 billion and members $3.8 billion, up from $7.2 billion and $3.5 billion in 2007.

Critics say the CalPERS earnings forecast, an average of 7.5 percent a year, is too optimistic and conceals an even larger funding gap. The board is working on a “risk mitigation” strategy that could slowly lower the forecast to 6.5 percent over 20 years.

When the earnings forecast goes down, some of the pension fund can be shifted to less risky bond-like investments. The yield is likely to be lower, but so is the chance of big losses in an economic downturn.

A lower earnings forecast also means that contribution rates are likely to go up, offsetting the lower earnings assumed in the future. That’s what happened when the CalPERS board in 2012 lowered the earnings forecast from 7.75 percent to 7.5 percent.

The CalPERS chief actuary, Alan Milligan, recommended lowering the forecast to 7.25 percent to provide a cushion or “margin for adverse deviation” as in the past. The board phased in the rate increase over two years to ease the impact on employer budgets.

Two more rate increases followed: a change in actuarial method in 2013 and a projection of longer life spans last year. Now a total employer rate increase averaging roughly 50 percent will be phased in by the end of the decade.

Under the proposed “risk mitigation” strategy CalPERS would consider lowering the earnings forecast in good years when the annual investment return is well above the current earnings target of 7.5 percent.

For example, a return of 11.5 percent might cause the board to consider lowering the earnings forecast by 0.05 percent. After a larger return of 17.5 percent, the board might consider lowering the earnings forecast 0.15 percent.

Brown aides urged the CalPERS board to consider using its existing policy to speed up the lowering of the earnings forecast. The rate increase resulting from a lower forecast would be phased in over five years and amortized or paid off over 20 years.

“If the current investment assumption of 7.5 percent is an unacceptable risk today — by the nature of this conversation it seems everyone is more or less in agreement that it is too high — the board should consider lowering it sooner rather than later,” Eric Stern of Brown’s finance department told the board.

Richard Gillihan, a CalPERS board member and director of Brown’s human resources department, said he agreed with the administration position and asked for an explanation of why the existing policy for lowering the forecast is not being used.

“It just seems like it’s too easy to pat ourselves on the back and say, ‘We came up with this plan,’ and then we are not doing anything with it for a few years and then a future board might change it.”

The CalPERS chief actuary, Milligan, said the proposed strategy balances the need to lower investment risk with concern about the impact on the budgets of 3,000 local governments, some in better financial condition than others.

“I would be concerned about the amount of strain we would put on some of our public agency (local government) employers,” Milligan said of dropping the earnings forecast too quickly. “Apparently, it’s not such a concern for the state.”

In the past, CalPERS rate increases only hit employers. But now many employees are included. A pension reform calls for employees to pay half of the pension “normal cost,” which excludes the debt or “unfunded liability” from previous years.

Milligan said the 50-50 split of the normal cost is required for local government, CSU, judicial and legislative employees. But the reform did not require a normal cost split for most state workers. Their rate is set by legislation resulting from bargaining.

In an example, over two or three decades miscellaneous employee rates could increase by a half to 1½ percent of pay and safety rates by 1½ to 3½ percent of pay. The timing would vary among plans, depending on the reform and demographics.

The CalPERS staff recommended a “blended” path with check points, perhaps every four years, when a lower earnings forecast would be considered. Rate increases would be more certain and predictable.

Union representatives argued for a “flexible” path when a lower earnings forecast would only be considered after a year with great investment returns. Rate increases would not be on “autopilot” and would be less likely to happen after a year of bad returns.

A spokeswoman for the League of California Cities told the board cities surveyed split on blended vs. flexible but were in favor of taking action to lower investment risk. A spokesman for special districts said they favored a blended plan.

The CalPERS board, in an 8-to-4 straw vote, directed the staff to prepare a flexible plan for a first reading in October. The final vote on a risk mitigation strategy may be in November.

 

Photo by Steve Rhodes via Flickr CC License

 

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

Dean Beeby of CBC News reports, Document raises questions about Harper retirement policies:

Canada scores poorly among developed countries in providing public pensions to seniors, according to an internal analysis of retirement income by the federal government.

And voluntary tax-free savings accounts or TFSAs, introduced by the Harper Conservatives in 2009, are so far unproven as a retirement solution and are largely geared to the wealthy.

Those are some highlights of a broad review of Canada’s retirement income system ordered by the Privy Council Office and completed in March this year by the Finance Department, with input from several other departments.

The research, compiled in a 30-page presentation deck, was created as the government came under fire from opposition parties, some provinces and retiree groups for declining to improve Canada Pension Plan or CPP payouts through higher mandatory contributions from workers and businesses.

The CPP issue has already become acrimonious in the federal election campaign, with Conservative Leader Stephen Harper saying on Aug. 11 that he is “delighted” to be making it more difficult for Ontario to launch its own version of an improved CPP. The federal Liberals are hoping to use Harper’s clash with Ontario Liberal Premier Kathleen Wynne over pensions to win seniors’ votes in the province and beyond.

A heavily censored copy of the internal document was obtained by CBC News under the Access to Information Act.

The review acknowledges that Canada trails most developed countries in providing public pensions, and is poised to perform even worse in future.

Low among OECD countries

“In 2010, Canada spent 5.0 per cent of GDP on public pensions (OAS/GIS and C/QPP), which is low compared with the OECD (Organization for Economic Co-operation and Development) of average of 9.4 per cent,” it noted.

“The OECD projects that public expenditure on pensions in Canada will only increase to 6.3 per cent of GDP by 2050 – much lower than the 11.6 per cent of GDP projected for OECD countries on average.”

The document also says Canada’s public pensions “replace a relatively modest share of earnings for individuals with average earnings” compared with the OECD average of 34 countries; that is, about 45 per cent of earnings compared with the OECD’s 54 per cent.

“Canada stands out as one of the countries with the smallest social security contributions and payroll taxes.”

The Harper government since at least 2013 has resisted repeated calls to enhance CPP, saying proposed higher premiums for businesses could kill up to 70,000 jobs in an already stagnant economy. Instead, the government has promoted voluntary schemes, such as pooled pension plans for groups of businesses, as well as TFSAs.

Speaking Sunday at a campaign stop in eastern Ontario, Conservative Leader Stephen Harper said, “Our view is that, you know, we have a strong Canada Pension Plan. It is, unlike the arrangements in many other countries, it’s solvent for the next 75 years, for generations to come.”

“Our judgment is [that] what Canadians want and need are additional savings vehicles,” he said.

The document notes that participation rates for TFSAs rise with income, with only 24 per cent of those making $20,000 annually or less contributing, compared with 60 per cent in the $150,000-plus bracket.

The review also acknowledges “it is still too early to assess their effectiveness in raising savings adequacy.”

Much of the document is blacked out under the “advice” exemption of the Access to Information Act, including a section on policy questions. The research may have underpinned a surprise announcement in late May by Finance Minister Joe Oliver that the government was considering allowing voluntary contributions by workers to their CPP accounts.

The review takes issue with Statistics Canada’s data showing a sharp decline in personal savings by Canadians since 1982, arguing that when real estate and other assets are factored in, savings are as high as they have ever been. “Taking into account all forms of private savings suggests no decline in the saving rate over time.”

Ignores evidence?

The provincial minister in charge of implementing the Ontario Retirement Pension Plan, the province’s go-it-alone CPP enhancement, says the internal review shows Harper is ignoring hard evidence.

“This document is further confirmation that Stephen Harper is continuing to bury his head in the sand,” Mitzie Hunter, associate minister of finance, said in an interview. “CPP is simply not filling the gap. … It’s unfortunate that Mr. Harper has really chosen to play politics rather than address serious concerns for retirement security in Canada.”

“TFSAs, which Harper touts as a cure-all, are really untested and they’re only really benefiting the wealthiest Canadians.”

Susan Eng, executive vice-president of CARP, which lobbies for an aging population, said the review cites evidence that single seniors are especially vulnerable to poverty, and that young Canadians and the middle class are not saving enough.

“The government repeats that mandatory employer contributions would be ‘job-killing payroll taxes’ despite the briefing clearly stating that Canada’s social security contributions and payroll contributions are amongst the lowest among similar OECD countries,” she said.

But Harper spokesman Stephen Lecce argues the document also found Canada compares well with other OECD countries on income replacement, ranking third; and that the poverty rate for Canadian seniors is among the lowest in the industrial world.

Lecce also cited a series of measures, including boosting Guaranteed Income Supplement payments and introducing income splitting for pensioners, that together have removed about 380,000 seniors from the tax rolls since 2006.

“Our position is clear, consistent with our Conservative government’s efforts to encourage Canadians to voluntarily save more of their money, we are consulting on allowing voluntary contributions to the Canada Pension Plan.”

So the CBC got hold of an internal document which questions Harper’s retirement policies? All they need to do is read my blog on a regular basis to figure out that there isn’t much thinking going on in Ottawa when it comes to bolstering Canada’s retirement system.

I’ve repeatedly blasted the Harper Conservatives for pandering to Canada’s powerful financial services industry which is made up of big banks, big insurance companies and big mutual fund companies that love to charge Canadian retail investors huge fees as they typically underperform markets.

In the latest pathetic display of sheer arrogance (and ignorance), our prime minister criticized Ontario’s new pension plan, calling it a “tax” and stating he’s ‘delighted’ to slow down Kathleen Wynne’s pension plan.

Amazingly, and quite irresponsibly, the Conservatives pledged to let first-time buyers withdraw as much as $35,000 from their registered retirement savings plan accounts to buy a home, in a yet another election move aimed at the housing market.

Now, think about this. Canada is on the verge of a major economic crisis which will be worse than anything we’ve ever experienced before and instead of bolstering the Canada Pension Plan for all Canadians,  the Conservatives are pandering to big banks which are scared to death of what will happen when the great Canadian housing bubble pops as Chinese demand dries up fast.

Great policy, have over-indebted Canadians use the little retirement savings they have to buy a grossly overvalued house in frigging Toronto, Vancouver or pretty much anywhere else so they can spend the rest of their lives paying off an illiquid asset that will make them nothing compared to a well-diversified portfolio over the next 30 years.

“Yeah but Leo, you can never lose money in housing, especially when you buy in a top location. Never! It’s the best investment, much better than investing in these crazy markets. Plus, you pay no capital gain tax on your primary residence when you sell it.”

I’ve heard all these points so many times that I just stopped getting into arguments with friends of mine who think “real estate is the best investment in the world.” Admittedly, I’ve been bearish on Canadian real estate forever but the longer the bubble expands, the harder the fall.

And mark my words, it will be a brutal decline in Canadian real estate, one that will last much longer than even the staunchest housing bears, like Garth Turner, can possibly fathom. But unlike what Garth thinks, the problem won’t be inflation and rising U.S. interest rates. It’s going to be all about debt deflation and soaring unemployment. When Canadians are out of a job and paying off crushing debt, they won’t be able to afford their grossly overvalued house and lowering rates and changing our immigration policies to bring in “rich Chinese, Russians, Syrians, etc” won’t make a dent to the decline in housing once debt deflation is in motion.

Enough on housing, let me get back to the Harper’s retirement policies and be fair and objective. Unlike the Liberals, I like TFSAs and think they benefit all Canadians who are prudent and save their money. Sure, higher income earners like doctors, lawyers, accountants, dentists, and engineers are the ones that are saving the most using TFSAs but the reason is because they need to save since they have no defined-benefit retirement plan to back them up.

But there are also many blue collar workers and lower income workers who are using their TFSAs too. Yes, they can’t contribute their $10,000 annual limit but they’re contributing whatever they can to save for their future.

I have  a problem with people who categorically criticize TFSAs. We get taxed enough in Canada and this is especially true for high income professionals with no defined-benefit plan. Why in the world wouldn’t we want to encourage tax-free savings accounts?

Having said this, when it comes to retirement, there’s no question in my mind that all these high income professionals and most other hard working Canadians are better served paying higher contributions to their Canada Pension Plan to receive better, more secure payouts in the future.

In other words, enhancing the CPP should be mandatory and the first policy any federal government looks to implement. Period. You simply can’t compare tax-free savings accounts or any other registered retirement vehicle available to having your money pooled and managed by the Canada Pension Plan Investment Board.

Now, the Harper Conservatives aren’t stupid. They know this. They read my blog and know the brutal truth on defined-contribution plans. But they’re caught in a pickle, pandering to the financial services industry and dumb interests groups which claim to look after small businesses.

If our big banks and other special interest groups really had the country’s best interests at heart, they wouldn’t flinch for a second on enhancing the CPP for all Canadians, building on the success of the CPPIB and other large well-governed defined-benefit plans which are properly invested across global public and private markets.

I will repeat this over and over again, good retirement policy makes for good economic policy, especially over the very long run. Canadian policymakers need to rethink our entire retirement system, enhance the CPP for all Canadians and get companies out of managing pensions altogether. We can build on the success of CPPIB (never mind its quarterly results) and other large well-governed DB plans. If you need advice, just hire me and I will be glad to contribute my thoughts.

On that note, back to trading these crazy, schizoid markets dominated by high-frequency algorithms. Don’t worry, the flash crash of 2015 is over, for now. If you watched CTV News in Montreal last night, you saw a lot of nervous investors worried about their retirement. This is why I hate defined-contribution plans because they put the retirement responsibility entirely on the backs of novice investors who will do the wrong thing at the wrong time (like sell in a panic as some big hedge fund loads up on risk assets).

 

Photo credit: “Canada blank map” by Lokal_Profil image cut to remove USA by Paul Robinson – Vector map BlankMap-USA-states-Canada-provinces.svg.Modified by Lokal_Profil. Licensed under CC BY-SA 2.5 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Canada_blank_map.svg#mediaviewer/File:Canada_blank_map.svg

CalSTRS chief investment officer Chris Ailman appeared on CNBC on Monday and talked about the U.S. economy, Monday’s market drop, and his pension fund’s long-term approach to investing.

Watch the full video above.

Source: CNBC

 

Photo by Stephen Curtin via Flickr CC License

New York State Comptroller Tom DiNapoli took to the radio on Monday night to talk about the day’s stock market plunge, and what – if anything – it means for the state’s pension funds, which collectively invest about one-third of assets in stocks.

From Capital New York:

During his interview, DiNapoli emphasized that a short-range blip would not have a major impact on the fund’s performance. The fund’s expected average rate of return (or discount rate) is 7.5 percent, and a five-year average of its performance is inversely correlated with the amount of money state and municipal governments are required to kick in to meet the obligations of pensioners.

“The fact that today and this week has been bad, it really is not an issue of our calculation in terms of the rate. Why? Because we value the fund on March 31st,” DiNapoli said, noting contribution rates will be released in the next several weeks. “Like all investors, we don’t like when the market goes down. But we’re not necessarily in a position where we’ve got to have an immediate reaction to it, because we’re going to be in business for a long time.”

[…]

“It’s going to be a long day. Obviously it’s going to be a long week. There are a lot of issues at play out there,” DiNapoli told Susan Arbetter of WCNY’s “The Capitol Pressroom.”

The comptroller mentioned uncertainty about the Federal Reserve Bank’s plans to increase baseline interest rates as well as lagging growth in China and the resulting tumble in its stock market as well.

“We’ve had a strong market for a long time — longer than we’ve seen for many years. It was due for a correction,” DiNapoli said. “Let’s just hope it will be a correction and not something of a more sustained, negative, drag on the market.”

DiNapoli is the trustee of the New York Common Retirement Fund, which operates a $185 billion portfolio. Thirty-seven percent of its assets are allocated towards domestic equities.

 

Photo by Tim (Timothy) Pearce via Flickr CC License