Demise of Defined Benefit Pensions?

Ray Turchanshy of Postmedia news reports, Too early to declare demise of defined benefit pensions:

Economist Jack Mintz from the University of Calgary got crowds buzzing at the western regional conference of the Canadian Pension and Benefits Institute, when he predicted that the defined benefit pension plan could make a comeback.

Defined benefit plans have been knocking on death's door, due to the huge cost and risk of investment loss to employers, compared with defined contribution plans in which the employee takes on the investment risk.

Mintz started his conference presentation by saying, "Freedom 55 is really when your kids turn 55."

He noted that the percentage of pre-retirement income that people need to live on during retirement, usually cited as 70 per cent, is often over- exaggerated, usually by financial industry people with investments to offer.

"If you have relatively low working income, just to survive you might need 100 per cent.

"On the other hand, when people do retire there are a lot of savings, like automobiles and furniture that you don't have to keep buying, and you don't have transportation expenditures to go to work, and can probably wear jeans instead of suits."

The median annual employment income of Canadians is $50,000 to $55,000, and the Organization for Economic Co-operation and Development says people making $27,500 require 70 per cent in retirement, workers making $52,500 need 60 per cent, and people making $105,000 require 50 per cent.

When it comes to saving for retirement, Mintz said Canadians hold $1.9 trillion in Canada Pension Plan, corporate pension and Registered Retirement Savings Plan assets. But they also have $1.9 trillion in home equity (which isn't taxed when you downsize); and $2.2 trillion in nonfinancial assets.

"So when people suggest we're under-saving, it's way over-exaggerated because they ignore these other assets. And we can be very proud in Canada that we have the lowest poverty rate of seniors in the world."

According to the OECD, the percentage of people age 65 and older living on half the average income ranges from 4.4 per cent in Canada to 30.6 per cent in Ireland, with a world average of 13.3.

"The big difference between the United States and Canada is that the U.S. economy has not only seen a massive erosion in terms of financial wealth, but also in housing wealth, which has not happened here in Canada."

Mintz noted a number of interesting trends:

* People without company pensions tend to work longer and therefore have more retirement income than those with company pensions, although retirement income of people without company pensions is much more variable.

* Women retire earlier than men and live longer, so they need to save more for retirement, especially if they're single or on their own. And we have more lone parents with children, another group in peril of having insufficient retirement income.

* People are working for the same company longer than they used to, from an average of 85 months in 1987 to 100 months in 2009.

But Mintz theorizes that an aging workforce will cause companies to lure and retain employees by dangling carrots like a defined benefit pension.

"Governments may correct some regulations. Perhaps defined benefit plans won't disappear, and in fact there may be a desire by many employers and employees to see some return of those defined benefit plans."

However, most people feel the cost and investment risk to employers will kill defined benefit plans in the private sector, and put pressure on government worker or public sector plans.

"When it comes to risk involving defined benefit plans in the public sector, that falls onto the taxpayers. And if these pension plan costs are high, what it means in the future is pressure on salaries in the public service, and some pressure to reduce services in the public sector.

"There will be a desire to outsource more work outside the public sector. And we'll see young people not willing to pay the costs of pensions to older workers."

Concern that Canadians retiring early and living longer are not saving enough for their extended retirements has produced various theories to revamp the system.

One is to create a government-sponsored defined contribution plan, such as a personal pension account like a group RRSP as a supplement to the Canada Pension Plan, suggested by Keith Ambachtsheer of KPA Advisory Services, or a series of provincial plans such as the proposed Alberta-British Columbia pension.

A second idea is to expand CPP, with increased contributions and investment growth covering liabilities, and with benefit increases phased in over time.

A third concept is a national privately delivered defined contribution plan.

And the C.D. Howe Institute proposes raising annual RRSP contribution limits from 18 to 34 per cent of income, to a maximum of $34,000 instead of the current $22,000.

Mintz said the federal government is looking at a very modest revamp of the CPP, like increasing the 9.9 per cent of pensionable earnings that employers and employees combine to contribute, or increasing the current pensionable earnings maximum of $47,200. The effect would be to increase the CPP's current aim of replacing 25 per cent of average working income in retirement.

Other suggestions coming out of the conference were to allow people to retain RRSP contribution room after taking money out, as is allowed with a Tax- Free Savings Account; to increase the age when people can take unreduced CPP benefits above 65; to reduce indexing of public and private pension plan benefits when the economy falters; and to make pension plans hold reserves for guaranteed defined benefits.

I agree with Jack Mintz that the percentage of pre-retirement income that the financial industry often cites as "necessary" to retire comfortably on is greatly exaggerated. I also think reports on the "death" of defined-benefit (DB) plans are also greatly exaggerated.

And I even agree that companies will use DB plans to lure employees. However, if you think about it logically, we shouldn't even have private DB plans. There should only be public DB plans which covers all Canadians. But there is a lot of money involved, and everyone wants a piece of the pension pie, so this will never happen (consultants, actuaries, financial services firms like banks, insurance and mutual fund companies all have a stake in the pension pie).

The ultimate solution is having everyone's pension managed by professionals working at large public DB plans. You need to get the governance right, and more importantly, you need to have realistic investment assumptions to make sure these plans are properly funded. This solution has the added benefit of pension portability, meaning that no matter where you work, your pension will follow you effortlessly. Of course, what's logical to me seems like a monumental undertaking. It's too bad because Canadians deserve better.

***Feedback***

Jonathan Jacob of Forethought Risk shared these points with me:

In your recent column you discuss the “ultimate solution is having everyone's pension managed by professionals working at large public DB plans”

While I may agree to a certain extent in theory, the practicality is frightening:

• Creation of too big to fail in pensions – what if those professionals at DB plans had a brutal year – the impact on the public sponsor who must shoulder the shortfall be it provincial or federal will be significant and will ultimately impact every Cdn taxpayer
• Alignment of interests – not creating a huge behemoth fund where executives expect huge pay packages that would be unacceptable to public sector employees.
• In the end you are proposing some sort of expansion of CPP which is not a terrible idea as long as the funding for such expansion is explicit – no more “pay as you go” crap
• This environment is difficult for creating a DB plan – but if you can afford to create one when interest rates are low, then you will be golden when rates rise again

Read more »

Ontario Finance Minister on Enhancing CPP

Susan Eng, Vice-President, Advocacy at CARP, sent me the video below of a recent town hall meeting on retirement security with Ontario Finance Minister Dwight Duncan:

CARP will host the Ontario Minister of Finance’s Town Hall on Retirement Security at the CARP Annual General Meeting. The Minister will be releasing an important consultation document and CARP members will have an opportunity to engage directly with the Minister in a Town Hall session.

“CARP members will be pleased to know that the Minister is taking action on the pension reform file. CARP is privileged to host the Minister and to give CARP members attending our AGM from across the country the opportunity to hear directly from the Minister about his plans to improve retirement security”, said Susan Eng, VP Advocacy for CARP

I thank Susan for sharing this with me and I applaud the Minister's commitment to enhancing CPP for more Canadians. Finance ministers across the country should take note.

Read more »

Teachers, OMERS Snag U.K. High-Speed Rail

Richard Blakwell of the Globe & Mail reports, Teachers, OMERS snag U.K. high-speed rail:

As Canada engages in a heated debated about the sale of a prized asset to a foreign company, a pair of large Canadian investors has picked up a key piece of Britain’s domestic infrastructure – its only high-speed rail line.

Ontario Teachers’ Pension Plan and Borealis Infrastructure – an arm of Ontario Municipal Employees Retirement System – signed a joint deal to buy High Speed One, the rail link from London to the mouth of the Channel Tunnel.

The pension funds paid £2.1-billion, or about $3.4-billion, to a state-owned rail company for the rights to run the line. They won’t actually own the property on which the 110-kilometre rail line runs, nor the four stations on it, including the historic St. Pancras in London; those will stay in government hands.

But the funds will operate and maintain the HS1, and collect track-access charges from all the rail companies that run trains on it, for 30 years.

Currently, Eurostar trains take the route before entering the Channel Tunnel and continuing on to European capitals, and some domestic high-speed services also use it. The very busy line carries nine million international passengers and five million domestic passengers a year. New routes to Germany and the Netherlands are expected to start in coming years.

The key for the Canadian pension funds, said Teachers senior vice-president Stephen Dowd, is that the rail line will generate “stable inflation-protected returns,” along with growth from new services as European regulators encourage more rail travel.

Neither OMERS nor Teachers would reveal specific terms of the agreement before the deal closes in a few weeks.

David Kaposi, global head of alternatives for pension consultant Mercer, said this kind of infrastructure investment is ideal for large pension funds, because it generates predictable returns over the long term to balance against the funds’ pension liabilities.

“What is attractive to many pension plans is a long-term stream of cash flows,” he said. “As long as they can earn a return on it that makes sense for their liabilities, it is actually a classic investment for a pension plan.”

OMERS and Teachers have investments in a number of other British infrastructure assets, including ports, airports, and gas distribution networks.

For the British government, the sale of HS1 will generate money to help pay down the country’s deep debt. Transport Secretary Philip Hammond said the price was more than the government expected to glean from the sale, and it represented a “vote of confidence” both in the country and the future of high-speed rail.

The Canadian pension funds outbid a number of other groups, including a consortium of Goldman Sachs and Eurotunnel (the company that runs the Channel Tunnel); another group led by Morgan Stanley; and one set up by German insurance company Allianz.

The nationality of the buyer was not an issue, a Transport department spokesman said. “We chose the bidder that in our opinion provided the best overall deal for U.K. taxpayers.”

Not everyone is thrilled about the sale. Britain’s huge Rail Maritime and Transport (RMT) union called it an “act of political vandalism on the U.K. railways.”

The line has been “sold off for a song in what amounts to nothing more than a fire sale of the family silver to prop up the financial deficit caused by the bankers and speculators in the first place,” RMT general secretary Bob Crow said in statement on Friday.

RMT spokesman Geoff Martin said the key issue is not that foreigners were the winners in the bidding for HS1. The union is concerned more broadly about the privatization of state assets, he said.

Sold off for a song? I doubt it, but let's wait to see the details of the deal. Infrastructure deals have been priced up lately as more investors look to get into this asset class. Teachers and OMERS have lots of experience with infrastructure, and without knowing any details, this sounds like an excellent long-term investment.

But there are risks in this asset class, and investors should beware before jumping into it. Importantly, infrastructure is no panacea, and as deals get priced up, and investors take on more equity risk and leverage, then they increase the risk of suffering losses on these investments (not to mention there are other risks in infrastructure deals that people should be aware of).

Read more »

Caisse: A Bridge to Québec's Future?

Today was one of those days! My MS was acting up early in the morning. I had this brutal pain in my upper back that felt like someone was sticking a dagger in me. But come hell or high water, I wasn't going to miss Michael Sabia's speech at the Palais des congrès de Montréal at lunch.

I was running late and just my luck the cab driver leaves me all the way on the other end of the building. I was walking with severe pain in my back but there was no way I was going to miss the speech. I finally got to room 520, and ran into some familiar faces which I was happy to see. Sitting next to me at my table was a very nice lady, Lucie Pellerin, a recruiter from St-Amour & Associates (if only all recruiters can be more like her; she gets it!).

Mr. Sabia, President and CEO of the Caisse de dépôt et placement du Québec, Canada's biggest pension fund, was the guest speaker at the the Board of Trade of Metropolitan Montreal's Desjardins business luncheon - Business Voices. He talked about the many facets of the Caisse's contribution to the economic development of Quebec, mainly in the context of a changing world, which both the Caisse and Quebec need to adapt to in order to achieve their full potential.

You can download the speech in French and in English. Mr. Sabia delivered the speech in French, which is very impressive. His French is excellent and he showed tremendous respect to his audience by delivering the entire speech in French. Quebec's elite and media were present, and I'm sure they were equally impressed (people at my table were impressed by that and more importantly, with the content of the speech).

Mr. Sabia started off by saying:

When I enter the office every morning, just across from here, on Place Jean-Paul Riopelle, I think about the privilege of leading the Caisse — an important Québec institution, an institution with immense potential.

The most urgent task, upon my arrival 18 months ago, was to get back on track.
Since then, we have made significant changes:

• We renewed our management team
• We simplified our investment strategies
• We reduced risk and tightened our risk controls
• We developed a client-centric culture

Our performance has improved.

We still have work to do, but it's better now.

Now that the Caisse is resting on more solid foundations, it is time to look to the future.

In doing so, we will address a series of questions and issues that give us the tools to seize opportunities for building a strong, successful Caisse in the coming years.

Our strategies for addressing these challenges represent a new chapter for the Caisse.

Today, I will focus only on one of these strategies: our contribution to Québec’s economic development.

With that he delved into the core issue:

The genius of the Caisse’s architects — Lesage, Parizeau, Castonguay, Marier — was to understand the importance of adding a financial institution to all the other reforms, a financial institution to make Québec’s social and economic transformation possible.

The Caisse was founded to serve this purpose.

At that time, the world was very different.

It was cut in half, immersed in the Cold War.

In China, a revolution was just beginning: the infamous Cultural Revolution.

The European Union was still light years away.

There was no free trade and nobody talked about globalization.

There was no Internet, no laptops, no cell phones, no Google.

Imagine such a world.

The world has changed.

Almost 50 years later, the Cold War is over.

We have global markets.

Instant communications.

And a global world.

China has become the world’s second-largest economy.

The euro is the currency for a market of more than 350 million people.

India, Brazil and many other countries are also becoming leading economic powers.
Quebec has also changed.

We’ve become a world centre of high value-added sectors:

• Multimedia
• Aerospace
• Engineering
• Biotechnology
• Environment technology

There are Laurent Beaudoin, the Lemaire brothers, Serge Godin, Alain Bouchard, Marcel Dutil and many others.

And now we see a whole new generation: Pierre Beaudoin, Sophie Brochu, Marc Dutil, Guy Laliberté, Monique Leroux, Pierre Karl Peladeau and more.

It has become quite normal to see Francophones at the head of the Québec economy.

What’s surprising now is to see an Anglophone Quebecer at the head of the Caisse...

This just shows you how much things have changed.

That last comment elicited quite a chuckle from the audience. I think he took a little shot at his critics and some in the media who think only Francophones should be at the helm of the Caisse (pure nonsense).

He went on to say:

Here, we must ask a fundamental question.

In this incredibly different world, how can the Caisse serve the best interests of Québec?

Must we adapt to a new reality?

The answer is yes. The Caisse is ready to keep pace with this new emerging world.

This must be based on our comparative advantages:

• Our in-depth knowledge of Québec
• Our role as a long-term investor
• Our critical mass
• Our international scope

The objective of the Caisse remains the same. Here’s what Mr. Lesage had to say about the Fund in 1965 — and I quote: “It must both meet the criteria for adequate profitability and make funds available for Québec’s long-term development.”

As in 1965, we must grow the assets of our long-term depositors, so they can meet their obligations. This is vital for Québec.

It has never been more important than today, as many Québecers are about to retire.

Quebecers must know that they will have access to their pension funds.

This is crucial. That’s why we reinforced the Caisse’s foundations.

That's why we make investments based on our comparative advantages.

We are willing to take risks — calculated risks — by investing in high-quality companies.

Well-managed, promising companies.

And where can we invest with a clear comparative advantage?

In Québec.

We have an intimate knowledge of the local market, economy and companies.

It is only natural that, in the pursuit of healthy returns, we invest here.

You cannot artificially separate the issues of returns and Québec’s economic development. The two go hand in hand. Accordingly, we aim to seek and seize profitable private equity, stock and real estate investment opportunities.

In small, medium-sized and large companies. In every region of Québec.

In this respect, our commitment is quite clear.

The $1.4 billion increase in our private sector investments in 2009 is very real.

We're here to serve our clients, to serve Québecers.

Mr. Sabia then gave some specific examples to follow-up on those comments:

How? By making long-term, stable and profitable investments in the areas we know well.

Take, for example, Gaz Metro:

• It’s profitable
• It’s low risk
• It has good cash flow
• It operates in one of Québec’s vital industries

This investment is perfectly in line with the needs of our clients.

And, at the same time, with our Québec development objective.

That's why we recently decided to increase our stake in Gaz Metro by purchasing SNC Lavalin shares.

Invest in SMBs

Right now, I'm talking about a big company, but we also focus on SMBs.

Québec has been successful for 30 years as a remarkably diversified economy.

Such a thing is possible with dynamic SMBs.

International companies sometimes start in the basement.

Serge Godin literally started CGI in his basement. Today, it’s a company with 30 000 employees in 15 countries.

Cascades, originally a family business, is another example of how an economy can grow over time.

Of course, there are dozens of Québec SMBs that may turn into major global organizations.

There are hundreds of young entrepreneurs, extraordinary managers, scientists and
technicians — determined, full of new ideas.

They are the ones who are building the Québec of tomorrow.

We must invest in the best, the most promising.

Not only to contribute to Québec's development, but also to seize business opportunities.

SMBs are everywhere in Québec. But not the Caisse.

How can we ensure that SMBs have access to our expertise and financial resources?

Our response: by forging a partnership with Desjardins, a financial institution very well integrated into the social and economic fabric of Québec.

Together, we created a $600 million fund.

We have already started investing…

From Montreal to Daveluyville

From Métabetchouan to Val-d'Or

All the way to Havre-Saint-Pierre

We will make sure to find SMBs dedicated to a bright future and provide our services and funds to develop Québec — as a whole — over the long term.

As far as I’m concerned, I will continue doing my part.

I'll go to any region and talk to people about what we do.

What we can do with them and for them.

Mr. Sabia also spoke of the Caisse's initiatives with Québec universities:

This brings us to our relationships with Québec universities.

For years, we’ve had ties with UQAM, McGill and HEC.

Now we’ve gone even further:

• Within the Caisse, an ongoing internship program
• With the Université Laval and UQAM, research programs in financial analysis
• With Sherbrooke, an agenda for research on investment practices
• With École de technologie supérieure, a financial engineering program
• And with Concordia, a sustainable investment program

So these are altogether another type of investment…in Québec’s financial expertise.

An investment, so to speak, with a very healthy return.

Finally, M. Sabia had this to say about the international challenges that Québec faces and how the Caisse can help build a bridge to the future:

In this incredibly different world, the challenge will not be easy.

For 20 years, Quebec's share of Canada’s total exports has declined. The ratio of exports to GDP of Quebec is lower than the Canadian average.

Only 30% of Québec’s small and medium-sized export companies are in Europe. Only 16% of these SMBs are in Asia. That’s just too little. Québec is facing an international challenge.

To enrich itself, to build large companies, Québec should export more.

And it should do it around the world.

There is no doubt in my mind that Québec’s economic future will be partly decided by our ability to penetrate major markets worldwide.

The fact that a society of fewer than 8 million people has such a financial institution is not a common phenomenon.

And given the limited size of the Québec and Canadian economies, the Caisse has been motivated to expand its presence in international markets over time.

45% of our equity securities are international. 55% of our real estate portfolio is located abroad. And 70% of our private equity is outside Canada.

To obtain returns for our depositors, we will continue to expand our presence in new
international markets.

The Caisse’s international perspective.

Our investments worldwide.

Our network of international contacts.

Our expertise from new markets.

All of it can be put to the service of Québec companies.

First, in the U.S. market.

Despite the difficulties of our neighbours, we are, after all, talking about the world's largest economy and a market we know well — a market that must remain a priority.

Québec must also broaden its presence in Europe, a market of more than 500 million
people.

To simplify Québec company access to this market, we entered into a partnership with AXA Private Equity, a large French firm, in October 2009.

At the same time, of course, we must look toward Asia and South America — to countries
with very strong growth.

With this in mind, we just forged a partnership with HSBC, a global financial institution with a strong presence in Asia and Brazil.

This agreement aims to provide Québec companies with the support of both institutions.

They offer financing for international projects of over $10 million.

This expertise and these networks are for our depositors, Québec businesses and, in turn, Québec.

At the same time, we launched a co-investment strategy with Québec companies.
Cirque du Soleil, already well-established in many countries, is a good example.

With Cirque du Soleil, we recently co-invested $25 million in a production and development fund. The goal? Create new products that will broaden the Cirque’s presence worldwide.

The Caisse has critical mass, expertise, scale and credibility in international markets.

And we aim to further extend our network of contacts and expertise around the world, especially in emerging countries.

In the future, we will develop more partnerships with international institutional investors who share our long-term vision.

Sovereign wealth funds or other international pension funds in Canada, Norway, China or Singapore. I think that’s where a vital part of the Caisse’s contribution can be made — where the Caisse can serve as a bridge between our portfolio companies and the world.

This is the part of our economic development strategy that we must emphasize and
intensify.

The Caisse’s international dimension, which contributes to Québec’s brand image and reputation worldwide, is part of the legacy we have inherited from our predecessors.

A legacy that we must continue.

The key for the Caisse is to leverage off its investments partners, Québec universities and build solid networks across the globe with large sovereign wealth funds and other large global pension funds. But the challenges for Québec companies are huge and it remains unclear how the Caisse's comparative advantages will be used to help these companies meet these challenges.

However, one thing is clear, the commitment is there and as the world changes for better or for worse, the Caisse will continue to play a vital role in shaping, promoting and sustaining Québec's economic development.

Read more »

Norwegian Govt Fund's 'Reprehensible' Fees?

Daniel Brooksbank of Responsible Investor reports, Norwegian Govt Fund under fire over ‘reprehensible’ external managers’ performance fees:

The Norwegian Finance Ministry has fended off criticism from the state spending watchdog about controversial performance fees paid by the country’s central bank to external fund managers that run assets for the NOK3trn (€365bn) Government Pension Fund.

The Office of the Auditor General recently issued a report to the Storting, the parliament, that was highly critical of Norges Bank Investment Management (NBIM), the arm of the central bank which runs the fund.

It revealed that one manager – named in the Norwegian media as Malaysia’s Pheim Asset Management – received fees of around NOK500m (€61m) for running a mandate valued at NOK3.3bn (€402m) at the end of 2009.

“It is considered reprehensible that Norges Bank entered into a contract with an external manager without determining an upper limit for performance-based remuneration,” the auditor said. Before the contract – originally signed in 2008 – was renegotiated, the fee would have been even larger, at NOK900m.

“This is so large, both in terms of the amount and percentage, that the signed agreement must be deemed to warrant criticism,” the auditor said. The comments come in a detailed 274-page probe of all government spending.

Hilde Singsaas, State Secretary at the Finance Ministry, issued a statement saying that when external managers earned high fees it meant the fund had earned far more. The fees furore has been compounded by press revelations in Norway that Pheim has been sanctioned for contravening market rigging provisions in Singapore. In September, Pheim and its CEO Dr Tan Chong Koay were ordered to pay civil penalties totalling SG$500,000 (€276,793), as well as legal costs to the Monetary Authority of Singapore, by the Singapore High Court.

NBIM charged the Govt Pension Fund NOK3.2bn in management costs in 2009 – of which NOK1.8bn went to external managers. Of that figure, NOK1.4bn was in performance-based fees.

The Finance Ministry told the auditor that responsibility for external managers lies with the central bank. But the auditor report questioned whether the Ministry had fulfilled its oversight of the bank.

The auditor also expressed concerns that the fund had continued to hold bonds of companies – Rio Tinto, Barrick Gold and Textron – that had been excluded from its investment universe for ethical reasons.

Singsaas said the Ministry of Finance would consider calls to cap managers’ fees: “The basis for such an assessment must be what best protects both the fund’s financial interests and its reputation.”

Any way you slice it, that's a lot of fees being doled out by this giant fund. Apart from the specific concerns cited by the Auditor General, I'm also wondering if performance fees are being paid for what is essentially beta. Remember, you can swap into the beta of almost any index at a fraction of the cost, so why dole out huge external manager fees? To be fair, this is what the Fund mostly does, managing the bulk of assets internally, just like AIMCo and PSP Investments.

The Government Pension Fund Global is very transparent and its mandate is unique. You can view the list of external managers on their website. I noticed a Montreal fund, Sectoral Asset Management, a leading healthcare fund. In cases like Sectoral, it's worth paying performance fees because they typically outperform their index by a wide margin. I can't comment on the other funds because I do not know them well enough.

Another thing you should bear in mind is unlike pension funds, the Government Pension Fund Global only invests in liquid equities and bonds (the fund received a mandate in March 2010 to invest in real estate but it has not awarded any external real estate mandates yet). This means it is exposed to market moves, or beta (note: the expected tracking error limit is 150 basis points, or 1.5 percentage points).

Finally, take the time to go over a speech by Governor Svein Gjedrem at the Norwegian Polytechnic Society on 2 November 2010, Perspectives on managing the Government Pension Fund Global. It is well worth reading to understand how this monster fund is being managed.

While the Auditor General issued a critical report, it's also worth pointing out many positive attributes of the way the Fund is being managed. Norway's Government Pension Fund-Global is tops when it comes to transparency and accountability among sovereign wealth funds, according to a recent ranking from the Peterson Institute for International Economics. The Fund recently grew to NOK3trn ($512bn) for the first time in its 14-year history. Keep an eye on this Norwegian giant, they're already a global powerhouse and they're going to be a force to be reckon with for many years to come.

***Update: First Foray into Real Estate

The Government Pension Fund Global has made its first investment into real estate. The fund will pay US$730 million to buy a 150-year lease on a 25% stake in The Crown Estate Regent Street's properties in London.

Read more »

Death of American Liberalism?

Too tired to post a lengthy piece. I'm awaiting QE2 tomorrow, but given that today is all about politics, I wanted to share with you an absolutely brilliant interview which I heard on CBC's Current this morning:

American Liberalism - Chris Hedges

American voters are widely expected to deliver a harsh message to U.S. President Barack Obama at the polls today. Republicans who aren't actually even popular appear set to re-take control of the House of Representatives and to pick up enough Senate seats to make the President's life difficult.

That may be bad news for American liberals. But according to Pulitzer Prize winning journalist and author Chris Hedges, they have a bigger problem. He says that American liberalism -- a once proud and politically potent tradition -- is dead. Chris Hedges is a Senior Fellow at The Nation Institute. He has just written Death of The Liberal Class. He was in our Toronto studio.

Click here to listen to this interview. Listening to Chris Hedges reminded of what the great social thinker, the late George Carlin, once said about why he doesn't vote (clip below). I'll be back tomorrow, pumped following another dose of QE.

Read more »

US Pensions Reaching a Breaking Point?

Joe Weisenthal of Business Insider reports, Bombshell Pension Vote Is About To Sink California Hundreds Of Millions Deeper Into The Red:

California recently got its budget situation under control, but everyone figures the state is still in serious financial trouble.

And this news won't help, though it was probably inevitable.

According to the Sacramento Bee, CalSTRS (the big teachers retirement fund) is set to vote on Friday whether or not it should reduce its annual investment returns estimate from 8% to 7.5%, a move that will add hundreds of million to state debts (since the pension is guaranteed, and public taxpayers are on the hook).

That would be a huge decision, if they do it. 8% has been the level set since 1995 (talk about a whole other era), and artificially high return estimates are how the pension systems aren't (on paper) even more insolvent than they already seem.

Michael Marois of Bloomberg reports, California Teachers' Pension Plan Weighs Lower Assumed Rate of Return:

The California State Teachers Retirement System, the second-largest U.S. public pension, will consider cutting its expected earnings rate on investments to 7.5 percent, increasing the need for higher contributions as it recovers from market losses.

The $132 billion pension fund’s governing board will consider approving a new rate of return, now 8 percent, at its Nov. 5 meeting in Sacramento, according to its agenda. The so- called assumed rate of return on investments is used to calculate the size of pension contributions from employers needed to pay retirees.

Public pension funds across the U.S. are adjusting their assumptions following losses in the recession that within three years may leave them $1 trillion short of the amount needed to pay benefits, according to a National Bureau of Economic Research report. The largest fund, the California Public Employees Retirement System, known as Calpers, uses a 7.75 percent assumed rate of return.

“The impact of reducing the assumed investment return and assumed inflation rates will result in a better representation of the fiscal condition of Calstrs benefit programs based on the current economic outlook,” the fund’s actuary Rick Reed said in a report to be presented to the board.

Calstrs, as the teachers’ fund is known, is 78 percent funded, meaning it is short by more than $42 billion. Reducing the assumed rate of return would lower that funding level to 74.2 percent, according to the report posted on the fund’s website.

Higher Contributions

The fund, which provides benefits for 848,000 public-school and community-college teachers, would need to ask lawmakers for an increase of as much as 16.8 percent in the amount the state and school districts pay toward employee retirement benefits if the board adopts the 7.5 percent assumed rate of return. Teachers are likely to be asked to pay more from their paychecks as well.

The teachers’ fund earned 12.3 percent in the year that ended in June, after losing 25 percent in fiscal 2009 and 3.7 percent in 2008.

Fewer than half of the public pension funds in the U.S. had assets to cover 80 percent of promised benefits in fiscal 2009, according to data compiled for last month’s Cities and Debt Briefing hosted by Bloomberg Link.

New York’s $124.8 billion pension fund, the nation’s third- largest, in September reduced its assumed rate of return to 7.5 percent from 8 percent. Calpers will review its 7.75 percent rate of return in February.

Of course, California isn't the only state suffering from pension woes. According to Gus Lubin of Business Insider, 11 state pension funds are running out of money:

Here's a shocker: The most immediate state pension crises aren't in New York or California. They're in Middle America.

Illinois is just 8 years away from exhausting its pension fund and creating a yearly $14 billion hole, according to data from Kellogg professor Joshua Rauh [PDF].

That's a projected 32 percent of the state's revenue going to fill a pension hole. Every year.

Indiana, Louisiana, Oklahoma and Colorado are among the next pension funds to fall. The rest of the union is just around the corner.

(Click here to see the states)

Reuters reports, Public pension woes haunt California, other states:

Pension reform has become a front-burner issue in California's gubernatorial race between Democrat Jerry Brown and Republican Meg Whitman. Reform measures are slated to appear on ballots in several California cities.

Other states and large cities have seen their public pension fund assets drop dramatically in the recession and housing crisis and are scrambling to plug funding gaps.

Here are some key facts about public pension reform:

CALIFORNIA'S PENSION WOES:

* Three big California public pension funds, the California Public Employees Retirement System (CalPERS), the California State Teachers' Retirement System (CalSTRS) and the University of California Retirement System (UCRS), face a collective shortfall of more than $500 billion over the next 16 years, well above the funds' own estimates of $55 billion, according to an April study by the Stanford Institute for Economic Policy Research.

* CalPERS, CALSTRS and UCRS combined administer the pensions of about 2.6 million Californians.

CALIFORNIA'S PROPOSED REFORMS:

* Jerry Brown favors renegotiating current pension formulas to require employees to contribute more toward their pensions and to work to a later age for full retirement benefits.

* Meg Whitman favors adopting a 401k-style defined contribution plan for new government hires and raising the retirement age to 65 from 55 for most state employees outside the public safety sector.

* Proposition B in San Francisco would increase employee contributions to their pensions to 9 to 10 percent from 7.5 percent to save the city $120 million a year. It is opposed by the city's unions but supported by some labor-friendly politicians, including former Mayor Willie Brown.

* A San Jose ballot measure would remove language from that city's charter that defines the rules for the age at which city employees can retire and how much the city must pay into their pension fund. It would apply to workers hired after 2011.

* Los Angeles Mayor Antonio Villaraigosa last week announced what he called a "landmark proposal" to reform pensions and retiree health benefits for newly hired police officers and firefighters. The reform would require new workers to contribute 11 percent toward their pensions, up from a current 9 percent, and would pare back the size of pensions. The measure is expected to save the city $173 million for every 1,000 new police officers and firefighters hired.

OTHER U.S. STATES:

* U.S. states face a total shortfall of at least $1 trillion in their funds for employees' pensions and retirement benefits, according to a report released by the Pew Center on the States in February. The report found that states did not save for the future or manage costs well, but they also typically expect an 8 percent return on investments.

* In August, Illinois said its public pension funds may have to shed $960 million in assets to pay retirees because the state has not come up with fiscal 2011 payments. In March, Illinois passed a bill to reduce benefits for new hires and raised the state retirement age, which it said would save $119 billion between now and 2045.

* Michigan in May passed a law requiring teachers to contribute 3 percent of their salaries to a new retiree health care fund.

* The U.S. Securities and Exchange Commission in August charged New Jersey with securities fraud for failing to disclose to municipal bond investors that it was underfunding its pensions. New Jersey agreed to settle the case without admitting or denying the findings. It was not required to pay any civil fines or penalties, but was ordered to cease and desist from future violations.

Finally, Australia's PSnews reports, Unfunded pension add up to billions:

The US State of California is facing a Public Service pensions shortfall of $US500 billion ($A512 billion).

A long-running issue on the edge of public debate, PS pension reform has been promoted to centre stage due to California’s fast-growing Budget hole and a series of public payment scandals.

Chair of the group, Californians for Health Care and Retirement Security, Dave Low said the problem had been building up for some time.

Mr Low said California’s pension woes mirrored those of dozens of other American States and was less of a worry than some - Illinois, for example.

But as the largest US State, California’s top pension funds, including the Public Employees’ Retirement System and State Teachers’ Retirement System, rank among the biggest in the world.

A 1999 law that gave State workers generous pensions and pay raises is widely blamed for igniting the pension crisis.

While politicians are pledging to plug the funding gaps through higher retirement ages and increased worker contributions, accountants and commentators say it could be decades before the benefits of any reform are realised because the proposals can only apply to new employees.

Pensions expert Vladimir Kogan said this would not get to the crux of the liability, which was the unfunded liability for current employees.

It is generally agreed however that redesigning the benefits for current employees and retirees to save on costs was not an option.

Don't underestimate the contagion effects of state pension meltdowns. As state pension funds lower their return estimates, adding hundreds of millions to state debts, legislators will scramble to plug large pension gaps. And they will likely meet stiff opposition.

State pension funds are just coming to grips with the fact that their rosy investment assumptions are ridiculously optimistic. Worse still, their new investment return estimates are still way too high. What does this tell me? The Fed better come in big with QE2, a move that might fuel demand for riskier assets. But no matter how big QE2 is, it simply won't make a difference to US pensions heading on collision course with fiscal destiny. They've already reached their breaking point.

Read more »