Canadian Plan Solvency Ratio Slips in Q3

Benefits Canada reports, OFSI pension estimates down, global pensions up:

The global funded status of pension plans increased in Q3, but results from OFSI show different results.

The Office of the Superintendent of Financial Institutions (OSFI) has released the results of its semi-annual solvency testing for 400 federally regulated, defined benefit (DB), private pension plans.

The average solvency ratio at the end of June 2010 is estimated at 87%, three points lower than the December 2009 estimate of 90%. Judy Cameron, managing director of OSFI's private pension plans division, attributes this decrease to market volatility in the earlier part of the early.

"Since June 30th, market conditions have remained volatile. Although pension fund returns have improved, there has been a substantial decline in long-term interest rates," said Cameron.

"The modest decline in the average estimated solvency ratio in June suggests that plans will continue to face elevated funding demands in the coming months,” she said. “OSFI encourages administrators to adopt robust risk-management practices regardless of market conditions. In particular, scenario testing can be used to assess and prepare for the impact of possible changes in investment returns and interest rates on plan solvency and funding requirements."

However, two recent reports—one from Aon Hewitt and the other from RBC Dexia—say that globally, pension funds are up slightly from where they were last quarter despite ongoing market fluctuations.

The Aon Hewitt report indicates that strong asset performances in July and September helped boost the overall funded status of global pension plans. The consulting firm found that the funded status of global pension plans was 80% in the third quarter of 2010, up slightly from 79% in the previous quarter.

"While the quarter closed with modest gains, market volatility continues to run at very high levels. Managing this risk remains the focus of pension plan sponsors as we head into year-end," said Ari Jacobs, Aon Hewitt's North American retirement solutions leader. "Plan sponsors that have taken steps to systematically de-risk their plans are benefiting from those decisions, while others continue to look for opportunities to gain control over their pension finances, including funding strategy, liability settlement and investment policy options."

Regional analysis

In Canada, strong asset returns led by domestic equities contributed to total assets increasing by 7.3%, according to a RBC Dexia Investor Services report.

Domestic stocks were the best performing asset class for Canadian pensions, the report states, increasing by 10.2% in the quarter and 6.7% year-to-date. “Most sectors posted double-digit returns with advances fairly wide spread but uneven during the quarter,” said Don McDougall, director of advisory services for RBC Dexia. “Pension plans nearly kept pace with the TSX Composite during the quarter but trail the index by 0.7% year-to-date.”

The Aon Hewitt report indicated that the gains were offset by a significant decrease in corporate bond yields, which resulted in a 6% increase in liabilities.

The net impact was that average funded ratios increased only incrementally, from 87% at the start of the quarter to 88% at quarter's end.

"Many organizations have been holding off on implementing liability driven investments or risk management strategies, thinking that interest rates were due to increase," said Rob Vandersanden, a principal in Aon Hewitt's Calgary office. "However, yields have continued to trend downwards, effectively wiping out the strong investment returns of the past quarter."

In the U.S., the funded status of pensions showed a marginal improvement in the third quarter, increasing from 80% to 82%. Strong equity markets also helped pension plans regain losses they experienced in the second quarter. However, the corporate bond rates used for measuring pension liabilities plummeted to less than 5% in August. Even after a slight uptick in September, these rates fell by 0.3% to 0.5% from levels seen in the prior quarter. As a result, pension liabilities increased by 4% to 6%, negating much of the benefit from strong equity performance.

Canadian pension plans did rally in the third quarter. But pensions are all about managing assets and liabilities. What typically happens after a financial crisis is that asset values decline and interest rates fall, exacerbating pension deficits. It took more than four years after the tech meltdown in 2000 before pension solvency ratios were boosted back to appropriate levels (even after stock markets bounced back, interest rates remained low, so pension deficits got worse). It will take even longer this time around. What pensions need are asset values to go up and interest rates to increase. Hence the response to reflate and inflate their way out of the pension mess.

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Canada Ranks Fifth in Global Pension Study

Derek Abma of Postmedia News reports in the Montreal Gazette, Canada's pension ranked among best, but could be better:

Canada's pension system is one of the best in the world, though there is room for improvement and the recent global financial crisis has affected its sustainability, a report said Wednesday.

The second annual Melbourne Mercer global pension index ranked Canada fifth out of 14 countries for its pension system's adequacy, sustainability and integrity.

Canada was fourth last year, but more countries were included in this year's rankings, including Switzerland, which finished second behind the Netherlands.

Canada's overall score was lower at 69.9 compared to 73.2 last year.

"Not surprisingly, the (global financial crisis) has threatened the sustainability of public and private pension systems in several countries through the decline in asset values and an increase in government debt," said David Knox, a senior partner with consultancy group Mercer, which did the study on behalf of the Australian Centre for Financial Studies.

"This was reflected most acutely in the scores for Canada, the United Kingdom and the United States."

Scott Clausen, another partner with Mercer, said Canada could take moves to improve its pension system, such as increasing coverage in employment-based pension plans, particularly for "middle-income employees in the private sector."

It was also recommended that Canada consider raising the government-pension age of 65 as life expectancy continues to increase.

"Increased life expectancy is a theme that is common to all of the countries in the index," Knox said. "As the gap between pension age and life expectancy widens, pressure on public pension systems will increase. This highlights the need for governments to continue to review their state pension or retirement age, and focus on increasing the adequacy of the private system."

Rounding out the top five rankings is this study was Sweden at third and Australia at fourth. The United States was 10th, down from sixth last year.

Janet Novack wrote a comment on why the US pension system ranks low:

A new report comparing pension systems in 14 countries, ranks the U.S. a lowly 10^th, behind the Netherlands, Switzerland, Sweden, Australia, Canada, the United Kingdom, Chile, Brazil and Singapore. It leads France, Germany, Japan and China.

The index, compiled by Mercer and the Australian Centre for Financial Studies, attempts to compare the widely varying systems of the countries in three broad areas: adequacy, sustainability and integrity. Not surprisingly, the U.S. ranks low on adequacy—lower than Australia, Canada or any of the European nations. But it scores slightly above average on sustainability, meaning the ability to deliver what’s been promised. The U.S. had a score of 54 on adequacy and 59 on sustainability, compared with an average of 63 on adequacy and 52 on sustainability for all 14 countries and 76 on adequacy and 72 on sustainability for the top-ranked Netherlands.

By contrast, France scored 75 on adequacy, but only 30 on sustainability. That nation, of course, is now wracked by protests over President Nicolas Sarcozy’s push to make its pension system more sustainable by raising the minimum age for a partial pension from 60 to 62 and for a full pension from 65 to 67. In the U.S., the minimum age to receive Social Security retirement benefits is already 62, while the “full retirement age” for Social Security is now 66 and is slated to rise slowly to 67 for those born in 1960 or later. President Obama’s deficit reduction commission might recommend it go higher.

The U.S. integrity score of 60 was also well below the average of 73. That category includes such factors as regulation and costs.

Overall, the pension experts judged the U.S. system, as well as those in the UK and Canada, as less sustainable than just a year ago, when they conducted their first joint international study. David Knox, the senior partner in Mercer’s Retirement, Risk and Finance business who oversaw the study, said those three nations were the “most severely affected” by “declines in asset values since 2008 and increases in government debt.’’ Consultant Mercer is a subsidiary of Marsh & McLennan Companies.

Pensions are fast becoming the hot political issue of the next decade. Demographics, exploding debt and longer lifespans are all weighing on global pension systems. This is a long-term structural theme that will require tough political choices and compromises from all stakeholders. Below, an update on protests in France.

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The Storm That Wasn't?

Over the weekend, Michael Santoli of Barron's wrote an article, The Storm that Wasn't:

Last Monday was the slowest trading session of the year, as measured by turnover in the stocks that make up the S&P 500, which in turn captures most of the give-and-take involving the stocks that matter to most investors.

The good folks at Bespoke Investment Group, at Barron's request, point out that Columbus Day is not, routinely, the sleepiest day of the year's first 10 months. By their lights, Columbus Day has, since 1993, often been an uneventful day, but never has it been the quietest day of the year to this point on the calendar.

At the risk of extrapolating too terribly much from this modest sampling of market history, the most logical explanation for the extreme "uneventfulness" of the equity market last Monday is that the bond market was closed, as it typically is on official holidays.

Stocks are now a neglected asset class, slave to the bond and currency markets. The fact that the Treasury market wasn't open for business Monday—and therefore that the largest pool of investment assets on the planet wasn't out there twitching to every hint and whisper of future central-bank action–deprived equity traders of their principal cue.

This might have marked the peak of stocks' slavish relationship with the macro forces that manifest themselves first through currency and bond markets. For months, the correlation among stocks has been so high as to mock active fund managers who attempt to pick winners and shun losers, but this all-or-nothing dynamic has faded as the market rally since early September has matured.

Not unrelated is the bounce in 10-year Treasury yields last week, from 2.38% all the way to 2.57%. The bond market is, hesitantly, transmitting the notion that even if the Fed does embark on a new asset-purchase campaign, perhaps the markets have already discounted it.

In the short term, the general neglect of equities is a headwind for the market, yet over a longer span it's a benefit. As long as stocks continue to act as nothing but the tail being wagged by the dog of the macro data driving the dollar and bonds, the less likely equities will become captive to any public mania and get overvalued and therefore vulnerable to another bruising downturn.

The folks who remain attentive to what's happening in the stock market are perhaps getting a bit too comfortable with the idea that the market can continue melting up. The weekly tally of those members of the American Association of Individual Investors who respond to the group's poll has remained above the historical average level of bullishness for six straight weeks.

That doesn't imply the best buying opportunity is at hand. And yet, the public has been a net seller of stocks for five straight months, according to the Investment Company Institute. The future returns following prior such streaks of public liquidation of equity funds have been far better than average, as BNY Convergex recently noted.

This is pretty much the salient market theme right now– investors are a bit overconfident and complacent in the very short term and yet in a broader sense are more cautious and skeptical than the economic data and market action warrant.

Here we are, halfway through October, and three-quarters of the way through the notoriously treacherous September-October period, and the much-hyped volatility storm has yet to arrive. Now that we live in a market where it's quite easy to bet on future volatility through futures on the CBOE Volatility Index (VIX), traders have bid up expectations of impending jumpiness to an alarming degree.

Often this has proved a harbinger of tumult to come, but given how widely anticipated the unsettled market weather is, perhaps we're inoculated from its nastiest implications.

On some level the market is simply reflecting the less-reported signs of healing in the economy. Retail sales just re-attained the level right before Lehman Brothers' failure. Nominal gross domestic product is at a record high. Mergers and acquisitions look poised to accelerate. The market has held up despite the stark underperformance of financial stocks, just as it did in 2004 in the face of stagnant semiconductor stocks (then considered a bellwether).

It's not a novel thought to offer that stocks seem ripe to pull back or at least flatten out for a bit. Whatever the salutary effects of a Republican rout on Nov. 2, they seem already more than discounted. Yet there's enough skepticism there, that any stiff pullback would likely be a reason to buy, and not to panic.

Mr. Santoli was interviewed on Yahoo Tech Ticker (see video below) stating that bulls were "caught offside" by China Rate Hike, BofA Woes:

Stocks slumped Tuesday following a surprise rate hike by China's central bank and a "sell-the-news" reaction to earnings from tech giants IBM and Apple. The selloff picked up steam mid-afternoon on reports Pimco, Blackrock and the NY Fed want Bank of America to repurchase $47 billion of mortgage-backed securities they claim were improperly serviced by its Countrywide unit.

"This is the tip of the iceberg," writes market-timer Thomas Kee, president and CEO of Stock Traders Daily. "This is the beginning of [sic] PUT BACKS. It will be a long legal haul, and another added weight on banks."

Even excluding the latest worry about financials, several factors conspired to drag stocks down Tuesday, Barron's columnist Mike Santoli tells Dan Gross and I in the accompanying clip.

After a 12% rally in the past six weeks, the market was technically overbought and the short dollar/long financial assets trade had become "very crowded," Santoli says. "A lot of people were caught offside" by China's rate hike and irrationally exuberant about prospects for more quantitative easing by the Fed. (Indeed, commodities and other "risk assets" joined stocks in retreat Tuesday as the dollar posted its biggest one-day rally since August.)

A Headwind for the Market

These "hair-trigger moves" are contributing to investors' mistrust of the market, Santoli says, as evinced by the steady outflows from equity mutual funds - despite the market's strength prior to Tuesday's tumble.

"There's definitely been a context shift" since the ‘Flash Crash' in May, he says. "It's not as if people are panicking out of stocks. They're steadily selling [and] diversifying out of stocks. It's going to be a headwind for the market for a while."

Despite their short-term bullishness, professional investors also have an eye on the exits, Santoli says, noting a "steady bid" for futures predicting a rise in volatility over the next six months. Investors have a "muscle memory" of 2008 and think "something could upend the market anytime." (Something like, say, an unexpected rate hike by China.)

But if sentiment is really a contrarian indicator, this underlying skepticism "tells me this is not a market that's getting overheated or a market that's going to a valuation extreme," Santoli says, building on the theme from his most- recent column: The Storm that Wasn't.

My take on today's action? It's just another day in the wolf market where the wolves were busy stealing shares from retail suckers and institutions that dumped because they panicked/ cut risk. Nothing has changed. The mortgage mess isn't going to kill banks, and smart money is still betting on the Bernanke put.

Importantly, top hedge funds are using these pullbacks to build on their positions, especially in energy and commodities. And what about pension funds? Some, like the Caisse, are prepping for the next big move, and mark my words, the next leg up is going to be huge. A lot of asset managers are underperforming their indexes, so they'll use any pullback to juice their portfolio with high beta stocks.

Speaking of high beta stocks, my beloved Chinese solar stocks got killed today, led by my number one pick, LDK Solar (LDK), down 14% on very high volume. In fact, volume was extremely high in the solar sector today, telling me that the wolves were up to their crooked ways, naked short selling and buying more shares on the cheap.

Watch this and other sectors very closely and use these pullbacks to accumulate more shares. As more Fed officials come out to state that quantitative easing has to be big, all the makings for a massive bubble are on their way. My big bet remains with alternative energy but others prefer gold, commodities and energy. It doesn't really matter, because all I know is that once the bubble sectors take off, they're not coming back to these levels. That much I can guarantee you.

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Private Equity -- All Aboard?

SmartCompany editor James Thomson reports, Private equity returns:

Yesterday’s US-based private equity firm KKR shocked the market by unveiling a $1.75 billion bid for Perpetual, one of Australia’s oldest and most respected financial services companies.

For many, the offer is a signal that private equity is officially back as one of the big forces in the Australian market. While private equity deals have been slowly firing up again after the GFC, this is one of the first really big, dramatic plays.

But it does appear that private equity isn’t just looking at the big end of town. Last week, franchise expert Stephen Giles of Norton Rose revealed that private equity firms are looking closely at Australia’s franchise sector, which has proven over the last few years that it can deliver above-market returns and keep growing through difficult economic conditions.

Indeed, this morning we have a report on the acquisition of Perth-based franchise chain Chooks Fresh & Tasty by the private-equity based group Quick Services Restaurant Holdings.

The re-emergence of private equity firms is great for entrepreneurs on a number of levels.

Firstly, with credit still tight from the banks, private equity can provide entrepreneurs with another option to access growth capital.

Clearly, the private equity firms have very strict investment criteria (a good record of profitability, clear growth plans and strong systems are top of the list) but there will be plenty of growing medium-sized companies that will appeal.

Secondly, as Leon Gettler writes today in our main feature, the number of entrepreneurs looking to sell up completely is on the rise.

Private equity could provide these business owners with an escape route. And if we see a string of big deals, we could also see asset values start to rise across the board.

Stay tuned – the private equity trend is one to watch carefully.

If you want to know where private equity is heading, just look at public equities. As long as global equity markets keep grinding higher, and M&A activity picks up, you have conditions in place to bolster PE activity.

And then there is liquidity, plenty of it, from sources like China. In fact, China’s Mr Private Equity explains the new frontier’s hopes and risks:

Victor Zhikai Gao is staying at the Langham Hotel, down the road from the Chinese Embassy. Just off a plane from Beijing, and sipping green tea to stay ahead of his jet lag, he is in London to brief an investment bank on China’s rapidly developing private equity sector. Although jaded, he manages to be simultaneously charming and provocative.

Gao started life as a diplomat, so he feels at home close to the Embassy on Portland Place. Between 1983 and 1989 he worked as an interpreter to Deng Xiaoping, before being posted to the United Nations Secretariat in New York. “I was in London in 1985 with the Chinese Premier when Margaret Thatcher was your Prime Minister. I met your Queen.”

He has spent the last two decades working in business. A former China policy adviser to the Hong Kong Securities and Futures Commission (1999-2000), he is currently an executive director of the Beijing Private Equity Association, he chairs an investment firm, and he is director of the China National Association of International Studies, a think tank affiliated to the Ministry of Foreign Affairs.

Despite his international experience, Gao retains a distinctly Chinese perspective. He is a regular guest on CNN and BBC because of his ability to explain Beijing’s true intentions to western audiences. He is back in London to talk about what he calls “the next step in China’s experiment with the market economy”. China’s financial sector has come a long way. “In the 1970s we didn’t have any commercial banks. In the 1980s we didn’t have a stock market. This year the Agricultural Bank of China was floated on the Shanghai and Hong Kong Stock Exchanges for $20bn (£12.45bn). Onshore,” he emphasises. “No US involvement whatsoever. Not long ago this would have been unthinkable.”

For the Chinese, geopolitics and business are interdependent; and at the heart of this is an obsession with America. Gao reminds me that Goldman Sachs has predicted China could overtake America as the world’s largest economy as early as 2027. He concedes that China will remain the junior power: its per capita GDP a fraction of America’s, and still no match for America’s military power. But the prospect is nonetheless a distracting one for China’s elite, and Gao suggests that many in the Chinese leadership worry whether Washington will stand idly by.

We track back to 1978, when Deng Xiaoping realised that China couldn’t get rich on its own and began to open the economy to foreign capital. Since then, Gao argues, China has survived a series of challenges which have left it stronger and increasingly self-confident. In 1989, the Chinese Communist Party survived the collapse of the USSR, becoming the world’s leading communist regime. In 1997-1998 the Asian financial crisis washed up against the Chinese economy; when the waters receded China was left relatively stronger than its neighbours. And then there was the global financial crisis. “This time it was the blue chips which suffered tragedy” says Gao, shaking his head. “The US, UK, Germany!” He accepts that China suffered seriously too, but argues that the swift action taken by the Chinese state compares favourably with western governments.

“In America the banks and the government were waving their dirty washing in public. In China the state just got on with it”. China’s bank managers received phone calls at the height of the crisis giving them a deadline in which to lend as much as quickly as they could, prioritising China’s stressed manufacturing base. The crisis left Beijing feeling vindicated that state intervention, Chinese style, trumped capitalism’s invisible hand.

Two years on, and China’s otherness is demonstrated by its $2.5 trillion of forex reserves. “Our banks and insurance companies are sitting on huge amounts of money and they want somewhere more attractive to invest it”. Which brings us to private equity. Companies like China Life Asset Management with RMB1.5 trillion (£140.65bn) under management and the Social Security Fund, a national pension fund managing RMB0.8 trillion, will shortly be allowed to invest 5 to 20 per cent of their cash in private equity funds.

There has been venture capital and some private equity in China since the early 1990s, when international firms arrived to pursue emerging technology, media and telecommunications (TMT) opportunities. The model was American, China was the playing field and the exits were all offshore (there are 125 mainland Chinese companies listed on NASDAQ). Few Chinese entities bothered to understand the intricacies of the underlying structure and the modus operandi of private equity funds. Now US and European firms are coming to China to fundraise as they build out their international and Chinese portfolios, and China is regarded as private equity’s new frontier. The Beijing Private Equity Association has more than 100 members. Similar organisations in Shanghai and Tianjin have over 100 members between them. Around 80 funds are headquartered in Hong Kong; their fund managers commute to the mainland to avoid China’s 30 per cent income tax rate. But Gao expects the centre of gravity to move to Beijing and Shanghai: “if you are based in Hong Kong you may struggle to raise a renminbi fund; you will miss opportunities.”

What we are beginning to see, explains Gao, is private equity with Chinese characteristics. China’s abundant and liquid capital is unique, as are the many, constantly diversifying investment opportunities: consumer products, TMT, health, education. “And just about anything with the potential to grow a nation-wide franchise” he adds. “As China’s domestic market just keeps growing, and there is increased integration of domestic and international markets, China will become one of the world’s top private equity centres.”

Before I leave him to sleep off his jet lag we touch again on geopolitics. I ask Gao about the pressure on Beijing to allow the renminbi to appreciate. “It will clearly be in China’s interests to one day have a fully convertible currency” he concedes, but not yet. “In China we are good at building walls, and China is not yet ready to reduce the walls around its economy.” Gao tells me about an op-ed he has just read, which estimates the massive economic, geopolitical and military price the US would pay if the dollar ceased to be the world’s reserve currency. “Isn’t that the inevitable consequence of appreciation?” asks Gao, fixing me with an owlish stare. “Why would this be in America’s interests?” And it strikes me that history’s emerging winners in the East are just as confused about what the future holds as us has-beens in the indebted, anxious democracies of the West.

Does all this mean good times for private equity lie straight ahead? Not exactly. There remains a considerable amount of economic uncertainty and banks aren't willing to lend as much as they did to finance mega buyout deals.

Nevertheless, there is plenty of liquidity out there to fund private equity funds, and as long as equity markets keep forging ahead, private equity activity will pick up in the coming months.

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Hedge Funds Pass High-Water Mark

FinAlternatives reports, Hedge Funds Pass High-Water Mark:

Hedge funds have finally recovered from losses they suffered during the financial crisis, according to the Barclay Hedge Fund Index.

The average hedge fund’s 3.63% gain in September at long last returns the average industry player to its high-water mark, BarclayHedge’s Sol Waksman said.

“September’s gain puts the index into new high ground. The prior peak was established at the end of October 2007 when the index gained 2.87%.”

“It’s taken three years for hedge funds to recover from the financial meltdown and break their previous high,” he said.

The BarclayHedge index is now up 5.26% on the year, buoyed by positive returns in 17 of its 18 strategy indices and “propelled by a robust rally in global equities, a boom in mergers and declining credit spreads,” Waksman explained. Some 90% of the hedge funds reporting to the BarclayHedge index were up in September.

Healthcare and biotechnology funds led the way last month, adding 6.35%. Equity long-bias funds also did well, rising 5.86%. Emerging markets funds were up 4.98% and global macro funds 3.65%.

With the Standard & Poor’s 500 Index an Dow Jones Industrial Average posting their best Septembers since the Great Depression, it was a long month for short sellers, who lost an average of 6.45% on the month.

The Barclay Fund of Funds Index returned 2.11% last month. It is up 1.25% on the year.

It's pretty much all about beta. Markets are up, credit spreads are tightening, and hedge funds are playing the Bernanke put. One risk officer at a fund of funds told me that most managers are having a hard time with their short books. "Any pickup in M&A activity can kill them, so they're reducing gross exposure".

Going into yearend, we"ll see if Foreclosure-Gate hurts hedge funds, the majority of whom remain long financial shares. But activity in the hedge fund industry is definitely picking up. Bloomberg reports that UBS, the largest Swiss bank, said it has been in talks with “dozens” of proprietary traders from firms worldwide who may start their own hedge funds as banks seek to comply with new U.S. rules aimed at curbing risk.

And in Asia, Chris Howells of ChannelNewsAsia.com reports that hedge funds are making a slow comeback in the region since many had suffered losses amid the financial crisis two years ago. We'll see how this all plays out, but hedge funds will play an important role in reflating risk assets.

Finally, I recommend you download and go through this presentation by Eric Chaney, Chief Economist at AXA Group. Eric's five key assessments:

1. Uncertainties may linger until China re-accelerates
2. This should happen in the next three months
3. €-area governments and ECB have ring-fenced debts
4. Yet, €-debt crisis aftershocks are possible
5. Fears of generalised deflation are overblown

Short term conclusions: Risk aversion may remain high

There is a lot of food for thought in this presentation, and many hedge funds and asset managers are positioning their portfolios accordingly.

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Is Canada on the Right Pension Track?

Bernard Dussault, former Chief Actuary of Canada, now Senior Researcher and Communications Officer at the National Association of Federal Retirees, sent me the latest from CUPE, Canadians support increase in Canada Pension Plan benefits:

More than three-quarters of Canadians support increasing Canada Pension Plan benefits, according to a new national survey released today. Eighty percent of Canadians also support increasing federal payments to senior citizens and half of the survey respondents believe the government is moving too slow in reforming Canada’s pension system.

Environics Research Group completed the Future of Pensions poll in late August for CUPE and the Public Service Alliance of Canada (PSAC). It surveyed 2,020 Canadians and has a margin of error of +/-2.2 per cent 19 times out of 20.

“From coast to coast, Canadians support higher CPP benefits," said CUPE National president Paul Moist. “They're sending a clear message to federal and provincial politicians who are currently studying ways to improve the CPP."

The survey asked Canadians their views on saving and their expectations for retirement. While many Canadians have set up a Retirement Savings Plan or a Tax-Free Savings Account, four in ten acknowledge that they are not saving for retirement—mostly because they cannot afford to.

Only one in four Canadians is fully confident that they will be able to save enough to live comfortably in retirement, and three in ten believe they won’t have enough to live comfortably, with lower income Canadians being the most pessimistic.

“Canadians are concerned with their capacity to retire in comfort,” said John Gordon, National President of PSAC. “If action is not taken now, poverty will become a dire reality for more and more elderly Canadians.”

Poll respondents also overwhelmingly support increasing Old Age Security and Guaranteed Income Supplements for those living below the poverty line. OAS and GIS payments amount to only $11,000 per year.

The survey also asked respondents for their preference on different types of pension plans. Despite the economic downturn, those currently part of workplace pension plans believe their pension benefits are safe. But 70 per cent prefer a defined benefit plan, which guarantees a fixed amount of benefit when you retire, to a defined contribution plan, where the benefits paid out depend on the performance of the investments in the fund.

In Quebec, where retirees benefit from the Quebec Pension Plan, the support for an increase in benefits is equally strong. Three-quarters of Quebecers support increased pensions and 82 per cent back higher old age security payments.

Together, CUPE and PSAC represent more than 800,000 public sector workers across Canada. Both organizations have been advocating for retirement security for all Canadians.

David Denison, President & CEO of the Canada Pension Plan Investment Board (CPPIB), and Jim Leech, President & CEO of the Ontario Teachers' Pension Plan (OTPP), are a few of the high profile pension executives who have come out to defend defined-benefit pension plans. Mr. Denison also gave an excellent presentation in June on Fixing the Future: how Canada Reformed Its National Pension Plan.

As far as I'm concerned, Canada is in a unique position to take the lead on global pension reform. We don't have a monopoly of wisdom on pensions -- other countries like the Netherlands are arguably ahead of us -- but we can start taking meaningful pension reforms to improve the retirement safety net.

But we also have to improve our existing governance and clean up some pension issues here. Diane Urquhart sent me a link which provides an update on Nortel's long-term disabled employees which are still struggling to get what they rightly deserve. My personal battle with MS has opened my eyes to discrimination against disabled workers. It disgusts me to see how these employees are treated by Nortel, and I hope you will all support them and fight to adopt Bill-216 (watch video below).

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Mercer Quits US Public DB Investment Consulting

Earlier this week, Benefits Canada reported that Mercer quits public U.S. DB investment consulting (HT: Johnny and Dave):

Just as plan sponsors are moving away from defined benefit (DB) pensions, so too is global consultant Mercer.

Mercer told its 24 public U.S. DB clients that it will no longer be offering investment consulting services. Charles Salmans, partner and director of global public relations with Mercer said the company is working on transition plans for these organizations. “We want the transition as smooth as possible.”

A statement released by the company said, “We will be working with our defined benefit clients to help ensure a transition period so that they can identify another investment consulting firm that can perform defined benefit investment consulting advisory services."

The statement also said that this decision was made "after a comprehensive review of our business and in light of changes in the public fund marketplace.”

Salman indicated that the decision is not directly related to either of the lawsuits that Mercer has settled in the last year and a half, regarding actuarial services. In both of those cases Mercer denied liability.

“We stand behind the professionalism and integrity of our investment consulting work for the public sector. Having said that, we are always evaluating our business and making prudent business decisions, and risk is certainly one factor that we consider in these decisions,” the company said.

Mercer's private clients and those in Canada need not fret. The company will continue to offer investment consulting services to plans outside of the U.S. and to private DB plans in the U.S.

I wonder if this decision had anything to do with Mercer's little Alaska problem where the Alaska Retirement Management Board accused Mercer of underreporting by more than $2.8 billion the contributions required to fund the plans.

I got to be honest, I'm not a big fan of investment consultants. I think a lot of them are peddling terrible advice and they have no skin in the game. Unfortunately, in the US, they act as gatekeepers for many of the large public retirement plans. You can't get money from any large plan unless their investment consultant approves it.

And why do the boards of these plans use them? Simple, to cover their asses in case something goes wrong. It's cover your ass politics everywhere. That's the problem in the US. Nobody wants to take responsibility and be accountable for investment decisions taken at these large public pension funds.

There are some excellent investment consultants, but they're rare. Usually they're 100% independent and they do take care to understand their clients' needs before shoving them in some fund that pays them a percentage of assets under management (always ask why they're recommending some fund and how they get paid -- flat fee or fee attached to assets the funds receive).

But I will tell you that most consultants shove their clients in the same "brand name" funds. I recently ran across Martin Gagnon, Co-Chief Executive Officer at Innocap, a Montreal based fund of funds which offers hedge fund managed account solutions, using a conservative approach to hedge fund investing with a strong emphasis on transparency, liquidity, asset control and risk management.

Martin told me that the top five managed accounts platforms around the world account for over 80% of total managed account hedge fund assets. It's all about being in the brand names, which is stupid, because you'll get better service with smaller groups like Innocap than you will with the larger players.

But investment consultants are covering themselves too, which is why most of them recommend brand names, regardless of their clients' needs. Like I said, with rare exceptions, I'm not a big fan of investment consultants. If they were that good, they'd be managing money instead of making recommendations and charging a mint peddling mediocre advice. Let's hope more of them follow Mercer's lead and get out of consulting US public DB plans.

***Feedback***

An independent consultant who I respect sent me this feedback, which I share here:

Interesting conclusion to your article.

On one hand you think Board Governance should be higher but what are they to do if they do not fully understand the issues presented. We work with a lot of boards who do not understand their managers or their portfolios. We explain it to them in terms they understand and help them to understand the issues.

I know you gave a small nod to independents but I still think your brush was too broad.

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