Ontario Teachers' Pension Plan is the front-runner to acquire Loral (LORL) Space & Communications Inc.’s Telesat Holdings Inc. for about $7 billion including debt, people with knowledge of the matter said.

The Telesat purchase would come in two pieces: buying publicly traded Loral, which owns 63 percent of the company, and acquiring the rest from Canada’s Public Sector Pension Investment Board, which co-owns the satellite operator.

Loral could be bought for more than $80 a share, said the people, who asked not to be identified because the talks are private. The shares closed at $70.08 yesterday in New York, giving it a market value of about $2.2 billion. Loral rose 7 percent to $75 at 8:26 a.m. in New York today.

Canada Pension Plan Investment Board also has been in talks with both of Telesat’s owners, the people said. Public Sector Pension owns about 37 percent of Telesat and controls about 67 percent of the voting rights. As a result, both Loral and PSP must agree to a deal for a full sale of Telesat.

The discussions signal that Loral’s largest shareholder, Mark Rachesky’s MHR Fund Management, and PSP are working together to get a deal completed. The two co-owners of Telesat were previously not talking with each other, making a joint transaction tricky, according to the people. Rachesky is Loral’s chairman.

A sale could be announced later this month or in early May, the people said.

Michael Bolitho, a Telesat spokesman, declined to comment, as did Deborah Allan, a spokeswoman for Ontario Teachers’ Pension Plan. A representative for PSP didn’t respond to requests for comment, while Linda Sims, a spokeswoman for Canada Pension Plan, declined to comment.

Previous Interest

Buyout firms including Apax Partners LLP, KKR & Co. and Carlyle Group LP had looked at buying Telesat, and all have dropped out of the bidding, the people familiar with the situation said. Reuters previously reported that Loral was in talks with Ontario Teachers’ and Canada Pension Plan.

Loral and PSP acquired Telesat from Canadian telecommunications company BCE Inc., a deal announced in December 2006 valued at about $3 billion including debt.

Telesat owns 14 satellites and manages the operations of satellites for third parties, according to its website. The company was founded in 1969 and launched the world’s first commercial, domestic communications satellite in geostationary orbit in 1972.

PSP took a huge risk at the time, so them doing well is ok. Could have invested in some distressed public companies in the sector at the time and also done very well, so not sure what the risk adjusted outcome against liquid options would have looked like, they still probably did well on this measure due to the Loral synergies. BC Partners and Apax in Europe also did very well in this sector, so it has been hot for years. PE in its classical form was really about clever distress investing, and financially de-risking as quickly as possible. One lesson people seem to forget is everything is cyclical. Understanding the drivers of an industries cyclicality is what winning investors do. 

The warning bells have been clear, but they are growing increasingly louder: Canadians are not saving enough for retirement, and they’ve got to do something about it, quickly.

“I think there’s a broad consensus that we are heading for a retirement income crisis,” said Murray Gold, managing partner at Koskie Minsky law firm, and a pension specialist who advises the Ontario Federation of Labour.

“Two-thirds of the workforce doesn’t have any pensions, and the kinds of pensions we have aren’t as good as they were 20 years ago,” he said.

Since the 2008 financial crisis, the provinces have called for reforms to boost payouts under the existing Canada Pension Plan, but the federal government has balked at the idea.

Premier Kathleen Wynne has said Ontario will go it alone and develop its own pension plan, with details to be revealed in this spring’s budget. It is expected to be a key plank of the Liberal platform if an election is called.

Nearly 1.3 million workers in Ontario do not have access to any type of employer-sponsored workplace pension. In Canada’s private sector, only one person in five has a workplace pension.

That has resulted in an erosion of pension coverage, and an erosion of quality, Gold said, raising questions about whether future retirees will be able to maintain their standard of living. If not, there would be a domino effect that would hurt the overall economy.

The oldest Baby Boomers are turning 68, some happily retired with company pensions and good nest eggs, thanks to equity in booming housing markets. But others are struggling, opting to work longer, even after the typical retirement age of 65.

The picture is even bleaker for the Boomers’ children and grandchildren, who are trying to find that first job, or jumping between jobs, which in all likelihood don’t include a company pension, and certainly not a defined benefit plan.

In recent years, companies have been getting out of defined benefit plans, which offer guaranteed payouts at retirement regardless of how investments performed. Instead, employers that do offer a pension are often moving to defined contribution plans, where employees essentially manage their own plans, much like a RRSP, with no promised set payout at retirement.

“People have now learned the ropes enough to know that there’s something at stake here, which is my retirement security or my kids’ retirement security,” said Susan Eng, vice-president of advocacy for CARP, formerly known as the Canadian Association of Retired Persons.

Eng says her members are watching their kids trying to eke out a better life, but can’t find work or can’t save enough. So those approaching retirement age end up helping the next generations financially.

“Our members are the people who will never benefit from this (pension reform) themselves. It’s too late for them,” she said, adding they want to ensure a safety net exists for future generations.

With talk of a proposed Ontario pension plan expected to heat up in the coming months, here’s a look at proposals to fix our pension woes.

Enhanced Canada Pension Plan

Almost all Canadian workers contribute to the Canada Pension Plan, which pays out in retirement or if someone becomes disabled. Under the current funding model, CPP pays out a maximum annual pension of about $12,000, though many people receive far less.

Some have argued that boosting CPP contributions is the easiest way to raise overall retirement incomes, though critics say raising pensions for all, including the affluent, isn’t the best solution.

Business groups have warned that hiking premiums would hurt employers, and potentially impede job creation.

Even though provinces have pushed for enhanced CPP for several years now, the federal government has signalled it has no desire to go this route.

Little action is expected here, because any changes to CPP would require Ottawa’s backing, along with approval from at least seven provinces representing two-thirds of the country’s population.

Pooled Registered Pension Plans (PRPPs)

Instead of an enhanced CPP, Ottawa has passed legislation permitting pooled registered pension plans, as have a few provinces, such as Quebec, Alberta and Saskatchewan. These plans are managed by financial institutions, with participants selecting options that set contribution rates.

Unlike defined benefit plans, these do not pay out a guaranteed retirement income. The payout depends on how the pool’s investments perform.

Small- and medium-sized businesses say they favour this model because it offers flexibility.

“There is a certain elegance to them. They enable a degree of choice, but at the same time nudging people toward virtuous decisions,” said Josh Hjartarson, vice president of policy and government relations for the Ontario Chamber of Commerce.

Hjartarson argued that enhancing CPP is a blanket move that would benefit people who don’t necessarily need it, while PRPPs are the preferred option for pension reform for its members.

He said many employers would choose to participate in a PRPP as part of an employee retention strategy, though others may not be financially able to do so.

“Let’s be honest, particularly in the current climate, not every employer is in a position to do that,” he said, adding that employees could also benefit as they could opt out if they don’t want to join.

There isn’t agreement on whether employers who offer a PRPP should be required to contribute to the pooled registered pension plan. The Ontario chamber surveyed nearly 1,000 employers in February, of which 33 per cent said yes, while 48 per cent no.

Critics say these plans are similar to group RRSPs, which simply can’t get to the size and scale needed to deliver predictable pensions with low management fees.

A middle way

Keith Ambachtsheer, director of the International Centre for Pension Management at the Rotman School of Management, argues that lower-income earners and high-income earners are well-served by current programs.

“If you are neither rich nor poor, nor in the public sector, then (pensions are) something you should be interested in,” said Ambachtsheer, who says something is needed between PRPPs and an enhanced CPP.

He argues that families with an annual income in the $30,000 to $100,000 range are at greatest risk if there isn’t pension reform. Low-income earners can receive CPP, old age security, which is clawed back based on income, as well as the guaranteed income supplement.

Ambachtsheer has put forward a proposal, published by the C.D. Howe Institute, calling for such a middle way.

He proposes to replace 60 per cent of middle-income family earnings after retirement, which would take an additional 6 per cent of pay contribution rate above the current 9.9 per cent CPP contribution rate. These contributions would be split 50-50 between employer and employee (so 3 per cent each), and would be phased in over a number of years.

While employers complain this model would be too costly, Ambachtsheer says they just want to say no. “I don’t have a lot of patience for these naysayers,” he said.

He insists such a model can be created, noting that even in tight times, employers often make annual inflationary pay increases. So, for example, instead of giving a 2 per cent wage increase, an employer could afford a 1 per cent contribution to pensions and then give 1 per cent in salary, and gradually increase pension contributions, he said.

Ontario pension plan

Details of what the province will propose for its made-in-Ontario solution are under wraps, though the plan has already drawn interest from provinces such as Manitoba and Prince Edward Island, whose populations are too small to go it alone.

Ambachtsheer argues that voluntary programs clearly don’t work, noting Canadians aren’t putting money into their RRSPs and tax-free savings accounts even though the tax incentives are there.

He says the keys to any Ontario pension plan are that it would need to ensure mandatory participation, and that it would need to be independently managed to keep fees lows, possibly modelled on the CPP investment board or the Ontario Teachers’ Pension Plan.

“Let’s get people saving, and do it in a way that is low-cost and professionally managed,” Ambachtsheer said. “We know how to do this. There’s nothing to be invented.”

The advantage is, given the working population of Ontarians, a pension plan could easily get to a size that would give it the advantages of scale. It would be much bigger than plans such as Teachers’ or the Healthcare of Ontario Pension Plan (HOOPP), and could invest in ways that would deliver higher returns than small plans or individual investors can get.

Savings and discipline

CARP’s Eng says the hard truth is that people must realize they have to ante up the cash. The general rule is that you need to contribute 18 to 20 per cent of income to earn a pension that pays 70 per cent of pre-retirement income, she says.

“It’s almost 18 per cent, split between employer and employee, that would otherwise be cash in your jeans,” Eng said. “Are people prepared to pay what it takes? I think we are getting close. There will be some sticker shock.”

She says those who envy Ontario teachers or other public sector workers with their good pensions need to remember they are making hefty contributions. Teachers contribute about 12 per cent of their income, matched by their employers.

But telling people they need to save more isn’t working, given Canadians aren’t taking advantages of existing RRSPs and TFSAs. And even if they are, individuals can’t easily invest in the same way as big pension funds, getting good returns with low fees, compounded over years.

Ambachtsheer blames inertia, saying only a small minority of people carefully plan their future, noting most are just dealing with busy lives without time to deal with retirement plans.

But given that 80 per cent of employees in the private sector do not have a pension, the urgency is growing.

“The societal question is, do we create a framework?” he said. “Is there some public initiative that would help these people?

“It’s just a matter of whether we can collectively wrap our heads around actually doing it.”

Volatility has returned to the markets, and growth stocks in information technology and health care have led the way down.

The chart above (click on image), from Deutsche Bank strategist Keith Parker, shows the extent to which fund positioning has helped fuel the recent decline in the stock market.

"Performance over the last month across stocks and sectors has been driven by position covering," says Parker in a report on recent investor positioning and flows.

"Through the first two months of the year, long/short equity hedge funds and mutual funds were neutral the market but long growth stocks, which helped underpin outperformance through the January-February sell-off. The rotation out of growth and into value starting in early March hurt and funds were forced to unwind positions."

Chart 2 provides a visual display (click on image below).

Coming into the first quarter of 2014, growth stocks and the stocks with the highest hedge fund ownership were one and the same.

Funds were loaded up on health care, consumer discretionary, and tech stocks (think biotech and social media), and the "momentum" trade did well in February following the big market sell-off in late January.

As chart 3 shows, the growth stocks were significantly outperforming the broader market until March (click on image below).

Since then, nearly all of the outperformance of this group of hot stocks has been erased as hedge funds have rebalanced, a process Parker says is probably almost over.

However, the unwind is "now spilling over to mutual funds that are still long growth, with outflows from growth funds exacerbating performance."

In the week through Wednesday, April 9, equity funds oriented toward growth stocks were hit with $1.7 billion of investor redemptions, following an outflow twice the size in the previous week. Flows into value funds, on the other hand, are accelerating — they took in $1.9 billion in the week through April 9 and $1.7 billion the week before. As one might expect from chart 1, consumer goods, utilities, and energy funds are receiving inflows while tech, health care, and financials funds are losing investor money.

David Kostin, chief U.S. equity strategist at Goldman Sachs, says the parallels between recent market action and that in March 2000, when the tech bubble burst, "dominated client discussions" last week.

"The current sell-off in high growth and high valuation stocks, with a concentration in technology subsectors, has some similarities to the popping of the tech bubble in 2000," says Kostin.

"Veteran investors will recall S&P 500 and tech-heavy Nasdaq peaked in March 2000. The indices eventually fell by 50% and 75%, respectively. It took the S&P 500 seven years to recover and establish a new high but Nasdaq still remains 25% below its all-time peak reached 14 years ago."

Kostin's take is that this time is different, as broad market valuations are not as stretched as they were then, and the "bubbly" parts of the market account for a much smaller portion of overall market capitalization today than then (tech accounted for 14% of overall S&P 500 earnings in 2000 but 33% of market cap, whereas today it accounts for 19% of both earnings and market cap).

While that is good news for the broader market, it's still bad news for these high-flying growth stocks (see chart 4, click on image below)).

"The stock market, but not momentum stocks, will likely recover during the next few months," says Kostin.

"Analysis of historical trading patterns around momentum drawdowns shows: (a) roughly 70% of the reversal is behind us following a 7% unwind during the last month; (b) an additional 3% downside exists to the momentum reversal during the next three months if the current episode follows the average historical experience; (c) if the pattern followed the path of a 25th percentile event a further 7% momentum downside would occur, or about double the reversal that has taken place so far; and (d) whenever the drawdown ends, momentum typically does NOT resume leadership."

On average, Kostin says, the S&P 500 has risen on average by 5% following momentum sell-offs like this, led by value stocks that underperformed as growth stocks were going up.

Jan Loeys, head of global asset allocation at JPMorgan, takes a similar view.

"Each of the market reversals of the past few weeks has in common that they represented widely held positions — long equities, overweight small caps, overweight tech, underweight emerging markets, and short duration," says Loeys.

"If there were greater worries about the economy or other downside risks, then we should have seen the dollar rise, credit and swap spreads widen, and emerging markets underperform. Correlations across risk assets should have risen. None of this has happened. There is no breadth to this sell-off."

Of course, there are, as always, reasons to be cautious. Many of them may relate to an optimistic scenario — one in which the economic recovery accelerates, causing the Federal Reserve to tighten monetary policy and interest rates to rise.

"S&P 500 price-to-earnings is demanding excluding mega-caps and likely dependent on interest rates staying low versus history," says David Bianco, chief U.S. equity strategist at Deutsche Bank.

Another factor to consider is corporate stock buybacks, which have restricted the supply of shares trading in the market.

"While everyone is focused on valuation and bubbles (to some degree rightfully so), the fact remains that the last few years have been supported by a low level of net equity issuance that has, all else equal, supported prices," says Dan Greenhaus, chief global strategist at BTIG.

This trend may now be poised to reverse as buyback activity slows, given the fact that shares have become more expensive as the market has headed higher.

"Rather than investing in new equipment and structures, businesses have used their cash positions to buy back stock or to grow through acquisitions," says Aneta Markowska, chief U.S. economist at Société Générale.

"This process, however, may be coming to an end. The ratio of the market value of equities to the replacement value of tangible assets (or the so-called Tobin's Q ratio) has increased significantly in the past year and now stands at the highest levels since 2000. With equity values currently estimated at 25% above replacement value, expanding organically seems to make a lot more economic sense than expanding through acquisitions or stock buybacks."

In other words, earnings per share have been boosted by a shrinking denominator — the amount of shares outstanding. If shares outstanding stop declining as buyback activity recedes and net equity issuance turns positive, it will put more onus on the numerator — the actual earnings — to propel earnings per share higher.

However, an acceleration in wage growth is a likely pre-requisite to Fed tightening. Such a development would pose a further headwind to earnings as corporations face rising employment costs.

"It now seems that what would be good for the recovery — higher labour income — will be detrimental for profit margins," says Gerard Minack, principal of Minack Advisors.

"This may be a good year for the economy, but profits may fall short of forecasts."

...let me just end this comment by stating that while tech stocks are getting whacked hard, the selloff in momentum stocks is overdone. The WSJ correctly notes that more investors are drawn into dividend stocks, but that's because they realize fears of Fed tapering are overblown and that more tapering will lead to deflation.

Why are momentum stocks selling off hard? A lot of it has to do with normal profit taking. Many of the hot stocks of 2013 ran up 300, 400 or 500 percent or more in the last couple of years so it's only normal they will get whacked hard from time to time. Regardless, I stick with my call in my Outlook 2014 and think all the bears getting greedy here will get their heads handed to them when these momentum stocks, including biotech stocks, snap back up violently. Admittedly, I am long biotech and this may be wishful thinking on my part as one of the smartest hedge fund talents in Canada recently told me he's very bearish on this market but I think he's timing is off (read my comment on the hedge fund curse).

This week is a big one for the Jewish and Christian faiths.

On Monday and Tuesday, Jewish people celebrated Passover, commemorating their ancestors' escape from slavery by the Egyptians. The story, immortalized on film in the classic movie The Ten Commandments, features Moses (played by Charlton Heston) telling the Egyptian Pharaoh (Yul Brynner) to "let my people go."

On Friday and Sunday, Christians celebrate Good Friday and Easter, marking the crucifixion and resurrection of Jesus.

Investors can use the themes of the holidays to resurrect their portfolios if they aren't getting the performance they want.

Like the slaves in Egypt whose hard work benefitted someone else, many investors' capital doesn't work hard for the owner, but instead makes big profits for mutual fund companies.

It's time to tell your mutual fund, "Let my money go."

Mutual funds are easy places to invest in if someone has neither the time nor willingness to conduct their own research.

The problem, however, is most mutual funds underperform the market or their benchmark index. In 2012, the S&P 500 was up 16%. According to Goldman Sachs, 65% of large-cap core mutual funds rose less than 16%.

In 2011, a mind blowing 84% of mutual funds underperformed the index. Over the past 10 years, the average number is 57%.

That means in any given year, you have less than a one-in-two chance of being invested in a mutual fund that simply keeps pace with the market.

And for the privilege of likely not making as much money as you should, you get to pay the funds a management fee that reduces your returns even more. Sometimes, you're even forced to pay a load, which is a fee just to enter the fund. For example, some funds, often bought through brokers, come with loads as high as 4.75%. So if you give the fund $10,000 to invest, it takes $475 right off the top and only invests $9,525. It's going to be tough to beat the market when, on day one, you're down nearly 5%.

Even if in the past your portfolio has been crucified by the large Wall Street institutions, you can still achieve solid returns over the long term.

Here are three steps for resurrecting your portfolio:

If you want to stick with mutual funds, own index funds.

They are much cheaper to own and will only cost you a few tenths of a percentage point. Plus, they tend to outperform their more actively managed peers.

For example, let's say you want to invest in emerging markets. The Vanguard Emerging Markets Index Fund (VEIEX), a member of The Oxford Club's Gone Fishin' Portfolio, has an expense ratio of just 0.33%. Compare that to the average emerging market fund fee of 1.64%. Over the past 10 years, the Vanguard fund's annual return has averaged 15.89%, nearly half a percentage point better than the average of all funds in the category.

If you invest $10,000, the Vanguard fund saves you $131 in fees per year. Doesn't sound like much, does it? But if you're saving that money every year and the fund returns 15.89% like it has historically, that's an extra $3,220 in your pocket over 10 years.

Take control of your money.

If you use a full-service broker or financial planner who does nothing but buy and sell investments based on what inventory his bosses tell him to move, or what stocks his firm's analysts rate a "Buy," you need to close your account as fast as you can.

A broker or financial planner who understands your needs and really works with you to achieve your financial goals can be well worth the fees you pay – especially if you don't like to do the work yourself. If the advisor helps you sleep better at night, stick with him or her.

Unfortunately, many brokers and advisors are more like the one described in the first scenario. They are salesmen, and the widgets they happen to sell are financial advice and products. If you suspect that describes the person you're working with, save yourself a bunch of money and frustration and move your money somewhere else.

Invest in conservative stocks that grow their dividends every year.

By purchasing and hanging on to stocks that I call Perpetual Dividend Raisers, you slash your fees. (You can buy stocks for $10 or less with most online discount brokers.)

Perpetual Dividend Raisers are stocks that grow their dividends every year, which gives you an annual raise as the dividends increase. Those dividends help you ride out a bear market as your dividends make up for some declines in stock price – plus, dividend stocks tend to fall less during bear markets.

By investing in stocks that raise their dividends every year, over time your yield increases, and what starts out as a 4% or 5% yield eventually becomes a 10% to 11% yield.

Those kinds of yields alone will be enough to beat the market in most years, regardless of how much the stock price climbs.

Since no financial messiah is coming to save your portfolio, consider taking these three steps to save yourself boatloads of money and improve your performance.

For those who celebrate, I hope this week's holidays are happy and meaningful.

I just wanted to say thanks for the Pension Pulse! It is amazing and very well written and researched. I am one of those Canadians in my early 60's that do not have a defined benefit plan or any pension at all other than CPP and of course OAS when I reach 65. I do have a large sum of RRSPs that I have been buying since I was 30. However, my retirement account is not yet large enough in order to allow me to retire.

However much I enjoy your articles with jaw dropping respect and admiration, there is nothing there for the average Canadian that does not have a DB plan. Please give us some ideas on investing, asset allocation, tax splitting and anything else that the average person can use who does not make a six figured salary. You are amazingly brilliant....start using your gift and knocking it down a notch for the rest of we poor folk.

Sincerely, Mike Turner in rural Nova Scotia, Canada

The École d'économie de Paris (the Paris School of Economics) is actually situated in the most un-Parisian part of the city. It is on the boulevard Jourdan in the lower end of the 14th arrondissement, bordered on one side by the Parc Montsouris. Unlike most French parks, there is a distinct lack of Gallic order here; in fact, with lakes, open spaces, and its greedy and inquisitive ducks, you could very easily be in a park in any British city. The campus of the Paris School of Economics, however, looks unmistakably and reassuringly like nearly all French university campuses. That is to say, it is grey, dull and broken down, the corridors smelling vaguely of cabbage. This is where I have arranged an interview with Professor Thomas Piketty, a modest young Frenchman (he is in his early 40s), who has spent most of his career in archives and collecting data, but is just about to emerge as the most important thinker of his generation – as the Yale academic Jacob Hacker put it, a free thinker and a democrat who is no less than "an Alexis de Tocqueville for the 21st century".

This is on account of his latest work, which is called Capital in the Twenty-First Century. This is a huge book, more than 700 pages long, dense with footnotes, graphs and mathematical formulae. At first sight it is unashamedly an academic tome and seems both daunting and incomprehensible. In recent weeks and months the book has however set off fierce debates in the United States about the dynamics of capitalism, and especially the apparently unstoppable rise of the tiny elite that controls more and more of the world's wealth. In non-specialist blogs and websites across America, it has ignited arguments about power and money, questioning the myth at the very heart of American life – that capitalism improves the quality of life for everyone. This is just not so, says Piketty, and he makes his case in a clear and rigorous manner that debunks everything that capitalists believe about the ethical status of making money.

The groundbreaking status of the book was recognised by a recent long essay in the New Yorker in which Branko Milanovic, a former senior economist at the World Bank, was quoted as describing Piketty's volume as "one of the watershed books in economic thinking". In the same vein, a writer in the Economist reported that Piketty's work fundamentally rewrote 200 years of economic thinking on inequality. In short, the arguments have centred on two poles: the first is a tradition that begins with Karl Marx, who believed that capitalism would self-destruct in the endless pursuit of diminishing profit returns. At the opposite end of the spectrum is the work of Simon Kuznets, who won a Nobel prize in 1971 and who made the case that the inequality gap inevitably grows smaller as economies develop and become sophisticated.

Piketty says that neither of these arguments stand up to the evidence he has accumulated. More to the point, he demonstrates that there is no reason to believe that capitalism can ever solve the problem of inequality, which he insists is getting worse rather than better. From the banking crisis of 2008 to the Occupy movement of 2011, this much has been intuited by ordinary people. The singular significance of his book is that it proves "scientifically" that this intuition is correct. This is why his book has crossed over into the mainstream – it says what many people have already been thinking.

"I did deliberately aim the book at the general reader," says Piketty as we begin our conversation, "and although it is obviously a book which can be read by specialists too, I wanted the information here to be made clear to everyone who wants to read it.' And indeed it has to said that Capital in the Twenty-First Century is surprisingly readable. It is packed with anecdotes and literary references that illuminate the narrative. It also helps that it is fluently translated by Arthur Goldhammer, a literary stylist who has tackled the work of the likes of Albert Camus. But even so, as I note that Piketty's bookshelves are lined with such headache-inducing titles as The Principles of Microeconomics and The Political Influence of Keynesianism, simple folk like me still need some help here. So I asked him the most obvious question I could: what is the big idea behind this book?

"I began with a straightforward research problematic," he says in elegant French-accented English. "I began to wonder a few years ago where was the hard data behind all the theories about inequality, from Marx to David Ricardo (the 19th-century English economist and advocate of free trade) and more contemporary thinkers. I started with Britain and America and I discovered that there wasn't much at all. And then I discovered that the data that did exist contradicted nearly all of the theories including Marx and Ricardo. And then I started to look at other countries and I saw a pattern beginning to emerge, which is that capital, and the money that it produces, accumulates faster than growth in capital societies. And this pattern, which we last saw in the 19th century, has become even more predominant since the 1980s when controls on capital were lifted in many rich countries."

So, Piketty's thesis, supported by his extensive research, is that financial inequality in the 21st century is on the rise, and accelerating at a very dangerous pace. For one thing, this changes the way we look at the past. We already knew that the end of capitalism predicted by Marx never happened – and that even by the time of the Russian revolution of 1917, wages across the rest of Europe were already on the rise. We also knew that Russia was anyway the most undeveloped country in Europe and it was for this reason that communism took root there. Piketty goes on to point out, however, that only the varying crises of the 20th century – mainly two world wars – prevented the steady growth of wealth by temporarily and artificially levelling out inequality. Contrary to our perceived perception of the 20th century as an age in which inequality was eroded, in real terms it was always on the rise.

In the 21st century, this is not only the case in the so-called "rich" countries – the US, the UK and western Europe – but also in Russia, China and other countries which are emerging from a phase of development. The real danger is that if this process is not arrested, poverty will increase at the same rate and, Piketty argues, we may well find that the 21st century will be a century of greater inequality, and therefore greater social discord, than the 19th century.

As he explains his ideas to me with formulae and theorems, it still sounds a little too technical (I am someone who struggled with O-level maths). But by listening carefully to Piketty (he is clearly a good and patient teacher) and by breaking it down into bite-sized chunks it does all start to make sense. For this beginner he explains that income is a flow – it moves and can grow and change according to output. Capital is a stock – its wealth comes from what has been accumulated "in all prior years combined". It's a bit like the difference between an overdraft and a mortgage, and if you don't ever get to own your house you'll never have any stock and always be poor.


In other words, in global terms what he is saying is that those who have capital and assets that generate wealth (such as a Saudi prince) will always be richer than entrepreneurs who are trying to make capital. The tendency of capitalism in this model is to concentrate more and more wealth in the hands of fewer and fewer people. But didn't we already know this? The rich get rich and the poorer get poorer? And didn't the Clash and others sing about it in the 1970s?

"Well actually, we didn't know this, although we might have guessed at it," says Piketty, warming to his theme. "For one thing this is the first time we have accumulated the data which proves that this is the case. Second, although I am not a politician, it is obvious that this movement, which is speeding up, will have political implications – we will all be poorer in the future in every way and that creates crisis. I have proved that under the present circumstances capitalism simply cannot work."

Interestingly, Piketty says that he is an anglophile and indeed began his research career with a study of the English system of income tax ("one of the most important political devices in history"). But he also says that the English have too much blind faith in markets which they do not always understand. We discuss the current crisis in British universities, which having imposed fees now find that they are short of cash because the government miscalculated what students would have to pay and is now unable to ensure that the loans handed out to cover the fees will ever be repaid. In other words, the government thought it was on to a sure money-maker by introducing fees; in fact, because it could not control all the variables of the market, it was gambling with the nation's money and looks set to lose spectacularly. He chuckles: "This is a perfect example of how to inflict debt on to the public sector. Quite extraordinary and quite impossible to imagine in France."

For all that he is keen on Britain and the United States, Piketty says that he only really feels at home in France. Capital in the Twenty-First Century is constructed out of a plethora of French references (the historian François Furet is key), and Piketty declares that he understands the French political landscape best of all. He was brought up in Clichy in a mainly working-class district and his parents were both militant members of Lutte Ouvrière (Workers' Struggle) – a hardcore Trotskyist party which still has a significant following in France. Like many of their generation, disappointed by the failure of near-revolution of May '68, they dropped out to raise goats in the Aude (this was a classic trajectory for many babacools – leftist hippies – of that generation). The young Piketty worked hard at school, however, studying in Paris and finishing up with a PhD from the London School of Economics at the age of 22. He then moved on to Massachusetts Institute of Technology, where he was a noted prodigy, before moving back to Paris to finally become director of the school where we are now sitting.

His own political itinerary began, he tells me, with the fall of the Berlin Wall in 1989. He set out to travel across eastern Europe and was fascinated by the wreckage of communism. It was this initial fascination that led him towards a career as an economist. The gulf war of 1991 also influenced him. "I could see then that so many bad decisions were taken by politicians because they did not understand economics. But I am not political. It is not my job. But I would be happy if politicians could read my work and draw some conclusions from it."

This is slightly disingenuous as Piketty did actually work as an adviser to Ségolène Royal in 2007, when she was the socialist candidate in the presidential elections. This was not a happy period for him – his love affair with the politician and novelist Aurélie Filipetti, another Royal acolyte, ended around then with acrimonious accusations on both sides. Fair enough, after this murky business, that Piketty might want to distance himself from the everyday rough and tumble of real politics.

But no matter. What have we learned? Capitalism is bad. Hooray! What's the answer? Socialism? Hope so. "It is not quite so simple," he says, disappointing this former teenage Marxist. "What I argue for is a progressive tax, a global tax, based on the taxation of private property. This is the only civilised solution. The other solutions are, I think, much more barbaric – by that I mean the oligarch system of Russia, which I don't believe in, and inflation, which is really just a tax on the poor." He explains that oligarchy, particularly in the present Russian model, is quite simply the rule of the very rich over the majority. This is both tyrannical and not much more than a form of gangsterism. He adds that the very rich are not usually hurt by inflation – their wealth increases anyway – but the poor suffer worst of all with a rising cost of living. A progressive tax on wealth is the only sane solution.

But for all that he is talking sense, much of it common sense, I put to him that no political party in Britain or the United States, of left or right, would dare to go to the polls with such idealistic ideas. The present government of François Hollande is widely despised not because of the president's sexual peccadilloes (in contrast, these are pretty much widely admired) but because of the punitive tax regime he has been seeking to impose.

"This is true," he says. "Of course it is true. But it is also true, as I and my colleagues have demonstrated in this book, that the present situation cannot be sustained for much longer. This is not necessarily an apocalyptic vision. I have made a diagnosis of the past and present situations and I do think that there are solutions. But before we come to them we must understand the situation. When I began, simply collecting data, I was genuinely surprised by what I found, which was that inequality is growing so fast and that capitalism cannot apparently solve it. Many economists begin the other way around, by asking questions about poverty, but I wanted to understand how wealth, or super-wealth, is working to increase the inequality gap. And what I found, as I said before, is that the speed at which the inequality gap is growing is getting faster and faster. You have to ask what does this mean for ordinary people, who are not billionaires and who will never will be billionaires. Well, I think it means a deterioration in the first instance of the economic wellbeing of the collective, in other words the degradation of the public sector. You only have to look at what Obama's administration wants to do – which is to erode inequality in healthcare and so on – and how difficult it is to achieve that, to understand how important this is. There is a fundamentalist belief by capitalists that capital will save the world, and it just isn't so. Not because of what Marx said about the contradictions of capitalism, because, as I discovered, capital is an end in itself and no more."

Piketty delivers this speech, erudite and powerful, with a quiet passion. He is, one would guess, a relatively modest and self-effacing character, but he loves his subject and it is indeed a delight to find oneself in the midst of a private seminar on money and how it works. His book is indeed long and complicated but anyone who lives in the capitalist world, which is all of us, can understand the arguments he makes about the way it works. One of the most penetrating of these is what he has to say about the rise of managers, or "super-managers", who do not produce wealth but who derive a salary from it. This, he argues, is effectively a form of theft – but this is not the worst crime of the super-managers. Most damaging is the way that they have set themselves in competition with the billionaires whose wealth, accelerating beyond the economy, is always going to be out of reach. This creates a permanent game of catch-up, whose victims are the "losers", that is to say ordinary people who do not aspire to such status or riches but must be despised nonetheless by the chief executives, vice-presidents and other wolves of Wall Street. In this section, Piketty effectively rips apart one of the great lies of the 21st century – that super-managers deserve their money because, like footballers, they have specialised skills which belong to an almost superhuman elite.

"One of the great divisive forces at work today," he says, "is what I call meritocratic extremism. This is the conflict between billionaires, whose income comes from property and assets, such as a Saudi prince, and super-managers. Neither of these categories makes or produces anything but their wealth, which is really a super-wealth that has broken away from the everyday reality of the market, which determines how most ordinary people live. Worse still, they are competing with each other to increase their wealth, and the worst of all case scenarios is how super-managers, whose income is based effectively on greed, keep driving up their salaries regardless of the reality of the market. This is what happened to the banks in 2008, for example."

It is this kind of thinking that makes Piketty's work so attractive and so compelling. Unlike many economists he insists that economic thinking cannot be separated from history or politics; this is what gives his book the range the American Nobel laureate Paul Krugman described as "epic" and a "sweeping vision". Piketty's influence indeed is growing well beyond the small enclosed micro-society of academic economists. In France he is becoming widely known as a commentator on public affairs, writing mainly for Le Monde and Libération, and his ideas are frequently discussed by politicians of all hues on current affairs programmes such as Soir 3. Perhaps most importantly, and unusually, his influence is growing in the world of mainstream Anglo-American politics (his book is apparently a favourite in the Miliband inner circle) – a place traditionally indifferent to French professors of economics. As poverty increases across the globe, everyone is being forced to listen to Piketty with great attention. But although his diagnosis is accurate and compelling, it is hard, almost impossible, to imagine that the cure he proposes – tax and more tax – will ever be implemented in a world where, from Beijing to Moscow to Washington, money, and those who have more of it than anyone else, still calls the shots.

There is a lot to ponder in their paper and the exchange above. In particular, can capitalists afford a recovery and if not, at what point does their regime crumble and bring about major social upheaval? And are pensions held hostage to the "conflictual power logic of capitalism" and therefore contributing to increasing inequality instead of reducing it?

I hope enhanced public pensions will be a "game changer" in terms of redistributing income downward but so far the evidence does not support this assertion. In fact, the evidence shows pensions are contributing to greater inequality.

I have a slightly different view of the so-called "pension pyramid" or "pension Ponzi." I remain an ardent defender of well governed defined-benefit plans and believe smart politicians understand that pensions pay political dividends. But as I wrote in that comment:

Shifting employees to a defined-contribution plan is basically condemning them to pension poverty. America's 401 (k) nightmare is proof that the current system is a failure and it's far from over. The worst is yet to come but by that time, it will be too late. In many respects, it's already too late.

What we are witnessing now is the end phase of financial capitalism. I touched upon it when I went over New Jersey's Pensiongate. You have a bunch of rich and powerful hedge fund and private equity managers contributing to their favorite Democratic and Republican candidates in order to secure more money to manage from public pension funds relying on useless investment consultants shoving them into alternative investments. These pension funds are all praying for an alternatives miracle that will never happen. It's great for Wall Street, which effectively carries a license to steal, but not great for Main Street.

Let me be blunt. I love America and think it's the best country in the world. My grandfather fought with the U.S. Army in WWI and my grandmother received a pension from them even after he died. The U.S. has always been and will remain the tail that wags the global economy. But U.S politicians have to get their collective heads out of their asses and start implementing real reforms on their healthcare and pension systems, including reforms on governance that will bolster public pension plans.

One U.S. politician who gets it is Senator Bernie Sanders of Vermont. He's a bit too leftist and cooky for my taste but he brings up many excellent points and regularly tweets on income inequality. Here is one of his tweets which caught my eye (click on image):

And a lot of these rich hedge fund managers are collecting huge fees for delivering mediocre performance. They have basically become large, lazy asset gatherers profiting from dumb public pension funds paying alpha fees for beta or sub beta performance.

If you don't think America has an inequality problem, read this New Yorker article by John Cassidy, it will blow you away. Unfortunately, inequality in the U.S. and elsewhere will only get worse.

I don't mince my words and I don't hold anything back. Ask yourself this, who benefits the most from the current system in the United States? Is it Main Street or Wall Street? Is it Joe and Jane Working Class or powerful rich hedge fund and private equity titans?

And Michael's book, The Bubble and Beyond, is must reading for anyone who wants to understand what happens next. As I stated in my Outlook 2014, once the mother of all liquidity rallies dissipates, we will have the mother of all liquidity hangovers, but we won't have to worry about that until 2015 or 2016. We are still in a private debt crisis, which is the primary reason why less and less people are investing in the stock market, something which all three participants in the great HFT debate didn't touch upon.

Persons interested in allocating/investing their assets tend to have two different schools of thought regarding investing in healthcare. The first line of thinking, which seems to be more common, is that healthcare is a great area in which to invest because there exist: (1) unmet medical needs yet to be addressed, (2) amazing scientific technologies that were not in existence just a few years ago, and (3) an aging demographic globally and commensurately an increasingly large pool of consumers of healthcare goods and services.

All of these are true, but they fail to recognize other truths that are equally important. First, there has been a trend toward aging demographics for decades. Second, while technologies are better, the hurdles for discovering new drugs and therapies are much higher. Over the past few decades, there have been incredible, life-saving discoveries including drugs to lower blood pressure, drugs to treat high cholesterol, drugs to treat various cancers, artificial joints and heart valves, pace makers, and diagnostic tools such as MRIs and PET scanners. Arguably, these were low hanging fruit, but they have made enormous impacts on health and longevity. Incremental discoveries that will provide further benefits become increasingly challenging to find.

Further, economic pressures augur against sustained growth in healthcare. At present, healthcare currently consumes over 17% of U.S. GDP, up from about 7% in 1970 (sources: The World Bank; CMS; CMS again). At such a level, there is a need for payers, whether they be governments or private companies, or insurers, to push back against further growth. It is likely not economically bearable. As a result, healthcare becomes a zero-sum game constrained to GDP growth rates (meaning that increases in spending in one area must be offset by decreases in other areas). Part of the growth in spending over past decades has arisen because of the complex nature of delivery of healthcare. There are inefficiencies in the market and information failures. The involved parties (payers, decision makers, and users/patients) all have different agendas, different pressures, and different levels of information. I have written about the economics of healthcare delivery on my blog (see: The problems inherent to healthcare economics and Healthcare economics – Medical billing: an arcane, problematic system and More on generic Viagra: inefficiency within healthcare).

Since the mid 1990s, price increases have been meaningful drivers of the growth in healthcare (here are some things I’ve written on my blog about drug prices: Should prescription drugs cost as much as they do? and Drug price inflation). Specifically on that point, the launch of a single new hepatitis drug (called Sovladi) has triggered a cascade of scrutiny about the high prices of certain drugs. Similarly, the American Society of Clinical Oncology (the leading medical group that focuses on treating cancer) is reportedly discussing an initiative to encourage doctors to consider the prices of medications as they decide on treatment regiments. Stories such as these are also garnering attention in the media, such as in the recent New York Times article Cost of Treatment May Influence Doctors.

I favor a second line of thinking about investing in healthcare, namely that this sector is highly specialized, complex, and esoteric. This complexity and specialization leads to mispricing of stocks and opportunities to invest in individual, specifically-selected equities (as opposed to seeking indiscriminate exposure to the healthcare universe broadly). The complexities are multifold, with scientific issues, regulatory dynamics, political machinations, and intellectual property matters variably influencing individual companies. These exist on top of the already arcane delivery of healthcare and the complex business operations of the companies involved. Any or all of these issues can drive mispricing of stocks. Indeed, even if one takes the view that secular trends will drive growth in healthcare, such an outlook might already be reflected in stock prices. Moreover, investors can become overly optimistic and bid prices up to inappropriately high levels. Behavioral biases exist for healthcare stocks, with exuberance and fear driving prices and creating opportunities.

On the topic of exuberance, healthcare can generate excitement for scientific reasons (the promise of curing cancer or any number of reasons) and economic reasons (the prospect of investing in a growth area not leveraged to the economy when investors become concerned about recessions or economic slowdowns). Markets become frothy at times. Wall Street analysts find reasons to justify higher stock prices (such as lowering their discount rates for future earnings or ascribing higher probabilities of success to early-stage, speculative drugs or unproven business models). These types of scenarios are not infrequent. As a result, there are excellent opportunities to find ‘short’ investments in healthcare, not just long investments. Catalysts for individual ‘short’ investments can run the gamut from disappointing earnings to the emergence of competition to failed clinical trials to decelerating revenues. Further, holding individual short investments that are intended to generate alpha/returns also serves to protect a portfolio of long investments in periods of stock price volatility, especially when investors become complacent and prices become frothy and excessive.

On the topic of investing in healthcare, it is worth noting that “biotech” as a subsector tends to garner headlines, but healthcare is far broader. (Philosophically, we believe that there are compelling reasons to invest in select biotech stocks, but many stocks are driven by hype and/or emotion and, as such, are generally not good investments.) There are approximately 2,000 public healthcare companies across the globe. There are hospitals, managed care organizations/HMOs, service companies, business-to-business providers, consumer healthcare companies, drug stores, medical device companies, pharmaceutical companies, healthcare IT companies, etc. The sector is large, diverse, heterogeneous, and filled with uncorrelated investment opportunities. By focusing on this sector continuously and consistently, we are able to find opportunities, both long and short. One constant seems to be that new opportunities continue to arise. This makes healthcare an attractive universe in which to invest.

 “In 2009, I hired three analysts. They had different styles. I did not have a full appreciation of the challenges of growing the team this quickly and the degree to which maintaining Sio’s style was critical. For example, some of the analysts gravitated toward more speculative investments than I was comfortable. Ultimately, as the portfolio manager, the track record and the responsibility lie with me. Looking back, 2010 was a year where the analysts, despite being good people, were distractions in aggregate rather than overall contributors to generating performance. I made the hard decision to part with all of these analysts in late 2010. It was the right thing for the team at Sio and for our investors. Despite a challenging year, I look back and assert that not only do I now have a better understanding of who is the right team for me, I also know how I will perform in a challenging environment. I rebuilt the team with extraordinary people who share and embrace Sio’s approach. I believe our results since that time suggest that this was the right course of action.”

The Colleges of Applied Arts and Technology (CAAT) Pension Plan reported a 13.9% net return for the year that ended on December 31, 2013.

The DB plan’s net assets climbed to $7.1 billion, up from $6.3 billion the previous year.

In its valuation filed as of Jan. 1, 2014, the pension plan is 105% funded on a going-concern basis and has a funding reserve of $525 million.

The plan returned 14.5% before investment management fees. Since the 2008 economic meltdown, the CAAT Pension Plan’s investment portfolio has produced an average annual return of 11.7% gross and 11.1% net of investment management fees.

Last year, contributions to the CAAT plan, which are shared equally by employees and employers of the Ontario college system, amounted to $368 million. Income from investments was $860 million. The plan paid $344 million in pension benefits for the year.

The CAAT plan has 22,000 members working in the Ontario college system, which is made up of 24 colleges and seven affiliated non-college employers. It also has 15,000 members who are retired or have a deferred pension.

For every dollar paid in pension, at least 70 cents come from investment income. The remaining 30 cents come from equal member and employer contributions.

The CAAT Pension Plan today announced a 13.9% rate of return net of investment management fees for the year ended December 31, 2013.The Plan’s net assets increased to $7.1 billion from $6.3 billion the previous year.

In its valuation filed as at January 1, 2014, the CAAT Pension Plan is 105% funded on a going-concern basis with a funding reserve of $525 million.

The Plan returned 14.5% before investment management fees totaling 60 basis points. Since the economic crisis of 2008, the CAAT Pension Plan’s well-diversified investment portfolio has earned an average annual rate of return of 11.7% gross and 11.1% net of investment management fees.

Contributions to the CAAT Plan, shared equally by employees and employers of the Ontario college system, were $368 million in 2013, while income from investments was $860 million. The Plan paid $344 million in pension benefits for the year.

The CAAT Pension Plan has 22,000 members employed in the Ontario college system, which is made up of 24 colleges and seven affiliated non-college employers, and 15,000 members who are retired or have a deferred pension.

For every dollar paid in pension, at least 70 cents comes from investment income. The remaining 30 cents comes equally from member and employer contributions.

The average annual lifetime pension for all retired members and survivors is $23,700. In 2013, members on average retired at age 62 after 24 years of pensionable service. The 730 members who retired last year collected an average annual lifetime pension of $37,400.

The CAAT Plan seeks to be the pension plan of choice for single-employer Ontario university pension plans interested in joining a multi-employer, jointly sponsored plan in the sector. The postsecondary education alignment and similar demographic profile of university and college employees makes the university plans an ideal fit with the CAAT Plan’s existing asset and liability funding structures. The CAAT Plan has been in discussions with individual universities, employer and faculty associations, and with government officials, about the feasibility of building a postsecondary sector pension plan that leverages the Plan’s infrastructure and experience, reducing costs and risks for all stakeholders.

“We believe the merger of interested university pension plans with the CAAT Plan would benefit all stakeholders by delivering predictable costs and more secure benefits at a lower risk,” says Derek Dobson, CEO of the CAAT Pension Plan. “We can achieve this through an alignment of interests within the sector that provides the added advantage of seamless portability of pensions between colleges and universities.”

Created at the same time as the Ontario college system in 1967, the CAAT Plan assumed its current jointly sponsored governance structure in 1995. The CAAT Plan is a contributory defined benefit pension plan with equal cost sharing. Decisions about benefits, contributions and investment risk are also shared equally by members and employers. The Plan is sponsored by Colleges Ontario, OCASA (Ontario College Administrative Staff Association) and OPSEU (Ontario Public Service Employees Union).

Our annual report will be out in a few weeks with a lot more detail but in short, our 13.9% net return in 2013 was driven by positive absolute performance in all of our asset classes (with the exception of bonds of course),the strongest coming from our 30% weighting in non-Canadian equities. It was also a good year for positive relative performance – again in virtually all asset classes. Added value was 210 bps net of fees or $130 million over the year.

Alberta Investment Management Corporation (AIMCo) is pleased to report a 14.0 % net rate of return on behalf of its balanced fund clients, who represent $63.2 billion of assets under management, for the year ending December 31, 2013. AIMCo’s government and specialty fund clients, who represent $11.5 billion of assets under management, earned a net return of 4.0%. In aggregate, AIMCo earned a 12.5% net rate of return on assets under management of $74.7 billion, generating investment income in excess of $ 8.3 billion and active return of $589 million across all clients.

Public market investments , comprised of $ 25.5 billion in Money Market & Fixed Income and $32.0 billion in Public Equities, significantly outperformed their market benchmarks, as did Mortgages and Private Debt& Loan. Private Investments in Real Estate and Timberlands also contributed to the strong performance. 

States Leo de Bever, Chief Executive Officer, “Since AIMCo was created in 2008, we have been singularly focused on achieving superior return on risk on our clients’ combined assets of $75 billion. Size gives us the economies of scale and access to investment expertise that allows us to extract above market returns on the best available terms .” Since 2008 , the organization has delivered on its mandate, earning a five year annualized net return of 8.8% and approximately $3 billion in value added.

Detailed performance information will be available in AIMCo’s Annual Report to be release d in June 2014. 

Alberta Investment Management Corp. said Wednesday it posted a 12.5% return last year, benefiting from improving equity markets as other big Canadian pension funds have done.

The double-digit gain beat the Alberta-based pension fund's benchmark return of about 11.5% and comes after Ontario Teachers' Pension Plan generated a 10.9% return last year and Caisse de Depot et Placement du Quebec posted a 13.1% gain.

Like these funds, AIMCo, which oversees 74.7 billion Canadian dollars ($67.7 billion) on behalf Alberta's provincial public sector employees, attributed its performance in part to its public equity holdings.

"We had an overweight to equities and that paid off quite handsomely," Leo de Bever, AIMCo's chief executive, told The Wall Street Journal in a phone interview.

Global stock indexes surged last year on expectations of improving global economic conditions. The U.S. broad-based S&P 500 stock index gained 30% in 2013, while the Stoxx Europe 600 rose 17% and Japan's Nikkei Stock Average benchmark gained 57%.

Looking ahead, Mr. de Bever suggests equities may not perform as well this year, but he remains more bullish on stocks compared with bonds.

"Over the next five years…I'd rather be in stocks than bonds because bond yields are either going to stay low" or if they rise that will hurt capital gains, the pension fund executive said.

In the fixed-income sector, AIMCo favored corporate bonds, and short duration debt, allowing these investments to outperform their benchmarks last year. The pension fund's real estate, and timberland investments in Australia also generated solid returns.

But repeating that performance is becoming more difficult because the "the pricing (for these assets) is getting very high," Mr. de Bever said.

Alberta’s giant pension fund manager posted double-digit returns for 2013, marking the best performance in its six-year history.

Edmonton-based Alberta Investment Management Corp. (AIMCo), which oversees $74.7 billion of assets, recorded a net return of 12.5 per cent last year. In dollar terms, that equates to more than $8.3 billion.

The gains included a net return of 14 per cent on the balanced funds AIMCo manages for various public-sector pension and endowment fund clients, including the $17.3-billion Alberta Heritage Savings Trust Fund.

Balanced funds, which hold a mix of stocks, bonds and other securities, comprised more than $63 billion, or nearly 85 per cent of AIMCo’s total assets at the end of 2013.

AIMCo’s government and specialty funds, which largely hold conservative, low-return money market securities, posted a net return of four per cent last year.

The sparkling 2013 performance boosted AIMCo’s five-year annualized net rate of return — which dates back to the global financial crisis of 2008 — to a more-than-respectable 8.8 per cent.

Leo de Bever, the veteran 65-year-old pension fund manager who has served as AIMCo’s first and only CEO since the firm was spun off as a Crown corporation in 2008, says AIMCo’s nifty 2013 gains were driven largely by the sizzling performance of U.S. and global equities.

The S & P 500 Index, the main U.S. stock market benchmark, rose nearly 30 per cent last year, its best performance since 1997. Japan’s Nikkei 225 Index soared by well over 50 per cent and the MSCI World Index jumped more than 22 per cent.

“Last year if you stayed away from bonds and were overweight equities, that obviously worked out well,” says de Bever.

“Global equities did the best, followed by U.S. equities and then Canadian equities. So any of our peers that were heavily into Canadian equities wouldn’t have done quite as well as those who had global exposure.”

The S & P/TSX Composite Index, Canada’s main equity benchmark, posted a relatively modest gain of 9.5 per cent last year, trailing all of the major U.S. indexes by a wide margin. Canada’s resource-heavy index was weighed down by the poor performance of energy and mining stocks.

The roles have reversed thus far in 2014, however, as energy stocks have surged. Toronto’s lead index is up about 6.7 per cent through Wednesday’s close. That’s well above the 1.4-per-cent uptick in the S & P 500 Index, the top-performing U.S. equity index.

“After a year like last year people were obviously saying, ‘What are the parts of the market that are really overvalued, and what are the areas that got hurt?’ ” de Bever notes. “Well, what got hurt last year were resources stocks. That was both a China story and a developing world growth story,” as both slowed.

“This year we’ve had some political turbulence (notably in Ukraine) which is probably causing some of that money to flow back into energy, since there’s a feeling that energy security in Europe is now going to be what it is,” (i.e., less certain.)

So what kind of year does de Bever anticipate for equity investors in 2014?

“My guess is that when we get to the end of the year, the net return will be much more modest than what we saw last year, but that doesn’t mean it’s going to be negative,” he says.

“The overall top-line growth of the economy is not bad. It’s not great, but what’s happening is that the profitability of a lot of companies is still strong because they are implementing new ways of doing things, and using new technologies to save costs. So as long as (economic growth) is up, stock markets may hang in there.”

Indeed, while the generally accepted view is that economic growth since the 2008-09 recession has been softer than in past cycles, de Bever says he is beginning to doubt that conventional view.

“I think people probably underestimate the strength of the economy right now,” he argues. “The measurement system we use for GDP (Gross Domestic Product) is very good for industrial economies that make stuff, but it’s not so good for measuring ideas and services,” he notes.

“My sense is that growth is understated, and inflation is probably overstated. Sometimes we’re too morose about our growth prospects. I think the economy is probably doing better than people think.”

In the national debate over what to do about public pension shortfalls, here’s something you may not know: The texts of the agreements signed between those pension funds and financial firms are almost always secret. Yes, that’s right. Although they are public pensions that taxpayers contribute to and that public officials oversee, the exact terms of the financial deals being engineered in the public’s name and with public money are typically not available to you, the taxpayer.

To understand why that should be cause for concern, ponder some possibilities as they relate to pension deals with hedge funds, private equity partnerships and other so-called “alternative investments.” For example, it is possible that the secret terms of such agreements could allow other private individuals in the same investments to negotiate preferential terms for themselves, meaning public employees’ pension money enriches those private investors. It is also possible that the secret terms of the agreements create the heads-Wall-Street-wins, tails-pensions-lose effect — the one whereby retirees’ money is subjected to huge risks, yet financial firms’ profits are guaranteed regardless of returns.

North Carolina exemplifies the latter problem. In a new report for the union representing that state’s public employees, former Securities and Exchange Commission investigator Ted Siedle documents how secrecy is allowing financial firms to bilk the Teachers’ and State Employees’ Retirement System, which is the seventh largest public pension fund in America.

The first part of Siedle’s report evaluates the secrecy.

“Today, TSERS assets are directly invested in approximately 300 funds and indirectly in hundreds more underlying funds, the names, investment practices, portfolio holdings, investment performances, fees, expenses, regulation, trading and custodian banking arrangements of which are largely unknown to stakeholders, the State Auditor and, indeed, to even the (State) Treasurer and her staff,” he reports. “As a result of the lack of transparency and accountability at TSERS, it is virtually impossible for stakeholders to know the answers to questions as fundamental as who is managing the money, what is it invested in and where is it?”

Before you claim this is just a minor problem, consider some numbers. According to Siedle’s report, this huge pension system now is authorized to invest up to 35 percent — or $30 billion — of its assets in alternatives. Consider, too, that Siedle’s report shows that with such a large allocation in these risky alternatives, the fund “has underperformed the average public plan by $6.8 billion.”

So what is happening to retirees’ money? As Siedle documents, more and more of it is going to pay the exorbitant fees charged by the Wall Street firms managing the pension money.

“Fees have skyrocketed over 1,000 percent since 2000 and have almost doubled since (2008) from $217 million to $416 million,” he writes, adding that “annual fees and expenses will amount to approximately $1 billion in the near future.”

The details get worse from there, which makes Siedle’s report a genuine must-read for anyone who wants to understand the larger story of public pensions. After all, North Carolina is not an isolated incident. In state after state, the financial industry is citing modest public pension shortfalls to justify pushing those pensions to invest more money in riskier and riskier high-fee investments — and to do so in secret.

It is a story that isn’t some minor issue. On the contrary, the fight over that $3 trillion is fast becoming one of the most important economic, business and political stories of modern times. The only question is whether the story can even be told — or whether those profiting off secrecy can continue hiding their schemes from the public.

The need for regulatory intervention by the U.S. Securities and Exchange Commission in the North Carolina state pension alternative investment stand-off between the State Treasurer and her deep-pocketed Wall Street allies, on the one hand, and the stakeholders committed to safeguarding the $87 billion pension, on the other, cannot be overstated. The same situation exists at countless other public pensions around the nation, in states such as Illinois, Kentucky, Rhode Island and South Carolina. At stake is nothing less than the fiscal viability of state and local governments across the country, as well as state employees’ retirement security.

The following is a summary of a 147-page forensic investigative report of the North Carolina pension which was filed with the SEC this week. My firm, Benchmark Financial Services, Inc. was retained by the State Employees Association of North Carolina, SEIU Local 2008, to conduct this preliminary review. Benchmark identified widespread potential violations of law within the pension which we believe should be investigated by the SEC, Internal Revenue Service and law enforcement.

Janet Cowell is neither the first North Carolina State Treasurer to abuse her power as sole fiduciary of the state pension nor, absent radical structural reform, will she be the last. Pay-for-play has long been a problem in the state’s pension system. For more than a decade state treasurers have handed out billions of dollars in public assets to money management and other firms that contribute to their political campaigns.

Cowell has taken this quid pro quo to a new level as the Teachers’ and State Employees’ Retirement System of the State of North Carolina (“TSERS”) has grown to $87 billion and disclosed fees paid to Wall Street have skyrocketed 1,000 percent. Cowell’s political manipulation of the state pension fund has cost North Carolina $6.8 billion in fees and lost investment opportunities during her tenure.

The unchecked ability to steer tens of billions in workers’ retirement savings into hundreds of the highest-cost hedge, private equity, venture and real estate funds ever devised by Wall Street, in exchange for political contributions to her campaign and to the campaigns of other influential politicians, makes the Treasurer today arguably the state’s most powerful elected official.

The profound lack of transparency related to these risky so-called “alternative” investments provides investment managers ample opportunities to charge excessive fees, carry out transactions on behalf of the pension on unfavorable terms, misuse assets, or even steal them outright. Worse still, the Treasurer has betrayed her fiduciary duty by entering into expansive agreements with Wall Street to keep the very details of their abuse of pension assets secret — including withholding information regarding grave potential violations of law.

Kickbacks, self-dealing, fraud, tax evasion and outright theft may be designated as confidential pursuant to the North Carolina Trade Secrets Protection Act, says the Treasurer.

On a more granular level, Cowell’s efforts to thwart disclosure have helped mask potential violations including, but not limited to the following: fraudulent representations related to the performance of alternative investments; concealment and intentional understatement of $400 million in annual alternative investment fees and expenses to date; concealment of approximately $180 million in placement agent compensation; the charging of bogus private equity fees; violations of securities broker-dealer registration requirements related to private equity transaction fees; securities and tax law violations regarding investment management fee waivers and monitoring fees; self-dealing involving alternative investment managers; mystery investor liquidity and information preferences, amounting to licenses to steal from TSERS; pension investment consultant conflicts of interest; predatory lending and life settlement related fraud.

Further, the Treasurer has invested billions of dollars of pension assets in North Carolina private equity funds and companies via an initiative with dubious economic prospects and which has the markings of political influence-peddling.

In our opinion, billions in TSERS investments can only be explained by the improper collateral benefits they provide to the Treasurer — as opposed to any supposed investment merit.

Absent reform, corruption of TSERS is likely to cost the state’s public workers and taxpayers billions more over the next few years and leave in place a system under which Cowell’s successors will compound the financial damage.

Today, TSERS assets are directly invested in approximately 300 funds and indirectly in hundreds more underlying funds (through fund of funds), the names, investment practices, portfolio holdings, investment performances, fees, expenses, regulation, trading and custodian banking arrangements of which are largely unknown to stakeholders, the State Auditor and, indeed, to even the Treasurer and her staff.

As a result of the lack of transparency and accountability at TSERS, it is virtually impossible for stakeholders to know the answers to questions as fundamental as who is managing the money, what is it invested in and where is it?

It is indisputable that TSERS’ disclosed investment management costs alone (i.e., not including the enormous hidden costs revealed in this report) have skyrocketed in recent years and are projected by the Treasurer to steeply climb. Investment risk has grown to a record crisis level. Performance of hedge funds, private equity and real estate alternative investments has been beyond bad — horrific — for over a decade. Pay-for-play and transparency reforms promised by the Treasurer have failed, year after year, to materialize — despite multiple costly expert reviews paid for by the pension.

Worse still, the Treasurer has refused to comply with a new state law, which specifically requires full disclosure of all direct and indirect pension investment management and placement agent fees.

Treasurer’s Lack of Transparency

Forensic investigations of pensions require access to evidence. Contrary to initial public statements by the Treasurer indicating a willingness to cooperate with our investigation, she has made conducting this review of potential violations of law on behalf of TSERS stakeholders far more difficult by withholding the overwhelming majority of the information we requested.

Throughout her tenure, the Treasurer has stated repeatedly in public that she is committed to transparency. In contrast, she has proved unwilling to disclose to the public even the minimum pension information required under state law. Further, her office has, in our opinion, released information regarding TSERS to the public that has often been left intentionally incomplete and made deliberately misleading.

It is also notable that the Treasurer has failed to disclose certain significant investment manager fee and performance data that even her oft-criticized predecessor, Richard Moore, had voluntarily provided.

All of the financial information we requested in connection with this investigation was readily available to Cowell and her staff and of obvious materiality to TSERS participants, taxpayers and investors.

Perhaps most disturbing, in response to our specific requests the Treasurer refused to disclose offering memorandum and other key documents (including information regarding millions in placement agent fees) related to TSERS’ costly, high-risk alternative investments, citing supposed “trade secret” concerns raised by the alternative managers.

Viewed from a regulatory and public policy perspective, the Treasurer’s practice of withholding relevant information and intentionally providing incomplete or inaccurate disclosures regarding TSERS investments results in: (1) concealing potential violations of state and federal laws, such as those detailed throughout this report; (2) misleading the public as to fundamental investment matters, such as the true costs, risks, practices and investment performance related to hedge, private equity, venture and real estate alternative investment funds; (3) understating the costs and risks related to TSERS investments specifically; (4) misrepresenting the investment performance and financial condition of the state pension to investors in state obligations.

As stated on the website of the SEC:

“The laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it. To achieve this, the SEC requires public companies to disclose meaningful financial and other information to the public. This provides a common pool of knowledge for all investors to use to judge for themselves whether to buy, sell, or hold a particular security. Only through the steady flow of timely, comprehensive, and accurate information can people make sound investment decisions.”

On the other hand, when state officials and pension funds, such as the Treasurer and TSERS, intentionally withhold or misrepresent basic facts regarding investments material to evaluating investments, the pool of knowledge all investors can rely upon becomes contaminated.

In our opinion, there is simply no reason participants in TSERS who rely upon the investment decisions made by the Treasurer for their retirement security, and other stakeholders, should be provided with unreliable investment information — afforded less protection under the state and federal securities laws — than investors in shares of public companies and mutual funds.

Nation’s Seventh Largest Public Pension Has No Audited Financials

Remarkably, there are no audited financial statements for TSERS, the seventh largest public pension in the nation. We are unaware of any other public pension that completely lacks financial statements audited by either an independent accounting firm or the State Auditor, or both. This represents a major material weakness in the State of North Carolina Comprehensive Annual Financial Report (“CAFR”) which is relied upon by ratings agencies, municipal bond holders and the federal government in providing assistance to states.

In our opinion the lack of audited financial statements for TSERS is indefensible. The limited financial information regarding TSERS which the State Auditor claims to have audited and which is included in the voluminous 300-page CAFR, is of minimal value and is almost certainly incomprehensible to stakeholders.

We found no evidence in the CAFR or elsewhere to suggest that the Treasurer or State Auditor is even aware of the myriad new risks facing TSERS, much less begun to focus upon the emerging critical issues related to alternative investments.

In our opinion, a stand-alone audit of TSERS which would improve oversight and management of pension investments, reveal deficiencies (including fraud and other malfeasance), and produce savings exponentially greater than any limited audit cost, is decades overdue.

Notably, Treasurer Cowell has expressed the opposite view, stating that a separate audit of TSERS would be cost-prohibitive.

We find this assertion to be absurd and recommend that the scope of any future stand-alone audit include responses to the specific stakeholder concerns we have identified in this report.

Treasurer’s Government Operations Reports Violate State Law

As required under relevant law, on a quarterly basis the Treasurer provides a report to the Joint Legislative Commission on Government Operations on the investment activities of the State Treasurer, including TSERS.

In our opinion, given the disorganization, misstatements and omissions therein, there is simply no way that the Joint Legislative Commission on Government Operations, or anyone else for that matter, could possibly monitor or evaluate TSERS investment activity and performance from the information included in these reports.

The incomplete performance information provided in the discussion and other sections in the Government Operations reports results in concealing significant underperformance against the relevant indexes that would be readily apparent if complete performance information were provided in the initial narrative section.

Effective August 2013, state law mandates full disclosure of all direct and indirect investment management and placement agent fees in the Treasurer’s Government Operations reports. Cowell has failed to supplement the Government Operations reports with the newly required information.

In connection with our forensic investigation, on March 17, 2014, we reported the Treasurer’s violations of this law to State Auditor Beth Wood and asked that her office immediately investigate.

A History of Pay-for-Play Abuses

Allegations of improper pay-for-play payments by money managers and other vendors retained by TSERS first emerged in 2005 and were the subject of an early 2007 Forbes article titled “Pensions, Pols, Payola.”

In 2009, the state’s chief pension investment officer was reportedly terminated for soliciting donations on behalf of a local charity. In 2012, campaign donations to Cowell from plaintiff class action and other law firms retained by TSERS surfaced.

Further, recent disclosures by the Treasurer confirm that at least since 2002, TSERS investment managers have been involved in another form of pay-for-play, i.e., paying tens of millions in compensation to influential secret placement agents that may not be properly registered under the federal securities laws.

The identity of all of the placement agents, their registration status and the amounts of the compensation paid, while known to the Treasurer, remain undisclosed to this day — despite repeated recommendations from investment and legal experts retained by the Treasurer to fully disclose them, and in violation of the new state law which mandates disclosure.

As discussed further below, we estimate a staggering $180 million in avoidable fees has been secretly squandered in payments to dispensable intermediaries for conflicted, unreliable investment advice.

Flawed Sole Fiduciary Governance Structure

The Treasurer is the sole fiduciary of TSERS funds. Along with Connecticut, Michigan, and New York, North Carolina is one of only four states with a “sole fiduciary” model for managing its public pensions.

All other states vest the fiduciary duty to oversee their retirement assets in a committee generally consisting of worker and retiree representatives, state officials and appointed members of the public, as opposed to a single individual.

There is longstanding, broad national consensus that the sole fiduciary structure is deeply flawed.

In January 2014, the Treasurer announced the creation of a supposedly independent, bipartisan commission (consisting of members hand-picked by her) to review the state’s governance structure for investment management. The Treasurer has retained the consulting firm of Hewitt EnnisKnupp-an Aon Company to provide supposedly independent, objective advice to the commission.

In our opinion, it is indisputable that elimination of the sole fiduciary structure should have been the premier priority once the Treasurer Cowell took office given the long history of abuses involving the Treasurer’s office. However, replacing it (as at least one of Cowell’s advisors has recommended), with an investment committee comprised of experienced investment professionals operating in secrecy — an arrangement riddled with potential conflicts of interest, utterly lacking transparency and accountability — is outrageous and blatantly disingenuous.

Public pension reform and secrecy are, in our opinion, fundamentally incompatible.Further, we believe the initial matters any such committee should immediately focus upon are the secrecy surrounding alternative investments and placement agents; hundreds of millions in undisclosed fees; the serious potential violations of law detailed in this report and, finally, the Treasurer’s motivations and actions related thereto.

TSERS’ Escalating High-Risk Alternative Investment Gamble

TSERS’ escalating historic high-risk alternative investment gamble began over a decade ago in 2001. Allegations of impropriety relate back to inception of the failed strategy. Despite recurring controversies and allegations of corruption surrounding the former and current state treasurers over the years, as well as intermittent reports of dismal performance, the state pension has continued to dramatically increase its allocation to alternatives from 0.1 percent to 35 percent today, adding tens of billions to these costly schemes that have been disastrous for TSERS.

Most often, the past and current Treasurer’s justification for increasing alternatives has been the greater returns alternative investments offer—returns that repeatedly have failed to materialize.

Treasurer’s “Experiment” Fails: A Decade of Soaring Fees to Wall Street Has Not Improved Performance

Early on in her tenure, the Treasurer defended shifting more and more pension assets to costly alternative managers, arguing that the hundreds of millions in additional fees to Wall Street would result in improved investment performance.

“We’ll be looking for if we’re paying higher fees for investments they better be performing and giving us a higher rate of return. Otherwise, it’s a failed experiment,” Cowell said.

The Treasurer’s candid admission that the TSERS historic high-risk gamble on alternative investments amounting to 35 percent of $87 billion, or over $30 billion, is an “experiment” is startling. The Treasurer should not be experimenting with tens of billions in state workers retirement savings; rather, as the sole fiduciary, she should be focused upon investing pension assets prudently.

However, even as of this date in 2010, the costly alternative investment experiment had already spectacularly failed — it had been severely underperforming for approximately eight years.

The Treasurer stated in 2010 that the “experiment is on a seven-to-ten-year cycle, and performance and fees will be weighed over that time frame.”

Twelve years after inception in 2002, the alternative investment experiment continues to cost the pension dearly and benefits only Wall Street.

Most important, there is no proof that alternative investments beat the market, as the Treasurer has repeatedly represented to the public. Indeed, possibly the world’s greatest investor, the Oracle of Omaha, Warren Buffet, six years ago wagered $1 million that hedge funds would not beat the S&P 500 over the next ten years. At this point Buffet is still handily winning. The North Carolina state pension is not.

Billions in Underperformance to Date – Worst Yet to Come

In stark contrast to recent statements by the Treasurer that the additional investment flexibility granted by the legislature to permit TSERS to increase alternative investments will improve performance, the investment performance history clearly reveals that TSERS’ alternative investments and the pension as a whole have performed poorly.

Over the past five years, under the Treasurer’s watch, TSERS has underperformed the average public plan by $6.8 billion.

Based upon the TSERS investment track record, it is highly likely, in our opinion, that increasing the allocation to high-cost, high-risk alternative investments that have consistently underperformed will result in billions greater performance losses, as well as approximately $90 million in additional disclosed fees paid to Wall Street money managers according to the Treasurer’s estimates.While Wall Street is certain to emerge as a winner under the Treasurer’s politically-driven alternative investment gamble, the stakeholders will, in our opinion, lose ever greater amounts due to rapidly escalating fees and plummeting net investment performance.

The Myth That Alternative Investments Provide Diversification and Reduce Risk

The Treasurer’s argument that high-cost, high-risk alternative funds reduce risk or provide diversification is deeply flawed. Since many of the alternative investment managers may invest a substantial portion of a fund’s capital in a single investment and substantially, or even completely, change their investment strategies at any time, there is no way TSERS can ensure that the alternative funds provide any meaningful portfolio diversification.

Further, while the massive additional cost and underperformance of the alternatives at TSERS are apparent at this time, the amount of any potential downside protection afforded is unproven and unknown.

Thus, it is impossible for the Treasurer, consistent with her fiduciary duty, to determine that the known cost related to any supposed risk reduction is reasonable.

Massive Risk, Fiduciary Breaches and Violations of Law Revealed in Alternative Investment Documents

In order to assess the risks, potential fiduciary breaches and violations of law related to the hundreds of alternatives owned by TSERS, we reviewed the private placement offering memoranda related to certain of these investments.

A few of the offering documents we reviewed were provided by the Treasurer in response to our public records request. Other information the Treasurer refused to provide we obtained from independent sources, including the SEC.

The documents we reviewed indicate the alternatives are high-risk, speculative investments; the funds’ investments are highly illiquid subject to enormous valuation uncertainty; the offerings involve serious conflicts of interest regarding valuation of portfolios by the managers themselves and calculations of fees, as well as opportunities for self-dealing between the funds, the managing partners and their affiliates that may, in our opinion, violate state and federal law.

For example, a manager may make investments for his own account in the very same assets in which the fund he manages invests, on more favorable terms and at the expense of investors in the fund, including TSERS. Alternatively, in the event that an investment opportunity is available in limited amounts, the manager may simply seize the entire investment opportunity for himself — robbing investors in the fund he manages, in breach of applicable fiduciary duties.

Accordingly, we recommend further investigation by the SEC of such potential fiduciary breaches and violations of law.

Hedge and other alternative fund offering documents often reveal that investors, such as TSERS, are required to consent to managers withholding complete and timely disclosure of material information regarding the assets in their funds. Further, investors must agree to permit the investment managers to retain absolute discretion to provide certain mystery investors, i.e., industry insiders, with greater information and the managers are not required to disclose such arrangements to TSERS.

As a result, TSERS is at risk that other unknown investors in funds are profiting at its expense—stealing from the pension.

The identity of any mystery investors that may be permitted by managers to profit at TSERS’ expense, as well as any relationships between these investors, the Treasurer or other public officials, should be investigated fully by law enforcement and the SEC. Such arrangements amount to a license to steal from the state pension.

The alternative fund offering documents also generally provide that the funds will invest in portfolio companies that will not be identified to the investors prior to their investment in the fund. As a result, TSERS will not have any opportunity to evaluate for itself information regarding the investments in which the funds will invest. Since pension fiduciaries are required to know, as well as evaluate the assets in which they invest, in our opinion, such provisions render these investments unsuitable for fiduciary accounts.

TSERS alternative funds generally disclose a litany of risky investment strategies they may pursue such as short-selling; investing in restricted or illiquid securities in which valuation uncertainties may exist; unlimited leverage, as well as margin borrowing; options; derivatives; distressed and defaulted securities and structured finance securities.

Further, TSERS alternative investment documents reveal that managers may engage in potentially illegal investment practices, such as investing in loans that may violate the anti-predatory lending laws of “some states” and life settlement policies which give rise to lawsuits alleging fraud, misrepresentation and misconduct in connection with the origination of the loan or policy. In our opinion, an investigation should be undertaken by the SEC into the investment strategies of the alternative funds, as well as any underlying funds, to determine whether any violations of law exist.

Unlike traditional investments, the alternative funds in which TSERS may invest may be managed by investment advisers not registered with the SEC under the Investment Advisers Act of 1940. Further, the funds themselves are not registered as “investment companies” under the Investment Company Act of 1940. As a result, the limited partners lack many meaningful protections of those statutes.

There is no evidence the Treasurer, or the State Auditor, is aware of, or has ever considered, the unique risks related to the lack of these statutory protections.

Alternative investment funds that are incorporated and regulated under the laws of foreign countries, present additional, unique risks which pension fiduciaries must consider. Further, since TSERS’ alternative investment assets are held at different custodians located around the world, as opposed to being held by TSERS’ master custodian, the custodial risks are heightened and should be considered and disclosed to the public.

There is no evidence the Treasurer, or the State Auditor, is aware of, or has ever considered, the unique risks related to foreign regulation and custody of alternative funds. Further, based upon our conversations with the State Auditor, only the Treasurer knows whether the alternative investment funds are, in fact, audited annually — as represented in the state CAFR.

Our forensic investigation into specific potential violations of law we identified involving the hundreds of private equity investment funds in which TSERS invests was severely hampered by the Treasurer’s repeated refusal to provide the documents we requested.

In light of a recent internal review by the SEC indicating that more than half of approximately 400 private-equity firms the SEC staff examined charged unjustified fees and expenses without notifying investors, we requested documents related to such potential violations of the securities laws from the Treasurer. Our request was denied.

Accordingly, in our opinion, whether any of the hundreds of TSERS private equity funds have been charging “bogus” fees to portfolio companies in violation of the federal securities laws is a matter that should be referred to the SEC for further investigation, as well as potential refund to TSERS of its share of any fees improperly charged.

In light of recent SEC whistleblower allegations that private equity firms have been violating securities laws by charging transaction fees without first registering as broker-dealers with the SEC, we requested information regarding such potential violations of the securities laws from the Treasurer. Our request was denied.

Accordingly, in our opinion, whether any of the hundreds of TSERS private equity funds have been charging transactions fees in violation of the securities laws is a matter that should be referred to the North Carolina Secretary of State Securities Division and the SEC for further investigation, as well as potential refund to TSERS of its share of any transaction fees illegally charged.

In light of whistleblower claims that have been filed with the IRS alleging that hundreds of private equity so-called monitoring fees paid by private equity owned portfolio companies are being improperly characterized as tax-deductible business expenses (as opposed to dividends, which are not deductible), costing the federal government hundreds of millions of dollars annually in missed tax revenue, we requested information regarding such potential violations of federal tax law from the Treasurer. Our request was denied.

Based upon our preliminary research it appears that at least three monitoring agreements involving a single TSERS private equity fund may be suspect to re-characterization by the IRS.

Given the hundreds of other TSERS private equity fund investments and hundreds of suspect monitoring fees identified by credible whistleblowers, it seems virtually certain that additional violations of tax law exist with respect to TSERS private equity investments.

Accordingly, in our opinion, whether any of the hundreds of portfolio companies owned by TSERS private equity funds have been improperly characterizing monitoring fees as business expenses in violation of the Internal Revenue Code and costing the federal government hundreds of millions annually in tax revenue is a matter that should be referred to the IRS and SEC for further investigation.

Since the IRS in recent years has been examining the propriety of private equity management fees waivers, which have allowed many fund executives to reduce their taxes by converting ordinary fee income into capital gains taxed at substantially lower rates, costing the federal government billions of dollars annually in missed tax revenue, we requested information regarding potential violations of tax law related to these waivers from the Treasurer. Our request was denied.

Accordingly, in our opinion, whether any of the TSERS private equity funds have been complicit in allowing their managers to improperly convert ordinary fee income into capital gains is yet another matter that should be referred to the SEC and IRS for further investigation.

Treasurer Conceals Investment Fees Will Skyrocket to $1 Billion

While the Treasurer has a fiduciary duty to ensure that fees TSERS pays money managers for investment advisory services are reasonable, as well as a statutory duty to disclose all direct and indirect investment and placement agent fees, she has failed to monitor and disclose all fees paid by TSERS.

The Treasurer has withheld from public disclosure a massive portion of the fees and expenses related to alternative assets, resulting in the dramatic understatement of fees, expenses and risks related to these investments, as well as TSERS as a whole.

In a letter dated February 27, 2014, we notified Cowell that based upon our preliminary review of the limited information provided in response to SEANC’s public records request, it was apparent that the Treasurer had failed to disclose a significant portion of the hedge fund and alternative investment manager fees paid by TSERS to money managers. Indeed, it appeared that the massive hidden fees she failed to disclose in many instances dwarfed the excessive fees disclosed to us.

The limited investment fee information provided by the Treasurer indicates that disclosed fees have skyrocketed over 1,000 percent since 2000 and have almost doubled since FY 2008/2009 from $217 million to $416 million. In the past fiscal year alone, disclosed fees have climbed from $295 million to $416 million — a staggering increase of more than over 40 percent.

Worse still, according to Cowell, annual investment fees are projected to increase about 10 basis points—another almost $90 million—due to the allocation away from low-cost internally managed fixed income to high-cost, high-risk alternative funds managed by Wall Street.

In summary, the total investment fees as disclosed by the Treasurer are projected to climb to over $500 million.

Unlike traditional investments, such as stocks, bonds and mutual funds, alternative investments are opaque and subject to myriad hefty fees.

Based upon our limited review of TSERS’ investments, we estimate total undisclosed fees will comparably climb to approximately $500 million.

Thus, we estimate total TSERS annual fees and expenses will amount to approximately $1 billion in the near future — almost twice the figure projected and disclosed by the Treasurer.

The increase of disclosed fees in 2013 to $416 million, while alarming, is a gross and intentional understatement by the Treasurer, in support of her failed alternative investment strategy. In our opinion, if the magnitude of the formidable undisclosed fees related to TSERS alternative investments were acknowledged, public acceptance of the Treasurer’s high-risk, underperforming investment gamble would wane.

Past and Present Placement Agent Abuses at TSERS

While Treasurer Cowell publicly acknowledged the importance of adopting a pay-for-play and placement agent policy in 2009, disclosure has not meaningfully improved during her tenure. Further, her investigation of placement agent abuses has languished for the past five years. Placement agent controversies remain profoundly unresolved.

Rather than promote transparency and accountability regarding placement agent usage at TSERS, the record reveals that the Treasurer has intentionally withheld, as well as sought to thwart the release of, damning placement agent information since taking public office.

Cowell did not disclose to the public in May 2009, or at any time subsequent, that she had received a SEC Letter of Inquiry regarding placement agents at TSERS. Worse still, she requested that neither the cover letter nor any other documents provided by her in connection with the SEC Inquiry be released by the SEC to the public in response to a request under the federal Freedom of Information Act. Cowell even asked to be given at least ten days prior notice and an opportunity to object to the Commission to the granting of any Freedom of Information Act request and, if necessary, to seek an appropriate protective order in the courts.

Despite repeated requests from the SEC, the Treasurer failed to disclose even a single placement agent payment amount in 2009.

In April 2010, the consulting firm of EnnisKnupp retained by Cowell recommended that to promote transparency and accountability, details regarding placement agent compensation be posted on the Treasurer’s website for disclosure to the public.

While the Treasurer’s Office implemented certain of EnnisKnupp’s recommendations, it did not and still has not implemented this key recommendation regarding public disclosure of placement agent compensation called for by best practices, according to Ennis.

Worse still, the Placement Agent Policy adopted by the Treasurer in 2009 expressly permits an investment manager or placement agent to designate as a trade secret under North Carolina law the placement agent identity, services and compensation. Cowell has refused to disclose millions in TSERS placement agent payments, claiming trade secrets.

In 2013, the law firm of Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C., hired by the Treasurer to review certain placement agent matters, in its Final Report called upon Cowell to disclose placement agent compensation amounts on the Treasurer’s website — as originally recommended in 2010 by EnnisKnupp and ignored by her for more than three years.

To date, the placement agent fee amounts paid by each TSERS manager and the total amount of placement agent compensation have not been disclosed to the public on the Treasurer’s website, or anywhere else.

The incomplete information provided to the public regarding placement agents on her website is so disorganized and unreliable that it can only confuse and mislead the public, in our opinion. Further, as a result of Cowell’s willingness to permit managers to designate certain placement agent fees as secret, the fees disclosed are obviously understated.

Assuming that the Treasurer has enforced compliance with the placement agent policy (which requires disclosure of the fees paid to her), the relevant information is readily-available — indeed already known to her.

According to statements attributed to the Treasurer, a staggering 50 percent of TSERS managers pay placement agent fees that range from 1 percent to 2 percent.

Our investigation reveals that TSERS placement agent percentages alone, in fact, range as high as 3 percent. In addition to the percentage fees, there are monthly retainers, expenses and discretionary bonuses included in the agent’s total compensation. We have not factored these amounts, which may be significant, in our estimate below.

It appears that for the past five years Cowell has intentionally withheld from public scrutiny arguably the most significant information regarding placement agent fees — the fact that TSERS has secretly squandered a staggering estimated $180 million in avoidable fees to dispensable intermediaries for conflicted, unreliable investment advice.

Due to the highly significant amounts secretly paid for questionable so-called investment services and the Treasurer’s apparent unwillingness to disclose such placement agent compensation amounts to stakeholders — even as required under state law — we recommend that further investigation by the SEC is needed at this time.

Dubious North Carolina Nexus Investments and Influence-Peddling

A significant portion of TSERS’s alternative investments, including but not limited to the North Carolina Innovation Fund and the other Credit Suisse/North Carolina funds, are invested in private equity funds and companies that are based in North Carolina. Both the current and prior Treasurer have/had policies giving preference to local funds and enterprises.

Pension policies targeting local businesses give rise to heightened concerns regarding potential improper relationships between locals and pension decision-makers that may result in imprudent investments.

In our opinion, many of the local private equity funds and companies in which TSERS has invested clearly lacked the requisite relevant experience and track records generally required by pensions. Not only did TSERS “seed” many of these funds and businesses apparently lacking merit, it continued to leave substantial assets at risk in them long after, in our opinion, it became apparent that their services were uncompetitive.

In our opinion, an investigation by law enforcement and the SEC into the facts and circumstances regarding many of the North Carolina nexus investments should be undertaken and would reveal imprudent decision-making based upon improper relationships, as well as outrageous profiteering.

Treasurer’s Heavy Reliance upon Troubled Credit Suisse

Clearly, Credit Suisse, a firm which has a significant presence in North Carolina in the form of 1,000 employees based in the Research Triangle Park has had a substantial, complex, secretive and highly lucrative relationship with both the current and past Treasurer. Due to the variety of investment services provided, the relationship is fraught with myriad potential conflicts of interest. Further, the firm’s management of investment funds that target North Carolina enterprises is a pivotal, potentially politically sensitive assignment.

In our opinion, in light of the TSERS’s longstanding heavy reliance upon Credit Suisse — a firm involved in numerous grave regulatory controversies globally at this time; the variety of services the firm provides and the myriad potential related conflicts of interest — further investigation of the relationship between the Treasurer, TSERS and the firm by the SEC is merited at this time.

We note that with respect to the majority of alternative investments made by TSERS where the investment managers involved have been permitted to designate the compensation arrangements involving millions of dollars they have entered into with placement agents as “trade secrets” under North Carolina law, Credit Suisse Securities is the named placement agent receiving the secret compensation.

Funds that invest in a range of hedge funds are facing a battle to win new business, as the same consultants they court to win money from pension firms are grabbing a chunk of an industry that was already struggling to grow.

So-called fund of hedge funds are designed to give investors an easy way of putting money into hedge funds, offering to spread their risks and do research into the individual hedge funds for them.

But sliding asset prices during the financial crisis and the fallout of the Bernie Madoff fraud scandal saw billions of dollars exit fund of hedge funds, leading many to close or merge.

Over the past few years, those that remain have found consultants - who have built up expertise after years of vetting fund of hedge funds for institutions - are now investing directly into funds on behalf of some large-scale clients.

Trade publication InvestHedge found three consultants - Mercer, Cambridge Associates and Towers Watson - were among the 10 biggest fund of hedge funds by assets as of the end of 2013, representing 12.6 percent of the $728 billion held by fund of hedge funds with assets worth at least $1 billion.

"In new allocations to the industry ... consultants are active in gaining mandates," said Joachim Gottschalk, chairman and chief executive of hedge fund firm Gottex.

The increased competition is particularly significant, because the industry is struggling to grow.

The value of assets held by fund of hedge funds worth at least $1 billion has risen by just 16.5 percent since 2009, according to InvestHedge, and remains well below the peak of just over $1 trillion hit in 2007.

The hedge fund industry on the other hand is booming - total assets under management are at historic highs after rising by almost two thirds over the same period, data from industry tracker HFR showed.

Fund of hedge funds have voiced concerns over a potential conflict of interest in cases where they pitch strategies to consultants that are also in competition with them.

But consultants argue they have internal measures to prevent the sharing of confidential information.

"Those individuals responsible for researching hedge fund of funds and the research they conduct is Chinese walled off from the rest of the business," said Dan Melley, UK head of fiduciary management at Mercer.

INDUSTRY RESHUFFLE

Fund of hedge funds have traditionally relied on high net-worth individuals. But in recent years, institutional investors have become a bigger part of the industry's client base, handing an advantage to consultants, many of which have long relationships with pension funds and other institutions.

Deutsche Bank's Alternative Investment 2014 Survey found the proportion of respondents from the fund of fund industry - of which fund of hedge funds are a part - who said more than half of their assets under management in 2013 came from institutions was 63 percent, up from 53 percent in 2008.

Many fund of hedge funds have adjusted to the new landscape, increasing the services they offer instead of simply selling fund of hedge fund portfolios.

"Before it was very formatted," said Nicolas Rousselet, managing director at Swiss investor Unigestion. "They had fund of funds or direct hedge funds ... Now it's much broader."

Many fund of hedge funds now provide co-management services for investors looking to play a more active role in their portfolio, fiduciary services for clients who want to keep their investments at arm's length, and advisory offerings for clients investing directly.

This has made the traditional fund of fund compensation structure - a 1 percent management fee and a 10 percent performance fee - a thing of the past.

"Increasingly any fund of fund that has any institutional business is in effect changed into a consulting firm," said Peter Douglas, founder of Singapore-based hedge fund consultancy GFIA.

"The idea that any capital owning institution is going to pay 1+10 for a commingled portfolio of hedge funds is yesterday's story."

That’s no accident, if there is any truth to the old maxim that it takes money to make money. The top firms, like No. 1-ranked Blackstone Alternative Asset Management, have the cash to branch out into newer, more lucrative areas beyond the traditional funds-of-funds model of investing in hedge funds on behalf of clients. This once-hot strategy has suffered significantly since the financial crisis of 2008, when funds of funds lost money and clients fled en masse. Now, cutting-edge funds-of-funds firms are getting into areas such as staking hedge fund firms with start-up capital and offering supervisory services for institutional investors who want to invest in hedge funds directly but still need a guiding hand.

These moves, while innovative, cost money and require connections — two things that many smaller firms do not have in abundance. With more and more institutional investors looking to go it alone, firms that have the money to innovate are best placed to survive the new climate.

Alberta’s big public sector pension fund manager is in the hunt for a new boss.

Alberta Investment Management Corp. (AIMCo) announced Friday it has launched a search for a new CEO to replace its current chief, Leo de Bever.

The 65-year-old has guided AIMCo since it was spun off by the province as a crown corporation in 2008.

“Executive succession for an organization is an important fiduciary responsibility for both the board and the CEO,” AIMCo said in a news release. “AIMCo has been focusing on this initiative for a number of months and ... will now be proceeding with a search process for our next CEO to ensure a new leader is in place to guide the organization into the next phase of its evolution.”

AIMCo said de Bever will continue in the role as CEO while the search process is underway.

“I’m now the oldest CEO in the pension industry in Canada,” said de Bever, whose blue-chip resume includes stints at the Ontario Teachers’ Pension Plan and Victorian Funds Management, one of Australia’s biggest pension funds.

“The board felt that they should start a CEO search because they want to make sure they have someone in place for the next five or 10 years. In the meantime, I’m in place and it’s business as usual.”

On Wednesday, AIMCo announced that it generated a 12.5 per cent net return for 2013 and a 14 per cent return on its balanced funds, marking the best results in its history.

The Alberta Investment Management Corporation (AIMCo) is launching a search for a new chief executive to replace founding CEO Leo de Bever.

AIMCo "will undertake a comprehensive and diligent process, and will take the full time necessary to identify and secure AIMCo’s next CEO,” the sovereign wealth fund has announced.

De Bever has led the fund to strong performance for several years, adding $23 billion in total return since its inception. Charles Baille, chair of AIMCo’s board of directors, called him “the driving force behind many of our successes.” De Bever, he said, had "created a high performing investment organization of which Albertans can be proud.”

He joined the organization in 2008 at its first CEO. The Alberta government created AIMCo as a Crown Corporation to professionalize the management of its sovereign wealth and pension assets, primarily.

“The Crown Corporation set-up allowed me to hire people and compensate them on a commercial basis, at one-third to one-fifth of the cost of doing things externally,” de Bever told aiCIO in 2012.

In the announcement, he said, "a critical part of the CEO’s job is to effectively pass the torch to the next generation of leadership.”

However, the CEO drew public criticism and the eye of regulators for his role at now-defunct real estate firm First Leaside Group. The Ontario-based investment group raised more than $330 million—largely from retail investors—but began seeking creditor protection in 2012, according to Morningstar.

De Bever served as a founding partner of First Leaside in addition to his duties at AIMCo. An archived version of his biography from the firm’s website touted his “extensive experience in managing and evaluating risk.”

The Ontario Securities Commission pursued a case against two other First Leaside executives, alleging that one of the founders “intentionally deceived investors" by selling assets without informing them that the company’s viability had been called into question by an accounting review.

De Bever was not charged with any wrongdoing.

The statement of his pending resignation made no mention of the First Leaside situation.

De Bever spent much of his career at the Bank of Canada, and served nearly ten years as a senior vice-president of the Ontario Teachers’ Pension Plan. Prior to joining AIMCo, de Bever led the Victorian Funds Management Corporation in Melbourne, Australia.

The New York State Teachers’ Retirement System will tell you that its private equity portfolio has generated a net IRR of 11.1 percent through the end of June 2013. But don’t ask for the details. The pension fund believes that the returns of individual funds are trade secrets, according to sister publication Buyouts.

Responding to an open-records act request by Buyouts earlier this year, New York State Teachers’ did provide some insights as to where its returns are coming from. Since inception through June 30, U.S. buyout funds, which account for about half of the private equity portfolio by market value, led the way with a 13.6 percent IRR and 1.5x investment multiple, according to documents provided by the pension fund.

That is followed by U.S. special situations funds (19 percent by market value) with a 12.8 percent IRR and 1.4x investment multiple; and international funds (17 percent of market value) with a 10.0 percent IRR and 1.4x investment multiple. Venture capital, representing 13 percent by market value, lagged in last place with a 3.9 percent IRR and 1.2x investment multiple.

The documents portray a large and active private equity program at the roughly $95 billion pension fund. As of Sept. 30, New York State Teachers’ had a $7.4 billion private equity portfolio consisting of commitments to 168 limited partnerships managed by 79 buyout and venture capital firms. Sponsors backed more than once by the pension fund include ABRY Partners, The Carlyle Group, Hellman & Friedman, Silver Lake and TPG Capital.

The state pension fund’s recent pace of commitments has been accelerating. Through Sept. 30, the pension fund had $15.9 billion in outstanding commitments, up from $14.9 billion at year-end 2012, suggesting it had made fresh commitments of $1 billion through the first nine months of last year, according to the documents. In 2012 the pension fund committed an estimated $1.6 billion, way up from an estimated $900 million in 2011 and $200 million in 2010.

But when it comes to individual funds, the pension fund draws the line at providing basic information such as the name of each limited partnership, the amount committed and the amount drawn down. In its February open-records request, Buyouts asked for IRRs and investment multiples for each partnership, along with management fees. The pension fund responded that those numbers were off limits. It cited a provision of the state’s open-records act that lets it deny requests of information that “would if disclosed impair present or imminent contract awards” and “are trade secrets …”

In our appeal of that decision, we pointed out that sister state pension funds such as the Teachers’ Retirement System of the City of New York have been disclosing such details about their funds “with no apparent ill effects” on the general partners.

But Kevin Schaefer, the records appeals officer for the pension fund, wasn’t convinced. In his March 6 reply by letter, he denied our appeal. He went through six factors used to determine whether information is a trade secret immune from disclosure. The first, he wrote, is “the extent to which the information is known outside the business.”

Buyouts possesses similar information—IRRs and investment multiples, for example—for several funds that are backed by New York State Teachers’ because they are also backed by New York City Teachers’; among them are The Blackstone Group’s fourth and fifth funds. Schaefer did not view our argument through the same lens. The information made public by New York City Teachers’, he wrote, “is specific” to that pension fund and not New York State Teachers’.

The second factor was similar to the first, while the third of six factors, Schaefer wrote, is “the extent of measures taken by a business to guard the secrecy of the information.” Buyouts possesses detailed fund information on hundreds of limited partnerships disclosed by sponsors via their pension backers around the country.

But again, Schaefer did not see it this way. “General partners of funds,” he wrote, “take measures to ensure the confidentiality of their investment strategy and fund level performance by providing it only to investors and customarily under confidentiality obligations.” At press time a spokesperson for New York State Teachers’ added in an email that ”the NYS and NYC are separate and distinct organizations which, among other differences, include separately negotiated investment agreements with potentially unique rights, obligations and liabilities—including those governing confidentiality requirements and the protection of trade secrets.”

Our request fell short on the other three factors as well.

Buyouts hasn’t decided whether to continue the battle. It should be obvious by now that no harm results from disclosing fund return data, which has been available from pension funds like the California Public Employees’ Retirement System for years following lawsuits early last decade by the San Jose Mercury News.

Put aside for the moment that I am a journalist who likes reporting on juicy return data. Is it wise to hide from New York State Teachers’ Retirement System pensioners—including both my parents—how individual money managers are performing, and how much they’re charging?

A recent Bloomberg story reported that the U.S. Securities and Exchange Commission has found that dozens of private equity firms are inflating portfolio-company fees without notifying investors. If true, I would argue that this industry needs to open its books even further, not less.

Readers may find it hard to grasp how successful the private equity industry has been in brainwashing investors, particularly large public pension funds. Investors who ought to have clout by virtue of their individual and collective bargaining power instead cower at the mere suggestion of taking steps that might inconvenience the private equity funds in which they invest.

The failure of Energy Future Holdings Corp., known as TXU Corp. when KKR & Co., TPG Capital and Goldman Sachs Capital Partners acquired it for $48 billion in 2007, and the stumbles of other huge deals of the past decade have reshaped how major buyout firms go about their trade.

The Dallas-based utility’s bankruptcy yesterday ended the biggest leveraged buyout on record and will wipe out most of the $8.3 billion of equity that investors led by three of the world’s largest private-equity firms sank into the company.

“Energy Future is emblematic of the peak of the buyout boom, when firms did very high-priced, over-leveraged deals that left little room for error,” said Steven Kaplan, professor at the University of Chicago Booth School of Business. “When you buy into a cyclical industry at the peak and you get the bet wrong, bad things happen.”

TXU marked the climax of an era when buyouts stretched into the tens of billions on dollars and Carlyle Group LP’s David Rubenstein predicted there would be a $100 billion LBO. After many of those deals faltered in the 2007-2009 global financial crisis, private-equity investors mostly shied away from companies valued at $20 billion and up, arguing that such buyouts are often overpriced, overburdened with debt and too big to exit easily.

Since the end of 2008, two private-equity buyouts priced above $20 billion have been announced, both in 2013. That compares with 15 in the five years through 2007, according to data compiled by Bloomberg. TPG told investors last year that its next fund will largely stay away from the biggest buyouts, according to a person who attended the firm’s annual meeting in October.

Debt Markets

Three private-equity executives interviewed for this story said they didn’t expect a revival of super-sized buyouts any time soon. The executives asked not to be named because they didn’t want to be seen as criticizing competitors.

Large companies such as Energy Future tend to put themselves up for sale at times when debt markets are wide open and deal valuations are high, said two of the executives.

Those conditions in 2007 set the stage for a buyout that loaded Energy Future with $40 billion of debt, or 8.2 times the company’s adjusted earnings before interest, taxes, depreciation and amortization, a common yardstick for leverage. By contrast, debt averaged 5.3 times Ebitda for all U.S. buyouts in 2013, according to Standard & Poor’s Capital IQ. In the end, the debt combined with a collapse of natural gas prices, to which Energy Future’s revenues are pegged, toppled the company.

‘Poor-Performing’

The biggest buyout funds have lagged behind smaller competitors in recent years, according to London-based research firm Preqin Ltd. Funds of $4.5 billion or more from the 2008 vintage posted median net internal rates of return of 7.8 percent through 2012, compared with 9.3 percent for pools of $501 million to $1.5 billion, the firm’s latest data show.

Of the megadeals announced before 2008, some have turned profits, such as those of hospital owner HCA Holdings Inc., energy pipeline operator Kinder Morgan Inc. and British retailer Alliance Boots GmbH. Others, including casino operator Caesars Entertainment Corp., broadcaster Clear Channel Communications Inc. and credit-card processor First Data Corp., have struggled with weak earnings and heavy debt.

“If you assembled all the mega-cap deals, you would have a poor-performing portfolio,” said Steven D. Smith, managing partner at Los Angeles-based private-equity firm Aurora Resurgence and a former global head of leveraged finance at UBS AG.

Kinder Morgan

Kinder Morgan produced a gain of 180 percent for Carlyle and other backers. At Caesars, Apollo Global Management LLC’s investment has tumbled about 57 percent in value, based on the April 28 closing price.

“The core of what’s wrong with many of these mega-cap deals is that they got priced to perfection,” Smith said. “In this world nothing is ever perfect, and so there are surprises.”

Megadeals can be difficult for investors to cash out of, resulting in longer holding periods and less than stellar returns, said John Coyle, a partner at Permira Advisers LLP, a London-based private-equity firm with more than $30 billion in assets. Many of the targets are too big to sell to another corporation or private-equity group, making the only path to an exit a sale of stock in an initial public offering.

“If you elect to go the IPO route, public equity investors won’t forget that you paid a premium in the bull market of 2006 to 2007,” Coyle said. “They know your exit options are limited, and therefore, with exception for only the rarest of assets, they have the pricing power.”

Valuations Fall

For years it was the fallout of the financial crisis, rather than a reconsideration of deal-making practices on the part of private-equity firms, that put a halt to the biggest deals. Debt financing for LBOs all but evaporated in 2008, when speculative-grade corporate loan issuance in the U.S. fell to $157 billion from a then-record $535 billion in 2007, according to S&P’s Capital IQ. It wasn’t until November 2011 that a corporate buyout once again topped $7 billion in size.

Large company deal valuations fell from the boom-era median of 12.7 times Ebitda to 8.6 for the nine largest corporate buyouts completed from 2009 to 2012, according to data compiled by Bloomberg. The proportion of equity to debt jumped to almost one-to-one in deals such as TPG’s and Canada Pension Plan Investment Board’s $5.2 billion purchase in 2010 of health-care data provider IMS Health Inc. and 2012’s $7.15 billion buyout of oil and gas driller EP Energy by Apollo Global and others.

Investor Pressure

Revived markets have eased the credit drought, as speculative-grade loan issuance rebounded to $605 billion last year, when banks pulled together debt packages for $24 billion-plus LBOs of computer maker Dell Inc. and foods group H.J. Heinz Co. Debt markets have rallied so strongly that $15 billion to $20 billion loan and bond packages for LBOs are possible, said one of the private-equity executives.

Even as lenders have opened their purses, buyout firms continue to apply the brakes to jumbo deals. The executives interviewed for this story, whose firms backed megadeals in the heyday, said some limited partners have urged them to steer clear because of their checkered results.

Limited partners, the pension systems and other financial institutions that supply the money buyout firms invest, have curbed commitments to buyout funds raised since 2009, shrinking sponsors’ capital. Buyout fundraising fell to a post-crisis low of $77.5 billion in 2011 from $229.6 billion in 2008, according to Preqin. Last year, $169 billion was gathered.

Multiple Managers

Clients have also pressed firms to avoid banding together with two or more competitors to raise the billions of dollars of equity that the biggest buyouts demand. It was only by pooling money, as KKR, TPG and Goldman Sachs did in the Energy Future deal, that firms were able to pull off the largest LBOs.

The consortium-backed deals left limited partners that had money with several of the firms with added risk in a single deal. Last year’s $24.9 billion Dell buyout skirted that issue because company founder Michael Dell provided most of the equity, with a single buyout firm, Silver Lake Management LLC, furnishing the rest.

“Limited partners don’t enjoy paying multiple managers fees to be invested in the same underlying companies,” said Jay Rose, a partner at StepStone Group LP, a San Diego, California-based pension-fund adviser.

Fundraising Woes

TPG, which is preparing to raise a new buyout fund this year, told limited partners at its annual meeting last year that it will avoid megadeals unless an opportunity is exceptional, according to an investor who attended. The firm plans to go back to investing in upper middle-market deals with smaller equity contributions, this client said. The firm also said that group deals largely are a relic of the past, according to the person.

The focus on smaller deals also reflects a tougher fundraising environment since the financial crisis. Like many of its peers, TPG expects to raise a smaller fund than the prior vehicle, which gathered $19.8 billion in commitments in 2008. Fund VI, which was 85 percent invested at the end of September, is on a path to run out of capital by mid-to-late 2014, based on the current investment pace, said another investor who attended the annual meeting. TPG this year sought as much as $2 billion from its largest investors to bridge the gap until it starts marketing its main fund.

Despite the obstacles, megadeals have come back before.

‘Short’ Memories

KKR’s $31.3 billion takeover of RJR Nabisco in 1989, by far the largest buyout of its era, barely escaped bankruptcy in 1990 and dealt KKR a loss of about $816 million on its $3.6 billion equity investment, according to a confidential KKR marketing document obtained by Bloomberg News. Not long after that transaction closed, the economy slumped, debt markets fell into disarray and it wasn’t until 2006, when KKR and others bought HCA, that a deal of similar size was struck.

“Even though most firms say they won’t pursue mega-buyouts, in the private-equity industry memories can be short and some just can’t help themselves,” said David Fann, president and CEO of TorreyCove Capital Partners LLC, a San Diego-based pension-fund adviser.

DESVARIEUX: So, Michael, this week we’re going to be talking about the very popular book by French economist Thomas Piketty. It’s a 700-page book that takes on the topic of income inequality. Why do you think so many people are talking about this book? What’s in it that has people buzzing?

HUDSON: Statistics. It shows that wealth inequality is actually much wider than income inequality, because if you earn income, you have to pay taxes on it, and rich people, the 1 percent, don’t like to pay taxes, so they basically expense most of their income. They expense it as interest, they expense it as depreciation. There are all sorts of expenses. But he shows statistically in almost every country not only that income and wealth are getting wider and wider apart, the 1 percent versus the rest of the economy–but it’s not just the 10 percent of the population that’s richer than the bottom half or the bottom 20 percent; it’s the 1 percent that has the vast majority of the wealth and controls the world’s stock markets of the bond markets. And since 1980 there’s been quite a turnaround. And the 1 percent have bought government as if government were sort of like a factory that you can make profits on. And you can get much more profits by buying a government than you can ever get by buying a property or real estate. And so what we’ve been turning into is an oligarchy.

Well, a lot of people saw this, but what Piketty did was show that in every country since 1980, since Reagan and Margaret Thatcher had the whole neoliberal revolution, the revolution that’s now being supported by the U.S. government, by the eurozone, by the International Monetary Fund and the World Bank, that all of this neoliberalism and so-called free markets is really just a property grab by the rich. And he shows that given this grab, you’re not going to be able to get more equality as long as all of this wealth that’s accumulating at the very top among the 1 percent is inherited and passed down and grows and grows. And so, basically, he’s described the symptoms of what’s wrong. And people are very glad that at least he’s described the symptoms that everybody knew but nobody had spent the three or four years that it took to make all of the charts charts that he’s made.

DESVARIEUX: So it also sounds like he’s focused on the 1 percent specifically. What about the 99 percent? What do you think is missing in Piketty’s argument?

HUDSON: Well, the one percent have got rich by holding the 99 percent in debt. Basically, you have an economy where governments and businesses, homeowners, credit card users, and people getting an education all have to run into student debt, mortgage debt, credit card debt, government debt, corporate debt, all to the 1 percent. So the 1 percent wouldn’t be making all of this income and concentrating all this wealth if they didn’t hold the bottom 99 percent in debt to itself. So you have a polarity. You wouldn’t have the 1 percent getting rich if they weren’t–if it wasn’t in an exploitative way, making the 99 percent more dependent on them.

Now, if the 1 percent made their money–you know, they call themselves job creators as if they’re creating the prosperity, but they’re not creating the prosperity, because what they’re getting is interest and economic rent much more than profits. They’re getting rich in an exploitative way, not in a productive way that helps the economy grow and raises living standards.

DESVARIEUX: What are some of the solutions that Piketty proposes?

HUDSON: Well, the first solution he proposes is that the people are–all this wealth at the top is being inherited. And since the Reagan and Thatcher revolution, they’ve got rid of inheritance tax. The 1 percent says, think of the small families that want to give a little bit of property to their children; let’s not tax them. And by the way, let’s make us completely tax-free for all of our billions of dollars, just so the middle-class families can maybe end up with their house or so. So they’ve hidden behind the middle-class to, really, abolish the effective inheritance tax. And so this wealth is being inherited to grow and grow. So the first thing he wants is an inheritance tax.

The second thing he wants is more problematic. He said, well, maybe there can be a world tax on wealth, because after all, the rich families in America hold their money offshore or in Swiss banks or in the Caribbean. So he wants a general wealth tax. And that’s what he’s been criticized for, because he hasn’t really gone to the root of what is creating this polarization.

DESVARIEUX: And, also, how would you even implement something like that, Michael?

HUDSON: Well, that’s why the neoliberal’s love Piketty. That’s why Krugman loves Piketty. You can’t implement it. So he’s produced a book without any solution, and the free enterprise boys like that. The 1 percent don’t mind being criticized as long as there’s no solution to their problem. And that’s what the critics have come out saying: wait a minute, there are a lot of solutions. For one thing, some kind of wealth is better than others. You don’t want to tax people building factories and improving living standards like the one percent pretend that they do, but what you do want to tax is unearned income, economic rent, capital gains. Right now, the capital gains tax, most people, rich people, make their money not buy earning income; the naked on capital gains, on stock markets going up, on bond prices going up, on all of the asset prices that the Federal Reserve’s qualitative easing has been just flooding the market with. So the first thing to do is to raise the capital gains rates much higher, closer to 100 percent, because that’s unearned. These are inflationary gains. Right now, the economy’s all about capital gains, so if you make $1 million like–as Warren Buffett said, he makes hundreds of millions of dollars. He pays a lower tax rate than his secretary. So the tax system is all wrong.

What Piketty does not suggest is getting rid of regressive taxes like the FICA wage withholding that everybody has to pay that’s now more than 15 percent of their paycheck. This is a regressive tax. That should be gotten rid of.

But most of all, he doesn’t talk about the whole restructuring that’s part and parcel of this neoliberal revolution to privatization. He doesn’t criticize privatization. And most of this increased wealth by the 1 percent since 1980 is all taken–a result of privatizing the public domain–public utilities, things that–100 years ago everybody expected banking to be a public utility, roads, railroads, public transport, telephone systems, broadcasting systems. Now that these are being monopolized, the rich are getting their money by monopoly rents.

And the solution isn’t simply to let the rich exploit the 99 percent by raising the prices you pay for your cable, for fridges, for transportation; it’s to take–to deprivatize these assets, to put them back in the public domain, so that you can provide basic services to people at a very low price instead of at an extortionate price that’s all meant to pay the 1 percent that basically has been foreclosing on governments and grabbing the public domain.

And Piketty quotes the French novelists, in English, of the 19th century and points out why is it that novelists understand the problem that’s happening in the economy more than economists. Economists all talked about the economy becoming more equal. But if you read Balzac, he said that the origin of almost every great family fortune is a great theft, often undiscovered, and people think it’s just a part of nature. And it’s thievery and theft, as Bill Black, who’s often on your show, also points out every week: you have essentially the decriminalization of fraud.

And what really pays is crime. And it’s the criminals that have risen most rapidly into the 1 percent. It’s the Wall Street bankers who’ve been doing the junk mortgages and engaging in the kind of fraud that we’ve been hearing about on Wall Street. This is not what Piketty discusses. He doesn’t say, throw the clerks in jail; he doesn’t say, have government regulatory agencies to prevent this kind of exploitation; he doesn’t say, reimpose anti-monopoly regulations to prevent monopoly profits from enriching the one percent; he doesn’t say, take all of these public utilities that Margaret Thatcher privatized in England and Ronald Reagan did in America and put them back in the public domain so that they can provide basic services to people at cost. All of this is a different topic from his book.

DESVARIEUX: Alright. Michael Hudson, thank you so much for joining us on The Real News.

HUDSON: Okay.

DESVARIEUX: And thank you for joining us on The Real News Network.

What we are witnessing now is the end phase of financial capitalism. I touched upon it when I went over New Jersey's Pensiongate. You have a bunch of rich and powerful hedge fund and private equity managers contributing to their favorite Democratic and Republican candidates in order to secure more money to manage from public pension funds relying on useless investment consultants shoving them into alternative investments. These pension funds are all praying for an alternatives miracle that will never happen. It's great for Wall Street, which effectively carries a license to steal, but not great for Main Street.

Let me be blunt. I love America and think it's the best country in the world. My grandfather fought with the U.S. Army in WWI and my grandmother (in Crete) received a pension from them even after he died. The U.S. has always been and will remain the tail that wags the global economy. But U.S politicians have to get their collective heads out of their asses and start implementing real reforms on their healthcare and pension systems, including reforms on governance that will bolster public pension plans. One U.S. politician who gets it is Senator Bernie Sanders of Vermont. He's a bit too leftist and cooky for my taste but he brings up many excellent points and regularly tweets on income inequality. Here is one of his tweets which caught my eye (click on image):

And a lot of these rich hedge fund managers are collecting huge fees for delivering mediocre performance. They have basically become large, lazy asset gatherers profiting from dumb public pension funds paying alpha fees for beta or sub beta performance.

In 1980, the American rich and middle class and most of the poor had higher incomes than their counterparts almost anywhere in the world. But incomes for the middle class and poor in the United States have since been growing more slowly than elsewhere. Why? Among the reasons: This country has lost its once-wide lead in educational attainment. Other countries have increased their workers’ skill levels more quickly, helping create well-paying jobs. The United States also tolerates more inequality: The minimum wage is lower here. Executives make more money. The government redistributes less of it. By 2010, the poor in several other countries had pulled ahead. And Canada’s median income had reached a virtual tie with that of the United States. Since 2010, other data suggest Canada has moved ahead.

According to the data agency, high school grads are making wage gains, while the earnings of holders of a post-secondary school degree are staying flat — and in the case of young men, even decreasing.

The federal agency's analysis of data compares earnings for the two groups in two different time periods — in 2000 to 2002, and then between 2010 and 2012.

The results were counter-intuitive, in that education didn't lead to greater wage gains, at least in the short term.

Between those two periods, men aged 20 to 34 whose highest level of education was a high school diploma saw their salaries increase by nine per cent. Women in the same group saw a rise of 11 per cent.

"In contrast, the average real hourly wages of young male bachelor's degree holders was unchanged, while those of young female bachelor's degree holders increased by five per cent," Statistics Canada said.

Data points like that suggest young workers are being misled, some experts said Monday. "The numbers reveal that what we thought was the standard track to a middle-class life — the university degree — maybe isn't all it's cracked up to be," public policy professor Ken Coates said in an interview.

'If you follow the swarm you're just going to walk over the cliff.'- Professor Ken Coates

Coates said the educational system and parents value university educations almost at all cost, but that's not in keeping with economics realities.

"We overemphasize the so-called knowledge economy, but the reality is we have not yet produced very many of those jobs and what we have is a natural resource economy that's propping up the rest, and a service industry tagging along behind it," Coates said.

Indeed, the numbers appear to suggest that Alberta's oil boom may be skewing the data by driving up demand for unskilled labour.

"Increases in economic activity fuelled by the oil boom of the 2000s ― which raised demand for less educated workers to a greater extent than it did for more educated ones ― accounted for roughly one-fifth of the narrowing wage differentials among young men and young women," the data agency said.

Coates said the real lesson to be gleaned from the numbers is not that the fate of those with just a high school diploma is getting better, but rather that the fate of those who blindly pursue more schooling is stagnating.

"If you follow the swarm you're just going to walk over the cliff," Coates said. "When we keep focusing on what the economy looked like in 1980, we are doing a very poor service to young people coming out of high school."

I've already covered bogus private equity fees as well as CalPERS' legal battle with blogger Yves Smith of Naked Capitalism. It seems like large public pension funds are public as long as it suits their needs, or more likely, those of their big and powerful private equity partners who basically run the show via the political back channels.

Commenting on this latest pathetic display of withholding information from the public, Yves Smith of Naked Capitalism says NY Teachers' exhibits Stockholm Syndrome:

Readers may find it hard to grasp how successful the private equity industry has been in brainwashing investors, particularly large public pension funds. Investors who ought to have clout by virtue of their individual and collective bargaining power instead cower at the mere suggestion of taking steps that might inconvenience the private equity funds in which they invest.

Poor Yves, despite the name of her blog, she still doesn't get what capitalism is all about. Even Thomas Piketty, whose popular book on how capitalism has failed the world, doesn't get it. Two guys that do get it are Shimshon Bichler and Jonathan Nitzan who just published their latest, The Enlightened Capitalist, a letter answering the critique of a large asset manager.

Capitalism, my dear readers, isn't about openness, fairness, transparency and meritocracy. Capitalism is all about crisis, sabotage, secrecy and how the elite can screw the unsuspecting masses using any means necessary, ensuring inequality which they require to thrive. 

The pension Ponzi is all about how a few powerful hedge funds and private equity funds can ensure their growth by capturing a larger slice of that big, fat public pension pie. They use all sorts of slick marketing, talk up the virtues of diversification and absolute returns, but for the most part, it's all hogwash, all part of Wall Street's secret pension swindle.

Ontarians who lack company pension plans will start paying up to 1.9 per cent of their income — matched by employers — into a provincial pension plan in 2017.

Finance Minister Charles Sousa made the promise in his Thursday budget, saying an Ontario Retirement Pension Plan would provide a maximum of $25,275 annually to future retirees who are young workers now.

But that, of course, depends on whether Premier Kathleen Wynne’s minority Liberal government survives a budget vote with a pension idea borrowed from the NDP and opposed by the Progressive Conservatives and the Canadian Federation of Independent Business as too costly and a potential job killer.

Sousa said the province had no choice given the federal government’s rejection of a push to enhance the Canada Pension Plan and warnings that too many people will face hard times after they stop working.

“We have a duty and must do more to ensure that people have adequate savings in their retirement years,” Sousa told the legislature in his budget speech.

His plan is a bet that workers won’t mind paying upfront now for more income later in life.

Progressive Conservative Leader Tim Hudak warned the cost of premiums could cost 100,000 jobs in the first 10 years as the premiums paid by employers add to their costs at a time when too many Ontarians are unemployed.

“Before you can have retirement security you need job security,” he told reporters during a news conference in the budget lockup. “It’s pretty darn hard to save for retirement when you can’t pay your hydro.”

NDP Leader Andrea Horwath did not show up for her traditional press conference after Hudak’s.

The mandatory Ontario plan — details of which remain sketchy — would supplement the Canada Pension Plan, with a goal of replacing at least 15 per cent of pre-retirement income.

It’s aimed at the two-thirds of Ontarians who do not have jobs with pension plans.

For a worker earning $45,000 annually, the yearly contribution would be $788 for a maximum annual payout of $6,410. That would rise to $1,263 annually and a maximum annual payout of $9,970 for someone making $70,000. For a $90,000 earner, annual premiums would be $1,643 for a maximum annual payout of $25,275.

Those annual contributions would be matched by employers, raising an estimated $3.5 billion a year for a pension pool. Lower-income workers would be exempt, but a threshold — such as the $3,500 set by the CPP — has not been decided.

Workers in company pension plans won’t be allowed to join unless the government determines the benefits provided aren’t adequate — a level that has not yet been set.

“Those already participating in a comparable workplace pension plan would not be required to enrol,” Sousa said.

Finance ministry officials said older workers will get smaller payouts that reflect what they have paid into the plan, meaning the biggest benefit of the scheme would be to Ontarians who have decades of working years ahead of them.

Legislation to create the Ontario pension plan is not part of the budget bill and would be introduced later this year.

A number of details remain to be worked out, such as an age of eligibility for payouts and which body would administer the plan.

Finance ministry officials said the government is considering a merger of smaller pension plans for public sector workers and will consider consolidating them with the Ontario Retirement Pension Plan to keep costs down and provide a broader scale for investments.

The aim is to have management expenses far below the level of most mutual funds, whose costs have long been blamed for eating dramatically into returns for investors.

Sousa said he remains hopeful the federal government will change its mind on enhancing the CPP and, if that happens, the Ontario plan could be integrated with it.

Failing that, the government is looking at ways other provinces could join the plan in future.

A new made-in-Ontario pension plan will expand retirement incomes for three million workers in the province, but exclude millions of others who already have workplace plans or are in federally regulated industries such as banking.

Ontario’s Liberal government unveiled its Ontario Retirement Pension Plan (ORPP) in Thursday’s provincial budget, saying it will act as a top-up to the Canada Pension Plan to improve retirement incomes for most workers. The initiative will be introduced in conjunction with a new voluntary savings program known as the Pooled Registered Pension Plan as a further boost to Ontario residents’ options to save for retirement.

Unlike the CPP, not all workers will be eligible for the ORPP, the government said.

It will cover about half of Ontario’s six-million-person work force, excluding the self-employed, all workers whose companies have workplace pension plans, and those in federally regulated sectors like banking, transportation and telecommunications.

Ontario Finance Minister Charles Sousa said the ORPP will help the people who face the greatest income reduction in retirement.

“This will target those most at risk of under-saving, particularly middle-income workers,” Mr. Sousa told reporters.

Conservative Leader Tim Hudak said the ORPP will be expensive for employers because it will create a new payroll tax to cover their share of contributions, and will do nothing to help Ontarians get better jobs in the first place.

“It’s pretty darn hard to save up for retirement when you can’t pay your hydro [bill],” he said.

The province decided to act alone in creating the new top-up program for the CPP after the federal government said last year that such a plan would be too detrimental to the economy.

Ontario has invited other provinces to participate, and Prince Edward Island and Manitoba have joined the advisory body designing the program. Alberta, British Columbia, Newfoundland, Nunavut and Northwest Territories are in talks with Ontario about the proposal.

The government plans to launch the ORPP in 2017 and phase it in over two years, the government said.

Workers would contribute 1.9 per cent of their incomes, which will be matched by employers, up to a $90,000 income maximum. It aims to pay out about 15 per cent of income before retirement.

Jim Keohane, who heads the $52-billion Healthcare of Ontario Pension Plan, said the ORPP is a “step in the right direction” for pension reform in Canada because it is not just a voluntary savings plan but will provide a guaranteed benefit.

“When you know how much pension income you are going to have – when the amount is defined – you can spend with more confidence,” he said. “You know you are getting a cheque each month, a set amount.”

Also on Thursday, the government said it plans to create a new pension plan manager for contributions made to the ORPP, which are expected to top $3.5-billion annually. The new pension manager could also handle funds for other public sector entities and pension plans.

The Workplace Safety and Insurance Board and the Ontario Pension Board, which together manage $40-billion in assets, have agreed to participate.

The new pooled registered savings plan that will supplement the ORPP will be voluntary for companies, and employees, although automatically enrolled, may opt out. Participants’ payroll deductions would be managed by private-sector investment firms.

Lawyer Mitch Frazer, who advises companies on their pension plans, said the new programs will clearly improve retirement savings, but he has not sensed a large demand from employers for a PRPP program.

“I think maybe some will pick it up over time if it is seen as a low-cost benefit they can offer to employees,” he said.

CARP members will welcome the leadership of Ontario in proposing a province wide pension plan to allow Ontarians to better save for their retirement. CARP calls on the other provinces to provide similar plans to provide access for all Canadians

In Budget 2014, Ontario announced that it will establish a province wide pension plan to allow Ontarians to supplement their retirement savings. The Ontario Retirement Pension Plan will be designed to provide a predictable lifetime pension benefit that will replace an additional 15% of pre-retirement income and extend coverage up to $90,000 of salary. Together with the CPP, the ORPP is designed to replace from 30% to 40% of pre-retirement income. The ORPP will be modeled on the CPP with mandatory employer and employee contributions using a payroll deduction mechanism and managed by an independent body with professional investment expertise.

“The time is long past for debating whether we need a supplementary pension plan, so it is welcome news that Ontario and at least two other provinces will start the process of constructing a national pension scheme to help Canadians save for a decent retirement. The design of the new Ontario Plan mirrors the successful CPP and several provincial plans in providing the best chance to save for a predictable lifetime pension.

“CARP members have been calling for just such a plan – CARP’s Universal Pension Plan– for years because they know exactly what it takes to get by in retirement and a decent pension is a priority. The proposed pension plan will benefit their children and grandchildren, not themselves directly, but it is a ballot question for them.” said Susan Eng, VP, Advocacy for CARP

Two-thirds of working Canadians do not have a workplace pension plan and few other options to adequately save for their retirement. A significant proportion of middle income Canadians are not saving enough to maintain their standard of living in retirement and need to start saving immediately– a caution reinforced by the former Governor of the Bank of Canada, David Dodge in his recent paper Macroeconomic Aspects of Retirement Savings.

The federal, provincial and territorial finance ministers failed to get federal agreement to a modest increase to the CPP at their December 2014 meeting. That would have been a welcome step in the right direction to providing access to a national supplementary pension plan.

Any new pension scheme should be available to all Canadian workers regardless of where they live and pension benefits should be portable among workplaces across Canada. This may be achievable if all provinces follow the lead of Ontario, Manitoba and Prince Edward Island in enacting parallel legislation with reciprocal provisions.

CARP has called for a Universal Pension Plan, modelled on the CPP, but not necessarily part of the CPP, with key features to provide for an adequate retirement income – including payroll deductions, mandatory enrolment and contributions, professional management and a governance board independent of government and the employers, on which employees’ interests are represented, and designed to provide an adequate and predictable retirement benefit.

The Pooled Registered Pension Plans (PRPPs) proposed by the federal government acknowledge that Canadians are not saving enough but have been criticized by pension experts and CARP members as not being up to the task of providing an adequate pension. In any event, provincial enabling legislation is not yet in place across Canada.

The Healthcare of Ontario Pension Plan (HOOPP) is encouraged by today’s announcement, in the Ontario budget, of a new pension solution for Ontarians.

HOOPP President & CEO Jim Keohane says that the proposed Ontario Retirement Pension Plan “is a step in the right direction” for what he calls the real issue of pension reform – Ontarians who lack a workplace pension. He applauds the decision to make the plan a defined benefit (DB) program, modelled on the Canada Pension Plan.

“At a time when we have an aging population, one that will grow more dependent on government services like healthcare, it is alarming that more than 60 per cent of the population has no workplace pension coverage,” says Keohane, who is a member of Ontario’s Technical Advisory Group on Retirement Security.

Keohane says “the vast majority of people are better served by a structure such as a defined benefit (DB) pension plan.”

He says he is pleased that the new Ontario plan will use the DB model, which is “the best and most efficient way to deliver retirement security.” The made-in-Ontario plan will feature mandatory contributions, investment pooling, and expert professional management, and will be run as a not-for-profit entity independent of the government.

HOOPP, with more than $51.6 billion in assets, is one of Canada’s largest DB pension plans and is currently fully funded with a growing surplus.

Keohane says increased retirement security is beneficial to the economy. “When you know how much pension income you are going to have – when the amount is defined – you can spend with more confidence,” he says. “You know you are getting a cheque each month, a set amount.”

He cites a recent study of defined benefit (DB) pensioners by the Boston Consulting Group that showed Ontario DB pensioners spend about $27 billion a year on goods and services, paying $3 billion in income taxes. A further $3 billion of their spending goes to sales and property taxes.

 “Retirement security means less dependence on taxpayer-funded income support programs,” adds Keohane. HOOPP has been speaking about the value DB plans play in delivering that security. To learn more, follow HOOPP on Twitter – the handle is @HOOPPDB.

When you think of the term “public pension fund,” you probably imagine hyper-cautious investment strategies kept in check by no-nonsense fiduciary laws.

But you probably shouldn’t.

An increasing number of those pension funds are being stealthily diverted into high-fee, high-risk “alternative investments” that deliver spectacular rewards for the Wall Street firms paid to manage them – but not such great returns for pensioners and taxpayers.

Citing data from the National Association of State Retirement Administrators, Al Jazeera America recently reported that “the average portion of pension dollars devoted to real estate and alternative investments has more than tripled over the last 12 years, growing from 7 percent to around 22 percent today.” With public pensions now reporting $3 trillion in total assets, that’s up to $660 billion of public money in these high-fee, high-risk investments.

And yet… despite the fact that they deal with the expenditure of taxpayer money, the agreements between public pension systems and alternative investment firms are almost entirely secret.

Until now.

Thanks to confidential documents exclusively obtained by Pando, we can now see some of the language and fee structures in the agreements between the “alternative investment” industry and major public pension funds. Taken together, the documents raise serious questions about whether the government employees, trustees and politicians overseeing major public pension funds are shirking their fiduciary responsibilities under the law when they are cementing “alternative” investment deals.

The documents, which were involved in a recent SEC inquiry into the $14.5 billion Kentucky Retirement Systems (KRS), were handed to us by SEC whistleblower Chris Tobe, an investment consultant and former trustee of the KRS. Tobe has also written a book — “Kentucky Fried Pensions” — about the scandalous state of the Kentucky public pensions system.

The documents provided by Tobe (embedded below the Pando article) specifically detail Kentucky’s dealings with Blackstone – a giant Wall Street investment firm which has deployed a platoon of registered lobbyists in Kentucky and whose employees are major financial backers of Kentucky U.S. Sen. Mitch McConnell (R).

The Blackstone-related documents, though, don’t just tell a story about public pensions in Kentucky. The firm, which just reported record earnings, does business with states and localities across the country. The Wall Street Journal reports that “about $37 of every $100 of Blackstone’s $111 billion investment pool comes from state and local pension plans.”

In one set of documents provided by Tobe, Blackstone’s payment structure is outlined, with language guaranteeing that Blackstone will receive its hefty annual management fees from the taxpayer – regardless of the fund’s performance.

In other documents, public pension money is exempted from some of the most basic protections usually guaranteed under federal law. Other contract language appears to license Blackstone to engage in financial conflicts of interests that could harm investors.

Despite the documents involving government agencies, and taxpayer money, they are all marked confidential. The public is not allowed to see them.

Tobe says the sheer size of Blackstone – and its attendant ability to set industry standards - means that the documents he obtained represent a story that goes way beyond one state.

“These agreements aren’t unique to Kentucky – they are everywhere,” Tobe told Pando. “They include exactly the kind of risk and boilerplate heads-I-win-tales-you-lose language that is almost certainly standard in the contracts that so many other pension funds have been signing… This is a national problem.”

Blackstone’s “Fund of Funds”: Up to $200M a year in fees and underperformance that can harm taxpayers

One of those documents given to Pando by Tobe is a confidential memo to KRS investment committee members from August 2011. In the memo, KRS staff outlines their desire to invest roughly $400 million in Blackstone’s Alternative Asset Management Fund (BAAM), which is a so-called “fund of hedge funds.”

As documented on page seven of that memo, Blackstone was guaranteed whopping fees of 50 basis points plus 10 percent of any overall profits on retirees’ money. In addition, the memo estimates 1.62 percent management fees and 19.78% incentive fees to be paid on top of the Blackstone fees to the underlying (and undisclosed) individual hedge fund managers in the “fund of funds.”

Pension officials made the decision to invest in the fund despite Blackstone then reportedly being under SEC investigation. According to KRS’s latest annual financial statement, Kentucky now has more than half a billion dollars invested in BAAM.

In 2013, according to KRS data, BAAM earned an 11.54 percent return for the pension system. That was 20 percent below the S&P 500 that year, meaning, Tobe says, that Kentucky taxpayers would have earned $78 million more in an almost fee-less S&P index fund. Those figures are consistent with a recent study from the Maryland Public Policy Institute showing “that state pension systems that pay the most for Wall Street money management get some of the worst investment returns.”

Fees, says Tobe, are a driver of the underperformance. Using the secret memo’s figures, Tobe estimates that 33 percent of that stunning one-year underperformance - or about $25 million – was in the form of fees paid to Blackstone and the other managers in its “fund of funds.”

According to data from the investment research firm Prequin, 20 others public pension funds are also invested in BAAM. Assuming those funds invested in BAAM under roughly the same terms as Kentucky, Tobe estimates that Blackstone and underlying managers in BAAM raked in well over $200 million in fees in 2013 on just that one fund of funds.

Absent from the memo to the trustees are any details about which particular hedge funds are in the BAAM fund. In an interview with Pando, Tobe argues that was by design because, he says, Kentucky officials wanted trustees to vote on the investment without being able to do due diligence. Tobe says that meant trustees were not made aware that BAAM invested in SAC Capital– the firm whose executives recently pled guilty to insider trading charges, and who at the time of the Kentucky investment were already under SEC investigation.

“The crack cocaine of the private equity industry”

Other documents obtained by Pando detail Blackstone’s separate private equity fund, Blackstone Capital Partners V, which the New York Times describes as “the biggest private equity fund in history.” Prequin data show that public pension systems in 24 states have made $6.5 billion worth of investment commitments to this one private equity fund.

According to KRS’s 2013 annual report, the Kentucky pension system has $81.1 million in that and one other Blackstone private equity fund.

One document prepared by the investment consulting firm Strategic Investment Solutions shows that in Capital Partners V, Blackstone is guaranteed management fees of between 1 percent and 1.5 percent, depending on the size of the investment. Attached to that document is another Blackstone document in which the company presents its past track record. In fine print at the end of that second document, the company declares that it does not make “any representation or warranty, express or implied, as to the accuracy or completeness of the information.”

Public pensions are typically bound by the so-called “prudent person rule”. Investopedia explains that this rule, which is enshrined in many state statutes, requires public pensions to avoid “shady, risky, or otherwise poor investments.” The Organization for Economic Cooperation and Development says it operates in the United States to require “that unwarranted risk be avoided” in favor of a “culture of cautious behavior among pension” overseers.

Yet, a document detailing investment contract language for investments in Blackstone Capital Partners V appears to show quite the opposite. Marked “Risk Factors and Potential Conflicts of Interest,” the document outlines major risks for public pensions – the kind of risks that are rarely ever disclosed to the public.

For example, the document shows Blackstone admitting that investing in the fund “involves a high degree of risk”; that “the possibility of partial or total loss of capital will exist”; that “there can be no assurance that any (investor) will receive any distribution”; and an investment “should only be considered by persons who can afford a loss of their entire investment.” Additionally, the document says investments made by the fund could subject investors to “certain additional potential liabilities” and that an investor “may be required to make capital contributions in excess” of what it originally pledged.

Amazingly, while asking public pension trustees to invest money in the fund, the Blackstone document also says that “none of the Partnership’s investments have been identified,” meaning trustees could not even evaluate the underlying investments before they decided to invest retirees’ nest eggs.

In terms of legal protections, the document says investments made by the private equity fund could be illiquid “for a number of years.” In a section marked “absence of regulatory oversight,” the document also says investors “are not afforded the protections of the 1940 (Investment Advisers) Act.” It also says that in the event of litigation brought against the managers of the fund, those costs “would be payable from the assets” of the investors.

Then there are the carve-outs for financial conflicts of interest. One section of the document declares that “Blackstone has long-term relationships with a significant number of corporations and their senior management” and that when making investment decisions, Blackstone “will consider those relationships.” Another section declares that “Blackstone may have conflicting loyalties” between the different funds it operates, and that “actions may be taken for the Other Blackstone Funds that are adverse” to investors.

According to former SEC investigator Ted Siedle, who served as counsel to Tobe during the SEC investigation, the conflict-of-interest section marked “Fees for Services” is particularly problematic. He says it permits private equity managers to assess fees on companies the private equity fund owns, but then not compensate the fund investors (like public pensions) for those fees. This stealth fee-inflating practice, which is attracting SEC scrutiny, has been called the “crack cocaine of the private equity industry.”

An official with the American Federation of Teachers, whose members are relying on pension investments, told Pando that the disclosures of huge fees and potential conflicts of interest may put pension trustees at odds with the law.

“Trustees risk violating their fiduciary duty if they don’t aggressively confront fees and potential conflicts of interest in the investment chain,” said Dan Pedrotty, AFT’s Director of Pensions & Capital Strategies.

More generally, critics of various political stripes say that while the risks outlined in the Blackstone private equity documents may be acceptable for individuals acting with their own money, they may be too perilous for public pensions, especially when a larger and larger portion of those pensions’ portfolios are in such private equity investments.

For instance, citing data from Wilshire Consulting, conservative American Enterprise Institute scholar Andrew Biggs says these kinds of dangers make alternatives “60% riskier than U.S. stocks and more than five times riskier than bonds.” Time Magazine’s Rana Foroohar reports that a recent conference of liberal scholars said the possibility of catastrophic losses mean “pension funds shouldn’t be in high-risk assets” and “should be mainly invested only in no or low fee index funds.” And both the Government Accountability Office and Siedle have raised questions about the risks inherent in private equity’s opacity and illiquidity.

Money, political influence and the alternative investment craze

In recent months, questions have been raised about why pension funds are investing so heavily in  high-fee, high-risk alternative investments. For example, a New York Times report recently noted that “a number of retirement systems that have stuck with more traditional investments in stocks and bonds have performed better” than those investing heavily in alternatives. Similarly, Bloomberg News reported that “more than half of about 400 private-equity firms that SEC staff have examined have charged unjustified fees and expenses without notifying investors” of such fees.

Pension analyst Leo Kolivakis says public pensions – read: public employees and taxpayers – are among those facing the biggest downside.

“Despite hedge funds having suffered the worst performance start to the year since 2011, industry assets hit a new peak of $2.7 trillion thanks to healthy net inflows,” he recently wrote. “And who is leading the charge? Who else? Dumb public pension funds getting raped on fees.”

The question, then, is why. When The Economist magazine reports that “the average return of hedge funds has lagged a plain-vanilla portfolio (in) nine of the past ten years,” why are pension funds dumpingso much cash into high-fee hedge funds? When none other than Warren Buffett is telling his own trustee to only invest his money in government bonds and cheap index funds, why are public pension officials nonetheless putting retiree money into high risk private equity firms? In short, why have public pension funds been so aggressively moving money into these alternative investments?

One part of the answer may have to do with a misguided effort by pension administrators to bet big on ever-more risky investments in hopes of earning outsized returns and more quickly closing revenue shortfalls. That, though, may be creating more problems. As a 2013 study by the International Monetary Fund showed, severely underfunded pension plans have “increas(ed) their risk exposures” ultimately “exposing them to greater volatility and liquidity risks.”

Tobe says the Kentucky Retirement Systems fits this description. He points out that according to KRS financial statements, Kentucky invests an above-average 34 percent of its assets in “alternatives.” That strategy last year delivered roughly 12 percent returns for KRS – far below the 16 percent median for public pensions. The high fees involved in such “alternatives” may help explain, in part, why a December 2013 KRS presentation (embedded below) shows the pension system is now just 23 percent funded – a rate that Tobe says is one of the worst in America.

That said, another reason why pension funds have moved into risky high-fee investments may have to do with political influence and campaign cash from the Wall Street firms that stand to benefit from the alternative investment craze.

While a spokesperson for Blackstone told Pando “I am not aware of any (Blackstone lobbyists) in Kentucky,” government ethics disclosures show Blackstone and companies Blackstone funds own actually employ 11 lobbyists in the state (when shown the disclosure forms, the spokesperson subsequently insisted that “these are not lobbyists but internal investment professionals who work with our clients on their investment objectives”).

Among the lobbyists is one from Park Hill Group, the Blackstone-owned firm whose website describes it as “a placement agent providing placement fund services for private equity funds, real estate funds, and hedge funds, as well as secondary advisory services.”

As documented by Bloomberg News, placement agents often leverage political connections to convince public pension systems to invest in their clients’ funds. Because pension funds are barred from choosing investments based on such political considerations, the controversial placement business has periodically faced legal scrutiny, with some states and cities moving to crack down on placement agents. But, as evidenced by Kentucky and its relationship with Blackstone, many states still very much permit them. Indeed, according to Forbes, “Park Hill itself received $2.35 million for lining up business in Kentucky – for Blackstone funds.”

Of course, what can supercharge the influence of lobbyists and placement agents is the campaign contributions of their clients. So, for instance, according to data from the Center for Responsive Politics, Blackstone employees are among the largest campaign contributors to Kentucky’s chief political powerbroker, U.S. Senator Mitch McConnell (R).

Some of that money can filter directly the coffers of state parties that specifically run elections for positions involved in pension policy. For example, Blackstone employees are top contributors to a joint fundraising committee “McConnell Victory Kentucky,” which, according to the Louisville Courier-Journal, donates heavily to the Kentucky Republican Party.

The potential relationship between campaign money and pension policy is not limited to Kentucky. As USA Today reported back in 2009: “More than two dozen firms that have surfaced in a broad corruption investigation of public pension funds gave at least $1.97 million in campaign contributions to officials with potential influence over the funds’ investments.”

Blackstone and private equity trade association response

Pando requested comment from the Kentucky Retirement Systems 4 days before publication time, but KRS did not respond. However, representatives of the alternative investment industry did.

In response to the disclosures, Blackstone senior managing director Peter Rose told Pando: “Our funds have produced equity-like returns with bond-like volatility over a market cycle and have protected capital in down equity markets. We are proud of what we have been able to achieve for our investors in over two decades of investing.”

Additionally, the trade association for the private equity industry also responded to the disclosures. Acknowledging that “A majority of private equity investment comes from institutional investors such as public pensions,” Noah Theran of the Private Equity Growth Capital Council told Pando: “Research has consistently shown that private equity is the best performing asset class for pensions over the long-term, but as is the case with any investment, it is not without risk.”

A commitment to secrecy

When Pando asked for specific comment on whether agreements between Wall Street firms and taxpayer-backed public pensions should be available to the public, Rose said: “We are going to decline to comment on this.” Likewise, the Private Equity Growth Capital Council and KRS did not respond to questions about secrecy.

That response – or lack thereof – highlights how public pension transactions with Wall Street remain shrouded in secrecy in states throughout the country. As Susan Webber has written, despite the astronomical sums of taxpayer money and retirement income at stake, “public pension funds routinely turn down requests” for such basic information in hopes of shielding the fee bonanza from scrutiny.

For example, following SEC warnings of fee abuse in private equity investments, the New York state’s Teachers’ Retirement System flatly rejected Reuters’ open-records request for information about its private equity holdings.

In North Carolina, a recent report by Siedle found that thanks to a lack of transparency, “It is virtually impossible for stakeholders to know the answers to questions as fundamental as who is managing (pension) money, what is it invested in and where is it?”

In Rhode Island, the financial industry is a major donor to the election campaigns of State Treasurer Gina Raimondo (D), who has used her power tomove more pension money into high-fee alternative investments. Many of those investments subsequently underperformed and hurt pension earnings, all while generatingbig Wall Street fees. When transparency and good-government groups asked for the full details of the alternative investments in question, Raimondo refused.

Meanwhile, when Pando requested details of the New Jersey state pension fund’s investment in a firm that is financially connected to the fund’s investment chief, the state government refused the request.

In Kentucky, the secrecy surrounding the pension fund has prompted Tobe to work with State Rep. Jim Wayne (D) on legislation proposing to crack down on placement agents, and to mandate the public disclosure of contracts between Wall Street firms and the pension system. Though Wayne is a Democrat, the bill was praised by the state’s major conservative think tank. And though the proposal was ultimately killed, Wayne says it provides a template for other states.

“This is a national problem and there’s just such a huge amount of money involved,” he told Pando. “Billions and billions of dollars are swirling around in these retirement systems, and there are people interested in capturing big shares of this money as they advise and direct how this money is invested. Clearly, there is a trust issue here with employees and pensioners. They have to trust that the system is being honest with them because their livelihoods are at stake. But they can’t trust a system that isn’t transparent.”

La Caisse de dépôt et placement du Québec has taken a new step in the deployment of its investment strategy, announcing changes to its structure. The appointment of an Executive Vice-President, Private Equity and Infrastructure and the creation of an Executive Vice-President position dedicated exclusively to Québec are consistent with the work carried out these past few years to strengthen La Caisse’s position in global markets and to maximize its impact in Québec.

“With these changes, we will be even better equipped to reach our goals here in Québec and in the world’s most promising markets,” said Michael Sabia, President and Chief Executive Officer. “This new structure allows us to mobilize our teams based on two well-defined mandates and, more generally, to continue to enhance La Caisse’s standard of performance and depth of expertise.”

Executive Vice-President, Private Equity and Infrastructure
Given the changes currently underway in the global economy, growth will be coming from varied sectors and diverse markets over the next few years. To identify the best private equity and infrastructure investment opportunities in the world, La Caisse must go even further in developing leading-edge expertise in order to make direct investments and develop solid partnerships around the world. To this end, it must be able to rely on high-level, talented individuals with access to extensive international business networks.

After a rigorous, global recruitment process, Andreas Beroutsos has been appointed Executive Vice-President, Private Equity and Infrastructure. In this role, he will oversee all private equity investment activities conducted outside Québec. Mr. Beroutsos was Director and Senior Partner and member of the Firmwide Senior Partner election committee at McKinsey & Company, the management consulting firm, where he established and managed the global private equity practice. After 20 years with this firm, 

Mr. Beroutsos became Partner and Senior Managing Director at Eton Park Capital Management. Until recently, he was Partner and Managing Director at One Point Capital and Managing Partner at Navigos Capital, in New York. He was the founder of both firms. Mr. Beroutsos studied at Harvard University and holds an MBA from Harvard Business School. 

He speaks five languages: Greek, French, English, Italian and Spanish. He joins La Caisse today and is based in Montréal.

Executive Vice-President, Québec 

Since 2009, La Caisse has substantially increased its assets in Québec, particularly in the private sector. Today, given La Caisse’s increased presence and its commitment to play a leading role with Québec companies throughout the province, it was a logical decision to create the position of Executive Vice-President, Québec. This new Executive Vice-President will be in charge of managing La Caisse’s Québec-based private equity investment portfolio and, more generally, playing a leadership role in the integrated coordination and planning of all of La Caisse’s activities in Québec. The Executive Vice-President, Québec will play an advisory role with all internal teams and will be charged with looking for the best business opportunities throughout the province.

Luc Houle, who has served as Senior Vice-President, Private Equity and who has been with La Caisse for more than 30 years, has agreed to be the Interim Executive Vice-President, Québec until the recruitment process has been finalized. Over the years, Mr. Houle has been instrumental in a large number of La Caisse’s major transactions in Québec and has successfully led the Medium-sized Companies and Large Companies and Venture Capital teams. He has vast experience on the ground, working with entrepreneurs, and is highly respected in the Québec business community. In addition to his investment role, Mr. Houle serves on the boards of directors of several companies.

Mr. Beroutsos and Mr. Houle will sit on La Caisse’s Executive Committee.

The process to recruit the Executive Vice-President, Québec, will be finalized over the next two to three months 

These changements (changes) follow Normand Provost’s announcement last August of his intention to retire. “On my behalf and on behalf of all my colleagues at La Caisse, I would once again like to thank Normand Provost for his dedication, accomplishments and immense contribution to the success of La Caisse throughout his exceptional career,” said Michael Sabia.

The federal government is withholding information from the Auditor General on the long-term health of public pension plans and tax policy changes, citing cabinet and budgetary secrets.

Auditor General Michael Ferguson’s office requested the government conduct an analysis of the long-term sustainability of public pension plans — plans that could prove a “significant risk” to Ottawa’s finances. Treasury Board bureaucrats responded they already do that work, they just refuse to make it public.

“Due to cabinet and budget confidentiality, the (Treasury Board) could not share much of its analysis with the Auditor General,” officials wrote in response to the audit.

“(An interdepartmental) committee will coordinate analysis across departments to ensure the government has the information and expert advice it needs to make informed decisions on the management level.”

While it’s not unprecedented for information to be withheld from the Auditor General, Ferguson said he was “surprised” at the scope of information officials refused to turn over.

And there is no appeal process — and nobody outside the government — that can review the decision to designate documents or information cabinet confidence. Once confidence is invoked, the information cannot be released for two decades.

“I think there are maybe some weaknesses, perhaps, in our protocols. Some things that are not specifically covered and we need to go back and try and get that improved,” Ferguson told reporters in Ottawa Tuesday.

Ferguson’s office has reached out to officials at the Privy Council Office, the department that supports Prime Minister Stephen Harper, to attempt to do just that. Those discussions are in early days, however, and there’s no guarantee the information auditors sought will be released.

Treasury Board President Tony Clement noted that officials, not politicians, make the decision to designate documents cabinet confidence. Clement also pledged to work with the Auditor General’s office to try and release more information on the health of public sector pensions.

“We will continue to find ways to work with the Auditor General outside that (cabinet confidence) rule, which we do hold sacrosanct. But if there are other ways we can work with the Auditor General, we’d dearly like to do so,” Clement told reporters.

In an audit released Tuesday, Ferguson’s office reported that public sector pensions could pose a “significant risk” to Ottawa’s financial position, with pension liabilities rising to $152 billion in 2012-2013.

The audit found that the three public sector pensions studied – for public servants, RCMP members, and Canadian Armed Forces personnel – had combined assets of $72.2 billion in 2012-2013, and added $9.2 billion to the federal government’s public debt charges that year.

Strong volatility in the markets since the 2008 recession, in addition to long-term interest rates held to historic lows, have contributed to the financial risks associated with the plans. Increased longevity — the average number of retirement years have increased from 14 in 1970 to 23 in 2010 — has also contributed to increased costs. Over the last two years alone, the federal government has shored up the plans to the tune of $1 billion in special payments.

The audit passes no judgment on the long-term sustainability of the plans.

Clement said there are no immediate plans to change the structure of the pension plans, either through clawing back benefits or increasing premiums paid by public servants. The Conservatives recently moved to increase the age of eligibility for full pension to 65, and increased public servants’ contributions to their plans to 50 per cent.

“I’ve indicated over the next round of collective bargaining that for the next three years, the focus is going to be on sick leave and absenteeism, not on further pension reforms. And I feel comfortable that that’s the right thing to do,” Clement said.

A bumpy trading environment is tripping up hedge funds.

Big stumbles by some star managers drove hedge funds to back-to-back monthly declines for the first time in two years, according to researcher HFR Inc.

The lackluster showing—the average hedge fund trailed benchmarks for both stocks and bonds in April—was a blow for an industry that charges more than other fund managers but pitches steady returns in both good times and bad.

Hedge funds on average dropped 0.17% in April, HFR said Wednesday, following a 0.33% decline in March. Funds hadn't turned in two consecutive losing months since April and May of 2012, HFR said.

That performance also trailed the broader stock market, where the S&P 500 rose 0.74% in April, including dividends. Many hedge funds, however, invest in markets other than stocks, and bet concurrently on some positions rising and others falling.

Brad Balter, a Boston-based adviser who helps wealthy investors choose hedge funds, said his clients increasingly are weighing whether they should continue pouring money into these highly paid managers.

"I'm not saying you should judge people in a single quarter, but there's less rope for poor performance," Mr. Balter said. He called the industry's showing in recent years for the most part "mediocre."

The latest industrywide figures come the same week a survey by the trade publication Institutional Investor's Alpha showed that the top 25 highest-earning hedge-fund managers collectively made $21 billion in 2013, an increase of more than 50% over 2012.

Most hedge funds charge some variation of the "2 and 20" model, in which the firm collects a 2% management fee and 20% of investment profits.

Some of the biggest losers among fund managers in April were those who tried to ride last year's big winners: tech stocks.

Coatue Management LLC, the $9 billion New York firm started by Philippe Laffont, a veteran of Julian Robertson's Tiger Management, slid about 4% for its second consecutive month of losses due mostly to tech-related stocks, according to people familiar with its results. Coatue is now down almost 11% for the year, and has given back more than half of its gains from 2013.

Hedge funds that bet on technology and health care as a group fell 3.7%, the steepest drop since 2008, according to HFR.

Jonathan Lennon, founder of hedge fund Pleasant Lake Partners, said it was challenging to navigate an environment in which many technology, media and telecommunications stocks are trading at "nosebleed valuations." He has maintained bets against technology and consumer stocks, which has helped $100 million Pleasant Lake gain about 12% this year.

The pain wasn't limited to tech stocks.

Paul Tudor Jones, a billionaire veteran of the industry and founder of Tudor Investment Corp., this week called the trading environment "as difficult as I've ever seen in my career." Mr. Jones' main fund is down about 4% this year, according to investor documents.

Sloane Robinson LLP, one of London's oldest hedge-fund firms, did even worse, recording a 20% yearly loss in its International fund. The fund has been hurt in part by bets against the Japanese yen, an investor said, a favorite hedge-fund trade from the past year that has hurt managers in 2014. Co-founder Hugh Sloan didn't respond to a request for comment.

But several boldfaced names in the industry shined.

William Ackman's Pershing Square L.P. hedge fund rose 7.3% last month, according to an investor update, helped by the activist's deal to back Valeant Pharmaceuticals International Inc.'s takeover attempt of wrinkle-treatment maker Allergan Inc.

Pershing Square L.P. is up 18.7% for the year through the end of April, according to the document viewed by The Wall Street Journal. The firm manages $13.7 billion overall.

Astenbeck Capital Management, the $3.4 billion commodities hedge-fund firm led by oil trader Andy Hall, gained 3.1% in April and is up more than 11% on the year, according to investor documents.

For some big firms, the problems arose when they switched gears at the wrong time. Quantitative Investment Management LLC, a $2.7 billion firm based in Charlottesville, Va., that frequently shifts its positions based on the firm's models, flipped to shorting U.S. equities early in the month, and began posting losses midmonth as stock indexes rallied, according to an investor communication.

Adding to the firm's pain: QIM had been betting for much of the month on further appreciation for U.S. Treasurys, a haven asset whose prices dropped as stocks rose. QIM's flagship fund ended the month down about 5%, and is now 6% in the red for 2014 overall.

For at least one big fund, staying the course turned out to be the right move.

Viking Global Investors LP, a $27 billion Greenwich, Conn. firm, was down almost 4% in the first two weeks of the month in its flagship fund, in part due to poor-performing bets on tech stocks, but told investors it intended to maintain its positions and ride out the turmoil.

After dropping 3.4% in the first two weeks of April, the Nasdaq-100 tech index roared back with a 4% return in the back half of the month. Viking ended up about 0.4% for April.