Deprecated: Methods with the same name as their class will not be constructors in a future version of PHP; Translation_Entry has a deprecated constructor in /home/mhuddelson/public_html/pension360.org/wp-includes/pomo/entry.php on line 14
Deprecated: Methods with the same name as their class will not be constructors in a future version of PHP; POMO_Reader has a deprecated constructor in /home/mhuddelson/public_html/pension360.org/wp-includes/pomo/streams.php on line 12
Deprecated: Methods with the same name as their class will not be constructors in a future version of PHP; POMO_FileReader has a deprecated constructor in /home/mhuddelson/public_html/pension360.org/wp-includes/pomo/streams.php on line 120
Deprecated: Methods with the same name as their class will not be constructors in a future version of PHP; POMO_StringReader has a deprecated constructor in /home/mhuddelson/public_html/pension360.org/wp-includes/pomo/streams.php on line 175
Deprecated: Methods with the same name as their class will not be constructors in a future version of PHP; POMO_CachedFileReader has a deprecated constructor in /home/mhuddelson/public_html/pension360.org/wp-includes/pomo/streams.php on line 221
Deprecated: Methods with the same name as their class will not be constructors in a future version of PHP; POMO_CachedIntFileReader has a deprecated constructor in /home/mhuddelson/public_html/pension360.org/wp-includes/pomo/streams.php on line 236
Deprecated: Methods with the same name as their class will not be constructors in a future version of PHP; WP_Widget_Factory has a deprecated constructor in /home/mhuddelson/public_html/pension360.org/wp-includes/widgets.php on line 544 pension governance | Pension360
But some observers – including Moody’s – have doubts that the partnership will prove fruitful for Caisse.
Over at Pension Pulse, Leo Kolivakis has thrown his expertise into the ring. In a post on Monday, he comments on the concerns over the partnership, and what Caisse needs to do to make this venture a successful one.
But now critics are coming out to question the economic viability of this decision as well as the process, stressing a private-public partnership is more efficient. I asked a friend of mine who knows infrastructure and he told me he doesn’t know much about light rail transit. He also somewhat cynically quipped: “Who uses quotes from geography professors?”.
I’m a little more open-minded than my friend as I trust geography professors more than economists when it comes to urban planning. Having said this, I question whether a public-private partnership, especially here in scandal-ridden Quebec, would be more “efficient” and in the best interest of Quebec’s taxpayers.
As far as the Caisse’s infrastructure group, they have made money in the past on transit but this is a different beast altogether. They will be playing a much more direct and central role in developing and overseeing these projects from start to finish, as well as managing fares to make them economically viable.
Macky Tall, a senior vice-president in charge of the Caisse’s infrastructure portfolio, raises excellent points on leveraging the Caisse’s real estate expertise to help fund these projects. More importantly, he’s absolutely right, new model is better for the Caisse than a traditional public-private agreement because it will retain ownership indefinitely, and can spread out its return over a longer period, not having to recoup its initial investment in the first 35 years.
Having said this, there are legitimate concerns about how this project will be handled and how the Caisse can fulfill its dual mandate of achieving the actuarial returns its clients need while it develops Quebec’s economy. If something goes wrong in a major multibillion infrastructure project, this can have a severe impact on the Caisse’s long-term results.
But there is no question that Montreal desperately needs to develop its infrastructure. Peter Hadekel of the Montreal Gazette wrote a comment a couple of weeks ago, Stagnation city: Exploring Montreal’s economic decline, where he stressed among other things the need to focus on infrastructure projects to bolster Montreal’s stagnating economy.
I’m highly skeptical of Montreal’s economic future, especially now that Canada’s crisis is just beginning. On a relative basis the city will do better than Calgary or Edmonton, which will bear the brunt of the economic weakness that comes with the plunge in oil prices. But this city has been stagnating for a very long time and never experienced the boom that Canada’s other major cities experienced.
Moreover, the primary factor behind Montreal’s stagnation remains a political climate that hinders outside investments and forced many anglophones, allophones and even francophones in Quebec to move elsewhere in search of better opportunities. My biggest concern is institutional racism pervading many of Quebec’s government and quasi-government organizations as well as large private corporations (let’s not kid each other, diversity in the workplace is not Quebec’s strong suit, not that the rest of Canada is any better).
But let’s leave the politics aside and get back to the Caisse and building these light rail transit projects. One of the key elements of good pension governance is communication. The Caisse needs to be open, transparent and very clear on the terms and costs at every stage of these projects if they intend to have the public’s support because if something goes wrong, it will be another fiasco that will make the ABCP scandal the media is covering up look like a walk in the park.
It’s about time the media and non-profit organizations start scrutinizing executive pay at public pension funds. I’ve been covering the good, the bad and downright ugly on executive compensation at Canada’s large public pension funds since the inception of this blog back in June 2008.
If compensation is tied to performance and benchmarks, doesn’t the public have a right to know whether or not the benchmarks used to evaluate this performance accurately reflect the risks taken by the investment manager(s)?
The dirtiest secret in the pension fund world is that benchmarks used to reference the performance of private investments and hedge fund activities in public pension funds are grossly underestimating the risks taken by the managers to achieve their returns. Moreover, most of the “alpha” from these investment activities is just “beta” of the underlying asset class. Why are pension executives being compensated for what is essentially beta?!?!?
There is a disconnect between public market benchmarks and private market benchmarks. Most pension funds use well known public market benchmarks like the S&P 500 to evaluate the performance of their internal and external managers. Public market benchmarks are well known and for the most part, they accurately reflect the risks that investment managers are taking (the worst example was the ABCP fallout at the Caisse which the media keeps covering up).
But there are no standard private market benchmarks; these investments are illiquid and valued on a quarterly basis with lags. This leads to some serious issues. In particular, if the underlying benchmark does not reflect the risk of private market investments, a pension fund can wipe out its entire risk budget if real estate or private equity gets hit hard in any given year, which is not hard to fathom in the current environment.
I followed up that first blog comment with my second comment on alternative investments and bogus benchmarks where I used the returns and benchmarks of real estate investments at a few of Canada’s large public pension funds to demonstrate how some were gaming their benchmarks to claim “significant outperformance and value-added” in order to justify their multimillion compensation packages even as their funds lost billions during the crisis.
In April 2009, I went to Parliament Hill where I was invited to speak at the Standing Committee on Finance on matters relating to pensions (after that hearing, I was even confronted by Claude Lamoureux, the former CEO at Ontario Teachers largely credited for starting this trend to pay top dollars to senior pension fund managers, which then spread elsewhere). There, I discussed abuses on benchmarks and how pension fund managers routinely game private market benchmarks to create “value-added” in their overall results to justify some seriously hefty payouts for their senior executives.
This brings me to the list above (click on image at the top). Where is Gordon Fyfe, the man who you can all indirectly credit for this blog? He should be right up there at the top of this list. He left PSP for bcIMC this past summer right on time to evade getting grilled on why PSP skirted foreign taxes, embarrassing the federal government.
In fact, over the ten years at the helm of PSP Investments, a federal Crown corporation that is in charge of managing the pensions of people on the federal government’s payroll, Gordon Fyfe and his senior executives literally made off like bandits, especially in the last few years. This is why I poked fun at them when I covered PSP’s FY 2014 results but was dead serious when I wrote this:
As you can see, PSP’s senior executives all saw a reduction in total compensation (new rules were put in place to curb excessive comp) but they still made off like bandits, collecting millions in total compensation. Once again, Mr. Fyfe made the most, $4.2 million in FY 2014 and a whopping total of close to $13 million over the last three fiscal years.
This type of excessive compensation for public pension fund managers beating their bogus private market benchmarks over a four-year rolling return period really makes my blood boil. Where is the Treasury Board and Auditor General of Canada when it comes to curbing such blatant abuses? (As explained here, the Auditor General of Canada rubber stamps financial audits but has failed to do an in-depth performance audit of PSP).
And don’t think that PSP’s employees are all getting paid big bucks. The lion’s share of the short-term incentive plan (STIP) and long-term incentive plan (LTIP) was paid out to five senior executives but other employees did participate.
Nothing is more contentious than CEO pay at public sector organizations. The Vancouver Sun just published an article listing the top salaries of public sector executives where it states:
Topping this year’s salary ranking is former bcIMC CEO Doug Pearce, with total remuneration of $1.5 million in 2013, the most recent year for which data is available. That’s a 24-per-cent jump from his pay the year before of $1.2 million.
It could be the last No. 1 ranking for Pearce, who has topped The Sun’s salary ranking several times: he retired in the summer of 2014 and was replaced by Gordon Fyfe.
Wait till the socialist press in British Columbia see Fyfe’s remuneration, that will really rattle them!
It’s worth noting however even in Canada, compensation of senior public pension fund managers varies considerably. On one end of the spectrum, you have Jim Leech and Gordon Fyfe, and on the other end you have Leo de Bever, Michael Sabia and Doug Pearce, Fyfe’s predecessor at bcIMC (Ron Mock currently lies in the middle but his compensation will rise significantly to reflect his new role).
Mark Wiseman and André Bourbonnais, PSP’s new CEO, actually fall in the upper average of this wide spectrum but there’s no doubt, they also enjoyed hefty payouts in FY 2014 (notice however, Wiseman and Bourbonnais made the same amount, which shows you their compensation system is much flatter than the one at PSP’s).
Still, teachers, police officers, firemen, civil servants, soldiers, nurses, all making extremely modest incomes and suffering from budget cuts and austerity, will look at these hefty payouts and rightfully wonder why are senior public pension fund managers managing their retirement being compensated like some of Canada’s top private sector CEOs and making more than their private sector counterparts working at mutual funds and banks?
And therein lies the sticking point. The senior executives at Ontario Teachers, CPPIB, PSP, bcIMC, AIMCo, OMERS, Caisse are all managing assets of public sector workers that have no choice on who manages their assets. These public sector employees are all captive clients of these large pensions. I’m not sure about the nurses and healthcare workers at HOOPP but that is a private pension plan (never understood why it is private and not public but the compensation of HOOPP’s senior executives is in line with that at other large Canadian pension funds, albeit not as high even if along with Teachers, it’s arguably the best pension plan in Canada).
Of course, all this negative press on payouts at public pension funds can also be a huge distraction and potentially disastrous. Importantly, Canada’s large public pension funds are among the best in the world precisely because unlike the United States and elsewhere, they got the governance and compensation right, operating at arms-length from the government and paying people properly to deliver outstanding results in public and private markets.
And let’s be clear on something, the brutal truth on defined-contribution plans is they simply can’t compete with Canada’s large defined-benefit pensions and will never be able to match their results because they’re not investing across public and private markets, they don’t have the scale to significantly lower costs and don’t enjoy a very long investment horizon. Also, Canada’s large pensions invest directly in public and private assets and many of them also invest and co-invest with the very best private equity, real estate funds and hedge funds.
In other words, it’s not easy comparing public pension fund payouts to their private sector counterparts because the skills required to manage private investments are different than those required to manage public investments.
I’ll share something else with you. I remember having a conversation with Mark Wiseman when I last visited CPPIB and he told me flat out that he knows he’s being compensated extremely well. He also told me even though he will never be able to attract top talent away from private equity funds, CPPIB’s large pool of capital (due to captive clients), long investment horizon and competitive compensation is why he’s able to attract top talent from places like Goldman Sachs.
In fact, Bourbonnais’s successor at CPPIB, Mark Jenkins, is a Goldman alumni but let’s be clear, most people are still dying to work at Goldman where compensation is significantly higher than at any other place.
But we need to be very careful when discussing compensation at Canada’s large pensions. The shift toward private assets which everyone is doing — mostly because they want to shift away from volatile public markets and unlock hidden value in private investments using their long investment horizon, and partly because they can game their private market benchmarks more easily — requires a different skill set and you have to pay up for that skill set in order to deliver outstanding long-term results.
Also, as I noted above, Canadian pensions invest a significant portion of their assets internally. This last point was underscored in an email Jim Keohane, CEO of HOOPP, sent me regarding the FT article above where he notes (added emphasis is mine):
You have to be careful with this type of simple comparison of Canadian pension plans with their US, European and Australian counterparts. It is a bit like comparing apples to oranges because the Canadian pension funds operate very different business models. The large Canadian funds use in house management teams to manage the vast majority of their assets, whereas most of these foreign funds mentioned outsource all or a significant portion of their assets to third party money managers. They are paying significantly larger amounts to these third party managers to run their money as compared to the amounts that Canadian pension funds pay their internal staff. As a result, their total implementation costs are significantly higher than Canadian funds. The right metric to compare is total implementation costs, and on this metric, Canadian funds are among the most efficient in the world.
We have very low implementation costs, with investment costs of approximately 20bps and total operating costs including the admin side between 30 and 35bps. We hire top investment managers to run our money and need to pay market competitive compensation to attract and retain them. I would agree that our long term nature and captive capital make us an attractive place to work so we don’t have to be the highest payer to attract talent, but we need to be in the ballpark. Running our money internally is significantly cheaper than the outsourcing alternative. It also allows you to pursue strategies that would be very difficult to pursue via an outsourcing solution, and it enables much more effective risk management.
One of the main reasons why Canadian pension plans have been successful is the independent governance structures that have been put in place. This enables funds like HOOPP to be run like a business in the best interest of the plan members. It is in the members best interest to implement the plan at the lowest possible cost. The cheapest way for us to run the fund is using an in-house staff paying them competitive compensation rather than outsource which would be much more costly. To put this in perspective, a few years ago we had 15% of our fund outsourced to third party money managers, and that 15% cost more to run than the other 85%!
Many of the international funds used for comparison in the article have poor governance structures fraught with political interference *which makes it politically unpalatable to write large cheques to in-house managers, so instead they write much larger cheques to outside managers because it gets masked as paying for a service. This is not in plan members best interests.
I agree with all the points Jim Keohane raises in regard to the pitfalls of making international comparisons.
But does this mean we shouldn’t scrutinize compensation at Canada’s large public pensions? Absolutely not. A few weeks ago when I discussed whether pensions are systemically important with Jim, I said we don’t need to regulate them with some omnipotent regulator but we definitely need to continuously improve pension governance:
… I brought up the point that in the past, Canadian public pensions have made unwise investment decisions, and some of them could have exacerbated the financial crisis. The ABCP crisis had a somewhat happy ending but only because the Bank of Canada got involved and forced players to negotiate a deal, averting a systemic crisis. And we still don’t know everything that led to this crisis because the media in Quebec and elsewhere are covering it up.
I also told him we need to introduce uniform comprehensive performance, operational and risk audits at all of Canada’s major pensions and these audits need to be conducted by independent and qualified third parties that are properly staffed to conduct them. I blasted the Auditor General of Canada for its flimsy audit of PSP Investments, but the truth is we need better, more comprehensive audits across the board and the findings should be made public.
Another thing I mentioned was maybe we don’t need any central securities regulator. All we need is for the Bank of Canada to have a lot more transparency on all investment activities at all of Canada’s public and private pensions. The Bank of Canada already has information on public investments but it needs more input, especially on less liquid public and private investments.
This is where I stand. I think it’s up to Canada’s large public (and private) pension funds to really make a serious effort in explaining their benchmarks, the risks they take, the value-added and how it determines their compensation in the clearest, most transparent terms but I also think we need independent overview of their investment and operational activities above and beyond what their financial auditors and public auditors currently provide us.
Importantly, there’s a huge gap that needs to be filled to significantly improve the governance at Canada’s large pensions, even if they are widely recognized as having world-class governance.
Finally, I remind all of you that it takes a lot of time and effort to share these insights. I’ve paid a heavy price for being so outspoken but I’m proud of my contributions and rest assured, while we can debate compensation at Canada’s large pensions, there’s no denying I’m THE most underpaid, under-appreciated senior pension analyst in the world!
The shift toward internal management is a smart move and I like the way they restructured their senior staff to implement this shift.
According to Reuters, Debra Smith, the new chief operating investment officer, will oversee the fund’s Investment Operations, Branch Administration, and a new unit comprised of Compliance, Internal Controls, Ethics and Business Continuity. And as stated in the WSJ article above, Smith will report to the investment committee twice a year, giving her a direct line to board members.
Pay attention here folks because this is a great move from a pension governance perspective. I’ve always argued that the head of risk and head of operations at public and private pension funds should report directly to the board of directors, not the CEO or CIO. If there is a disagreement on operational or investment risks being taken, the board can listen to the arguments and decide if the risks are worth taking.
I’ve also long argued that whistleblowers need to be protected and whistleblower policies need to be beefed up at all public pension funds so that employees who witness shady activity can safely report it without worrying about being fired. If some senior manager is accepting bribes from an external fund manager or from a big vendor peddling the latest most expensive software, there should be a way to detect and report this fraud.
Finally, go back to read my comment on why U.S. pension funds are going Canadian. The reason is simple. It makes sense to manage assets internally, saving on fees and having more control over your investments. CalSTRS isn’t the first big state pension fund to do this (Wisconsin is) and it won’t be the last.
Of course, to really go Canadian, U.S. public pensions have to pay their senior investment staff big bucks and they have to separate politics from their entire governance process. When I read articles on how John Buck Co., a real-estate investment firm whose executives contributed substantially to the campaign of Chicago Mayor Rahm Emanuel, has earned more than $1 million in fees for managing city pension money, I shake my head in disbelief. This is Chicago-style politics at its worst. No wonder Illinois is a pension hell hole!