Ontario Teachers’ Pension Plan, Toronto, is starting to step back from investing in alternative investments such as real estate and infrastructure because they are “too expensive,” said Ron Mock, president and CEO of the C$154.4 billion ($126.4 billion) pension fund, while speaking on a panel at the Milken Institute Global Conference in Beverly Hills, Calif., on Wednesday.

“There’s a lot of money crowded into the broadly defined alternatives space,” Mr. Mock said. “We find it too expensive. It’s time for us to step back.”

Instead, Ontario Teachers executives are investing “between the asset classes where we found the most interesting deals today,” he said.

For example, Ontario Teachers is an investor in the U.K. and Irish lotteries for their stable cash flows and high rate of return, which can be improved with technological upgrades, Mr. Mock said.

“(The lottery investment) is almost like an infrastructure asset,” he said.

Even though Ontario Teachers is being more cautious in its infrastructure investments, Canada’s eight pension funds are “dying to come into the U.S. to fund (the country’s) infrastructure needs” using direct investments, Mr. Mock said. “We are working with the government because there are impediments.”

But Mr. Mock said sovereign wealth funds and pension plans are untapped capital pools for global infrastructure.

Hiromichi Mizuno, executive managing director and chief investment officer of Japan’s ¥137 trillion ($1.15 trillion) Government Pension Investment Fund, Tokyo, also said on the panel that the pension fund has a 5% cap rather than a target allocation for alternative investments. This means Japan’s pension fund executives can invest in alternative investments opportunistically rather than try to meet a target allocation.

I find this whole discussion quite interesting. I agree with the commentary of the former pension fund manager. Private assets are just as volatile as public assets. When private assets are sold the main valuation methodology for determining the appropriate price is public market comparables, so you would be kidding yourself if you thought that private market valuations are materially different than their public market comparables. Just because you don’t mark private assets to market every day doesn’t make them less volatile, it just gives you the illusion of lack of volatility.

Another important element which seems to get missed in these discussions is the value of liquidity.At different points in time having liquidity in your portfolio can be extremely valuable. One only needs to look back to 2008 to see the benefits of having liquidity. If you had the liquidity to position yourself on the buy side of some of the distressed selling which happened in 2008 and early 2009, you were able to pick up some unbelievable bargains.

Moving into illiquid assets increases the risk of the portfolio and causes you to forgo opportunities that arise from time to time when distressed selling occurs - in fact it may cause you to be the distressed seller!Liquidity is a very valuable part of your portfolio both from a risk management point of view and from a return seeking point of view.You should not give up liquidity unless you are being well compensated to do so.Current private market valuations do not compensate you for accepting illiquidity, so in my view there is not a very compelling case to move out of public markets and into private markets at this time.

Too many investors have moved outside their areas of expertise as they seek higher returns, posing dangers for riskier assets, according to Colony Capital Inc. Executive Chairman Thomas Barrack Jr.

“Everybody is outside of their own asset class,” Barrack said in a Bloomberg Television interview Tuesday with Erik Schatzker and Stephanie Ruhle at the Milken Institute Global Conference in Beverly Hills, California. “When amateurs enter the marketplace for all of this, you are going to get an abundance of something and it is usually not good.”

Central banks globally have pushed investors into higher-yielding assets by reducing interest rates and purchasing bonds. The Standard & Poor’s 500 Index reached an all-time high on Friday and sovereign debt in Europe is trading at negative yields.

“Institutional investors that are in this endless search for yield are ignoring the risk peril of all the consequences of those things,” he said.

Investors with an abundance of liquidity have used real estate as a safe haven, Barrack, 68, said. Apartments in New York City and London are serving as a “safe deposit box” for foreign investors, he said. The influx of money, particularly from international players seeking less risk, has pushed up property values.

“Real estate has become the last bastion,” he said. “The liquidity in the world has created this flurry for solidity. If you do not think there is a bubble at that level, you are going to be mistaken.”

Little Experience

Capitalization rates, a measure of real estate investment yield that falls as prices rise, are being driven down by buyers with less experience in property investing, Sam Zell, the billionaire chairman of Equity Group Investments, said during a Global Conference panel discussion about real estate.

“Capital investment in the last 10 to 20 years is all about allocation,” said Zell, 73. “It’s not a whole bunch of amateurs, but a bunch of people that may not have a lot of experience in real estate, but with a whole lot of money.”

To protect themselves from possible future losses, real estate investors should look for “equity-type returns” in the capital stack, Barrack said during the panel discussion.

“Floating debt can choke and kill you quickly,” he said.

Stagnant Rents

While commercial-property prices have risen, office rents in most urban downtowns, with the exception of New York City, are effectively at the same levels as 20 years ago, Barrack said.

Including such expenses as leasing commissions, tenant improvements and property taxes, “if you effectuate down in current dollars, true office rents are about the same as in 1995,” he said in the television interview.

Colony Capital oversaw about $24 billion of equity before Barrack combined it with Colony Financial Inc. this year. His firm in recent years has owned Michael Jackson’s Neverland Ranch, invested in single-family rental homes and distressed mortgages.

“When the masses start entering the water and thinking they can navigate the waves, I get out,” said Barrack.

U.S. stocks closed down more than 1 percent on the last day of trade for April as investors weighed mixed economic data and continued weakness in the dollar.

The major indices closed below their 50-day moving averages.

The Nasdaq closed down 82.22 points, or 1.64 percent, at 4,941.42, recovering slightly from a 2 percent dip. Biotechs weighed on the index, with the iShares Nasdaq Biotechnology ETF (IBB) ending more than 3 percent lower.

The Dow Jones Industrial Average closed down 195.01 points, or 1.08 percent, at 17,840.52, with Apple down 2.7 percent as the greatest laggard. American Express, Wal-Mart and Coca-Cola were the only blue chips advancers.

The blue chip index clung to gains of 0.10 percent for 2015. Earlier, the index lost more than 250 points to temporarily wipe out gains for the year.

The S&P 500 closed down 21.34 points, or 1.01 percent, at 2,085.51, with information technology leading all 10 sectors lower.

"Yesterday's weak earnings and today's light unemployment figure have got the market worried that the Fed's going to raise rates and the underlying economy is not as strong as everyone had hoped," said Kim Forrest, senior equity analyst at Fort Pitt Capital.

Wednesday's weaker-than-expected first-quarter GDP report and Fed meeting statement that removed all calendar references to a rate hike also put investors on edge ahead of a key economic indicator—April's jobs report due next Friday. The data could indicate a pickup in the second quarter and bring a rate hike sooner rather than later.

"We haven't seen yet a whole lot of evidence of things really turning around in April," said Bill Stone, chief investment strategist at PNC Asset Management. He still expects low- to mid- single-digit growth for 2015.

On Thursday, weekly jobless claims came in at 262,000, a 15-year low. U.S. personal income was flat in March, and consumer spending up just 0.3 percent when adjusted for inflation.

April's Chicago Purchasing Managers' Index (PMI) read was 52.3, topping expectations.

"Overall the data has been much weaker. It is still way too early to say you're going to see spectacular growth in the second quarter," said Krishna Memani, CIO of Oppenheimer Funds. "Clearly the bond market is not helping but the bond market is not the primary driver of equities."

Longer-dated U.S. Treasury yields held near highs as European bond yields climbed.

Earlier, U.S. stocks briefly halved losses as investors found some relief from news of progress towards a deal on Greece. An International Monetary Fund spokesman said the fund does not expect the country to exit the euro zone.

Meanwhile, Greece's government signaled the biggest concessions so far as crunch talks with lenders on a cash-for-reforms package started in earnest, while trying to assure leftist supporters it had not abandoned its anti-austerity principles.

The Athens stock exchange closed up 3 percent, with most European equities ending mildly higher.

The market was "at a recovery" from morning lows, said Tim Courtney, CIO at Exencial Wealth Advisors. "Part of it is what's coming out of Greece. What I think is moving the market today and last week is, where the good news is going to come from."

Corporate results have tended to beat estimates on earnings per share but miss on revenue.

Rising rates and lowered earnings expectations for stocks trading at high multiples makes the market "vulnerable," said Bruce Bittles, chief investment strategist at RW Baird.

Analysts noted Thursday's decline did not not indicate a significant selloff as the major indices came off high levels and traders took profits on the last day of trading for the month.

"It's nothing more than a normal, modest correction," said Paul Nolte, portfolio manager at Kingsview Asset Management. "Volume hasn't picked up."

"You need a clear reporting of earnings (at these multiples) that propels stocks higher," said Art Hogan, chief market strategist at Wunderlich Securities, noting that the U.S. dollar remained in focus.

The U.S dollar held lower against major world currencies after the euro traded above $1.12 for the first time in two months on Wednesday.

"Certainly the change in the direction of the dollar has caused a lot of anxiousness," Bittles said.

"I think the biggest meaning in the euro being strong is (ECB President Mario) Draghi's plan isn't working," said Marc Chaikin, CEO of Chaikin Analytics. "It's a negative for the U.S. economy as well because it takes off the table the whole notion of global expansion."

But some currency strategists say the euro's strength may be temporary.

German bund yields surged on Thursday, following a strong rally on Wednesday. U.S. Treasury yields also continued to trade higher, with the benchmark 10-year note yield hitting 2.10 percent on Thursday.

Investors also attempted to interpret Wednesday's Fed statement which removed all calendar references on the timing of a rate hike. Officials have indicated a desire to raise rates at some point this year, with the market now anticipating an increase possibly in September.

The markets "seem to be concerned about when that may take place," said Ryan Larson, head of U.S. equity trading at RBC Global Asset Management (U.S.). "The data has been good enough to confirm that we continue to improve but not enough for the Fed to move aggressively."

On Wednesday, official data showed gross domestic product in the U.S. expanded at an only 0.2 percent annual rate, on Wednesday. That was a big step down from the fourth quarter's 2.2 percent pace and marked the weakest reading in a year.

Major earnings on Thursday included Exxon Mobil, Colgate-Palmolive, ConocoPhillips, CME Group, Viacom, Imax and Beazer Homes before market open.

Exxon Mobil posted first-quarter earnings that declined sharply from a year ago but handily beat expectations on both the top and bottom lines.

AIG, Visa, LinkedIn, Western Union and Dreamworks Animation are due after the bell.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 14.

About three stocks declined for every advancer on the New York Stock Exchange, with an exchange volume of 1.0 billion and a composite volume of 4.4 billion in the close.

Crude oil futures settled up 1.79 percent at $59.63 a barrel on the New York Mercantile Exchange. Gold futures settled down $27.60 at $1,182.40 an ounce.

In this environment, investors should overweight small caps (IWM), technology (QQQ or XLK) and biotech shares (IBB or XBI) and keep steering clear of energy (XLE), materials (XLB) and commodities (GSG). And even though deflationary headwinds will pick up in 2015, I'm less bullish on utilities (XLU) and healthcare (XLV) because valuations are getting out of whack after a huge run-up last year.

One of Europe’s biggest hedge fund investors, Unigestion, is pushing hedge funds to scrap management fees in place of a bigger slice of profits as investors attempt to crack down on high charges.

Nicolas Rousselet, head of hedge funds at the $16.7 billion investor, which has $1.9 billion invested in hedge funds, said that a zero management fee in exchange for a higher performance fee of 25% was “a great fee structure”. Hedge funds typically charge a 2% management fee and a 20% performance fee although better performing, more established managers can charge much higher fees. These top managers tend to attract investors easily, often having to turn away new ones, and can dictate terms to investors.

Mr. Rousselet said Swiss-based Unigestion had been pushing for a “transformation of fees”, that his team had successfully negotiated lower management fees with some hedge fund managers last year, and in two instances secured rates of lower than 1%.

Among those were both newer managers and more established ones that wanted to work with Unigestion on a new share class or fund.

Mr. Rousselet said: “If [a hedge fund manager] truly believes in his ability to perform, he should take my deal.” However, he acknowledged that low fees could pose a business issue for the hedge fund manager and conceded that the main challenge for investors was that the best-performing funds were oversubscribed.

He said that this transformed fee structure encouraged hedge fund managers to take on more risk, but that hedge fund investors like Unigestion needed to ensure that funds were prepared to take some risks. The aggressive stance is the latest development in a long-running fee debate between hedge funds and investors.

Data released earlier this month by Deutsche Bank Global Prime Finance showed that the success rate of fee negotiations was only gradually improving: some 37% of investors that negotiated fees were successful in one out of every two negotiations. This rate has increased from 35% a year ago, and 29% the year before that.

Investors are usually able to negotiate fees if they can commit a larger investment, and agree to invest for the longer term.

Deutsche Bank said that the most successful negotiators interviewed for its survey, which spanned 435 investors who have $1.8 trillion worth of investments in hedge funds, had an average of $5.6 billion invested in hedge funds. They agreed to invest on average $70 million for at least one year.

Sir, Sir John Ritblat makes a good point regarding hedge fund fees (Letters, March 2). Hedge fund managers should only be rewarded with an incentive fee for delivering performance that exceeds a “normal” hurdle.

For internal benchmarking purposes, many investors use an absolute return measure such as the return on short-dated Treasury bills plus 4 per cent. We should like to see a hurdle at a similar level adopted by the hedge fund industry generally, which by so doing would accept that it expected to deliver a “super return” in exchange for its incentive fee, as its highly talented managers no doubt consider themselves capable of producing. Otherwise investors can find themselves in the depressing position of paying an incentive fee on any positive performance however small.

If one assumes the “standard” — but by no means ubiquitous — 2 per cent plus 20 per cent fee structure, then a 5 per cent gross return to the fund is whittled down to a 2.4 per cent net return to the investor. A hurdle rate — typically of 8 per cent — is standard in the private equity fund sphere and only when the manager has delivered this return to the investor can he help himself to a share of the surplus. Why should the hedge fund industry not follow suit?

We would like to propose a question to you: Is it possible for an investment management firm to operate with the same level of precision and reliability found in industries where failure is simply not an option?

To answer this question, we looked at operational practices in industries such as nuclear power, space travel, aviation and healthcare, which face the prospect of catastrophic failure on a daily basis and have the highest standards for reliability and quality – after all, failure in these industries is a matter of life or death. While the consequences of success or failure in the investment management industry may not be quite as extreme, we do believe that investment managers must treat their investors’ dollars with the same level of respect and thus operate to the same standards.

In this post, we explore what investment management would look if we applied the same level of operational excellence found in these industries. Investment management is a business of precision, yet far too often you hear rumours of ‘fat-finger’ execution errors, or other more serious issues due to operational failures. And these are only the failures that you hear about – what about the failures that go unreported to clients, or even worse, failures that the investment manager itself is not aware of? What it all comes down to is that errors in investment management, no matter how small, are a sign of a lack of quality, and with a lack of quality there is a potential for loss and deviation from strategy.

Are Current Best Practices Sufficient?

Most major operational deficiencies (lack of proper oversight and separation of duties, for example) can often be uncovered by traditional manager due diligence activities. However, many approaches to manager due diligence are conducted through the use of questionnaires which are often built around a series of “check boxes” to ensure that nothing large falls through the cracks. This process places little attention to the quality and repeatability of investment operations. Third party due diligence firms conduct more detailed reviews, but can only see so far into the manager’s processes.

Most practitioners would agree that the intricacies of processes are a potential source of operational risk. For example, frequent small errors could be a reason why a fund might deviate from its benchmark or intended strategy. These errors may also reflect a general lack of attention to detail in the manager’s organization. But most importantly, they conspire to provide the investor with something other than what they are paying for – quality service and predictability of returns.

The Next Level: Systematic and Detailed Examination

Passing a due-diligence audit is a good first step, but managers have the ability to hold themselves to a higher standard. When we at Northwater think about operational deficiencies, we look at all potential failures that can occur throughout the investment process, e.g., inside the details of reconciliation processes, trade execution and model updates. It is only at the finest level of granularity that one can assess errors that may go unnoticed. A systematic method is needed in order to investigate, prioritize and the resolve potential failures.

Failure Mode and Effects Analysis (FMEA) is one technique that we have implemented to assess quality and to reduce the probability of smaller errors, not just to prevent large, obvious ones. FMEA was originally developed by reliability engineers and is widely used today in many non-financial industries. To implement FMEA concepts, we have taken an in-depth look at our own processes to identify areas that can be improved, examine the potential results of errors that can occur, develop highly-documented processes to ensure accuracy and consistency, and continually review and improve these processes.

Nuclear power plants, airlines and hospitals have all adopted strict and well-documented quality control processes that prevent not just large errors, but the potential for a small error to propagate through a system with the potential to push a system beyond its tipping point.

Acknowledge the Human Element

Other industries explicitly acknowledge and manage the human factor and acknowledge that human error rates are not zero even for the simplest task.  Consider a study conducted by NASA to understand human error rates when performing relatively simple tasks; cognitive scientists have found that humans have base error rates in performing even the simplest tasks such as the classification of even vs. odd numbers or identification of triangles.

Despite the best intentions of employees, an underlying issue in investment management is that firms are made up of people and people make mistakes– it is inevitable. Even if the average employee isn’t Homer Simpson, the pilots from “Airplane!”, or the cast from TV’s “Scrubs”, the staff at these organizations face legitimate challenges such as time availability, stress levels, distractions, and even ergonomics and office culture. As such, a lot can be assessed from a review of the processes in place to manage the ‘human factor.’

At Northwater, we have explicitly acknowledged the human element within our processes as well as the performance shaping factors that can impact human performance. Automating processes is a standard method for minimizing the probability of an operational error. It is also possible to redesign processes to reduce complexity. This reduction in complexity helps to minimize the probability of error when a human is involved with a process. We believe that this is an important aspect of our approach to the minimization of operational risk.

By looking to other industries, investment managers can achieve a higher operational standard. If you are interested in learning more about our novel approach to understanding and minimizing operational risk, please contact us.

As discussed, we probably didn't go into sufficient detail in the post. We did quite a few things in our opinion to reduce operational risk.

One, as mentioned, was the implementation of the FMEA methodology. Requires all the people involved in daily trading (PM's, ops people, model people) to systematically map all processes and then brainstorm on how processes can fail. Then rank how failures can cause problems by severity and ultimately prioritize and implement changes to processes to eliminate or significantly reduce the probability of those failures.

FMEA is a standard practice in many other industries to assess operations but you don't seem to hear about it in finance.

We believe that standard op risk practices are important and useful for finding issues associated with investment management firms. They play an important role in helping investors. This topic is more about assessing quality and repeatability of operations. And achieving the highest possible quality, resulting in minimizing the probability of an operational issue associated with day to day portfolio management.

We believe that the third party operational risk firms can't ever go into as much detail as the management firm itself. It is only the people involved in the actual processes that can really understand how processes could fail. Benchmarking and big picture best practices are done well by the third party people but I don't believe they can do a good job at assessing the real quality of the processes.

Financial firms typically strive to implement industry best systems. However, at times, these systems require workarounds and spreadsheets. As well, many of these workaround can be operated by junior people and we believe they are accidents waiting to happen. It is just assumed that these people won't make mistakes or it is up to these people to show sufficient "attention to detail" to never make a mistake. But to us, that is an unrealistic assumption.

Humans make mistakes.

The next aspect that helped us was acknowledgement of the human side. Once you read some of the literature on how humans screw up simple things, you realize it is just a matter of time until someone makes a mistake while operating a process. Humans have small, but non zero error rates for even the simplest tasks. As task complexity increases, the error rate increases.

If a diligent person does 20 simple tasks per day and they do that every day for a year, then you should consider the potential error rate of those tasks. A 1 in 1,000 error rate will cause errors to become a reality for the case of 20 tasks per day for an entire year. If the potential consequences of one of those errors is severe then you have a real problem.

When humans are involved in a process, make their tasks as simple as possible. This accounts for increasing error rates that occur as task complexity increases.

Obviously automation is a well-known solution. Some tasks can’t be automated or at times, systems require some human intervention, and at times a human must intervene in the instance of an exception. These are the instances when the human element should be considered.

We have implemented many more checklists and improved existing checklists for clarity. Implemented many more double checks for tasks involving humans and have also strived to make the independent double checks truly independent. i.e., two people sitting beside each other looking at the same information at the same time is not an independent test since they will potentially influence one another and reduce effectiveness of what is supposed to be an independent check.

We have also implemented a daily pre-trading huddle with people involved with trading, model updates, operations in order to understand the portfolio management tasks for the day. This mirrors the huddles that are more frequently used in operation rooms before a procedure starts (see “Checklist Manifesto”, book by Gawande below).

Again other industries recognize some of these human elements and try mitigate. Finance doesn't seem to do that, most just assume that humans involved in processes perform their tasks perfectly.

We intentionally also modified our working environment. During portfolio management model updates and trading times we do not permit any interruptions of the portfolio management team. We place an indicator in the office that says tells other people in the office that the portfolio management process is taking place and to stay away and do not interrupt the portfolio management team (operations, model updates, reconciliation, trading). An open office (most trading rooms) is great for communication, sharing ideas, etc. but a disaster waiting to happen if you consider how humans perform when they are interrupted or bothered while performing tasks. Again, other industries are aware of these issues.

The FMEA process changes need to be considered within that context. Obviously automation is key, but humans are involved in most processes at some point along the line. Making the human involvements as simple as possible and having safety modes that can catch failures is also key. FMEA is a manner for understanding all of that.

Implementing FMEA and also reading all about how humans make errors changes our way of thinking. We believe we have improved operational efficiency and minimization of operational risk.

The challenge is that the managers who know they can deliver sustainable alpha (ie the only ones it is worth investing in under the current fee structure paradigm), are still not negotiable today unless you are prepared to write 10 figure tickets and underwrite business risk yourself. There is a considerable capacity shortage for quality alpha generators. In rare instances, 2% and 20% might not be enough!

However, in many instances, 0% and 25% is too much if you factor in all the operational risks that you face.

Unfortunately, the biggest problem brought by high fees is borne by managers as a whole in the form of abnormal attrition rates. High attrition rates exist partly because investors cannot tolerate drawdowns from high management expense ratio operation. That triggers a window dressing exercise, whether it is voluntary or policy driven.

I think if managers rewarded long-term investors by reducing the fee paid by an investor by a notch on each of its investment anniversary, attrition rates would stabilize. It would be less psychologically painful to re-underwrite a losing fund if the fee structure comes down every year. The only risk from the manager view point is that if he is really successful, after a few years, every investor stuck around and now its entire capital base is charged below market rates. But there are ways to circumvent that second order problem.

That's one approach we have tried to implement without success due to existing MFNs but we never lose an occasion to talk about that.

Ironically, MFNs signed by large investors who are members of high profile investor associations that supposedly promote better alignment of interest is what makes it almost impossible for managers to consider alternative fee structures where the economics are less skewed in favor of the manager.

Benjamin Franklin famously said the only two things about which we can be certain are death and taxes. If he were alive today he might be tempted to add pensions crisis as a third certainty of human existence.

I wrote my first “pensions are in crisis” article (for this newspaper) more than a decade ago. That is not a claim to successful futurology or deep insight. It was merely an observation of an existing state of affairs. It was also something that pension experts had been warning about for a long time. Attempts have been made to make things better but these have mostly been piecemeal. Of course, with regard to the National Pension Reserve Fund, it was a case of one step forward and then fall off a cliff. Many pensions are still in crisis, both public and private.

The list of culprits is a familiar one: we are living longer. In particular, we are living longer than expected by the actuaries who set up the pension schemes in the first place – yet another example of the futility of forecasts. Investment returns have also, in many instances, been lower than forecast. The ending of company defined benefit schemes has also created more problems than it solved.

Dilemma

All of this is standard stuff. The response of pension experts is always a rational one: above all else, we should be saving more for our old age. The action taken by most of us is often to yawn and pay attention to something more interesting. Like slowly boiled frogs, we do nothing as the problem builds. Curiously, unlike boiled frogs, we know what is happening and why. We also know what to do to escape the pensions dilemma but mostly choose not to.

This is where it gets interesting. The pensions industry yells louder at everyone to save more. During good times and bad times, the experts are mostly ignored. It’s not just about the recent recession leaving no money left over for saving. When things were booming we saved more but still nowhere near enough.

All of these remarks apply to many economies, not just Ireland’s. We are uninterested in our pension arrangements. Attempts to persuade people to do something often fail. Perhaps it is time to face up to this and acknowledge the consequences for public policy: a lot of people are going to be very disappointed by their pension entitlements. State pensions will remain a significant part of old-age income. This, in turn, will generate another fiscal crisis, sooner or later.

The political power of older people is growing in line with their numbers. Few politicians are willing to antagonise a most important bloc of voters. It seems to be easier to cut public sector pay than to take on pensioners. Nobody dares tackle existing benefits, some of which are as daft as they are unaffordable.

Journeys on the Aircoach from Killiney to Dublin Airport are illustrative. The conversation is often about overseas villas and the latest cruise. These well-heeled pensioners are travelling to their holiday destination in leather-seated, free wifi luxury at the expense of the taxpayer. It really is quite an experience.

Indefensible

Free travel for all is just one indefensible, unaffordable benefit that, I forecast, will never be tackled. I am not going to mention healthcare spending for fear of what will happen to me the next time I am on that bus.

It is tempting to say I must be wrong: a future financial crisis will force politicians to do the right thing and sort out pensions and unaffordable entitlement spending. But we have just lived through the worst financial crisis of all time which left many “unsustainable” benefits untouched and did little to sort pension arithmetic that doesn’t add up. These are battles that seem to be too hard, politically, to fight.

Future governments will be faced with a paradox: the ever-increasing power of pensioners will lead to ever-decreasing willingness to tackle unaffordable spending commitments. But those older people will be growing more and more disgruntled with their pensions.

"...there are 2.5 million private sector workers supporting 1.5 million public sector workers in Greece. How is this sustainable? I got into a fight with a professor of geology who was complaining to me her salary went down from 2,300 euros a month to 1,300 euros a month and she still has to work 12 hours a week. I told her she's lucky she still has a job and told her to go see my butcher who works close to 60 hours a week and only earns 750 euros a month to feed his family of four. And it drives me crazy when I hear Greeks talk about the good old drachma days when they were collecting 25% interest at a bank but the inflation rate was sky high and you took out loans at 40% interest, if you were lucky."

"The country is in desperate need of reforms but Greeks are incapable of governing themselves and cutting public sector expenses. Did you know that by law you're not able to foreclose on a primary residence in Greece? Did you know that if you own a private business you cannot fire more than 2% of your workforce at a time? The Greek government owes private businesses billions of euros in arrears and isn't paying them so many businesses close up shop, at which point people lose their job. But god forbid we cut expenses at Greece's over-bloated public sector, all hell will break loose. Still, this is what Greece needs, someone to come in here and make the needed cuts and I think that is what is going to happen once Syriza balks and signs a new agreement on specific reforms."

The first month of quantitative easing (QE) has come and gone. Although early indicators are positive, it will take some time to tell whether QE will ultimately lift the euro zone out of its economic malaise. But the immediate impact of QE on defined benefit (DB) pension schemes is clear, and it is creating huge challenges.

QE has dealt Irish DB pension schemes, which are facing exceptionally low interest rates, yet another blow. The €60 billion per month of bond purchases in which the European Central Bank (ECB) is engaged is distorting an already stressed market very significantly.

Although QE has boosted asset returns, the considerable associated reductions in bond yields have pushed DB liability values to ever-dizzying heights and reduced expected returns on asset portfolios. This brings further massive financial reporting pressures for plan sponsors, who are committed to delivering pension benefits to their employees.

Liabilities

QE has likely already increased the value of Irish DB scheme liabilities by up to 20 per cent (ie by between €10 billion and €15 billion across all plans), making an already difficult situation at the end of 2014 considerably worse.

Yields on long-dated German bonds have now fallen below zero at maturities up to just under 10 years. As a result, local insurers are or may soon be pricing annuities at negative interest rates, resulting in the rather bizarre outcome that it may cost more than the sum of expected future payments to buy out a pension benefit.

For schemes that are required to reserve to this level under the local regulatory test, this provides significant funding difficulties.

For schemes in wind-up, it may result in an even more unfair distribution of assets from the viewpoint of non-pensioners.

The concept of building a regulatory funding hurdle around what is a very uncompetitive annuity buy-out market in Ireland remains a concern. This has not been adequately alleviated by the advent of sovereign annuities, which remain a relatively unused and unwieldy solution.

How should trustees react to these QE-related challenges? First, they need to realise that QE will not be permanent. It is scheduled to run until September 2016 and although it may be extended beyond then, there are some challenges in upsizing the programme. As a result, the current issues, although extremely challenging, may be temporary.

Second, they need to be aware that QE has provided massive support to asset prices but that this support will not be permanent and, at some stage, assets will have to stand on their own feet.

Caution

Third, they need to treat with caution the Pensions Authority’s position that bonds are the optimum investment class.

In its 2014 annual report, it expressed concern about the level of investment risk to which Irish DB pension schemes are exposed.

Risk management and diversification away from volatile equities should certainly be encouraged and supported. However, now is a very expensive time to reduce risk by increasing allocations to euro zone bonds. De-risking in this form, while QE is influencing the market, will likely have a permanent impact on pension benefits (through benefit reduction or a forced move away from DB schemes).

The regulatory framework should ideally take account of the unprecedented market conditions Irish schemes face due to QE and allow schemes that are well managed, have defined risk management strategies and are sustainable over the long term to navigate the current short-term challenges.

Unfortunately, there appears to be little sign of pragmatism or even acknowledgement that we going through extraordinary market conditions. The Pensions Authority says “...there should be no question of changing the standard in order to give schemes and their members the false impression that the situation is easier than it actually is... ”

Accordingly, it falls to trustees and sponsors to make sensible risk management decisions and do their best to plot a course for the long term while managing short-term financial challenges.

Stan worked on the line at GM’s Oshawa plant for thirty years. “Last of the breed,” he says. “Man, look at the news.” Indeed. GM just punted a thousand workers, who will be gone by November. When Stan started there, 15,000 guys crowded the gates. Now there are 3,600. Soon, a third less. “This place is doomed,” he prophecies.

Pensions are one reason, which is why I was talking to the guy. GM Canada has about 30,000 retirees drawing monthly cheques. It also has an unfunded pension liability estimated to be more than $2 billion. That’s despite a $3.2-billion cash gift the company received from the government when GM was bailed out in ‘09. It effectively means most company pensioners today are drawing taxpayer money. Yep, just like civil servants. Except most ex-GM workers get more.

Stan never saved a nickel, has no RRSPs, no TFSA, no investment portfolio and $12,500 in his TD Canada Trust daily savings account earning 0.10%. But he does have a house east of Toronto he paid $220,000 for, plus a wife who works at Loblaws.

But Stan’s one lucky dude. He has a gold-plated pension from the olden days when automakers secretly sweated as the union’s brass swaggered to the negotiating table. He also has a big choice to make. He can collect a monthly cheque until he dies. Or he can commute it – taking over the pension himself with a lump-sum payment. In his case, it will be just under $1 million – some of it rolled into a tax-free registered account, some of it in taxable cash.

“I’m scared,” he said. “I can’t sleep, and now all I do is worry.” That’s normal, I told him. People lacking money worry occasionally about being poor. People who have money obsess about losing it. It’s why rich people never smile.

Well, Stan made his choice finally. He took the money, will have it invested privately and get his monthly allowance that way. Here’s why.

“I don’t trust them.” These are the words of a guy who’s watched the ranks of the employed decimated, seen his company rescued from colossal failure by the government, and knows there’s not enough money in the pot to fund his pension for the next 35 years. In fact, unfunded pension liabilities are a ticking timebomb with the potential to blow up the lives of many unsuspecting people.

For example, Canada Post has an unfunded pension liability of $6.5 billion, which should explain why it’s trying hard to get out of the mail delivery business and laying off armies of people. Across Canada it’s estimated there are $300 billion worth of pensions that public sector workers are expecting that actually have no dollars allocated to them. Some bitter surprises are in store.

Anyway, Stan’s smart. Why even take a chance when you can take the money now?

Then there’s this: “What if they screw up again?” Governments struggling with their own debts and deficits might not be so generous with GM the next time it hits the rocks. Pensioners in Canada could live through the same experience as cops and firefighters have in American cities and states where pension benefits are arbitrarily cut. Already teachers in Ontario have been forced to pay more into their massive pension plan and will be receiving less, just to keep it solvent.

By taking the money and putting it to work, hopefully matching long-term investment returns, Stan will never deplete it and harvest a monthly amount equal to that the pension administrators were promising.

Most importantly he said, “I have to do this for Brenda.” Smart. If Stan took the company pension the way most of his greying buddies are, with its stress-free payments, then died in a few years, Brenda would get a small and temporary survivor benefit. But by commuting the pension amount, Stan’s family owns 100% of the money – forever. If he passes first (“Like that won’t happen…”) then Brenda gets every cent, to support her and help the kids as they get established.

Besides, there couldn’t be a better time for the guy to be doing this, since interest rates have cratered. Low rates make a commuted pension worth more in today’s dollars, since the present value of it rises. If current rates were a couple of percentage points higher then the autoworker’s pension value would be at least $300,000 lower. In fact, his commuted value jumped enough to buy a new RV with the tiny quarter-point bank rate drop in January.

Like I said. Lucky dude.

Finally, Stan can take his wad, invest it reasonably for growth and stability, and end up paying less tax than his pension-collecting pals. That’s because a portion of his income can be deemed return of capital, which means it’s not reportable, keeping him in a lower tax bracket.

Of course, in return for these benefits, he worries. He has to trust someone with his million. And that is the highest hurdle.

Having turned the corner on my 70th year, like prize winning author Julian Barnes, I have a sense of an ending. Death frightens me and causes what Barnes calls great unrest, but for me it is not death but the dying that does so. After all, we each fade into unconsciousness every night, do we not? Where was “I” between 9 and 5 last night? Nowhere that I can remember, with the exception of my infrequent dreams. Where was “I” for the 13 billion years following the Big Bang? I can’t remember, but assume it will be the same after I depart – going back to where I came from, unknown, unremembered, and unconscious after billions of future eons. I’ll miss though, not knowing what becomes of “you” and humanity’s torturous path – how it will all turn out in the end. I’ll miss that sense of an ending, but it seems more of an uneasiness, not a great unrest. What I fear most is the dying – the “Tuesdays with Morrie” that for Morrie became unbearable each and every day in our modern world of medicine and extended living; the suffering that accompanied him and will accompany most of us along that downward sloping glide path filled with cancer, stroke, and associated surgeries which make life less bearable than it was a day, a month, a decade before.

Turning 70 is something that all of us should hope to do but fear at the same time. At 70, parents have died long ago, but now siblings, best friends, even contemporary celebrities and sports heroes pass away, serving as a reminder that any day you could be next. A 70-year-old reads the obituaries with a self-awareness as opposed to an item of interest. Some point out that this heightened intensity should make the moment all the more precious and therein lies the challenge: make it so; make it precious; savor what you have done – family, career, giving back – the “accumulation” that Julian Barnes speaks to. Nevertheless, the “responsibility” for a life’s work grows heavier as we age and the “unrest” less restful by the year. All too soon for each of us, there will be “great unrest” and a journey’s ending from which we came and to where we are going.

A “sense of an ending” has been frequently mentioned in recent months when applied to asset markets and the great Bull Run that began in 1981. Then, long term Treasury rates were at 14.50% and the Dow at 900. A “20 banger” followed for stocks as Peter Lynch once described such moves, as well as a similar return for 30 year Treasuries after the extraordinary annual yields are factored into the equation: financial wealth was created as never before. Fully invested investors wound up with 20 times as much money as when they began. But as Julian Barnes expressed it with individual lives, so too does his metaphor seem to apply to financial markets: “Accumulation, responsibility, unrest…and then great unrest.” Many prominent investment managers have been sounding similar alarms, some, perhaps a little too soon as with my Investment Outlooks of a few years past titled, “Man in the Mirror”, “Credit Supernova” and others. But now, successful, neither perma-bearish nor perma-bullish managers have spoken to a “sense of an ending” as well. Stanley Druckenmiller, George Soros, Ray Dalio, Jeremy Grantham, among others warn investors that our 35 year investment supercycle may be exhausted. They don’t necessarily counsel heading for the hills, or liquidating assets for cash, but they do speak to low future returns and the increasingly fat tail possibilities of a “bang” at some future date. To them, (and myself) the current bull market is not 35 years old, but twice that in human terms. Surely they and other gurus are looking through their research papers to help predict future financial “obits”, although uncertain of the announcement date. Savor this Bull market moment, they seem to be saying in unison. It will not come again for any of us; unrest lies ahead and low asset returns. Perhaps great unrest, if there is a bubble popping.

Policymakers and asset market bulls, on the other hand speak to the possibility of normalization – a return to 2% growth and 2% inflation in developed countries which may not initially be bond market friendly, but certainly fortuitous for jobs, profits, and stock markets worldwide. Their “New Normal” as I reaffirmed most recently at a Grant’s Interest Rate Observer quarterly conference in NYC, depends on the less than commonsensical notion that a global debt crisis can be cured with more and more debt. At that conference I equated such a notion with a similar real life example of pouring lighter fluid onto a barbeque of warm but not red hot charcoal briquettes in order to cook the spareribs a little bit faster. Disaster in the form of burnt ribs was my historical experience. It will likely be the same for monetary policy, with its QE’s and now negative interest rates that bubble all asset markets.

But for the global economy, which continues to lever as opposed to delever, the path to normalcy seems blocked. Structural elements – the New Normal and secular stagnation, which are the result of aging demographics, high debt/GDP, and technological displacement of labor, are phenomena which appear to have stunted real growth over the past five years and will continue to do so. Even the three strongest developed economies – the U.S., Germany, and the U.K. – have experienced real growth of 2% or less since Lehman. If trillions of dollars of monetary lighter fluid have not succeeded there (and in Japan) these past 5 years, why should we expect Draghi, his ECB, and the Eurozone to fare much differently?

Because of this stunted growth, zero based interest rates, and our difficulty in escaping an ongoing debt crisis, the “sense of an ending” could not be much clearer for asset markets. Where can a negative yielding Euroland bond market go once it reaches (–25) basis points? Minus 50? Perhaps, but then at some point, common sense must acknowledge that savers will no longer be willing to exchange cash Euros for bonds and investment will wither. Funny how bonds were labeled “certificates of confiscation” back in the early 1980’s when yields were 14%. What should we call them now? Likewise, all other financial asset prices are inextricably linked to global yields which discount future cash flows, resulting in an Everest asset price peak which has been successfully scaled, but allows for little additional climbing. Look at it this way: If 3 trillion dollars of negatively yielding Euroland bonds are used as the basis for discounting future earnings streams, then how much higher can Euroland (Japanese, UK, U.S.) P/E’s go? Once an investor has discounted all future cash flows at 0% nominal and perhaps (–2%) real, the only way to climb up a yet undiscovered Everest is for earnings growth to accelerate above historical norms. Get down off this peak, that F. Scott Fitzgerald once described as a “Mountain as big as the Ritz.” Maybe not to sea level, but get down. Credit based oxygen is running out.

At the Grant’s Conference, and in prior Investment Outlooks, I addressed the timing of this “ending” with the following description: “When does our credit based financial system sputter / break down? When investable assets pose too much risk for too little return. Not immediately, but at the margin, credit and stocks begin to be exchanged for figurative and sometimes literal money in a mattress.” We are approaching that point now as bond yields, credit spreads and stock prices have brought financial wealth forward to the point of exhaustion. A rational investor must indeed have a sense of an ending, not another Lehman crash, but a crush of perpetual bull market enthusiasm.

But what should this rational investor do? Breathe deeply as the noose is tightened at the top of the gallows? Well no, asset prices may be past 70 in “market years”, but savoring the remaining choices in terms of reward / risk remains essential. Yet if yields are too low, credit spreads too tight, and P/E ratios too high, what portfolio or set of ideas can lead to a restful, unconscious evening ‘twixt 9 and 5 AM? That is where an unconstrained portfolio and an unconstrained mindset comes in handy. 35 years of an asset bull market tends to ingrain a certain way of doing things in almost all asset managers. Since capital gains have dominated historical returns, investment managers tend to focus on areas where capital gains seem most probable. They fail to consider that mildly levered income as opposed to capital gains will likely be the favored risk / reward alternative. They forget that Sharpe / information ratios which have long served as the report card for an investor’s alpha generating skills were partially just a function of asset bull markets.Active asset managers as well, conveniently forget that their (my) industry has failed to reduce fees as a percentage of assets which have multiplied by at least a factor of 20 since 1981.They believe therefore, that they and their industry deserve to be 20 times richer because of their skill or better yet, their introduction of confusing and sometimes destructive quantitative technologies and derivatives that led to Lehman and the Great Recession.

Hogwash. This is all ending. The successful portfolio manager for the next 35 years will be one that refocuses on the possibility of periodic negative annual returns and miniscule Sharpe ratios and who employs defensive choices that can be mildly levered to exceed cash returns, if only by 300 to 400 basis points. My recent view of a German Bund short is one such example. At 0%, the cost of carry is just that, and the inevitable return to 1 or 2% yields becomes a high probability, which will lead to a 15% “capital gain” over an uncertain period of time. I wish to still be active in say 2020 to see how this ends. As it is, in 2015, I merely have a sense of an ending, a secular bull market ending with a whimper, not a bang. But if so, like death, only the timing is in doubt. Because of this sense, however, I have unrest, increasingly a great unrest. You should as well.

Unnoticed amid the budget hoopla last week, the Ontario Retirement Pension Plan Act was passed into law, authorizing the provincial government to annex a portion of the wages of millions of Ontarians, totalling $3.5-billion annually, to invest on their behalf. You will forgive us if we do not cheer. This is bad policy, as unnecessary as it is misconceived, and destined to cause much harm.

To its alleged necessity, first: the Wynne government continues to claim there is a pension “crisis,” on account of the vast numbers of Ontarians who are said to be chronically “undersaving.” There is no evidence of this. Between the Canada Pension Plan, Old Age Security, Registered Retirement Savings Plans, and other private savings vehicles, the vast majority of Ontarians are not only in no danger of indigence when they retire — poverty, at record lows for the population at large, is even lower among the elderly — but can maintain themselves at a standard of living comparable to that of their working years.

Experts advise this requires a retirement income of one half to two thirds of earnings. According to a study by economists Kevin Milligan and Tammy Schirle, virtually every Canadian household in the bottom two fifths of the income scale meets or exceeds the 50 per cent threshold. At higher incomes, it is true, you find greater numbers with inadequate savings, particularly where neither spouse has a workplace pension: overall, these account for about one in six households.

And that’s only if you ignore the increasing amounts of savings held outside RRSP-type instruments, or in the equity in people’s houses. So it’s not clear there’s any need to force even these individuals to save more, let alone forcing everyone to, even assuming one could: many will simply save less through their RRSPs to make up for the income the government takes from them.

And that, remember, is what’s involved here. The Wynne government likes to make it sound like a gift they are giving Ontarians. But the money workers will receive, eventually, is only money the government takes from them, now: it’s a forced savings plan, not a redistribution scheme. Which might be tolerable, if the government had a halfway sensible plan to invest it. There are disturbing signs it does not.

While the plan is often said to be based on the CPP — indeed, it is touted as a substitute for expanding the CPP — the government has often cited the Quebec Pension Plan approvingly. The CPP’s runaway costs, wildly inflated salaries and exploding payroll are themselves a source of concern, but it is at least notionally focused on maximizing returns to pensioners (even if it underperforms the market as often as not). But the QPP is something else again: through the Caisse de Dépot et Placement du Québec, it is mandated to use pensioners’ savings to support Quebec’s “economic development,” meaning whatever schemes come into politicians’ heads.

So when we read in Ontario budget documents that the plan, starting in 2017, will provide “new pools of capital for Ontario-based project such as building roads, bridges and new transit,” we may be excused for feeling the government has something other than pensioners’ best interests in mind. And to the extent that Ontarians realize this, they will be less inclined to see it as a savings plan, and more as a tax grab by another name. But by then it will be too late.

I think the presentation that got a lot of us thinking was the one by Kevin Milligan, an associate professor of economics at the University of British Columbia. He argued convincingly that lower income Canadians are better off in retirement now and forcing them to pay more into the CPP will leave them worse off. You can read the paper he co-authored with Tammy Schirle of Wilfrid Laurier University by clicking here. The two main conclusions of their paper are:

1) CPP reform that expands coverage for lower earners can do them harm--it transfers income from a period they are doing poorly (while working) to one in which they were already doing better (retired).

2) An expansion of the CPP that simply expanded the year's maximum pensionable earnings (YMPE) upwards would have nearly the same impact on combined public pension income as the PEI proposal, but with greater simplicity.

Janet Tavakoli is a born storyteller with an incredible tale to tell. In her captivating memoir, Decisions: Life and Death on Wall Street, she takes us on a brisk journey from the depravity of 1980s Wall Street to the ramifications of the systemic recklessness that crushed the global economy. Her compelling narrative sweeps through her warnings about the dangers of certain bank products in her path-breaking books, speeches before the Federal Reserve, and in talks with Jaime Dimon.

She probes the moral complexity behind the lives, suicides and murders of international bankers mired in greed and inner conflict. Some of the people that touched her Wall Street career reflect broken elements of humanity. The burden of choosing money and power over values and humility translates to a loss for us all.

To truly understand the stakes of the global financial game, you must know its building blocks; the characters, testosterone, and egos, as well as the esoteric products designed to squeeze investors, manipulate rules, and favor power-players. You had to be there, and you had to be paying attention. Janet was. That’s what makes her memoir so scary. In Decisions, she breaks the hard stuff down with humor and requisite anger. As a side note, her international banking life eerily paralleled my own - from New York to London to New York to alerting the public about the risky nature of the political-financial complex.

Her six chapters flow along various decisions, as the title suggests. In Chapter 1 “Decisions, Decisions”, Janet opens with an account of the laddish trading floor mentality of 1980s Wall Street. In 1988, she was Head of Mortgage Backed Securities Marketing for Merrill Lynch. Those types of securities would be at the epicenter of the financial crisis thirty years later.

Each morning she would broadcast a trade idea over the ‘squawk box.‘ Then came the stripper booked for a “final-on-the-job-stag party.” That incident, one repeated on many trading floors during those days, spurred Janet to squawk, not about mortgage spreads, but about decorum. Merrill ended trading floor nudity and her bosses ended her time in their department. Her bold stand would catapult her to “a front row seat during the biggest financial crisis in world history.” Reading Decisions, you’ll see why this latest financial crisis was decades in the making.

In Chapter 2 “Decision to Escalate”, Janet chronicles her work with Edson Mitchell and Bill Broeksmit, who hired her to run Merrill’s lucrative asset swap desk after the stripper incident. Bill and Janet shared Chicago roots and MBAs from the University of Chicago. Janet became wary of the serious credit problems lurking beneath asset swap deals, many of which involved fraud. The rating agencies were as oblivious then, as they were thirty years later. Transparency was important to Janet. She and Bill “agreed to clearly disclose the risks—including [her] reservations about “phony” ratings.” Many Merrill customers with high-risk appetites didn’t care. They got burned when the underlying bonds defaulted. Rinse. Repeat.

During that time, Janet penned a thriller, Archangels: Rise of the Jesuits, eventually published in late 2012. It probed the suspicious death of shady Italian banker Roberto Calvi. In June 1982, Calvi was found hanged from scaffolding under London’s Blackfriars Bridge. Ruled a suicide, the case re-merged in 2002 when modern forensics determined Calvi was murdered. Neither Bill nor Janet bought the suicide story; though Bill joked he’d never hang himself.

Janet and I both moved to London in the 1990s, I left Lehman Brothers in New York for Bear Stearns in London in 1993 to run their financial analytics and structured transactions (F.A.S.T.) group. Those were heady days for young American bankers. We all wanted to be in London where the action was. Edson Mitchell and Bill Broeksmit wound up working for Deutsche Bank in London in the mid 1990s.

In 1997, Edson asked Janet to join him at Deutsche Bank given her expertise in structured trades and credit derivatives. The credit derivatives market was an embryonic $1 trillion. By its 2007 peak, it was $62 trillion. She declined. Edson died three years later in a plane crash.

In Chapter 3, “A Way of Life”, Janet describes her personal epiphany and public alerts about credit derivatives and the major financial deregulation that would impact us all. In 1998, she wrote the first trade book warning of those risks, Credit Derivatives: Instruments and Applications. A year later, on November 12, 1999, the Clinton Administration passed the Gramm-Leach-Bliley Act that repealed the 1933 Glass-Steagall Act that had separated deposit taking from speculation at banks. In 2000, President Clinton signed the Commodity Futures Modernization Act that prevented over-the-counter derivatives (like credit derivatives) from being regulated as futures or securities. His Working Group included former Treasury Secretary and former co-chair of Goldman Sachs, Robert Rubin, Treasury Secretary Larry Summers, and Federal Reserve Chairman Alan Greenspan.

With Glass-Steagall gone, banks had the green light to gamble with their customers’ FDIC-insured deposits and enter investment-banking territory through mergers. They “used their massive balance sheets to trade derivatives and take huge risks.” Our money became their seed money to burn.

Once the inevitable fallout from this government subsidized casino unleashed the financial crisis of 2008, bank apologists, turned star financial journalists like Andrew Ross Sorkin would say the repeal of Glass Steagall had nothing to do with the crisis, since the banks that failed, Bear Stearns and Lehman Brothers were investment banks, not commercial banks that acquired investment banks. That argument missed the entire make-up of the post-Glass Steagall financial system. Investment banks like Lehman Brothers, Bear Stearns and Goldman Sachs had to over-leverage their smaller balance sheets to compete with the conglomerate banks like Citigroup and JPM Chase. These mega banks in turn funded their investment bank competitors who concocted and traded toxic assets. They supplied credit lines for Countrywide’s subprime loan issuance. Everyone could bet on the same things in different ways.

While Janet’s 2003 book, Collateralized Debt Obligations & Structured Finance explained the architecture and risks of CDOs and credit derivatives, her 1998 book became an opportunists’ guide. One type of credit derivatives trade, a ‘big short’ that profited when CDOs plummeted in price, gained notoriety when Michael Lewis wrote a book by that name. Michael Burry, the man Lewis chronicled, ultimately testified before the Financial Crisis Inquiry Commission that, among other things, he read Janet’s 1998 book before trading. Lewis wrote of the aftermath, Janet’s analysis contributed to the main event. Taxpayers took the hit.

As the securitization and CDO markets exploded in the 2000s, credit derivatives linked to CDOs stuffed with subprime-loans became financial time bombs. Janet was one of a few voices with in-depth knowledge of the structured credit markets, sounding alarms. Her voice, and those of other skeptics (myself included) were increasingly “marginalized” by a media and political-financial system promoting the belief that defaulting loans stuffed into highly leveraged, non-transparent, widely-distributed assets wrapped in derivatives were no problem.

In early June 2010, Phil Angelides, Chairman of the Financial Crisis Inquiry Commission (FCIC) questioned former Citigroup CEO Chuck Prince and Robert Rubin (who became Vice-Chairman of Citigroup after leaving the Clinton administration. ) They denied knowing Citigroup had troubles until the fall of 2007. Incredulously, Janet listened as Angelides accepted their denial even though Citigroup was hurting in the first quarter of 2007 due to their $200 million credit line to Bear Stearns whose hedge funds had imploded.

So many lies linger. According to Janet, “One of the most unattractive lies of the 2008 financial crisis was that investment bank Goldman Sachs would not have failed and did not need a bailout.” But then-Treasury Secretary and former Goldman-Sachs Chairman and CEO, Hank Paulson rejected an investment bid in AIG from China Investment Corporation while AIG owed Goldman Sachs and its partners billions of dollars on credit derivatives wrapping defaulting CDOs. That enabled him to arrange an AIG bailout to help Goldman Sachs recoup its money at US taxpayers’ expense.

Goldman Sachs claimed it was merely an intermediary in those deals. Janet exposed a different story – presenting a list of CDOs against which AIG wrote credit derivatives protection. Underwriters of such deals are legally obligated to perform appropriate due diligence and disclose risks. Goldman Sachs had been underwriter or co-underwriter on the largest chunk of them, an active, not intermediary role. Some deals were inked while Paulson was CEO.

In Chapter 4 “Irreversible Decision,” Janet circles back to Deutsche Bank and her old boss, Bill. The SEC was investigating allegations that Deutsche Bank didn’t disclose $12 billion of credit derivatives losses from 2007-2010. In a 2011 presentation, Bill said the allegations had no merit. Meanwhile, Deutsche Bank faced investigations into frauds including LIBOR manipulation, helping hedge funds dodge taxes, and suspect valuation of credit derivatives.

Janet reveals the dramatic outcome of those investigations in Chapter 5, “Systemic Breakdown.” On January 26, 2014, Bill Broeksmit, 58, hung himself in his home in London’s Evelyn Gardens (the block where I first lived when I moved to London for Bear Stearns.) She was shocked by the method. Bill had made clear his “aversion to death by hanging.” Those decades in finance had crushed him.

Six months later, a Senate Subcommittee cited Deutsche Bank and Barclays Bank in a report about structured financial products abuse. Broeksmit’s email on synthetic nonrecourse prime broker facilities was Exhibit 26. Banks had placed a large chunk of their balance sheets at risk, flouting regulations, and enabling a tax scheme. From 2000 to 2013, the subcommittee reported hedge funds may have avoided $6 billion in taxes through structured trades with banks.

Finally, in Chapter 6, “Washington’s Decision: “A Bargain,”” Janet reminds us that September 2015 marks the seventh anniversary of the financial crisis. She calls Paulson and Rubin financial wrecking balls for their role in the crisis and cover-up.

She ends Decisions on the ominous note that “the government tried to hide the real beneficiaries of the bailout policies – Wall Street elites – behind a mythical idea of a “crisis of confidence” if we prosecuted, arrested, and imprisoned crooks. “

The real crisis of confidence though, is due to the clique of inculpable political and financial leaders. Alternatively, she writes, “If we indicted fraudsters, raised interest rates, and broke up too-big-to-fail banks, people would have more confidence in our government and in the financial system..”

Instead, we get Ben Bernanke espousing the "moral courage" it took to use taxpayers’ money and issue debt against our future to subsidize Wall Street over the real economy, allegedly for our benefit. Big banks are bigger. Wealth inequality is greater. Economic stability has declined. The bad guys got away with it. Read Janet’s illuminating book to see how and to grasp the enormity of what we are up against.

As far as organizational issues, I can tell you from my experience working at the Caisse and PSP Investments, big funds mean big egos. There are plenty of arrogant jerks working at these funds, foolishly believing they're "king shit" because they hold a chair. Trust me, once you lose your chair, nobody gives a damn about you unless of course you invest huge sums in a fund and plan your exit strategy while the folks at the Auditor General of Canada are snoozing at the wheel (what a scandal!).

Now, I don't know Don Raymond and don't think he has a huge ego (even if he is an ex Goldman alumnus, he's not a "big, swinging dick"). But his bias on quantitative investing was ridiculous to the point where you still can't apply to CPPIB's Public Markets unless you program C++ and are a derivatives and econometrics expert with a MSc in Finance and a CFA (a bunch of credentials that look good but mean nothing when it comes to making money in these markets).

I have an MA in Economics from McGill. During my undergrad years, I did my minor in mathematics at that same university. I also took honors history of economic thought and honors econometrics courses with Robin Rowley who taught us how to critically examine a lot of the quantitative nonsense being published in respected economic journals. Rowley graduated from the London School of Economics (LSE) at the same time as David Hendry, one of the best and most respected econometricians in the world who is equally skeptical on a lot of nonsense being published out there.

At McGill, I was also fortunate to take courses in comparative economic systems with Alan Fenichel and underground economics with Tom Naylor, the combative economist who taught us what is really going on in the world and to ignore the neoclassical garbage our other professors were teaching us. I also took and audited courses in political philosophy with Charles Taylor, a world-renowned philosopher (and the only professor who gave me intellectual orgasms in each and every class).

All this to say, I'm against the Don Raymond school of thought and the tyranny of quants and think a lot of Canada's large public pension funds are too busy hiring quants programming a lot of malakies (Greek word for wankers) and not enough thinkers from diverse backgrounds who can fundamentally and critically analyze what is going on in the global economy.

In the summer of 2006, right before I was wrongfully dismissed by PSP Investments, I did some research on the U.S. housing bubble and looked at the issuance of CDOs (collateralized debt obligations), including CDOs-squared and CDOs-cubed. I showed my findings to PSP's senior management and in particular, I showed them one chart on CDO issuance that scared the hell out of me (click on image below):

But the 'quant experts' shrugged it off and kept doing what they were doing, like using PSP's AAA balance sheet to sell credit default swaps (CDS) and buy as much asset backed commercial paper (ABCP) as the National Bank and Deutsche Bank were selling them. That didn't end well for PSP and exacerbated their huge losses in fiscal year 2009. It was even worse for the Caisse but that ABCP scandal is being covered up by Quebec's media. 

When the latest intake of hedge fund analysts arrived for their first day of work they might have imagined a life of poring over spreadsheets, and routine research trips to shiny corporate headquarters.

More recently, however, they might instead be expected to scope out an egg factory in a remote war zone, or eye up the quality of the brick work on an office block in the north of England.

Faced with meagre returns on bonds and highly valued stocks, an increasing number of hedge fund managers are seeking out more adventurous opportunities in order to deliver the type of high returns investors expect from the industry.

“Hedge fund managers are looking at more esoteric investments when they are looking for yield,” says Russell Barlow, head of hedge funds at Aberdeen Asset Management. “Yields have come in across the board, and as yields continue to compress across the more mainstream asset classes some managers are choosing to look further afield.”

Many hedge funds that specialise in credit have reached a point in the market cycle where most of their successful trades have become crowded and difficult to navigate. Over the past year investors in these hedge funds say they have become more used to managers pitching them ideas that would previously have been seen as edgy for even the most risk-tolerant.

An investor describes a pitch by one hedge fund to provide working capital loans to food exporters in Ukraine, such as egg factories, where double digit returns were promised for tying up money for 60 to 90 days.

“These sorts of trades usually involve only a small amount of exposure, but you need to take on war risk and political risk to get it done,” the investor says. “These funds are not specialists in this sort of thing, but in a world where spreads are at all-time lows they are just trying to find returns.”

Another group of hedge funds, according to their lawyer, who wanted to remain anonymous, last year explored the idea of buying up the euro-denominated Cypriot bank accounts of Russian citizens who had been placed under sanctions. By offering a so-called haircut to the holders, they hoped to make a quick return once the situation normalised, but the scheme was eventually scuppered by compliance fears, the lawyer said.

Investors say that while hedge fund managers argue they only seek to take on small pockets of risk that they understand, most are reluctant to be seen in public to be dabbling in the darker corners of the international markets.

The shadow of the pre-2008 world of hedge funds betting on highly illiquid holdings only to lose large amounts of money during the crisis still hangs over the industry.

At the same time, some of their investors, many of whom are large institutions such as pension funds, are more willing to accept risker propositions at a time when they are starved of returns elsewhere.

“Some hedge funds are going out to less liquid instruments, but they also have their investors pushing them that way,” says Mr Barlow of Aberdeen. “We are reluctant to be taking that same path, unless we have a structure and a mandate to do this. The risk is investors are just focusing on yield and may not be focusing on things like liquidity risk.”

Other hedge fund managers have focused their efforts on the more humdrum world of peer-to-peer and secured property lending. Omni Partners, a London-based hedge fund, has recently raised $45m of a planned $250m fund that makes short-term loans predominantly to developers across the UK secured against their properties.

Steve Clark, Omni Partners’ founder, argues that the 10.4 per cent net return delivered by the first incarnation of the fund last year demonstrates it is possible to generate double-digit performance through alternative lending without taking on large risks.

“There’s continued demand from investors for an unlevered high yield strategy that has the key characteristics of superior asset quality and short tenor,” he says.

Yet for the hedge funds that are trying to navigate a world of meagre yields, there are others who have decided the best strategy for a market they view as overvalued is to bet against it.

Crispin Odey, in this case an investor focused on stocks rather than credit, recently became one of the first well known hedge fund managers to position for a big fall in the stock market, based in part on his belief that the end of quantitative easing in the US could trigger large and unintended consequences across global markets.

One part of this strategy has been to use the shares of asset managers as a proxy for betting on a sell-off in emerging markets, as well as taking out numerous other so-called short positions against unprofitable companies he thinks investors have tolerated only due to low interest rates.

Other equities-focused hedge funds have eschewed the larger macroeconomic call of Odey, and instead continued to look for individual opportunities to make money through short selling.

Kyle Bass, founder of Dallas-based Hayman Capital Management, earlier this year said he would bet against pharmaceuticals companies while at the same time mounting legal challenges against drug patents he believed were unenforceable.

Managers such as these will need to have strong stomachs to withstand the long periods of paper losses that contrarians must endure, and for now it appears only a few feel bold enough to make outright bets against the status quo. For the rest, if interest rates continue to remain low they may need to get increasingly accustomed to trips to war zones to make money.

Investor Leon Black, like many peers, has urged caution given high market valuations. But the Apollo Global Management CEO said his $163 billion firm is rapidly expanding one of its business lines: lending money.

"Credit in general is a huge, huge opportunity today," Black said last week at the Milken Institute Global Conference in Los Angeles, noting the diminished role of banks in providing loans.

Black's Apollo is one of many investors to see the opportunity.

A new paper from the Alternative Investment Management Association, a London-based hedge fund lobbyist, estimates that private debt funds—including hedge and private equity funds, among others—now manage about $440 billion globally, with $64 billion of new capital allocated to the sector last year alone, per Preqin data.

The surge in activity from private lenders, according to AIMA, is a boon for smaller companies.

"Many small and medium sized businesses would miss out on growth opportunities or fail altogether if it were not for the absolutely vital support of hedge funds and other alternative asset managers," AIMA CEO Jack Inglis said in a statement.

Hedge funds and others in the space usually provide loans of between $25 million and $100 million, often for periods of one to three years, according to AIMA's survey. About 65 percent of companies taking the loans typically have earnings before interest, tax, depreciation and amortization of between $5 million and $75 million.

The report notes that the companies lent to are typically too small to raise capital through the public bond market and banks have been more reluctant to lend to them because of stricter standards following the 2008 financial crisis.

The most popular sectors for lending are consumer goods and services, healthcare, industrial, and real estate, according to AIMA's survey of private fund managers.

Examples of recent loans from U.S. firms given by AIMA include private equity shop KKR & Co giving an approximate $12 million loan to help grow a Scottish wind farm; a $26 million loan from hedge fund firm Pine River Capital to an American aircraft parts dealer for purchasing a target company; and Avenue Capital, another hedge fund manager, lending money to investment firm H.I.G. Europe to help it buy consumer loan broker Freedom Finance Nordic.

Another benefit of the private lending, according to AIMA, is systemic: instead of a few big banks, there are lots of funds to share the risk, and the funds use relatively little borrowed money to amplify their bets, so-called leverage.

Last year, the world’s top 25 hedge fund managers earned roughly half their 2013 income and the smallest amount since the 2008 financial crisis. But that still translated into astronomical paychecks: their collective income was $11.6 billion.

Consider the estimated 2014 paycheck for Jonathon S. Jacobson, founder of Boston-based Highfields Capital Management. The former Harvard University endowment manager accustomed to rock star status in his field made $50 million, according to an annual list published this week by Institutional Investor’s Alpha, a trade publication.

Jacobson’s compensation may seem spectacular, but it amounted to just one-tenth of the $500 million he is estimated to have made the previous year. And Highfields, which manages $12.5 billion, produced a percentage return only in the low-single-digits.

Among the top 25 hedge fund managers, the average pay was $467 million last year, down from $846 million in 2013, according to Institutional Investor’s calculations. Three earned more than $1 billion last year. Jacobson just barely made the top 50, coming in last on the list.

The only other Massachusetts investor on the roster was Seth Klarman, chief executive of Baupost Group, one of Boston’s largest hedge fund firms, with $28.5 billion under management. Klarman ranked number 26, with estimated pay of $170 million last year.

Klarman is considered a value investor who looks for bargains and unusual investments. As energy investments tanked last year, for instance, Baupost started looking for deals, according to a Bloomberg News report.

The firm delivered returns of 7 to 8 percent last year, according to a person briefed on the results.

That may sound modest to ordinary investors, who typically gauge their returns against the Standard & Poor’s 500 index of large stocks, which rose 13.7 percent last year. But that’s not the only measuring stick many hedge fund clients use.

Industrywide, the average hedge fund return last year was 2.9 percent, according to the Barclay Hedge Fund Index, which gathers data from thousands of firms. Within that universe hedge fund managers produce varying results with many approaches, from betting that stocks will rise or fall to investing in bonds, commodities, market sectors, and numerous other styles. Many of those funds struggle in periods when stocks are rising sharply.

“The equity market has been having quite a nice run. Almost anything that diversifies away from that will be lower [in returns] by definition,’’ said Robert J. Waid, a managing director at Wilshire Associates Inc., a Santa Monica, Calif., investment consulting firm.

Historically, many hedge fund managers have become famous, and wealthy, with aggressive strategies that produced big returns. Investors have been willing to pay their large fees — typically, 2 percent of assets plus 20 percent of profits — in the search for substantial gains.

But many institutional investors, like pension funds and endowments, allocate a portion of their money to hedge funds for an entirely different reason: to protect them when the market falls.

The Massachusetts state pension fund has 9 percent of its $61 billion in hedge funds, even as the nation’s largest public pension fund, the California Public Employees’ Retirement System, last year said it would exit the sector entirely.

Michael Trotsky, executive director of the Massachusetts fund and a former hedge fund executive himself, said he looks for hedge fund returns to come out somewhere between those of bonds and stocks. More than anything, he wants them to be less risky than stocks.

“Hedge funds are not as volatile as stocks — or as the S&P 500 — nor should they have the same returns,’’ Trotsky said.

He said there are some “great hedge funds” that don’t go up and down in ways tracking stock market performance. “We’re willing to pay for that,” Trotsky said.

The Institutional Investor’s rankings, now in their 14th year, are estimates based on such factors as the hedge funds’ rate of return and the fees they charge investors. Neither Klarman nor Jacobson would comment on the report.

Despite last year’s relatively low return numbers, investors are still putting money in hedge funds because they think they’ll outperform other investors over time, according to Institutional Investor’s editor, Michael Peltz.

“They’re looking at net returns after fees,” Peltz said. “And more often than not, these top managers over time have net returns better than the overall market.”

“Nothing will change this week,” said Aris Karnachoritis confidently as the waitress handed out bottles of beer and frosted glasses to him and his friends.

Constantinos Neocleous, sitting beside him at a table on the beach at Vouliagmeni near Athens, nodded in agreement. “It’s not in anyone’s interests to have a crisis now,” he said.

Beyond the beach lay shallow waters of radiant turquoise. Children paddled. Teenagers romped. And from nearby, where a group of young men were playing beach tennis, came the comforting “plock-plock” sound of bat on ball.

The talks between Alexis Tsipras’s government and its creditors have dragged on for so long that it has become hard to believe there will ever be a decisive make-or-break juncture. And never has that been harder to believe than now, with the arrival of summer and the entrancing distractions it brings to a country like Greece.

There is a striking disconnection in Athens between the blithe lack of concern that the government evinces, and which it has successfully communicated to much of the public, and the objective seriousness of Greece’s plight.

This week Greece and the eurozone face a week of fresh nail-biting uncertainty as the single currency area’s finance ministers prepare to report on progress towards an agreement with Tsipras’s government. On Tuesday Greece is due to repay €770m (£560m) to the IMF.

A deal with its creditors – the European commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) – on moves to liberalise the economy would give it access to the remaining €7.2bn from a €240bn bailout. But it has refused to budge on two “red-line” demands – for pension cuts and looser rules on hiring and firing – and hopes of reaching an agreement in time for a meeting of the finance ministers on Monday have gradually seeped away.

On Thursday Greece’s finance minister, Yanis Varoufakis, promised that the IMF would nevertheless get its money. Armageddon – a Greek default on its borrowings followed in all likelihood by exit from the eurozone – may once again have been postponed. But for how long?

Beyond the IMF deadline loom far bigger repayments the government has to make to the ECB in the summer. Yet it is already so desperately short of funds that it has ordered local authorities and public bodies to turn over their cash reserves to the central bank.

“We have only the money to pay for this month,” conceded Karnachoritis, a young civil engineer, as he sipped his beer. “But that has been the situation for the past two months.” Like his companions, he thought it would take several more months to reach an agreement. “I don’t believe anything will happen before September,” he said.

Certainly, the government could do with time to lower the expectations it created and which swept Syriza to power last year: expectations it could renegotiate the terms of Greece’s bailout and convince Angela Merkel to abandon fiscal austerity.

In 2014 the Greek economy started to grow again. But last week the European commission cut its estimate for GDP growth this year to a miserly 0.5%

The evidence of real and painful economic hardship is subtle in Athens. But it is there.

As it passes through Dafni, a suburb of the capital, the road to Vouliagmeni becomes a shopping area. About four out of every five shops has closed.

“The owners of the shops think the reason they have no customers is because of a mall that opened up nearby,” said Nikos Servios, from the nearby Neos Kosmos district, who went to buy a pair of shoes. “But I’ve been to the other mall and most of the people go there to window-shop, watch a movie – it has a cinema – or drink a coffee. Nobody is buying.”

In the centre of Athens, the executive of a manufacturing company described how his firm was having to pay in advance for imported components because the exporters could not insure their credit risk.

“We are paying up front to companies the firm has dealt with for 20 years. That hurts. And it costs,” said the executive, who requested anonymity because he was not authorised to speak on behalf of his employers.

Kostas Panagopoulos, of Alco Polls, said a survey he carried out last month indicated the public was already resigned to compromise: 52% of respondents said they wanted a deal with Greece’s creditors “even if the prime minister had to step over those red lines”.

Tsipras’s real challenge, said Panagopoulos, is to “overcome the resistance of groups within his own party and that of the small right-wing party” with which Syriza is in coalition. Panagopoulos thought the prime minister’s most likely course would be to go to the country with a referendum.

On Friday when Tsipras reported to parliament on the negotiations, he left a notebook behind. The journalists who seized on it found he had drawn a doodle of a ballot box.

“I believe he did that on purpose,” said Panagopoulos.

In recent days Tsipras’s ministers appear to have embarked on a drive to push out the time horizon for a solution. Varoufakis suggested Monday’s meeting could be a “platform” for an eventual accord. On Thursday the deputy prime minister, Yannis Dragasakis, told the Guardian the government no longer wanted an interim deal but a comprehensive agreement.

The question is whether the time is there to be won. A referendum cannot be arranged overnight. Yet there are doubts about whether – even if the government repays the IMF on Tuesday – it will have enough cash left for pensions and wages come the end of the month.

Pressure is building elsewhere. The ECB has been propping up Greece’s commercial banks with emergency lending that the other eurozone countries, which are the ECB’s shareholders, fear may never be repaid. Last week saw a reportedly “intense” meeting at the central bank’s Frankfurt headquarters as some countries lobbied for the imposition of tougher conditions. That, however, could prompt a loss of confidence in Greece’s financial institutions and a run on its commercial banks’ deposits.

Not everyone views the situation with equanimity. Seating at a nearby table in the restaurant-bar at Vouliagmeni, dressed in ripped denim shorts and a crocheted bikini top, was Rania Mavroyani, who said she lived off property that had been left to her.

“I’m worried, because I don’t know what’s going to happen,” she said

Might Greece be better off leaving the eurozone and going back to the drachma?

“The drachma?” she repeated, and even through her sunglasses there was no mistaking the alarm in her eyes. “I don’t want it back. We must belong to Europe,” she said.

But was a return to Greece’s pre-euro currency a possibility?

“It [is a possibility,” said Mavroyani. “And it scares me.”

German finance minister Wolfgang Schauble said over the weekend that Greece risked spinning into default unless there was a breakthrough soon. "Such processes also have irrational elements. Experiences elsewhere in the world have shown that a country can suddenly slide into insolvency," he told the Frankfurter Allgemeine.

Greek officials retort that this is a conceptual misunderstanding by the German and North European authorities. Syriza officials say they may trigger the biggest sovereign default deliberately if pushed too far, concluding that it is a better outcome than national humiliation and the betrayal of their electoral vows to the Greek people.

"If it comes to the crunch, Greece must default and go its way," said Costas Lapavitzas, a Syriza MP and member of the party's standing committee. "There is no point raiding pension funds to buy time. We just exhaust ourselves for no purpose."

"We went up and down Greece in the elections urging the voters to throw out the old government. The question now is whether we mean what we say, and whether we have the courage of our convictions."

Officials say Russian president Vladimir Putin has offered Greece roughly €2bn up-front to smooth the way for the so-called "Turkish Stream" gas pipeline. While this would allow Greece to meet its IMF payments in May and June and then default later to the European Central Bank - deemed the real foe - it would not solve any of Greece's problems.

The implicit quid pro quo would be a Greek veto on an extension of Western sanctions against Russia. Such a decision would damage the rift with Europe beyond repair and would infuriate the Obama White House, which still has some sympathy for Syriza.

It is understood that US Treasury Secretary Jacob Lew told the Greeks that they would be "dropped like a stone" if they played this game.

Amos Hochstein, Washington's energy envoy, said in Athens on Friday that the pipeline was a foolish distraction. "Turkish Stream doesn't exist. There is no consortium to build it, there is no agreement to build it. So let's put that to the side," he said. Behind closed doors he has imposed an emphatic American veto on the whole plan.

“In their attempt to respect their duties, the ECB’s policymakers have made themselves political,” Greece’s finance minister Yanis Varoufakis told an audience of academics and economists in Paris last month.

The refrain strikes at the heart of his government’s complaints against the notionally independent ECB.

As one of Greece’s three main creditors - alongside the International Monetary Fund and the European Commission - the central bank is unique in wielding the power that can ultimately force the country out of the single currency.

Despite not officially being party to the political negotiations over extending Greece’s bail-out, the ECB has made a number of discretionary moves since theSyriza government was elected just over 100 days ago.

When he first swept into power, Prime Minister Alexis Tsipras appealed to Mr Draghi to provide some form of bridging finance to keep the country afloat as he sought to re-write the terms of Greece’s rescue programme.

It soon became clear the Italian would not be playing ball.

Not only has the ECB rebuffed requests for temporary financial relief, but its disciplinarian stance has led to accusations that it is acting ‘ultra vires’ - taking politically motivated action outside of its legal remit to ensure financial stability in the eurozone.

The first controversial move came as Mr Tsipras and Mr Varoufakis were hot-footing around Europe, drumming up support for their government’s nascent plans to rip up Brussels austerity contract.

On February 4, the ECB's 28-member Governing Council took a late-evening decision to remove its ordinary funding operations for Greek banks.

The vote was held hours after Mr Varoufakis had met with the ECB’s chief in Frankfurt earlier in the day.

In removing the waiver, which allowed Greece’s banks to post government debt as collateral for cheap cash, the Greek financial system became solely reliant on expensive emergency funds to stay afloat.

Frankfurt said its decision was based on an assessment that it was “not possible to assume a successful conclusion of the programme review”. This was widely interpreted as a threat to the fledgling Leftist government: capitulate, or you will be forced to suffer the consequences.

Greek bank stocks fell by as much as 30pc the following day and the beginnings of a bank run were well in motion.

The ECB has since been forced to inject ever-increasing amounts of emergency loans into Greece. Last week, the Governing Council met to make its 13th weekly hike of the emergency ceiling, taking it to €79bn.

The liquidity squeeze has since intensified. The central bank followed up its action by officially banning Greek banks from increasing their holdings of short-term government debt. This has proven to be another major constraint on the cash-strapped government which is struggling to pay out public sector pensions and salaries.

"...there are 2.5 million private sector workers supporting 1.5 million public sector workers in Greece. How is this sustainable? I got into a fight with a professor of geology who was complaining to me her salary went down from 2,300 euros a month to 1,300 euros a month and she still has to work 12 hours a week. I told her she's lucky she still has a job and told her to go see my butcher who works close to 60 hours a week and only earns 750 euros a month to feed his family of four. And it drives me crazy when I hear Greeks talk about the good old drachma days when they were collecting 25% interest at a bank but the inflation rate was sky high and you took out loans at 40% interest, if you were lucky."

"The country is in desperate need of reforms but Greeks are incapable of governing themselves and cutting public sector expenses. Did you know that by law you're not able to foreclose on a primary residence in Greece? Did you know that if you own a private business you cannot fire more than 2% of your workforce at a time? The Greek government owes private businesses billions of euros in arrears and isn't paying them so many businesses close up shop, at which point people lose their job. But god forbid we cut expenses at Greece's over-bloated public sector, all hell will break loose. Still, this is what Greece needs, someone to come in here and make the needed cuts and I think that is what is going to happen once Syriza balks and signs a new agreement on specific reforms."

Any solution to Greece's financial woes is more of a political than an economic question, European Central Bank policymaker Ewald Nowotny said on Monday, as euro zone finance ministers meet to continue Greek debt talks.

Top officials have voiced little optimism about a breakthrough at the meeting. Nowotny declined to suggest a way out of the impasse, reiterating that the ECB's role was to ensure price and financial stability.

He cited Monday's talks by euro zone finance minister, adding: "It would be premature to give any details," he told a panel discussion on Spain and Austria.

Enticing large pension funds to spend big on Canadian infrastructure projects will form a key part of the Liberal Party’s cities agenda, which is among the next policy planks that Leader Justin Trudeau will announce in the coming weeks.

Mr. Trudeau and his team of advisers are working on the final details of the infrastructure platform, which the party has long said would form a significant part of its pitch to voters in the October election.

But having decided to largely devote future surpluses toward tax cuts and enhanced direct payments to families, there is little room left to promise major additional spending on infrastructure.

Senior Liberals responsible for the party’s economic policies say the infrastructure component will draw inspiration from Australia and Britain, where efforts are being made to plan infrastructure projects so they meet the needs of pension investors looking for large, long-term projects that are open to private investment.

Liberal finance critic Scott Brison said in an interview that the Liberal plan would not interfere with the mandate of large Canadian pension funds such as the Canada Pension Plan, but would aim to address the reasons these funds are more likely to invest in infrastructure abroad than at home.

“You can respect absolutely the independence of Canadian pension funds to do their jobs – and that is maximize long-term pension security and returns for their members – but at the same time you can package projects within Canada that are attractive to not just Canadian pension funds but global pension funds,” he said. Mr. Brison and Liberal MP Chrystia Freeland met Monday with The Globe and Mail’s editorial board.

While no date has yet been set for the release of the party’s infrastructure platform, the annual meeting of the Federation of Canadian Municipalities is scheduled for June 5-8 in Edmonton and the party would like to have details ready by then to discuss with Canada’s mayors and city councillors.

Mr. Trudeau was also in Toronto on Monday where he delivered a speech to the Canadian Club that promoted the tax policies he announced last week. He argued that taxing high-income Canadians to pay for these measures is a better way to raise revenue than the NDP’s proposal of higher corporate tax rates.

The tax proposals were the first of what is expected to be a series of policy announcements in the coming weeks that will include infrastructure, child care and innovation.

Attracting more pension investment in Canadian infrastructure would require selling Canadians on a much larger role for public-private partnerships than is currently the case. It would also mean going further in a direction that is already preferred by the Conservatives. It is the Harper government that created a Crown corporation – PPP Canada Inc. – in 2009 focused on public-private partnerships for infrastructure. The 2015 federal budget promised a new public transit fund that would run through PPP Canada and would receive $1-billion in annual funding starting in 2019-20.

A 2013 analysis by the Organisation of Economic Co-operation and Development looked specifically at pension-fund investment in infrastructure and compared the Australian and Canadian approaches.

It said Canadian pension funds have been dubbed the “Maple revolutionaries” by the Economist magazine for their expertise in infrastructure investing around the world, but that these funds “bemoan the lack of investment opportunities at home.”

The report said these funds view public-private partnerships in Canada as too small. While Mr. Brison and Ms. Freeland said in interviews Monday they are interested in Australia’s approach, the OECD report questioned whether these policies would be popular with Canadians.

“Australia has a history of privatization over the last two decades, especially in large transport items such as airports, ports, toll roads and tunnels. In contrast, only very few privatizations of public infrastructure assets have occurred in Canada,” it said. “According to observers, there is no widespread political will to do so in the foreseeable future.”

Meanwhile, a 2011 program in Britain called the Pensions Infrastructure Platform that was meant to entice pension investment in infrastructure has run into criticism and has so far failed to meet its initial targets.

The strategy has come with challenges. Mr. Mock said one of the biggest difficulties is navigating the legal systems and governance requirements of foreign countries when buying large stakes in their companies.

Mr. Mock cited Asian companies that have not yet gone public among investment opportunities he’s keeping an eye on. He said the pension fund doesn’t typically make venture capital investments in Canadian companies because those types of investments are generally in the tens of thousands of dollars, while he’s looking to invest hundreds of millions at a time.

“As a fiduciary, we really do have to focus on earning the returns on behalf of the teachers,” he said.

Another opportunity he’s keeping his eye on is infrastructure investments in Europe and Canada. He said pension funds have a role to play in helping Canada address its crumbling infrastructure problem over the next 10 years.

“I think that is a vital opportunity in Canada,” he said.

Over the last 15 years, the Social Security Administration’s Office of the Chief Actuary has consistently underestimated retirees’ life expectancy and made other errors that make the finances of the retirement system look significantly better than they are , a new study by two Harvard and one Dartmouth academics concludes. The report, being published today by the Journal of Economic Perspectives, is the first, the authors say, to compare the government agency’s past demographic and financial forecasts with actual results.

In a second paper appearing today in Political Analysis, the three researchers offer their theory of  why the Actuary Office’s predictions have apparently grown less reliable since 2000:  the civil servants who run it have responded to increased political polarization surrounding Social Security “by hunkering down” and resisting outside pressures—not only from the politicians, but also from outside technical experts. “While they’re insulating themselves from the politics, they also insulate themselves from the data and this big change in the world –people started living longer lives,’’ coauthor Gary King, a leading political scientist and director of Harvard’s Institute for Quantitative Social Science, said in an interview Thursday. “They need to take that into account and change the forecast as a result of that.”

In its annual report last July, Social Security predicted its old age and disability trust funds, combined, would be exhausted in 2033 and that after that point the government will have enough payroll tax revenues coming in to pay only about three quarters of promised benefits. King said his team hasn’t estimated how much sooner the fund might run out, but described it as in “significantly worse shape” than official forecasts indicate.

In addition to underestimating recent declines in mortality (i.e. increases in life expectancy) for those 65 and older, the Actuary has overestimated the birth rate—meaning the number of new workers who will be available to pay baby boomers their benefits 20 years from now , the researchers assert. Before 2000, the Actuary also made errors, but they went in both directions and the Actuary was readier to adjust the forecasts from year to year as new evidence came in, King said. Since 2000, he added, the errors “all are biased in the direction of making the system seem healthier than it really is.’’

A Social Security spokesman said today that Chief Actuary Stephen Goss couldn’t comment on the papers because he wasn’t provided them in advance and is tied up today in meetings with the Social Security Advisory Board Technical Panel.  But the spokesman pointed to an Actuarial Note which Goss and three colleagues published in 2013 in response to a New York Times op-ed by King and one of his current coauthors,  Samir Soneji, an assistant professor at Dartmouth’s Institute for HealthPolicy& Clinical Practice. In that op-ed, they attacked the Actuary’s methods of projecting mortality rates and predicted the trust fund would be depleted two years earlier than predicted. In their response, Goss and his colleagues called King and Soneji’s methods of predicting death rates “highly questionable” and noted that the Actuary’s methods have been audited since 2006 by an independent accounting firm and received unqualified opinions.

The dust-up might be ignored as bickering by the pointy heads, if it weren’t so consequential.  In a recent Gallup survey, 36% of workers said they were counting on Social Security as a major source of retirement income. Differences over the estimates are important, King observed, because they affect “basically half of the spending of the U.S. government,’’ including Medicare.  Moreover, the forecasting assumptions affect the projected impact of any proposed changes to the program.

In their political paper, King, Soneji and Konstantin Kashin, a PhD candidate at King’s institute, recount how partisan fighting over Social Security intensified in the late 1990s, when conservatives began arguing the program was unsustainable and should be partially privatized, with younger workers offered individual savings accounts. In 2001, newly elected President George W. Bush appointed a commission intended to support such a change, but he put the issue aside after the September 11 terrorist attacks. After his reelection in 2005, however, Bush started pushing for changes in a series of town halls and speeches that, the paper notes, put the Social Security actuaries under “an extreme form of political pressure.’’ Democrats and news reports pointed to changes in the language used by the Social Security Administration that seemed (in line with White House policy) to emphasize that the program was not financially sustainable. Goss openly clashed with a Republican Social Security Commissioner.

Bush’s privatization push flopped and during recent elections some Republicans have attempted to cast themselves as the protectors of Social Security, which enjoys strong support from voters across the political spectrum. In 2013, after President Obama proposed a deficit reduction deal that, along with raising taxes on the rich, would have chipped away at inflation adjustments in Social Security, the idea was attacked by politicians from both parties.

But the problem of how to solve the system’s long term funding deficit has hardly gone away and the political  heat seems to be rising again. Democrats have slammed a provision adopted by the new Republican Congress that would block a transfer of money from the Social Security old age fund to the Social Security disability fund, which will be depleted next year. They say such transfers have been routine in the past and that it is a ploy by Republicans to force cuts in the retirement program too. Last month, Republican New Jersey Gov. Chris Christie, a possible Presidential candidate, proposed that the age for receiving full Social Security benefits be raised gradually to 69 and that benefits be limited for individuals with more than $80,000 in other income and ended completely for those earning more than $200,000. 

King emphasized that there is “no evidence whatsoever,” that Goss and his actuaries are bending to political pressure from either Democrats or Republicans. On the contrary, he said, while resisting such pressure, they’ve put too high a value on remaining consistent in their forecasts, in part because they don’t want to “panic” the public. “They’re trying to show the numbers don’t change because they think it will inspire confidence. Maybe in the very short run it will inspire confidence by not changing the numbers. But having the numbers be wrong doesn’t inspire confidence at all,’’ King said.

The political paper asserts that Goss has resisted changes in forecasting assumptions suggested by the Social Security Advisory Board’s Technical Panel on Assumptions and Methods—a panel of actuaries and economists that meets once every four years and is in session now. In some cases, the paper claims, the Actuary has made some suggested change in an assumption, but then changed another, unrelated assumption in the opposite direction “to counterbalance the first and keep the ultimate solvency forecasts largely unchanged.” In their 2013 Actuarial Note, however, Goss and his colleagues say that while the 2011 Panel did push for faster changes in mortality assumptions, the panel’s recommendations, if adopted in full, would have actually resulted in a projection that the Social Security trust funds would run out a year later.

King, who presented his own findings to the Technical Panel yesterday, is pushing for one big change in the Actuary’s practices that he says the Panel has also favored: making all the Actuary’s data and methods open for scrutiny by others. “This is a period of big data. When you let other people have access to data, things like Money Ball happen,’’ King said. In addition to new algorithms, he said, the government actuaries need to take note of recent findings about unconscious bias by researchers and apply new methods social scientists have developed to guard against such bias. “Four hundred years ago you had people sitting in a monastery and thinking they thought great thoughts and that was their entire life,’’ King said. “Now we check on each other. If they would leave things open they’d have so much help and they’d be better off politically because their forecasts would be better.”

All those discussions on the validity of the actuarial valuations on the OASDI programs are unfortunately just a case of "shooting the messenger". Irrespective of the degree of accuracy of the concerned actuarial estimates, the OASDI is actually (and still) in a difficult financial position. The worst aspect of it is the higher (currently 12.4%) contribution rate that will be required as soon as the fund is exhausted in the early 2030s. The current "intermediate" pay-as-you-go rate (13.6% re: http://www.ssa.gov/oact/TR/2014/VI_C_SRfyproj.html#317167 ) already exceeds the 12.4% actual contribution rate and will unavoidably continue to increase until at least 2030 (likely not beyond 2035) to about 18%.

What do Connecticut teachers and Dallas policemen and firemen have in common? They’re public sector employees whose respective pension funds are projecting 8.5% annualized long-term investment returns.

Along with the Houston Firefighters Fund and the Milwaukee City Employees Retirement System, which also project 8.5% returns, the Connecticut Teachers Pension Fund and the Dallas Policemen and Firemen Fund have the highest assumed rate of return of any public employee pension fund in the Boston College Center for Retirement Research’s database.

Relative to their peers, none of these four pension funds have outlandish assumptions. All 150 public employee pension funds in CRR’s database have an average estimated investment return of 7.7%. Twenty funds are at the median (half the funds are higher and half are lower) assumption of 7.8% returns. Forty funds share the mode (most occurring assumption) of 7.5%.

Nearly 97% of the funds posts return assumptions in the 7%-8% range after rounding. This is an extremely tight data set with regard to return assumptions, which should make anyone wonder why there are almost no differences of opinion.

The lowest assumed rate of investment return (and the only one that clocks in under 6%) is the Pennsylvania Municipal Retirement System’s at 5.5% (click on image).

Unfortunately, relative to some respected investors’ estimates of what mainstream stocks and bonds are likely to deliver over the next seven-to-10 years, every fund in CRR’s database except the Pennsylvania Municipal Retirement System may be projecting unrealistically high returns.

Likely future stock and bond returns

The easiest way to question these 7%-8% pension fund investment return assumptions is to begin with bonds. The 10-year Treasury is currently yielding a bit over 2%. That means an investor holding the instrument to maturity will get the yield it delivers, nothing more and nothing less. Perhaps investment grade corporate bond holders will receive 3%.

While junk bonds are yielding in the 5%-6% range, that’s not much given the asset class’s historical average default rate. Because defaults have pronounced cycles — moments where they seldom occur and moments when they’re rampant — it’s likely investors have fooled themselves that the current low-default environment is permanent.

Many investors think emerging markets bonds will deliver a bit more — say, 2.5% after inflation, or 5% assuming a 2.5% rate of inflation.

So altogether, let’s say the bond part of a pension fund’s portfolio will return 3.5% for the next seven-to-10 years (not counting management fees).

If our bond return assumption is correct, the stock part of a balanced portfolio split roughly evenly between stocks and bonds will have to deliver more than 10% annualized for the entire portfolio to approach a 7% return. Stocks will have to deliver close to 13.5% to the Connecticut teachers or the Dallas policemen and firemen to sustain those public employees through retirement.

Can stocks rise to these feats of heroism over the next decade or so? Not likely, according to Boston-based asset manager Grantham, Mayo, van Oterloo (GMO).

GMO, which lists its asset-class return assumptions monthly, currently thinks most developed market stocks will produce negative real — or after-inflation — returns over the next seven years. The firm evaluates stocks on long-term metrics such as (but not exclusively) current price over past 10-years’ inflation-adjusted average earnings, also known as the “Shiller P/E” after Yale economics professor Robert Shiller. Based on past earnings, GMO says, stocks are expensive and therefore poised for low future returns (click on image).

Since GMO publishes real or inflation-adjusted return numbers, one can just add an inflation assumption (say, 2%-3%) to the return forecast to get a nominal number, which is what the pension funds use. For example, GMO’s expected negative 2.0% real return for U.S. large company stocks might be a 1% nominal return if you assume 3% inflation. That’s breathtakingly far away from what the pension funds are assuming.

In developed markets only the highest-quality domestic stocks — those that consistently produce returns on invested capital in excess of their cost of capital and may be said to have economic “moats” or durable competitive advantages — are priced to deliver a minuscule 0.5% annualized real return, according to GMO.

Emerging markets stocks are the best of the bunch at 2.7% annualized for the next seven years. If one assumes 2.5% inflation, that’s a 5.2% nominal return — still far from (likely only about half) what they need to deliver to satisfy pension funds’ total portfolio return assumptions.

Although the starting yield does well in predicting future bond returns, predicting future stock future returns is fraught with difficulty.

Nevertheless, the pension funds have already made assumptions about future returns, as they must, and it’s not clear they’ve put much thought into the exercise. While century-long returns of a balanced portfolio may be in the 7% range, such portfolios go through multi-decade periods without returning anything close to the century-long results.

The pension funds have evidently made no attempt to take a measure of current valuation to arrive at their assumptions. They seem to have lazily plugged in century-long returns to satisfy their assumption requirements.

As for the Shiller P/E and GMO’s work, they are based on past earnings rather than being a complete guess as to what might materialize in the future. GMO has good, if imperfect, records in forecasting future seven-to-10 year stock returns, as this academic paper indicates.

Revising return assumptions downward would undoubtedly cause pension funds pain. Failing to do so, however, will cause future pensioners and possibly taxpayers pain. Public sector pension funds need to go back to the drawing board — or need to be made to go back to the drawing board — to think about future returns.

Last week the Illinois Supreme Court overturned a state law that would help fix the state’s notorious pension crisis. What a tragedy for the state’s taxpayers. The justices basically ruled that the pension arrangements are iron-clad, although these pensions are on a course to bankrupt the state and imperil public services that Illinois families depend on. The unions come first. This could have negative consequences for more than half the states that are trying to defuse government employee pension time bombs. ‎

By way of background: Illinois has one of the deepest public employee pension holes in the nation. The long term deficit is estimated at above $110 billion and the red ink rises every year. Even in California – where several cities have declared bankruptcy – the pension sink hole isn’t as deep on a per capita basis.

The watchdog group Open the Books reports that there are more than 5,000 teacher and other education officials who receive an annual pension of more than $100,000 a year. Worse yet, half of all government employees retire with benefits before age 60. That’s more than twice what a typical private worker gets for having worked 12 months, not nine months, a year.

The Illinois court invalidated a 2013 pension fix that was enacted by a Democratic legislature and a Democratic governor, Pat Quinn. That law cut off the front door to the pension swindle – switching new workers into defined contribution programs like 401k plans. The law also adjusted the automatic cost of living adjustments (now at 3 percent annually regardless of inflation). The reform also adjusted the retirement age for new employees after January 2011, highly important because at least half of the employees covered are retiring before age 60—including 70 percent of teachers. Even the features of the law dealing with new employees entering the bankrupt system were unbelievably tossed out by the court meaning that the costs must keep rising inexorably into virtual perpetuity.

The victims of these daunting pension costs are citizens who rely on state services. Pension checks are crowding out funding for everything else and last year rose 12 percent as most state spending is being cut or frozen.

Thanks to this ruling, there is no way out of the pension calamity absent a repeal of the pension clause in the Illinois Constitution.

The state can’t borrow – it already has the worst credit rating in the nation. It has to borrow less – not more. Last week’s court decision sent interest rates on Land of Lincoln debt to even higher levels – near junk bond status. Days later, Chicago bonds were marked down to junk status.

The state is already making deep cuts in other spending programs. To accommodate lavish government retiree pensions, the court has rules that everything else – from funding for schools, roads, bridges, prisons, and ‎police services – gets whacked. Current Governor Bruce Rauner is taking on the unenviable job of cutting at least $6 billion from state spending in order to balance the budget. The Court just made his job doubly excruciating.

The liberal justices made no secret of their preferred fix: raise taxes.‎They wrote: “the General Assembly could have also sought additional tax revenue,” and they chastised lawmakers for allowing a highly unpopular temporary tax increase to expire “even as pension funding was being debated and litigated.” But that tax hike was never meant to pay for pensioners even though most of the money was used to plug the massive growth in annual retirement payments. ‎

‎Raising taxes is an economic suicide pact for Illinois citizens. Illinois is already losing businesses and jobs due to some of the highest tax burdens in America. Raising taxes, as the pols in Springfield found out in recent years, raises almost no money because it accelerates the exodus to Texas, Florida, and Arizona.

The Court rejected the plea by lawmakers and others that the pension crisis qualifies as an emergency that grants the legislature the option of disregarding the pension protection clause. But this problem is a financial ticking time bomb that imperils funding for basic services that taxpayers and businesses depend on. ‎Is it not an emergency if the municipalities can’t get ambulances or fire trucks to their residents for lack of funds?

As in so many states today, pension costs in Springfield are crowding out funding for basic municipal services taxpayers depend on. The cost of borrowing keeps rising because of investor fear that these states will soon look like Greece. Balancing the budget now seems impossible. And the only people feeling financially secure are the state’s retired government employees – many of whom have moved to Palm Beach and Phoenix.

If courts won’t allow states to trim pension costs, eventually states like Illinois will rush to Washington for federal bailout money. With more than $1 trillion in unfunded public pensions nat‎ionwide, Illinois is looking like the canary in the coal mine. What a tragedy if courts in other states prevent legislatures from defusing these fiscal time bombs.

Greek government officials are insisting that a deal with the country's international lenders over reforms is imminent, but one key business leader told CNBC that Greece needs to implement reforms fast, whether a deal is on the cards or not.

"Greece is in a liquidity trap. We need to rectify the situation and agree on certain issues," Costantine Michalos, president of the Union of Hellenic Chambers of Commerce & Industry, told CNBC Tuesday.

"You don't need an agreement with your lenders and partners to improve your tax collecting mechanism, you don't need an agreement to improve your labor laws based on European norms on flexibility, and you don't need an agreement in order to proceed with privatizations," he added.

It comes as Greece's Labour Minister, Panos Skourletis, added his voice to that of the prime minister and finance minister, insisting that a deal with creditors was imminent "in the coming days," Reuters reported Tuesday.

Greece has been negotiating with creditors for months over reforms that -- when implemented -- could unlock a last tranche of much-needed bailout aid, worth 7.2 billion euros ($8.14 billion).

Sticking points in the talks have ranged from labor market and pension reforms to disputes over the privatization of Greek state assets, although Greece has made some concessions on the latter point.

Greek Prime Minister, Alexis Tsipras, on Monday ruled out further pension cuts, but said a list of proposals for an overhaul of the nation's VAT (sales tax) regime had been sent to lenders and he claimed a deal was imminent.

Speaking at a meeting of the Greek Industrial Federation Monday, Tsipras said Greece had tabled proposals for a "viable deal with creditors" and that the country was "in the final straight for an agreement."

The remarks were echoed by the country's Finance Minister, Yanis Varoufakis, who added that Greece was near a cash-for-reforms deal with its euro zone partners and the International Monetary Fund (IMF) that would help it meet debt repayments next month.

"I think we are very close (to a deal) ... let's say in a week," Varoufakis told Greek TV channel, Star TV. "Another currency is not on our radar, not in our thoughts."

He also suggested that Europe's bailout fund pay back the country's maturing bonds held by the European Central Bank (ECB), and that Greece could pay it back at a later date.

There are also growing concerns that Greece could be facing bankruptcy, amid a risk of a default on debts to international creditors, with deadlines looming for repayments to the ECB and IMF next month.

Greek banks are running short on the collateral they need to stay alive, a crisis that could help force Prime Minister Alexis Tsipras’s hand after weeks of brinkmanship with creditors.

As deposits flee the financial system, lenders use collateral parked at the Greek central bank to tap more and more emergency liquidity every week. In a worst-case scenario, that lifeline will be maxed out within three weeks, pushing banks toward insolvency, some economists say.

“The point where collateral is exhausted is likely to be near,” JPMorgan Chase Bank analysts Malcolm Barr and David Mackie wrote in a note to clients May 15. “Pressures on central government cash flow, pressures on the banking system, and the political timetable are all converging on late May-early June.”

European policy makers are losing patience with Tsipras who said as recently as May 14 that he won’t compromise on any of his key demands. He’s planning to force a discussion of Greece at a summit of European Union leaders in Latvia that begins on May 21, a day after the European Central Bank’s Governing Council meets in Frankfurt.

Bonds Drop

Greek bonds tumbled on Monday, pushing 10-year yields up by the most since January. Yields on two-year Greek notes jumped 352 basis points to 24.44 percent. Greek bonds remain the best-performing sovereign securities over the past month, according to Bloomberg’s World Bond Indexes. The Athens Stock Exchange rose 1.6 percent, following a report that the European Commission is trying to broker a compromise deal. An EU Commission spokeswoman said she wasn’t aware of such a proposal.

While talks are centering on whether to give Greece more money, the ECB could decide to raise the stakes as soon as this week if it increases the discount on the collateral Greek banks pledge in exchange for cash under its Emergency Liquidity Assistance program.

Such a move might inadvertently prompt a further outflow of bank deposits and pressure Tsipras to choose between doing a deal and putting his country on the road to capital controls. A Greek government spokesman declined to comment, as did officials at the Greek central bank and the ECB.

“We are in an endgame,” ECB Executive Board member Yves Mersch said in an interview with Luxembourg radio 100.7 broadcast Saturday. “This situation is not tenable.”

Liquidity Lifeline

The arithmetic goes as follows: Greek lenders have so far needed about 80 billion euros ($91 billion) under the ELA program.

Banks have enough collateral to stretch that lifeline to about 95 billion euros under the terms currently allowed by the ECB, a person familiar with the matter said. With the central bank raising the ELA by about 2 billion euros every week, that could take banks to the end of June.

A crunch will come if the ECB increases the haircut on Greek collateral to levels not seen since last year. That could be prompted by anything from a complete breakdown in talks to a missed debt payment, the official said. A continuation of the current impasse could even be all that’s needed, the official said.

An increased haircut would reduce the ELA limit to about 88 billion euros, the person said. While that gives banks about four weeks before hitting the buffers, the leeway is so limited that Greece might need to impose capital controls, limiting transactions such as ATM withdrawals, to conserve the cushion. Market News International first reported on the reduced ceiling on May 12.

ECB Tools

“Since the great crisis of 2008, Europe has created many tools to control the flow of money and banks,” said Andreas Koutras, an analyst at In Touch Capital Markets in London. “Thus the crisis in Greece is more likely to be resolved through the tools of the ECB rather than” by political means.

Investors in Greek debt are showing few signs of panic for now, with the yield on the Greek 10-year bond still having dropped about 2.2 percentage points lower than its two-year high of 13.64 percent on April 21.

Nor are ECB policy makers willing to raise the pressure on Greek banks on their own. Central bank governors won’t take any action which would be seen as pushing Greece out of the currency bloc if negotiations show progress and convergence, the person said.

Collateral Fix?

Greek lenders are also working with the country’s central bank on plans to collateralize additional assets, a separate local official with knowledge of the matter said.

Still, it’s unclear if these assets, including government guarantees, would be accepted by the ECB if the standoff in bailout negotiations persists. According to a senior Greek commercial banker, the ECB’s decision on what to accept as collateral is essentially a judgment call, and not necessarily related to the quantity of the assets available.

“The Greek government at this point has no room for maneuver,” Spanish Economy Minister Luis de Guindos said in a speech in Madrid on Monday. He said he was still optimistic a deal will be reached in the coming days. “This deal is essential for Greece given its liquidity situation,” he said.

Tsipras will push Greece’s case at this week’s EU leaders’ summit in Riga after a weekend that showed few signs of progress. An International Monetary Fund memo dated May 14 said Greece won’t be able to make an IMF payment on June 5 unless an accord is reached with partners, the U.K’s Channel 4 news reported on Saturday.

The ECB’s next full monetary policy meeting is on June 3, two days before the IMF payment.

“There were too many people crying wolf before,” Koutras said. “But as Hemingway wrote: How did you go bankrupt? Two ways: Gradually, then suddenly.”

Once again, Greece seems to have slipped the financial noose. By drawing on its holdings in an International Monetary Fund reserve account, it was able to repay €750 million ($851 million) – ironically to the IMF itself – just as the payment was falling due.

This brinkmanship is no accident. Since coming to power in January, the Greek government, led by Prime Minister Alexis Tsipras’s Syriza party, has believed that the threat of default – and thus of a financial crisis that might break up the euro – provides negotiating leverage to offset Greece’s lack of economic and political power. Months later, Tsipras and his finance minister, Yanis Varoufakis, an academic expert in game theory, still seem committed to this view, despite the lack of any evidence to support it.

But their calculation is based on a false premise. Tsipras and Varoufakis assume that a default would force Europe to choose between just two alternatives: expel Greece from the eurozone or offer it unconditional debt relief. But the European authorities have a third option in the event of a Greek default. Instead of forcing a “Grexit,” the EU could trap Greece inside the eurozone and starve it of money, then simply sit back and watch the Tsipras government’s domestic political support collapse.

Such a siege strategy – waiting for Greece to run out of the money it needs to maintain the normal functions of government – now looks like the EU’s most promising technique to break Greek resistance. It is likely to work because the Greek government finds it increasingly difficult to scrape together enough money to pay wages and pensions at the end of each month.

To do so, Varoufakis has been resorting to increasingly desperate measures, such as seizing the cash in municipal and hospital bank accounts. The implication is that tax collections have been so badly hit by the economic chaos since January’s election that government revenues are no longer sufficient to cover day-to-day costs. If this is true – nobody can say for sure because of the unreliability of Greek financial statistics (another of the EU authorities’ complaints) – the Greek government’s negotiating strategy is doomed.

The Tsipras-Varoufakis strategy assumed that Greece could credibly threaten to default, because the government, if forced to follow through, would still have more than enough money to pay for wages, pensions, and public services. That was a reasonable assumption back in January. The government had budgeted for a large primary surplus (which excludes interest payments), which was projected at 4% of GDP.

If Greece had defaulted in January, this primary surplus could (in theory) have been redirected from interest payments to finance the higher wages, pensions, and public spending that Syriza had promised in its election campaign. Given this possibility, Varoufakis may have believed that he was making other EU finance ministers a generous offer by proposing to cut the primary surplus from 4% to 1% of GDP, rather than all the way to zero. If the EU refused, his implied threat was simply to stop paying interest and make the entire primary surplus available for extra public spending.

But what if the primary surplus – the Greek government’s trump card in its confrontational negotiating strategy – has now disappeared? In that case, the threat of default is no longer credible. With the primary surplus gone, a default would no longer permit Tsipras to fulfill Syriza’s campaign promises; on the contrary, it would imply even bigger cutbacks in wages, pensions, and public spending than the “troika” – the European Commission, the European Central Bank, and the IMF – is now demanding.

For the EU authorities, by contrast, a Greek default would now be much less problematic than previously assumed. They no longer need to deter a default by threatening Greece with expulsion from the euro. Instead, the EU can now rely on the Greek government itself to punish its people by failing to pay wages and pensions and honor bank guarantees.

Tsipras and Varoufakis should have seen this coming, because the same thing happened two years ago, when Cyprus, in the throes of a banking crisis, attempted to defy the EU. The Cyprus experience suggests that, with the credibility of the government’s default threat in tatters, the EU is likely to force Greece to stay in the euro and put it through an American-style municipal bankruptcy, like that of Detroit.

The legal and political mechanisms for treating Greece like a municipal bankruptcy are clear. The European treaties state unequivocally that euro membership is irreversible unless a country decides to exit not just from the single currency but from the entire EU. That is also the political message that EU governments want to instill in their own citizens and financial investors.

If Greece defaults, the EU will be legally justified and politically motivated to insist that the euro remains its only legal tender. Even if the Greek government decides to pay wages and pensions by printing its own IOUs or “new drachmas,” the European Court of Justice will rule that all domestic debts and bank deposits must be repaid in euros. That, in turn, will force a default against Greek citizens, as well as foreign creditors, because the government will be unable to honor the euro value of insured deposits in Greek banks.

So a Greek default within the euro, far from allowing Syriza to honor its election promises, would inflict even greater austerity on Greek voters than they endured under the troika program. At that point, the government’s collapse would become inevitable. Instead of Greece exiting the eurozone, Syriza would exit the Greek government. As soon as Tsipras realizes that the rules of the game between Greece and Europe have changed, his capitulation will be just a matter of time.

Suppose Premier Kathleen Wynne’s Liberal government forced you into its Ontario Retirement Pension Plan (ORPP) and took 1.9% of your earnings up to a maximum of $1,643 annually for your entire working life.

Suppose it invested this money into poorly-run, money-losing Ontario public infrastructure projects, in which the government partnered with private companies and lost its shirt -- and thus your future pension benefits.

Based on the scant information the Liberals are giving out in preparing to implement their ORPP on Jan. 1, 2017, that could happen. Here’s why.

In Finance Minister Charles Sousa’s 2014 budget, here’s how the Liberals explained how they will invest over $3.5 billion annually in mandatory pension contributions.

These will come from more than three million Ontario workers who will be forced into the ORPP because they do not have private pension plans, and from their employers.

(The ORPP will be funded by a 1.9% annual payroll tax imposed on these workers, plus an additional 1.9% annual tax for each employee, paid by their employers.)

“By ... encouraging more Canadians to save through a proposed new Ontario Retirement Pension Plan, new pools of capital would be available for Ontario-based projects such as building roads, bridges and new transit,” the Liberals said.

“Our strong Alternative Financing and Procurement model, run by Infrastructure Ontario, will allow for the efficient deployment of this capital in job-creating projects.”

Really? First, the purpose of the ORPP should not be to help the Liberals fund infrastructure because they’re broke and can’t get the money elsewhere, other than by holding a fire sale of provincial assets like Hydro One, which they’re already doing.

The only purpose of the ORPP -- similar to the stated one of the Canada Pension Plan (CPP) -- should be to “maximize returns (to contributors) without undue risk of loss.”

To do that, the Canada Pension Plan Investment Board (CPPIB), which invests mandatory contributions on behalf of working Canadians so the plan will have the funds to pay them a pension upon retirement, operates independently of the federal and provincial governments.

As the CPPIB says in its 2014 annual report:

“As outlined in the CPPIB Act, the assets we manage ($219.1 billion) belong to the (18 million) Canadian contributors and beneficiaries who participate in the Canada Pension Plan. “These assets are strictly segregated from government funds.

“The CPPIB Act has safeguards against any political interference (operating) at arm’s length from federal and provincial governments with the oversight of an independent ... Board of Directors. CPPIB management reports not to governments, but to the CPPIB Board of Directors.”

To be sure, the CPPIB has been criticized over everything from its administrative costs, to the bonuses it pays to senior executives, to the wisdom of some of its investment decisions.

But on the key issue of how it is run, politicians, by law, aren’t allowed to interfere in its investment decisions, for obvious reasons.

By contrast, the Wynne government is sending contradictory messages about how investments needed to ensure its solvency will be decided by the ORPP.

On the one hand, Sousa says, “our plan would build on the strengths of the CPP ... publicly administered at arm’s length ... (and) have a strong governance model, with experts responsible for managing its investments.”

But on the other, the Liberals want a substantial amount of the funds raised by the ORPP to go to “new pools of capital” for “Ontario-based” infrastructure projects.

These are contradictory statements.

Either the ORPP investment board will be independent in its investment decisions, or it will be ordered, or influenced, by the Wynne government to make investments in Ontario infrastructure projects the government wants to build.

As for the Liberals’ claim their, “strong Alternative Financing and Procurement model, run by Infrastructure Ontario, will allow for the efficient deployment of this capital in job-creating projects”, Ontario Auditor General Bonnie Lysyk recently examined that model.

She concluded Infrastructure Ontario frequently gets its head handed to it in partnerships with the private sector, to the tune of billions of dollars in added costs.

Lysyk said the government could save money on infrastructure projects if it could competently manage them itself. (A big “if”.)

Finally, the CPPIB, which has a five-year annualized rate of return of 11.9% and a 10-year rate of 7.1%, invests only 6.1% of its portfolio in infrastructure (including a stake in the Hwy. 407 ETR).

Based on the little the Wynne government has said about how it will operate the ORPP, we should all be concerned.

Premier Kathleen Wynne’s Ontario Retirement Pension Plan (ORPP) will have a huge impact on the pocketbooks of millions of workers.

But with the plan set to start Jan. 1, 2017, the Liberals have provided little information about it.

Among the key unanswered questions:

Who will be included?

How will the Liberals invest the $3.5 billion-a-year it will generate?

Wynne has said except for the self-employed, if you work for a business that does not provide a private pension plan, you have to join the ORPP.

You will pay 1.9% of your annual salary into the ORPP through a payroll tax, with your employer matching your contribution.

To give an idea of the costs, if you make $45,000 annually starting at age 25 and contribute for 40 years, you will make annual payments of $788, matched by your employer. At age 65 you will receive a pension until you die of $6,410 annually, in 2014 dollars.

If you earn $90,000 annually (earnings above this are exempt), you will pay $1,643 annually and receive a pension of $12,815.

But what is Wynne’s definition of a private pension plan?

Originally it was thought to mean any private workplace pension.

But pension experts now say it’s unclear whether workers in defined contribution plans will be exempt from the ORPP.

In these plans, the employer and employee make annual contributions, but there is no guarantee of what the final pension will be.

By contrast, defined benefit plans pay a pre-determined pension based on salaries and years of experience.

(We do know workers with defined benefit plans will be exempt from the ORPP.)

But it’s also unclear how the province will invest the $3.5 billion annually in new revenue the ORPP will generate, important so that it remains solvent and able to meet its financial obligations.

Wynne’s Liberals have sent out contradictory messages on this.

They have said both that the ORPP will be managed by an independent investment board like the Canada Pension Plan, but also that it will invest in Ontario government public-private infrastructure projects, meaning the board won’t be truly independent.

Ontarians have a right to answers. After all, it’s their money at stake.​

I wrote my report on the governance of the federal government's public sector pension plan for the Treasury Board back in the summer of 2007. The government hired me soon after PSP Investments wrongfully dismissed me after I warned their senior managers of the 2008 crisis. And I didn't mince my words. There were and there remains serious issues on the governance of the federal public sector pension plan.

I remember that summer very well. It was a very stressful time. PSP was sending me legal letters by bailiff early in the morning to bully and intimidate me. I replied through my lawyer and just hunkered down and finished my report. The pension policy group at the Treasury Board didn't like my report because it made them look like a bunch of incompetent bureaucrats, which they were, and they took an inordinate amount of time to pay me my $25,000 for that report (the standard amount when you want to rush a contract through and not hold a bidding process).

If I had to do it all over again, I wouldn't have written that report. The Treasury Board buried it, and it wasn't until last summer that the Office of the Auditor General finally started looking into the governance of the federal public sector pension plan.

In 2011, the Auditor General of Canada did perform a Special Examination of PSP Investments, but that report had more holes in it than Swiss cheese. It was basically a fluff report done with PSP's auditor, Deloitte, and it didn't delve deeply into operational and investment risks. It also didn't examine PSP's serious losses in FY 2009 or look into their extremely risky investments like selling CDS and buying ABCP, something Diane Urqhart analyzed in detail on my blog back in July 2008.

I had discussions with Clyde MacLellan, now the assistant Auditor General, and he admitted that the Special Examination of PSP in 2011 was not a comprehensive performance, investment and operational audit. The sad reality is the Office of the Auditor General lacks the resources to do a comprehensive special examination. They hire mostly CAs who don't have a clue of what's going on at pension funds and they need money to hire outside specialists like Edward Siedle's Benchmark Financial Services.

Top U.S. hedge fund management firms, including Leon Cooperman's Omega Advisors and Philippe Laffont's Coatue Management, continued to reduce or slash stakes altogether in Apple Inc (AAPL.O) during the first quarter, as shares of the iPhone maker rallied.

According to regulatory filings released on Friday, Coatue cut its holding of Apple by selling 1.2 million shares during the first three months of this year, but it remains the fund's single biggest U.S. stock investment, with 7.7 million shares. Omega Advisors sold all of its 383,790 shares in Apple during the first quarter, while Rothschild Asset Management cut its stake by 107,953 to 938,693 shares, filings showed on Friday.

David Einhorn's Greenlight Capital also cut its exposure in Apple during the first quarter, slashing its stake by 1.2 million shares to 7.4 million shares.

Apple shares rose 12.7 percent in the first quarter and have continued to increase. Since the end of March, the shares have risen 3.6 percent through Thursday's close. Including Friday's trading, shares are up 3.3 percent since the end of March.

In the fourth quarter, David Einhorn's Greenlight Capital and Coatue Management reduced their stakes in Apple, which was a big winner in 2014, with its shares rising nearly 38 percent.

At the end of 2014, Apple was one of the hedge fund community's favored positions, according to Goldman Sachs. Their analysis of more than 850 funds with $2 trillion in assets showed 12 percent of hedge funds counted it among their top 10 holdings. And given its size as the largest publicly traded U.S. company, that made it "key for both hedge fund and index performance," Goldman said in its February report.

Not every big hedge fund manager is souring on Apple. Ray Dalios' Bridgewater Associates increased its stake by 473,500 shares to 732,997. And billionaire hedge-fund activist Carl Icahn kept his stake unchanged at 52.8 million shares as of the end of the first quarter.

The actions were revealed in quarterly disclosures of manager stock holdings, known as 13F filings, with the U.S. Securities and Exchange Commission. They are of great interest to investors trying to divine a pattern in what savvy traders are selling and buying.

The disclosures are backward-looking and come out 45 days after the end of each quarter. Still, the filings offer a glimpse into what hedge fund managers saw as opportunities on the long side.

The filings do not disclose short positions. As a result, the public filings do not always present a complete picture of a management firm's stock holdings.

In recent years, some of the most prominent hedge fund victories have been all about health care. Larry Robbins, the billionaire founder of Glenview Capital Management, has generated excellent performance in the last two years by allocating a big chunk of his portfolio to hospital stocks—one of his hedge funds has posted a three-year annualized return of 57%. Billionaire William Ackman had the biggest year of his hedge fund career in 2014 because of Botox-maker Allergan, which was responsible for 19.1% of Ackman’s gross return.

In the first three months of 2015, hedge funds continued to rush into health care, chasing returns in the sector that has led the U.S stock market this year. Hedge funds increased their long exposure to health care to $289.67 billion, according to research firm Novus, making up 10.35% of the net assets under management of stock-picking hedge funds. Novus, which does not include quantitative trading hedge funds in its stock holding analysis, says that in the last year hedge funds have gone from being underweight health care to overweight.

The most popular hedge fund health care stock by far is Actavis, the generic drug maker that bought Allergan this year for $67 billion and is run by Brent Saunders, a CEO who is popular with both Ackman and Carl Icahn. Goldman Sachs released a report on Thursday that showed Actavis is the most popular stock with hedge funds that it tracks, even more popular than Apple. There are 171 hedge funds invested in Actavis and those hedge fund owned $20.3 billion of the stock at the end of March, according to Novus. The only company in America in which hedge funds held more stock, according to Novus, was Apple.

Actavis is a hedge fund-fueled stock. Hedge funds owned 24% of the outstanding shares at the end of March. Big positions in Actavis are owned by funds managed by billionaire John Paulson, whose Paulson & Co., had Actavis as its second-biggest U.S. holding at the end of March, and billionaire Andreas Halvorsen, who has made Actavis the biggest U.S. stock position of his some $30 billion hedge fund.

Actavis was recently the second-biggest holdings of billionaire Dan Loeb’s Third Point hedge fund, which had biotech company Amgen as its biggest position at the end of March. These two stocks alone made up about a quarter of Loeb’s U.S. stock holdings. A big buyer of Actavis in the first quarter of 2015 was billionaire Stephen Mandel’s Lone Pine hedge fund.

Valeant Pharmaceuticals is the second-most popular health care stock with the hedge fund crowd when measured by the value of shares held by hedge funds, according to Novus. There are 100 hedge funds that own $17.8 billion of the stock. Valeant is a hedge fund machine that was essentially created by ValueAct Capital Management, the San Francisco hedge fund run by Jeffrey Ubben. The stock is Ubben’s biggest holding by far, recently making up more than 21% of his U.S. stock portfolio. It made up more than a quarter of Bill Ackman’s U.S. stock portfolio at the end of March after his Pershing Sqaure hedge fund finally took a position this year in the drug maker that Ackman had teamed up with in early 2014 to try to buy Allergan. Valeant is Ackman’s biggest position so far in 2015.

Johnson & Johnson is a health care stock owned by 163 hedge funds. More hedge funds own Johnson & Johnson than any other health care stock except for Actavis. Pfizer is another drug company that has long been very popular with hedge funds, which own more than $6 billion of the stock, as is Gilead Sciences, where 141 hedge funds owned nearly $5 billion of the stock at the end March, according to Novus.

What healthcare stocks were hedge funds buying in the first quarter? Davita Healthcare Partners is one example. They have also been playing the mergers that have dominated the industry, buying shares of Salix Pharmaceuticals, Hospira and Pharmacyclics.

The Symmetric Twenty comprise the top twenty ranked long-short equity managers. We force-rank the entire Symmetric universe according to their realized StockAlpha year to date, 12 months back and three years back. The list is further adjusted to reflect those whose StockAlpha has not only the greatest magnitude, but also the greatest consistency over each period.

The following chart shows the cumulative StockAlpha for the Symmetric Top 20 vs. cumulative StockAlpha for the entire hedge fund universe. The chart demonstrates the magnitude of dispersion between the best and most consistent stock pickers and the average stock pickers. The Symmetric Top 20 have added over 25% of StockAlpha above the average hedge fund over the past 3 years or roughly 8% a year.With hedge fund fees typically being around 2% of assets and managed and 20% of profits, its clear that only the very top stock pickers are worth paying for. The average hedge fund would return negative StockAlpha after fees (click on image).

Most allocators approach hedge fund replication using 13-Fs by pointing out the 45 day delay with filings releases and the lack of information about the short side/international part of the book. The standard argument is that this makes replication a bad idea.

We don't think this is the right way to think about it. A better approach is to ask: do the benefits of being invested directly in the fund (short exposure + inter quarter trading + international exposure) make up for the 2/20 in fees and long lockup periods? 2/20 is such an enormous performance drag that in some cases you may be better off than the net return of the fund just by replicating the publicly disclosed book.

At the very least allocators should be benchmarking their funds net returns to a synthetic replicated version to understand what value they are getting above and beyond what is available cheaply.

Berkshire's largest investments include some of the most popular blue chips known to Wall Street. In the recent quarter, Buffett added to several of these positions. Let's take a look at Berkshire's top eight holdings according to dollar value at the end of March, not including Buffett's option to purchase 700 million shares of Bank of America at any time prior to September 2021 for $5 billion.

8. Davita Healthcare Partners

This Denver-based company provides a variety of healthcare services throughout the United States and abroad. DaVita (DVA) is a leading provider of kidney care, delivering dialysis services to patients with chronic kidney failure and end-stage renal disease. It operates or provides administrative services at 2,197 outpatient dialysis centers located in the U.S. serving approximately 174,000 patients. The company also operates 93 outpatient dialysis centers located in 10 countries outside the U.S.

At the end of March, Berkshire held 38.6 million shares of DaVita, worth $3.13 billion. While Buffett is typically responsible for billion-dollar positions at Berkshire, he is not likely responsible for this investment. Ted Weschler, one of Buffett's hand-selected portfolio managers, is a major DaVita bull. He has been investing in the company for more than a decade.

7. U.S. Bancorp

Financials are a major part of Buffett's investing strategy. Berkshire raised its stake in U.S. Bancorp during the first quarter to 83.8 million shares, worth $3.66 billion. In comparison, Berkshire held 80.1 million shares at the end of 2014. In January, the bank reported record full year 2014 net income of $5.85 billion. Furthermore, U.S. Bancorp (USB) returned 72% of 2014 earnings to shareholders through dividends and share buybacks.

In April, the bank announced it returned 70% of first quarter earnings to shareholders, and was named one of the World's Most Ethical Companies by the Ethisphere Institute.

6. Procter & Gamble

At the end of March, Berkshire held 52.8 million shares of Procter & Gamble (PG), unchanged from the prior quarter and worth $4.33 billion. Last November, Berkshire announced it will acquire Procter & Gamble's Duracell battery business. In fact, Berkshire will exchange its P&G stake for a recapitalized Duracell, which will include $1.7 billion in cash at closing. The transaction is expected to close in the second half of 2015.

Procter & Gamble is typically considered a staple among investors seeking a solid dividend and stability, but shares have declined more than 10% this year so far. Nonetheless, the company declared a 3% dividend increase in April, marking the 59th consecutive year that Procter & Gamble has raised its dividend. In the first three months of 2015, net sales fell 8% year-over-year to $18.1 billion.

5. Wal-Mart

Berkshire maintained its stake in the world's largest retailer at 60.4 million shares during the first quarter. The position was worth $4.97 billion at the end of March, down from $5.2 billion at the end of December. Berkshire steadily increased its stake in Wal-Mart (WMT) last year as shares gained 9% in 2014. However, shares are down about 7% this year.

Looking ahead, Wal-Mart expects challenges to its operating income. In February's earnings release, Wal-Mart CFO Charles Holley said, "Given the investments we're making in our worldwide e-commerce initiatives and in our associates through higher wages and training, we expect operating income to be pressured in fiscal 2016. We will invest approximately $0.02 per share in the first quarter and approximately $0.20 per share for the full year in the new wage structure, comprehensive associate training and educational programs. Our incremental investment in global e-commerce initiatives will range between $0.06 and $0.09 per share this year. Together, we're investing between $0.26 and $0.29 per share for these initiatives in fiscal year 2016."

4. American Express

The only sector Buffett favors more than consumer staples is financial services. Berkshire held 151.6 million shares of American Express (AXP) at the end of March, worth $11.84 billion. The position was unchanged from the previous quarter, but the value of the position declined by over $2 billion due to a declining share price.

American Express is losing its exclusive partnership with Costco, and total revenue in the recent quarter shrank 3%. On the positive, the company remains committed to returning money to shareholders. In May, the board of directors approved the repurchase of up to 150 million shares, and hiked the quarterly dividend 12% to $0.29 per share. Berkshire also has positions in Mastercard and Visa.

3. International Business Machines

IBM (IBM) was the worst performer in the Dow Jones Industrial Average last year, but is Berkshire's third largest position. During the first quarter, Berkshire stayed faithful and raised its stake in Big Blue to 79.6 million shares, worth $12.77 billion and up from 77 million shares in the prior quarter.

In April, IBM announced its 12th consecutive quarter of declining revenue. Yet shares have found support this year and are among the best performers in the Dow. During the first quarter, IBM returned $2.3 billion to shareholders through dividends ($1.1 billion) and share repurchases ($1.2 billion). Buffett recently told CNBC that he's mainly sticking with IBM because he likes it and even expected revenue to decline. Buffett first started buying IBM shares in early 2011.

2. Coca-Cola

Coca-Cola (KO) is one of the most predictable positions at Berkshire. In fact, Buffett is on record saying he will never sell his shares in the world-renowned beverage company. At the end of the first quarter, Berkshire held the usual 400 million shares of Coca-Cola, worth $16.22 billion. Shares have been mostly flat over the past year as the market still has fears about consumers losing their taste for Coke, but the company is trying not to go stale.

Coca-cola recently entered into an agreement to purchase a 16.7% equity stake in Monster Beverage, hiked its strategic position in Keurig Green Mountain, and launched a new milk product called Fairlife. Coca-Cola is also making operating changes to drive stronger growth and save $3 billion annually by 2019.

1. Wells Fargo

America's most profitable bank is also Buffett's top holding. Shares of Wells Fargo (WFC) have performed well over the past year, but Buffett is still buying. Berkshire held 470.3 million shares of Wells Fargo at the end of the first quarter, up from 463.5 million shares in the prior quarter. The position was valued at $25.6 billion at the end of March. Like most of Warren Buffett's favorite stocks, Wells Fargo pays a healthy dividend, which was increased by 7% to $0.375 per share in April.

The Canada Pension Plan Investment Board (CPPIB) delivered a net investment return of 18.3% for fiscal 2015—the biggest one-year return since it was created.

The CPP fund ended the year with net assets of $264.6 billion, compared to $219.1 billion at the end of fiscal 2014. The $45.5 billion increase in assets for the year consisted of $40.6 billion in net investment income after all CPPIB costs and $4.9 billion in net CPP contributions.

Multiple factors contributed to fiscal 2015 growth, including all major public equity markets, bonds, private assets and real estate holdings.

Combined, all three of CPPIB’s investment departments delivered substantial investment income to the Fund. International markets, both emerging and developed markets, advanced significantly, boosting returns further as CPPIB continues to diversify the fund. The benefit of the fund’s diversification across currencies also played a role in its returns, as the Canadian dollar fell against certain currencies, including the U.S. dollar.

In the 10-year period up to and including fiscal 2015, CPPIB has contributed $129.5 billion in cumulative net investment income to the fund after all CPPIB costs, and more than $151.5 billion since inception in 1999, meaning that over 57% of the fund’s cumulative assets are the result of investment income.

The Canada Pension Plan Investment Board sees the United States as a key destination for investments in the near term, but expects to shift a bigger share of its assets to faster-growing emerging economies over time.

Emerging markets equities account for about 5.9 per cent of the assets managed by the CPP Investment Board, but chief executive Mark Wiseman said Thursday the fund is building its capabilities in markets like India, China and Latin America in a “slow and prudent progression.”

“We believe they will undoubtedly have ups and downs, but in the long run those economies will produce disproportionately higher growth than the developed economies of Europe and North America,” Wiseman said.

The CPP Fund reported Thursday a return of 18.3 per cent for its latest financial year, its best showing ever.

Compared with the end of fiscal 2014, the fund’s assets were up $45.5 billion from the end of fiscal 2014 — the biggest one-year gain since the fund received its first money for investments in March 1999.

In the medium term, Wiseman said there are “excellent prospects” in the United States, which is home to about $100.7 billion or 38 per cent of the fund’s assets — the largest of any country.

“We see more investment opportunities there than in other developed world markets,” Wiseman said.

As for Canada, which represented about 24.1 per cent of the fund’s assets as of March 31, Wiseman said the CPPIB continues to have a positive view despite the impact of the recent oil price shock.

He said lower energy prices, the decline in the loonie’s value against the U.S. dollar, and “solid growth” in the United States — Canada’s biggest market — should help the overall economy.

“So, by and large, we remain optimistic about Canada as well as the U.S,” Wiseman said.

The CPP Investment Board says there were multiple reasons for the strong investment performance last year, including growth at all major stock markets, bonds, private assets and real estate holdings.

Only $4.9 billion of last year’s increase came from employer and employee contributions while $40.6 billion came from investments. None of the fund’s assets were required to pay benefits to current retirees, with contributions expected to carry the load until the end of 2022.

The value of its investments also got a $7.8-billion boost in fiscal 2015 from a decline in the Canadian dollar against certain currencies, including the U.S. dollar and U.K. pound.

The fund’s 10-year inflation-adjusted rate of return was 6.2 per cent — well above the 4.0 per cent that Canada’s chief actuary estimates is necessary.

The CPP Fund ended its fiscal year on March 31, 2015, with net assets of $264.6 billion, compared to $219.1 billion at the end of fiscal 2014. The $45.5 billion increase in assets for the year consisted of $40.6 billion in net investment income after all CPPIB costs and $4.9 billion in net CPP contributions. The portfolio delivered a gross investment return of 18.7% for fiscal 2015, or 18.3% on a net basis.

“The CPP Fund generated exceptional returns this year, achieving both the highest one-year return and annual investment income since our inception,” said Mark Wiseman, President & Chief Executive Officer, CPP Investment Board (CPPIB). “More importantly, our 10-year return, a measure that better indicates how we seek to serve contributors and beneficiaries, reached 8.0% on a net basis.”

In the 10-year period up to and including fiscal 2015, CPPIB has contributed $129.5 billion in cumulative net investment income to the Fund after all CPPIB costs, and over $151.5 billion since inception in 1999, meaning that over 57% of the Fund’s cumulative assets are the result of investment income.

“First, let me cite the hard work, dedication and capabilities of the CPPIB team across all of our offices, as well as close collaboration with our key partners worldwide,” added Mr. Wiseman. “Many factors helped lift the year’s results but the impact of decisions made over several years – and patience – is evident.”

Multiple factors contributed to fiscal 2015 growth, including all major public equity markets, bonds, private assets and real estate holdings. Combined, all three of CPPIB’s investment departments delivered substantial investment income to the Fund. International markets, both emerging and developed markets, advanced significantly, boosting returns further as CPPIB continues to diversify the Fund. The benefit of the Fund’s diversification across currencies also played a role in its returns, as the Canadian dollar fell against certain currencies, including the U.S. dollar.

“While any large increase helps foster public confidence in the sustainability of the Fund, results can and will fluctuate in any given year,” said Mr. Wiseman. “The Fund’s horizon, size and funding allow us to accept more risk and invest differently than almost all other investors, including having a high tolerance for potential future negative shocks. In the same way that we temper our enthusiasm for this year’s exceptional performance, we will also stay on course even through negative returns in any given short-term period. As a result of our unique position, we focus on long-term results of 10-plus years.”

The Canada Pension Plan’s multi-generational funding and liabilities give rise to an exceptionally long investment horizon. To meet long-term investment objectives, CPPIB is building a portfolio and investing in assets designed to generate and maximize long-term returns. Long-term investment returns are a more appropriate measure of CPPIB’s performance than returns in any given quarter or single fiscal year.

Long-Term Sustainability

In the most recent triennial review released in December 2013, the Chief Actuary of Canada reaffirmed that, as at December 31, 2012, the CPP remains sustainable at the current contribution rate of 9.9% throughout the 75-year period of his report. The Chief Actuary’s projections are based on the assumption that the Fund will attain a prospective 4.0% real rate of return, which takes into account the impact of inflation. CPPIB’s 10-year annualized nominal rate of return of 8.0%, or 6.2% on a real rate of return basis, was comfortably above the Chief Actuary’s assumption over this same period. These figures are reported net of all CPPIB costs to be consistent with the Chief Actuary’s approach.

The Chief Actuary’s report also indicates that CPP contributions are expected to exceed annual benefits paid until the end of 2022, after which a portion of the investment income from CPPIB will be needed to help pay pensions.

Performance Against Benchmarks

CPPIB measures its performance against a market-based benchmark, the Reference Portfolio, representing a passive portfolio of public market investments that can reasonably be expected to generate the long-term returns needed to help sustain the CPP at the current contribution rate.

In fiscal 2015, the CPP Fund’s gross return of 18.7% outperformed the Reference Portfolio delivering $3.6 billion in gross dollar value-added (DVA) above the Reference Portfolio’s return, after external management fees and transaction costs. Net of all CPPIB costs, the investment portfolio exceeded the benchmark’s return by 1.3%, producing $2.8 billion in net DVA.

“Dollar value-added is an important measure as it shows the difference between active investments made relative to their benchmarks in dollar terms. We will maintain a greater focus on total Fund – absolute as well as relative – returns, by continuing to develop and apply our capabilities more widely to portfolio management,” said Mr. Wiseman. “Our attention to both measures helps maximize returns, CPPIB’s objective, in the best interests of current and future beneficiaries, since the source of pension benefits is the total Fund. To reduce volatility, DVA is particularly valuable when it is generated as loss reduction in negative market conditions. Both total returns and DVA can vary widely from year-to-year depending on market conditions. Accordingly, both measures must be looked at over longer periods of at least one market cycle, such as five years or more.”

Given our long-term view and risk-return accountability framework, we track cumulative value-added returns since the April 1, 2006, inception of the Reference Portfolio. Cumulative value-added over the past nine years totals $5.8 billion, after all costs.

Total Costs

CPPIB total costs for fiscal 2015 consisted of $803 million or 33.9 basis points of operating expenses, $1,254 million of external management fees and $273 million of transaction costs. CPPIB reports on these distinct cost categories as each is materially different in purpose, substance and variability. We report the external management fees and transaction costs we incur by asset class and report the investment income our programs generate net of these fees. We then report on total Fund performance net of CPPIB’s overall operating expenses.

Fiscal 2015 CPPIB operating expenses reflect increased incentive compensation due to strong total Fund and DVA performance over the past four years, and the continued expansion of CPPIB’s operations and further development of our capabilities to support 17 distinct investment programs. International operations accounted for approximately 30% of operating expenses, including the impact of a weaker Canadian dollar relative to countries we have operations in.

Fiscal 2015 external management fees and transaction costs reflect the continued growth in the volume and sophistication of our investing activities. With external management fees also reflecting performance-based fees, the year-over-year increase was in part driven by higher performance fees for exceptional financial performance. The increase in transaction costs in fiscal 2015 was due to a large private market transaction.

Portfolio Performance by Asset Class

Portfolio performance by asset class is included in the table below. A more detailed breakdown of performance by investment department is included in the CPPIB Annual Report for fiscal 2015, which is available at www.cppib.com.

Asset Mix

We continued to diversify the portfolio by return-risk characteristics of various assets and geographies during fiscal 2015. Canadian assets represented 24.1% of the portfolio, and totalled $63.8 billion. International assets represented 75.9% of the portfolio, and totalled $201.0 billion.

Investment Highlights

During fiscal 2015, CPPIB completed 40 transactions of over $200 million each, in 15 countries around the world. Highlights for the year include:

Private Investments

• Signed an agreement to invest approximately £1.6 billion to acquire a 33% stake in Associated British Ports (ABP) with Hermes Infrastructure, an existing U.K.-based partner. ABP is the U.K.'s leading ports group, owning and operating 21 ports with a diverse cargo base, long-term contracts with a broad mix of blue chip customers and experienced management.

• Expanded our Australian infrastructure portfolio with a A$525 million commitment to build and operate a new tunnelled motorway in Sydney, called NorthConnex. This transaction was completed with Transurban Group and Queensland Investment Corporation, our existing partners in the Westlink M7 toll road. CPPIB will own a 25% stake in the nine-kilometre motorway that will connect Sydney’s northern suburbs with the orbital road network and will be the longest road tunnel project in Australia.

• Completed our first investment in India's infrastructure sector with the country’s largest engineering and construction company. We committed US$332 million in the Larsen & Toubro Limited (L&T) subsidiary, L&T Infrastructure Development Projects Limited (L&T IDPL), which has a portfolio of 20 infrastructure assets, including India’s largest private toll road concession portfolio spanning over 2,000 kilometres.

• Completed a US$596 million secondary private equity investment in two JW Childs funds. As the lead investor, CPPIB invested US$477 million in a secondary transaction related to the JW Childs Equity Partners III fund, which provided an attractive liquidity solution to existing limited partners. We also committed US$119 million to a new fund, JW Childs Equity Partners IV. JW Childs focuses primarily on mid-market investments in the consumer products, specialty retail and healthcare services sectors across North America.

Public Market Investments

• Acquired 172,382,000 ordinary shares of Hong Kong Broadband Network Limited (HKBN) as the sole cornerstone investor in HKBN’s initial public offering. CPPIB invested HK$1,551 million for an approximate 17% ownership interest, becoming the largest shareholder. HKBN is Hong Kong’s second largest residential broadband service provider by number of subscriptions, reaching more than 2.1 million residential homes and 1,900 commercial buildings.

• Received an additional Qualified Foreign Institutional Investor (QFII) quota of US$600 million to invest in China A-shares that are traded on the Shanghai and Shenzhen Stock Exchanges. Since 2011, when CPPIB obtained its QFII licence, a total allocation of US$1.2 billion has been granted to CPPIB, thereby making it among the top 10 largest QFII holders.

• Invested US$250 million in the initial public offering of Markit Ltd., representing an approximate 6% ownership interest. Founded in 2003, Markit is a globally diversified provider of financial information services that enhance transparency, reduce risk and improve operational efficiency.

Real Estate Investments

• Entered into a new real estate sector with the 100% acquisition of a U.K. student accommodation portfolio and management platform operating under the Liberty Living brand, at an enterprise value of £1.1 billion. Liberty Living is one of the U.K.’s largest student accommodation providers with more than 40 high-quality residences located in 17 of the largest university towns and cities across the U.K.

• Committed RMB 1,250 million to jointly develop the Times Paradise Walk project, a major mixed-use development in Suzhou, the fifth most affluent city in China, with Longfor Properties Company Ltd. The mixed-use development comprises residential, office, retail and hotel space for a total gross floor area of 7.9 million square feet. It is designed to be a top-quality, one-stop commercial destination in Suzhou with completion scheduled in multiple phases between 2016 and 2019.

• Significantly expanded CPPIB’s real estate portfolio in Brazil during the year. We committed approximately R$1.3 billion to Brazilian retail, logistics and residential assets this year, bringing our total equity commitment to date to R$5.5 billion. This included a R$507 million commitment for a 30% ownership stake in a new joint venture with Global Logistic Properties comprising a high-quality portfolio of logistics properties located primarily in São Paulo and Rio de Janeiro.

• Invested approximately €236 million in Citycon Oyj to hold 15% of the shares and voting rights, expanding CPPIB’s retail platform in the Nordic region. Citycon is a leading owner and developer of grocery-anchored shopping centres in the region. The investment helped to support Citycon’s acquisition and development opportunities.

Investment highlights following the year end include:

• Entered into a joint venture partnership with GIC to acquire the D-Cube Retail Mall in Seoul, South Korea from Daesung Industries for a total consideration of US$263 million. Following the transaction, GIC and CPPIB will each own a 50% stake in the mall. Completed in 2011, D-Cube is an income-generating, high-quality retail mall in a prime location.

• Entered into an agreement to form a strategic joint venture with Unibail-Rodamco, the second largest retail REIT in the world and the largest in Europe, to grow CPPIB's German retail real estate platform. The joint venture will be formed through CPPIB's indirect acquisition of a 46.1% interest in Unibail-Rodamco's German retail platform, mfi management fur immobilien AG (mfi), for €394 million. In addition, CPPIB will invest a further €366 million in support of mfi's financing strategies.

• Signed an agreement to acquire an approximate 12% stake, by investing £1.1 billion alongside Hutchison Whampoa, in the telecommunications entity that will be created by merging O2 U.K. and Three U.K.

• Signed a definitive agreement to acquire Informatica Corporation for US$5.3 billion, or US$48.75 in cash per common share, alongside our partner, the Permira funds. Informatica is the world’s number one independent provider of enterprise data integration software. The transaction is expected to be completed in the second or third quarter of calendar 2015.

• Invested US$335 million in the senior secured notes of Global Cash Access, Inc. (GCA) through our Principal Credit Investments group. GCA is the leading provider of cash access solutions and related gaming and lottery products to the gaming sector.

Asset Dispositions

• Signed an agreement, together with BC European Capital IX (BCEC IX), a fund advised by BC Partners, management and other co-investors, to sell a 70% stake in Cequel Communications Holdings, LLC (together with its subsidiaries, Suddenlink) to Altice S.A. Upon closing of the proposed sale, it is expected that BCEC IX and CPPIB will each receive proceeds of approximately US$960 million and a vendor note of approximately US$200 million. CPPIB and BCEC IX will each retain a 12% stake in the company.

• Announced that AWAS, a leading Dublin-based aircraft lessor, signed an agreement to sell a portfolio of 90 aircraft to Macquarie Group Limited for a total consideration of US$4 billion. CPPIB owns a 25% stake in AWAS alongside Terra Firma, which owns the remaining 75% stake.

• Sold our 50% interest in 151 Yonge Street to GWL Realty Advisors. Proceeds from the sale to CPPIB were approximately $76 million. Located in downtown Toronto, 151 Yonge Street was acquired in 2005 as part of a larger Canadian office portfolio acquisition.

• Sold our 39.4% interest in a Denver office properties joint venture to Ivanhoé Cambridge. Proceeds from the sale to CPPIB were approximately US$132 million.

Corporate Highlights

• In May 2015, we continued to expand our global presence with the official opening of a CPPIB office in Luxembourg, representing our sixth international office. We have a significant and growing asset base in Europe today. Establishing an office in Luxembourg supports our global strategy of building out our internal capabilities to support our long-term investment goals. Through our Luxembourg office, we will conduct asset management activities such as investment monitoring, cash management, finance and operations, including transaction support, legal and regulatory compliance.‎ Looking ahead, we expect to complete our previously announced plans to open an office in Mumbai later in calendar 2015.

• Welcomed the appointment of Dr. Heather Munroe-Blum as the new Chair of CPPIB’s Board of Directors. Dr. Munroe-Blum succeeded Robert Astley, CPPIB’s Chair since 2008, upon the expiry of his term on October 26, 2014.

• Welcomed the appointment of Tahira Hassan to CPPIB’s Board of Directors in February 2015 for a three-year term. Ms. Hassan also serves as a non-executive Director on the Boards of Brambles Limited and Recall Holdings Limited and held various executive leadership roles with Nestlé for more than 26 years.

• Announced senior executive appointments:

• Mark Jenkins was promoted to Senior Managing Director & Global Head of Private Investments responsible for leading the direct private equity, infrastructure, principal credit investments, natural resources and portfolio value creation functions. Mr. Jenkins joined CPPIB in 2008 and most recently held the role of Managing Director, Head of Principal Investments.

• Pierre Lavallée was appointed to the new role of Senior Managing Director & Global Head of Investment Partnerships. Mr. Lavallée, who joined CPPIB in 2012, leads this new investment department to focus on broadening relationships with CPPIB’s external managers in private and public market funds, secondaries and co-investments, expanding direct private equity investments in Asia and further building thematic investing capabilities.

• Following the year end, Patrice Walch-Watson was appointed to Senior Managing Director & General Counsel and Corporate Secretary, and a member of the Senior Management Team, effective June 5, 2015. Ms. Walch-Watson joins CPPIB from Torys LLP where she was a Partner, with expertise in mergers and acquisitions, corporate finance, privatization and corporate governance.
  

  
  

You can download CPPIB's Annual Report for fiscal 2015 by clicking here. Take the time to read it, it's well written and provides in-depth information on their investments and a lot more. At the very least, read the President's message here.

Fiscal 2015 was an exceptional year for CPPIB. All public and private investments delivered strong gains. Most were double digit gains except for Canadian equities and bonds which each delivered a 9% gain. Also, the value of its investments got a $7.8-billion boost in fiscal 2015 from a decline in the Canadian dollar against certain currencies like the U.S. dollar and U.K. pound.

CPPIB's strong performance will silence its critics. The key passages from above:

• In fiscal 2015, the CPP Fund’s gross return of 18.7% outperformed the Reference Portfolio delivering $3.6 billion in gross dollar value-added (DVA) above the Reference Portfolio’s return, after external management fees and transaction costs. Net of all CPPIB costs, the investment portfolio exceeded the benchmark’s return by 1.3%, producing $2.8 billion in net DVA.
• Given our long-term view and risk-return accountability framework, we track cumulative value-added returns since the April 1, 2006, inception of the Reference Portfolio. Cumulative value-added over the past nine years totals $5.8 billion, after all costs. 
• CPPIB total costs for fiscal 2015 consisted of $803 million or 33.9 basis points of operating expenses, $1,254 million of external management fees and $273 million of transaction costs. CPPIB reports on these distinct cost categories as each is materially different in purpose, substance and variability. We report the external management fees and transaction costs we incur by asset class and report the investment income our programs generate net of these fees. We then report on total Fund performance net of CPPIB’s overall operating expenses.

That really sums it all up. Yes, it's expensive to run an operation like CPPIB but the cumulative value-added over the past nine years totals $5.8 billion, after all costs. And they have done a good job of keeping those costs down, investing directly where they can.

And then people wonder why I'm such a stickler for enhancing the CPP for all Canadians. Because bar none, this is the most cost effective way to bolster the retirement security of all Canadians. The results speak for themselves and the fact is CPPIB invests across public and private markets, which adds important long-term diversification benefits.

By the way, you have to pay people for performance and the senior managers at CPPIB get paid very well (click on image):

But keep in mind this is an almost $300 billion fund operating in Toronto, which is is why they need to be competitive with compensation. Still, I wouldn't call Mark Wiseman's compensation outrageous relative to some of his peers. I think he gets paid very well for what he does and the huge responsibilities he has.

Mark is a good guy and sharp as hell. I'm not in total agreement with him on the outlook for Canada and I've been hard on him concerning diversifying the workplace at CPPIB at all levels, including senior managers (their board needs diversity too). Case in point, here is a picture with all of CPPIB's senior managers from the Annual Report (click on image):

Finance Minister Joe Oliver says his government is ready to start consulting Canadians on allowing larger, "voluntary," contributions to the Canada Pension Plan.

"We are open to giving Canadians the option to voluntarily contribute more to the Canada Pension Plan to supplement their current retirement savings," he told the House of Commons on Tuesday.

Oliver said the move would build on the Harper government's record of creating more options for retirement savings, including the pooled pension plans and tax-free savings account alternatives championed by the Conservatives. A statement released by his office said that "by providing voluntary, flexible savings tools, Canada's retirement system is, in fact, now among the best in the world."

No more details were provided in his brief answer to a planted question from a Conservative caucus colleague. It's unclear how the voluntary contributions would work, or what limits would apply.

But Oliver reiterated his government's position on hiking basic premiums, something federal government talking points have called a "mandatory, job-killing, economy-destabilizing, pension-tax hike on employees and employers."

"What we will not do is reach into the pockets of Canadians with a mandatory payroll tax, like the Liberals and the NDP would do," Oliver said in question period.

"A one-size fits all pension tax hike is not what Canadians want, nor what they need," Oliver's release said.

Policy reversal?

This is the second time in two years the government has seemingly done an about-face on the CPP issue.

In 2010, then-finance minister Jim Flaherty announced consultations had begun to expand CPP, calling the program "the envy of the world."

He said the expansion should be "modest and phased in," and that provinces were on board.

Then, in 2013, he abruptly backtracked and started referring to the CPP as a "payroll tax" that the country couldn't afford until there was more economic growth.

Employees and employers are each required to contribute up to almost $2,480 annually on income up to $53,600.

This year, the CPP pays out a maximum benefit of $12,780.

Past proposals have suggested doubling both the contribution cap and the maximum payout. Although Flaherty had made it clear he wasn't in favour of going that high, he never publicly outlined what numbers he had in mind.

Oliver now intends to spend the summer months ahead of a coming election consulting with "experts and stakeholders," on what voluntary contributions to the CPP might look like.

Finance critic NDP MP Nathan Cullen questioned what he called the Conservatives'"death-bed conversion" to CPP enhancement.

"It's incredibly vague. It's a non-announcement today. This is at the very last minute. If they were serious about this, we would have seen something a lot sooner," he said.

Ontario Liberal MPP Mitzie Hunter, the associate minister of finance, dismissed the announcement, saying the federal government "has made it clear they have no real interest in enhancing CPP."

"It's disappointing that the federal government is only concerned with their short-term election prospects instead of providing a secure retirement for millions of Canadians."

Canada's most populous province recently passed a bill approving the creation of a provincial pension plan that would start in 2017. Ontario's plan, which would be phased in over a two-year period, would be for those who don't have a workplace plan.

The federal Conservative government is proposing a voluntary expansion of the Canada Pension Plan, adding a pre-election twist to the politically charged debate over how best to boost Canadian savings.

Finance Minister Joe Oliver made the announcement Tuesday in the House of Commons, promising that consultations will take place over the summer on the details.

The general premise is that Canadians who choose to pay higher CPP premiums would receive higher guaranteed payments in retirement.

The announcement marks a significant shift for the Conservatives, who have long resisted changes to the CPP on the grounds that higher premiums would represent job-killing payroll taxes.

It also amounts to a key campaign promise because this measure will not be in place before an expected Oct. 19 federal election.

“Our Conservative government believes all Canadians should have options when saving for their future. That is why we intend to consult on giving Canadians the voluntary option to contribute more to the Canada Pension Plan to supplement their retirement savings,” Mr. Oliver said.

Though the announcement represents a significant policy shift, the Finance Minister did not take questions from the media and few details were provided.

This expansion of the CPP on a voluntary, instead of compulsory, basis is an attempt by the Conservatives to offer voters another way to save for retirement without obliging them to do so.

The Tories have been at loggerheads with the opposition parties – and most provinces – over the issue for years.

Labour groups and the seniors advocacy group CARP have long argued that voluntary savings vehicles do not work and that a mandatory CPP expansion is needed to ensure that all Canadians are saving enough for retirement.

The Conservatives have sided with business groups, such as the Canadian Federation of Independent Business, that argue that increasing mandatory contributions to the CPP by employees and employers would be damaging to the economy.

The CFIB said Tuesday that it was “delighted” by Mr. Oliver’s proposal, provided that it would also be a voluntary decision as to whether or not employers make larger contributions for employees.

Susan Eng, the vice-president of CARP, also responded positively, although she stressed that mandatory increases are still likely to be needed.

Mr. Oliver said the voluntary plan would build on other government initiatives, including tax-free savings accounts and pooled registered pension plans.

He suggested that the Tories give Canadians more choice than the Liberals and the NDP.

However, Liberal finance critic Scott Brison noted it was his party that advocated both a mandatory and a voluntary expansion of the CPP in the 2011 election campaign.

NDP finance critic Nathan Cullen called the move a “deathbed conversion” by the Conservatives.

“You can tell when the government’s serious about something: They ram it through an omnibus bill. When they’re not serious about it, they launch a series of consultations over the summer on the eve of an election as if somehow they were going to be converted at the very last minute,” he said. “This is about polls. It’s about the Conservatives realizing they’re in trouble.”

At one point during the past several years of debate over CPP reform, the Conservatives spoke out against the idea they now propose.

In 2010, Jim Flaherty, then the finance minister, took the view that further voluntary savings vehicles were not enough.

The government later changed course. While Mr. Flaherty briefly advocated for expanded mandatory CPP contributions, Prime Minister Stephen Harper has long opposed the idea in his public comments.

The Ontario government has been among the most vocal advocates urging the federal government to support an expanded CPP. When Ottawa decided against the idea, Ontario proposed its own supplemental pension plan, which would begin in 2017 and would apply only to workers who do not have a company pension plan.

Ontario has suggested that if Ottawa changes its position and decides to support an expanded CPP, it would not go ahead with its own pension plan.

Ontario’s associate finance minister, Mitzie Hunter, described the federal proposal as “disappointing.”

“Two things are clear – people are not saving enough for retirement, and we don’t have a federal partner willing to tackle this problem,” she said in a statement.

A new survey suggests about a third of Canadians don’t have the money to take advantage of new rules under which Ottawa almost doubled the amount that can be contributed each year to tax-free savings accounts.

The poll done for CIBC found that roughly 34 per cent of respondents said they either didn’t have the money to take advantage of the new $10,000 limit or had other investment plans.

Breaking the figure down, 18 per cent of those surveyed said they would probably contribute less than the old limit of $5,500, while 12 per cent said they would not have enough savings this year to make a contribution. Four per cent said they would contribute to other saving plans.

The survey found just 10 per cent said they typically contribute the maximum and would now invest $10,000, while an additional 17 per cent said they would try to increase their contributions above $5,500.

Twenty per cent of those responding did not have a TFSA account and had no plans to open one.

The online survey was conducted between April 30 and May 4, less two weeks after the federal budget announcement.

I will give an interview to CPAC on this matter at 1:30 this afternoon where my main two comments will be that:

• The federal government should first consult the provinces rather than the public because the CPP can be amended only with the approval of at least 7 provinces covering at least 2/3 of the Canadian population.
• Because participation in the CPP is mandatory, no voluntary contributions can be made to it. Voluntary contributions could only be made to a new plan (i.e. other than CPP), which would still require provincial approval because pensions are under provincial jurisdiction control.