In 2008 central banks, led by the Federal Reserve, rode to the rescue of the global financial system. Seven years on and trillions of dollars later they no longer have the answers and may even represent a major risk for the global economy.

A report by the Group of Thirty, an international body led by former European Central Bank chief Jean-Claude Trichet, warned on Saturday that zero rates and money printing were not sufficient to revive economic growth and risked becoming semi-permanent measures.

"Central banks have described their actions as 'buying time' for governments to finally resolve the crisis... But time is wearing on, and (bond) purchases have had their price," the report said.

In the United States, the Federal Reserve ended its bond purchase program in 2014, and had been expected to raise interest rates from zero as early as June 2015.

But it may struggle to implement its first hike in almost 10 years by the end of the year. Market pricing in interest rate futures puts a hike in March 2016.

The Bank of England has also delayed, while the European Central Bank looks set to implement another round of quantitative easing, as does the Bank of Japan which has been stuck in some form of quantitative easing since 2001.

Reuters calculates that central banks in those four countries alone have spent around $7 trillion in bond purchases.

The flow of easy money has inflated asset prices like stocks and housing in many countries even as they failed to stimulate economic growth. With growth estimates trending lower and easy money increasing company leverage, the specter of a debt trap is now haunting advanced economies, the Group of Thirty said.

The Fed has pledged that when it does hike rates, it will be at a slow pace so as not to strangle the U.S. economic recovery, one of the longest, but weakest on record in the post-war period. Yet, forecasts by one regional Fed president shows he expects negative rates in 2016.

AN END TO "EXTEND AND PRETEND"

Most policymakers at the semi-annual IMF meetings this week have presented relatively upbeat forecasts for the world economy and say risks have been largely contained. The G30, however, warned that the 40 percent decline in commodity prices could presage weaker growth and "debt deflation".

Rates would then have to remain low as central banks would be forced to maintain or extend their bond programs to try and bolster growth and the price of financial assets would fall.

That is not just a developed-world problem. In China, credits to state-owned enterprises and increasingly by the shadow banking sector have been a driving force in an investment splurge in the world's second largest economy.

According to an IMF report issued this week, there is "excessive" lending of $3 trillion in emerging market economies, an average of 15 percent of gross domestic product, which runs the risk of unwinding should economic conditions worsen.

"Capital losses would affect many investors, including banks, and the process of extend and pretend for poor loans would have to come to a stop," the G30 report said.

Even in a more benign economic outlook, central banks will have a tough time exiting easy money policies and may face demands to hold rates low. The IMF has repeatedly urged the Fed not to hike rates yet.

None of the world's major central banks are remotely close to hitting their inflation targets and many of them are haunted by memories of high inflation. The European Central Bank was born with, and still has, a sole inflation mandate.

With the consequences of an exit from easy money so unpredictable, the G30 said the risk was of exiting too late for fear of sparking another crisis.

"Faced with uncertainty, the natural default position is the status quo," the G30 said.

Global policy makers used nearly all their tools to get the world economy out of a stall six years ago. What’s vexing them now is how to shift into higher gear.

The prospect of the world’s biggest economy being healthy enough for its central bank to raise interest rates for the first time in nearly a decade would usually be reason to cheer. So might efforts by the next-largest to move toward more balanced growth.

A sluggish and uneven global recovery is making these turning points -- the Federal Reserve’s plan to raise rates and a slowing of China’s once high-flying economy -- harder to digest for central bankers and finance chiefs who met over the weekend in Lima. Clouding the picture is lackluster investment from companies sitting on cash, still too reluctant to deploy the capital that typically drives recoveries.

"The world is not in crisis, but there’s a great sense of unease, and that sense of unease explains why globally, almost everywhere, private investment is much weaker than you would expect at this stage in the cycle," Singapore Deputy Prime Minister Tharman Shanmugaratnam said in the Peruvian capital at the International Monetary Fund’s annual meeting, which wrapped up Sunday.

Great Moderation

The last time the Fed was preparing to begin a tightening cycle, in 2004, the U.S. economy was poised to grow 3.8 percent on the year, while global output was on track to expand 5.2 percent, according to IMF data.

Policy makers can only dream of such bounty now. A slowdown in emerging markets driven by weak commodity prices forced the IMF last week to cut its outlook for global growth in 2015 to 3.1 percent, the weakest since 2009, from a July forecast of 3.3 percent. The Washington-based fund raised its projection for U.S. growth this year to 2.6 percent, from 2.5 percent in July.

"We carry with us a backpack called the Great Moderation," said Stefan Ingves, governor of Sweden’s central bank, referring to the period of steady growth and low inflation that began in the mid-1980s and ended during the financial crisis.

"Everything we’ve done since is trying to fix problems hoping that we get back to another Great Moderation. The hard part is that it’s very difficult to be sure things will normalize in that particular way," he said during a panel discussion in Lima.

Excessive Borrowing

The IMF also warned that over-borrowing by companies has left developing economies vulnerable to financial stress and capital outflows. In 2015, emerging markets will see their first year of negative capital flows since 1988, as investors pull $541 billion from countries such as China and Brazil, the Institute of International Finance said in a report last week.

Markets are reflecting the lack of a clear direction. The MSCI Emerging Markets Index of equities (EEM), after slumping for five straight months, is up 8.5 percent this month. Bloomberg’s USD Emerging Market Sovereign Bonds Index last week staged its biggest weekly gain since September 2013, after falling to a nine-month low last month.

"I wouldn’t paint a dark picture," IMF Managing Director Christine Lagarde told reporters in Lima. "I would simply insist on the policy mix that can be applied in order to move from an uneven and modest recovery, which has decelerated, to something that is definitely stronger."

IMF officials say many emerging markets are well prepared for a financial shock, having built up foreign-currency reserves and adopted flexible exchange rates. They say the added cushion could well prevent a replay of the crises that roiled Latin America during the early 1980s and Asia during the late 1990s.

‘Broken’ Models

But with China slowing and countries such as Brazil and Russia in recession, emerging markets are suffering from a "broken growth model," David Lubin, head of emerging markets economics at Citigroup Global Markets Ltd., said at an IIF conference in Lima.

"Historically, emerging-markets crises were located in the balance of payments," Lubin said. "This is not. This is a growth crisis."

Willem Buiter, chief economist for Citigroup, is predicting a global recession will start in 2016, led by China.

The IMF left its forecast for China’s growth at 6.8 percent this year and 6.3 percent in 2016. Still, the fund warned the “cross-border repercussions” of slowing Chinese growth “appear greater than previously envisaged.”

"I’m getting to the point where I don’t see concerns about China going away -- maybe ever," said David Fernandez, head of fixed-income research for the Asia-Pacific at Barclays Bank PLC.

To be sure, the Fed’s move to tighten monetary policy and China’s shift to more consumption-driven growth may turn out to be welcome developments, Brazilian Finance Minister Joaquim Levy said.

Turning Optimistic

"My impression of the discussions is that they started with a somewhat gloomy mood, but people have realized that the risks we’re facing are somewhat positive problems," because they point to "most economies moving away from the old problems and starting a new phase," he said.

Fed Vice Chairman Stanley Fischer said Sunday the U.S. economy may be strong enough to merit an interest-rate increase by year end, while cautioning that policy makers are monitoring slower domestic job growth and international developments. “We remain committed to communicating our intentions as clearly as possible -- but not more clearly than the facts warrant,” he said.

For some, the day of Fed liftoff can’t come soon enough.

"Our recommendation is just do it," said Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development. "Take the mystery out of the thing."

Federal Reserve officials now seem open to deploying negative interest rates to combat the next serious recession even though they rejected that option during the darkest days of the financial crisis in 2009 and 2010.

“Some of the experiences [in Europe] suggest maybe can we use negative interest rates and the costs aren’t as great as you anticipate,” said William Dudley, the president of the New York Fed, in an interview on CNBC on Friday.

The Fed under former chairman Ben Bernanke considered using negative rates during the financial crisis, but rejected the idea.

“We decided — even during the period where the economy was doing the poorest and we were pretty far from our objectives — not to move to negative interest rates because of some concern that the costs might outweigh the benefits,” said Dudley.

Bernanke told Bloomberg Radio last week he didn’t deploy negative rates because he was “afraid” zero interest rates would have adverse effects on money markets funds -- a concern they wouldn’t be able to recover management fees -- and the federal-funds market might not work. Staff work told him the benefits were not great.

But events in Europe over the past few years have changed his mind. In Europe, the European Central Bank, the Swiss National Bank and the central banks of Denmark and Sweden have deployed negative rates to some small degree.

“We see now in the past few years that it has been made to work in some European countries,” he said.

“So I would think that in a future episode that the Fed would consider it,” he said. He said it wouldn’t be a “panacea,” but it would be additional support.

In fact, Narayana Kocherlakota, the dovish president of the Minneapolis Fed, projected negative rates in his latest forecast of the path of interest rates released last month.

Kocherlakota said he was willing to push rates down to give a boost to the labor market, which he said has stagnated after a strong 2014.

Although negative rates have a “Dr. Strangelove” feel, pushing rates into negative territory works in many ways just like a regular decline in interest rates that we’re all used to, said Miles Kimball, an economics professor at the University of Michigan and an advocate of negative rates.

But to get a big impact of negative rates, a country would have to cut rates on paper currency, he pointed out, and this would take some getting used to.

For instance, $100 in the bank would be worth only $98 after a certain period.

Because of this controversial feature, the Fed is not likely to be the first country that tries negative rates in a major way, Kimball said.

But the benefits are tantalizing, especially given the low productivity growth path facing the U.S.

With negative rates, “aggregate demand is no longer scarce,” Kimball said.

Fortress Investment Group LLC and Bain Capital are leading the list of big-name money managers liquidating hedge funds this year as volatility roils global markets.

Hedge funds with more than $16 billion have announced shutdowns so far in 2015, according to data compiled by Bloomberg. Fortress said Tuesday it’s closing its $2.3 billion macro business run by Michael Novogratz after posting losses for almost two years. Bain said last week it’s shuttering its macro fund, which sustained more than three years of declines.

“There’s an inherent flaw in the hedge fund business model,” said Sam Won, founder of Global Risk Management Advisors, which advises hedge funds and investors. “A lot of investment themes for hedge funds are of a longer tenor than the investor is committed to the fund.”

Hedge fund managers, among the highest-paid investors on Wall street, have struggled to navigate markets rattled by the Swiss franc’s unexpected surge in January, the devaluation of the Chinese yuan in August, or this year’s declines in oil and gold prices. It hasn’t been all bad news for the industry: Funds averaged a 0.7 percent return in 2015 through September, according to Bloomberg data, compared with a loss of 6.6 percent for global stocks.

Fortress closed its macro business as trades including the Swiss franc and the Brazilian real went awry.

‘Added Stress’

“After asking myself the simple question, ‘Is the environment we are operating in conducive to achieving our best results?’ the decision became easier,” Novogratz wrote Tuesday in a letter to clients. “We have reached a point where the added stress of an underperforming fund has become unproductive.”

The large-scale closures started with Comac Capital, the London-based manager run by Colm O’Shea, who shut his $1.2 billion firm in January after losses on the Swiss franc. Two months later, a pair of funds backed by billionaire investor Julian Robertson, TigerShark Management and Tiger Consumer Management, told clients they were shuttering.

Meredith Whitney, who turned fame as a banking analyst into a stint running her own hedge fund, said in June that she had returned money to clients after less than two years and was done with the industry. Incapture, an investment and technology firm backed by former Barclays Plc Chief Executive Officer Bob Diamond, said in August it was closing its sole fund.

“We’re seeing persistent back-to-back negative performance by some of the biggest names,” said Peter Rup, chief investment officer at New York-based Artemis Wealth Advisors LLC, which invests $400 million of client money in hedge funds. Central bank stimulus has had a “perverse effect on the minds of managers, convincing them that they can generate profits just by being long,” he said.

China’s Growth

Some 417 hedge funds announced shutdowns in the first half, according to Hedge Fund Research Inc. While that number isn’t on track to surpass the 864 funds that closed in 2014, the market turbulence of the last two months caused by concerns about China’s slowing economic growth could lead to a pickup in the fourth quarter.

A record 1,471 funds liquidated amid the 2008 financial crisis.

Some of the biggest names that remain in business are having a hard time, reminiscent of the 2008 slump that saw the industry post record losses and clients pull more than $150 billion. Funds run by David Einhorn and Bill Ackman are among those in the red, while Michael Platt and Sean Fahey are managing less than a third of the assets that they oversaw at their peaks.

Dan McCrum of the Financial Times asks, Where are the pension fund heroes?:

Here is a request, or perhaps a challenge, for nominations: which pension schemes are any good at picking hedge funds?

The question arises in a week when Fortress became the latest brand name hedge fund sponsor to suffer the humiliation of inadequate performance. The US asset manager’s flagship macro fund will close, after losing large amounts of investors’ cash, and Michael Novogratz, the flamboyant money manager responsible, is considering his options.

He is far from the only star investor to have had a bad few months, with losses widespread since June and the industry on track for its worst performance since 2011 — the year of the European debt crisis. However, Mr Novogratz’s fall is a reminder of the way the cast of highflying hedge fund managers rotates. The top of the league tables always show someone making big profits, but the names change every year.

The reason is weight of numbers. With thousands of hedge funds competing, it is inevitable some will shine at any given moment. What is far harder, and rarely lauded, is selecting a group of hedge funds to manage money for several years.

Choosing hedge funds is difficult in part because of the rotation and randomness in investment returns. Statistical studies of past performance show it really is no guide, meaning every year the investor starts with a freshly shuffled pack of cards. Hence, perhaps, the lack of fund of hedge fund managers famous for their investment prowess. At the same time, the life of a hedge fund is fleeting: those that make it past the first year last only another four, on average. The manager of retirement savings for spans measured in decades must always be vigilant for signs of decline.

So when it comes to pension scheme investment in hedge funds, what sort of performance should be celebrated?

As a starting point consider the average hedge fund as judged by HFR, keeper of one of the more popular databases of fund performance. It is not possible to invest in the “average” hedge fund but, if it was, $100 placed in the industry’s care at the start of 2010 would now be worth $123, after fees. Some might think this a relatively low hurdle to beat, given $100 invested in Vanguard’s Total Bond index fund at the same time would now be worth $124, after rather fewer fees.

Instead, let us try to consider the best performance which might be hoped for from a collection of hedge funds. Keepers of commercial databases tend not to let journalists rummage unsupervised in their annals of mediocrity so, as a proxy, imagine choosing hedge fund strategies with perfect hindsight.

HFR breaks the industry into 31 separate strategies, reflecting the more popular types of fund. Say the best hedge fund investor could forecast the three strategies that will generate the greatest investment gains each year, and splits all her money between them every New Year's Day. In 2012 our imaginary genius went for activists, value-minded stock pickers and specialists in asset backed securities. A year later she would stick with the value guys, but swap in some funds focused on heathcare and technology stock pickers, as well as those that specialise in spotting pricing anomalies in energy and property-related securities.

Pick the three best hedge fund strategies every year and $100 at the start of 2010 would be worth almost twice as much — $193 — after fees.

Here’s the rub, however. Had our forecasting genius put $100 into the Vanguard fund that tracks the S&P 500 stock market index, it would also be worth $193.

The conclusion appears to be that the very best that might be hoped for from investing in smart, and expensive, hedge funds is simply to have kept pace with dumb old stocks.

One final, and perhaps more realistic benchmark, against which hedge funds and their investors might be measured, then. If a pension fund allocated 40 per cent of its money to Vanguard’s bond fund, 60 per cent to the US stock fund, and reset the balance back to those levels every year, its $100 would have grown to $164.

A hedge fund portfolio that has grown faster than that would be worth lauding indeed. Feel free to make nominations in the comments, or to the email address below.

For those pension funds left pondering the failures of their hedge fund programmes to keep up, perhaps a better question is worth asking: does it even make sense for them to try?

I answered Dan McCrum's question in my last comment covering another shakeout in hedge funds. Let me briefly go over some points below:

• There is no question in my mind that Ontario Teachers' Pension Plan is one of the best hedge fund investors in the world. A big reason for this is the guy who was recruited to start this program back in 2001 and is now the leader of that organization, Ron Mock, had unbelievable experience managing a huge hedge fund that blew up when one of his traders went rogue on him. That and other harsh lessons taught Ron Mock all about the perils of investing in hedge funds.
• The reins of hedge fund program have been handed over to Wayne Kozun who is responsible for Teachers' Fixed Income and Global Hedge Fund portfolio (another great guy who knows his stuff). Wayne oversees a great team which includes a fellow called Daniel MacDonald, one of the best hedge fund portfolio managers in the pension fund industry (I know, I've seen him in action and he asks all the right questions). Together, the global hedge fund team pick and monitor a number of hedge funds and they make sure they're all delivering alpha, not leveraged beta (As Ron Mock always reminds me: "Beta is cheap; true alpha is worth paying for").
• But even OTPP has gotten clobbered on hedge funds, especially in 2008 when it crashed and burned. So, if one of the most sophisticated and best funds of hedge funds can experience a serious setback, what makes you think that other much less sophisticated public pensions can navigate this space without being eaten alive by hedge fund fees?
• The answer is quite simple. Most of these unsophisticated investors jumping on the hedge fund bandwagon are listening to their useless investment consultants which typically shove them in the hottest hedge funds they should be avoiding. This is why most investors consistently lose money on hedge funds, especially after you factor in the fees and illiquid nature of these investments.
•  So why do so many U.S. public pension funds keep piling into hedge funds instead of following CalPERS and nuking their program? Because many of them are chronically underfunded, poorly staffed, and they keep chasing the pension rate-of-return fantasy which forces them to take increasingly more risks in hedge funds and more illiquid alternative investments like private equity and real estate. 
• The central problem of course is governance. Unlike Canadian public pension funds, U.S. public pension funds are poorly governed, have too much government interference, are unable to pay their staff properly so they can manage public, private and hedge fund assets internally to significantly lower costs, and are pretty much at the mercy of their investment consultants which have hijacked the entire investment process. What this means is that U.S. public pension funds pay out insane fees to hedge funds, private equity funds, real estate funds and investment consultants. It's all about milking that public pension cow dry and making overpaid hedge fund and private equity managers and their Wall Street buddies much richer. 
• But in a deflationary and low-return world, institutional investors from all over the world are starting to scrutinize fees and other hidden costs attached to investing in hedge funds and private equity funds. In California, both CalPERS and CalSTRS are being scrutinized by the state treasurer for the fees they pay out to private equity funds and I expect other states to follow suit with their own investigations (look at the mess in Illinois which is a disaster).
• As far as hedge fund benchmarks, I don't think it's fair to compare them to the S&P 500 or even a balanced fund because hedge funds are suppose to deliver absolute returns in all markets or at least deliver much higher risk-adjusted returns than a balanced 60/40 fund. The problem is most hedge funds stink as do most hedge fund databases which are full of biases.  
• This makes the job of picking the right hedge fund nearly impossible (akin to trying to pick the right mutual fund) but just like in private equity, there is some performance persistence among top hedge funds which is why they garner the bulk of the industry's assets. 
• But in this environment, where even brand name funds are taking a beating, I would beware of large hedge funds and start focusing my attention on some of the smaller ones that are far from perfect but tend to have better alignment of interests. The problem with this strategy is how do you pick the smaller hedge funds and is it worth devoting resources to managers and strategies that are not highly scalable?
• Small hedge funds deal with other problems including insane regulations which are destroying their chances of getting up and running unless they have at least $250 million or more of asset under management. I was talking to a manager who wants to start a macro fund, has great experience, and he told me the regulatory environment in Canada is just insane. He also told me that anyone who wants to manage more than a billion dollars off the start in this environment is asking for trouble. I agreed and pointed out that even Scott Bessent, Soros's protege, and Chris Rokos, the former star trader at Brevan Howard, are managing the growth of their new macro funds very carefully focusing on performance first and foremost.

Prior to joining Northwater, Mr. Petroff held the position of Executive Vice President of Investments and Chief Investment Officer at the Ontario Teachers' Pension Plan ("OTPP") since 2009, where he was responsible for all aspects of the firm's investment activities as well as the pension fund's asset-mix and risk allocations. Throughout his 22 year career with OTPP, Mr. Petroff held progressively more senior-level positions which have given him broad exposure and management experience in a wide range of asset classes and investment products. In 2014, Mr. Petroff was recognized as Chief Investment Officer of the Year and he received the prestigious Lifetime Achievement Award at the Industry's Innovation Awards ceremony.

Before joining OTPP, Mr. Petroff worked at the Bank of Nova Scotia , Guaranty Trust Company and Royal Trustco Limited. Neil has served on several corporate and charitable boards including Cadillac Fairview Corporation Limited, Maple Financial Group Inc. and the Integra Foundation.

"Neil Petroff is truly a world-class investment professional" said David Patterson , Chair and Chief Executive Officer of Northwater. "His substantial experience and expertise will be invaluable to Northwater and its clients as we continue to offer industry-leading alternative investment solutions to institutional investors around the world."

About Northwater Capital Management Inc.

Northwater Capital Management Inc. has, over the years, been known for being first into new and innovative investment strategies. It was the first Canadian firm in synthetic indexing, fund of funds in hedge funds, intellectual property funds, risk parity portfolios and bespoke liquid alternative strategies. Currently, it manages the Northwater Intellectual Property Funds and the Fluid Strategies portfolios. Founded in 1989, Northwater is a private investment company with offices in Toronto and Chicago.

On Theranos Inc.’s website, company founder Elizabeth Holmes holds up a tiny vial to show how the startup’s “breakthrough advancements have made it possible to quickly process the full range of laboratory tests from a few drops of blood.”

The company offers more than 240 tests, ranging from cholesterol to cancer. It claims its technology can work with just a finger prick. Investors have poured more than $400 million into Theranos, valuing it at $9 billion and her majority stake at more than half that. The 31-year-old Ms. Holmes’s bold talk and black turtlenecks draw comparisons to Apple Inc. cofounder Steve Jobs.

But Theranos has struggled behind the scenes to turn the excitement over its technology into reality. At the end of 2014, the lab instrument developed as the linchpin of its strategy handled just a small fraction of the tests then sold to consumers, according to four former employees.

One former senior employee says Theranos was routinely using the device, named Edison after the prolific inventor, for only 15 tests in December 2014. Some employees were leery about the machine’s accuracy, according to the former employees and emails reviewed by The Wall Street Journal.

In a complaint to regulators, one Theranos employee accused the company of failing to report test results that raised questions about the precision of the Edison system. Such a failure could be a violation of federal rules for laboratories, the former employee said.

Theranos also hasn’t disclosed publicly that it does the vast majority of its tests with traditional machines bought from companies like Siemens AG .

The Palo Alto, Calif., company says it abides by all applicable federal lab regulations and hasn’t exaggerated its achievements. It disputes that its device could do just 15 tests, declining to say how many tests it now handles or to respond to some questions about its lab procedures, citing “trade secrets.”

But Theranos’s outside lawyer, David Boies, acknowledges that the company isn’t yet using the device for all the tests Theranos offers. The transition to doing every test with the device is “a journey,” he says.

Asked about the claim on the company’s website, Mr. Boies replied that using the device for the “full range” of blood tests is a goal Theranos will eventually achieve.

Theranos points out that it has publicly disclosed doing “certain esoteric and less commonly ordered tests” with traditional machines on blood drawn with smaller needles from veins.

During the Journal’s reporting, Theranos deleted a sentence on its website that said: “Many of our tests require only a few drops of blood.” It also dropped a reference to collecting “usually only three tiny micro-vials” per sample, “instead of the usual six or more large ones.” Heather King, the company’s general counsel, says the changes were made for “marketing accuracy.”

Ms. King and Mr. Boies say Theranos’s lab work is accurate. Theranos has performed tests on millions of patients referred by thousands of doctors and has received highly positive feedback, they say.

Ms. Holmes, Theranos’s chairman and chief executive, declined interview requests from the Journal for more than five months. Last week, the company said she would be available to comment, but her schedule didn’t allow it before publication of this article.

User-friendliness

Some doctors appreciate the company’s user-friendliness. Results sometimes arrive within 15 minutes, says Scott Wood, a primary-care doctor in Menlo Park, Calif. “That’s exciting and could be very useful in emergency situations,” he says. When patients ask about trying Theranos, he replies: “Sure, go ahead.”

Other doctors said they stopped steering patients to Theranos because of results they didn’t trust. “I don’t want my patients going there until more information and a better protocol are in place,” says Gary Betz, an internist in Phoenix.

Ms. Holmes launched Theranos in 2003 when she was 19 and dropped out of Stanford University in her sophomore year.

Theranos is built around Ms. Holmes’s self-professed phobia of needles. She has said in numerous public appearances that drawing a tiny amount of blood at a time from each patient’s finger and avoiding the large syringes used by traditional labs will make patients less reluctant to get blood tests. That will lead to earlier diagnoses and save lives, according to Ms. Holmes.

Her first idea was a small arm patch to screen blood for infectious diseases and deliver antibiotics, according to Phyllis Gardner, a Stanford medical-school professor with whom Ms. Holmes consulted at the time. The patch never made it to market.

“She was a young kid with only rudimentary engineering training and no medical training,” says Dr. Gardner, whose husband was a member of a Theranos advisory board and still owns shares in the company.

In 2005, Ms. Holmes hired Ian Gibbons, a British biochemist who had researched systems to handle and process tiny quantities of fluids. His collaboration with other Theranos scientists produced 23 patents, according to records filed with the U.S. Patent and Trademark Office. Ms. Holmes is listed as a co-inventor on 19 of the patents.

The patents show how Ms. Holmes’s original idea morphed into the company’s business model. But progress was slow. Dr. Gibbons “told me nothing was working,” says his widow, Rochelle.

In May 2013, Dr. Gibbons committed suicide. Theranos’s Ms. King says the scientist “was frequently absent from work in the last years of his life, due to health and other problems.” Theranos disputes the claim that its technology was failing.

After Dr. Gibbons’s widow spoke to a Journal reporter, a lawyer representing Theranos sent her a letter threatening to sue her if she continued to make “false statements” about Ms. Holmes and disclose confidential information. Ms. Gibbons owns Theranos shares that she inherited from her husband.

Two giant rivals

Theranos began offering tests to the public in late 2013. It opened 42 blood-drawing “wellness centers” in the Phoenix area, two in California and one in Pennsylvania. Most are in Walgreens Boots Alliance Inc. drugstores.

Ms. Holmes successfully lobbied for an Arizona law that allows people to get tests without a doctor’s order. Theranos’s promise of fast results and prices that are “a fraction” of other labs pits it against Quest Diagnostics Inc. and Laboratory Corp. of America Holdings, which dominate the $75 billion-a-year blood-testing industry in the U.S.

While the biggest venture-capital firms specializing in health care aren’t listed as Theranos investors, Oracle Corp. cofounder Larry Ellison and venture-capital firm Draper Fisher Jurvetson, have bought stakes in Theranos, according to data from Dow Jones VentureSource.

Theranos has raised several rounds of financing, most recently in June 2014. Like most closely held companies, Theranos has divulged little about its operations or financial results.

Clinical labs usually buy their testing instruments from diagnostic equipment makers. Before those makers can sell to labs, they must undergo vetting by the Food and Drug Administration.

Because Theranos doesn’t sell its Edison machines to other labs, it didn’t need the FDA’s approval to start selling its tests. Still, the company has sought clearance for more than 120 of its tests in an effort to be rigorous and transparent.

In July, Theranos announced the first FDA clearance of one of those tests, which detects herpes. The FDA and Theranos decline to comment on the status of the other submissions.

Whether labs buy their testing instruments or develop them internally, all are required to prove to the federal Centers for Medicare and Medicaid Services that they can produce accurate results. The process is known as proficiency testing and is administered by accredited organizations that send samples to labs several times a year.

Labs must test those samples and report back the results, which aren’t disclosed to the public. If a lab’s results are close to the average of those in a peer group, the lab receives a passing grade.

In early 2014, Theranos split some of the proficiency-testing samples it got into two pieces, according to internal emails reviewed by the Journal. One was tested with Edison machines and the other with instruments from other companies.

The two types of equipment gave different results when testing for vitamin D, two thyroid hormones and prostate cancer. The gap suggested to some employees that the Edison results were off, according to the internal emails and people familiar with the findings.

Senior lab employees showed both sets of results to Sunny Balwani, Theranos’s president and chief operating officer. In an email, one employee said he had read “through the regulations more finely” and asked which results should be reported back to the test administrators and government.

Mr. Balwani replied the next day, copying in Ms. Holmes. “I am extremely irritated and frustrated by folks with no legal background taking legal positions and interpretations on these matters,” he wrote. “This must stop.”

He added that the “samples should have never run on Edisons to begin with.”

Former employees say Mr. Balwani ordered lab personnel to stop using Edison machines on any of the proficiency-testing samples and report only the results from instruments bought from other companies.

The former employees say they did what they were told but were concerned that the instructions violated federal rules, which state that a lab must handle “proficiency testing samples…in the same manner as it tests patient specimens” and by “using the laboratory’s routine methods.”

In its everyday business at the time, Theranos routinely used Edison machines to test patients’ blood samples for vitamin D, the two thyroid hormones and prostate cancer, the former employees say.

In March 2014, a Theranos employee using the alias Colin Ramirez alleged to New York state’s public-health lab that the company might have manipulated the proficiency-testing process.

Stephanie Shulman, director of the public-health lab’s clinical-lab evaluation program, responded that the practices described by the anonymous employee would be a “violation of the state and federal requirements,” according to a copy of her email.

What the employee described sounded like “a form of PT cheating,” Ms. Shulman added, using an abbreviation for proficiency testing. She referred the Theranos employee to the public-health lab’s investigations unit.

The New York State Department of Health confirms that it got a formal complaint in April 2014 “in regard to testing practices at Theranos” and forwarded it to the Centers for Medicare and Medicaid Services.

Asked about the complaint, Theranos confirms that the Edison system produced results for several tests last year that differed from results obtained from traditional equipment.

Leftover samples

But that comparison was based on “left-over proficiency testing samples” used “to conduct additional experiments and verify best practices,” says Ms. King, Theranos’s general counsel. The company has never failed proficiency testing, she adds.

She says Mr. Balwani’s instructions were consistent with the company’s “alternative assessment procedures,” which it adopted because it believes its unique technology has no peer group and can be thrown off by the preservatives used in proficiency-testing samples.

Theranos has been “upfront and transparent with regulators” about the procedures, Ms. King adds.

As of the end of 2014, Theranos did less than 10% of its tests on Edison machines, including tests for prostate cancer and pregnancy, one former senior employee says.

In addition to the 15 tests run on the Edison system, Theranos did about 60 more on traditional machines using a special dilution method, the former senior employee says. The company often collected such a small amount of blood that it had to increase those samples’ volume to specifications required by those traditional machines, former employees say.

A third set of about 130 tests was run on traditional machines using larger samples drawn from patients’ arms with a needle.

For tests done with dilution, the process caused the concentration of substances in the blood being measured to fall below the machines’ approved range, three former employees say. Lab experts say the practice could increase the chance of erroneous results.

Most labs dilute samples only in narrow circumstances, such as when trying to find out by how much a patient has overdosed on a drug, say lab experts.

“Anytime you dilute a sample, you’re adulterating the sample and changing it in some fashion, and that introduces more potential for error,” says Timothy R. Hamill, vice chairman of the University of California, San Francisco’s department of laboratory medicine. Using dilution frequently is “poor laboratory practice.”

Theranos says dilution is common in labs but declines to say if it dilutes samples. Theranos’s “methods for preparing samples for analysis are trade secrets and cannot be revealed,” Ms. King says.

Those methods “have been disclosed” to regulators and don’t “adversely impact the quality of its tests or the accuracy of its test results,” she adds.

Former employees say diluting blood drawn from fingers contributed to accuracy problems early last year with a test to measure potassium. Lab experts say finger-pricked blood samples can be less pure than those drawn from a vein because finger-pricked blood often mixes with fluids from tissue and cells that can interfere with tests.

Some of the potassium results at Theranos were so high that patients would have to be dead for the results to be correct, according to one former employee.

Ms. King denies any problems with the potassium test and says Theranos has no indication that “inaccurate results were returned to patients.”

Theranos challenged interpretations of its test results by health-care providers and patients whose medical records were reviewed by the Journal.

After those people spoke to the Journal, Theranos visited some of them and asked them to sign prepared statements that said the Journal mischaracterized their comments. Two did and one refused.

Carmen Washington, a nurse who worked at a clinic owned by Walgreens in Phoenix, says she began to question Theranos’s accuracy after seeing abnormal results in potassium and thyroid tests.

She says she raised her concerns with the drugstore operator and Theranos’s lab director, asking for data to show that the company’s finger-prick testing procedures produced results as accurate as blood drawn from a vein.

“They were never able to produce them,” she says. Ms. King says the company did show detailed testing-accuracy data to the nurse.

A Walgreens spokesman says the nurse kept writing lab orders for Theranos tests until she stopped working at the clinic in February. Walgreens says its partnership with Theranos has gone smoothly overall.

About a dozen doctors and nurses complained about test results by phone or email to the company from late 2013 to late 2014, a person familiar with the matter says. The Arizona attorney general’s office, state health department and Better Business Bureau say they have received no complaints about Theranos.

A second opinion

Dr. Betz, the Phoenix doctor, says one of his female patients went to Theranos in August 2014 for a routine potassium test to monitor potential side effects from her blood-pressure medication. He says Theranos reported that her potassium level was close to the threshold considered critical.

Another lab reran the test three days later. The results came back normal.

Ms. King says Dr. Betz’s nurses kept sending patients to Theranos until early this year.

Real-estate agent Maureen Glunz went to Theranos a few days before last Thanksgiving after complaining of ringing in her ear. Her blood was drawn from a vein in her arm. The results showed abnormally elevated levels of glucose, calcium, total protein and three liver enzymes.

Her primary-care doctor, Nicole Sundene, who is a naturopath, worried that Ms. Glunz might be at risk of a stroke and asked her to go to an emergency room. The hospital’s tests two days later showed nothing abnormal.

Dr. Hamill of UC San Francisco says some of Ms. Glunz’s results should “have fairly steady values...over relatively long time periods.”

Ms. King says “some degree of variability in lab results across different laboratories is commonplace,” adding that Ms. Glunz’s medication and diet could have caused “fluctuations” in her results. None of the results were “close to the critical range,” Ms. King adds.

It is misleading to draw conclusions from “a handful of patient anecdotes,” she says.

Ms. Glunz says she likes Theranos’s low prices and would go there again if she could be sure its tests are accurate. “But trial and error on people, that’s not OK,” she says.

Under pressure from regulators, laboratory firm Theranos Inc. has stopped collecting tiny vials of blood drawn from finger pricks for all but one of its tests, according to a person familiar with the matter, backing away from a method the company has touted as it rose to become one of Silicon Valley’s hottest startups.

The move is a setback to the Palo Alto, Calif., company’s ambition to revolutionize the blood-testing industry. As a result of the halt, Theranos is operating more like a traditional lab that draws blood with needles from patients’ arms. Theranos is valued at $9 billion, or about as much as each of the industry’s two largest companies in the U.S.

Food and Drug Administration inspectors recently showed up unannounced at Theranos, the person familiar with the matter said. The inspection was triggered by concerns the agency had about data Theranos had voluntarily submitted to the FDA in an effort to win approval for its proprietary testing methods, this person said.

During the inspection, FDA officials indicated to Theranos that the agency considers the “nanotainers” made and used by the company to collect finger-pricked blood an unapproved medical device, the person familiar with the matter said.

Theranos founder Elizabeth Holmes said in an interview on the CNBC show “Mad Money” that the company is “not even using our nanotainers except for FDA-cleared assays.”

So far, the agency has approved just one of the more than 100 proprietary tests submitted by Theranos. That test detects herpes and was cleared by the FDA in July. Theranos still is allowed to use a finger prick and the nanotainers for that one test, the person familiar with the matter said.

Since the inspection by FDA officials, Theranos has also been audited by the Centers for Medicare and Medicaid Services, the main regulatory overseer of clinical labs, according to people familiar with the matter. A CMS spokeswoman declined to comment.

To resume broader use of the tiny vials, Theranos must have them vetted and officially approved by the FDA, the person familiar with the situation said.

The company’s general counsel, Heather King, didn’t immediately respond to questions about the inspections, but said that “Theranos has never been asked to stop using its finger stick technology.” On Wednesday, Ms. King had said that “Theranos remains deeply engaged with regulators, including FDA.”

A page-one article in The Wall Street Journal on Thursday detailed how the company has struggled to turn the excitement over its technology into reality. At the end of 2014, the proprietary lab instrument Theranos developed as the linchpin of its strategy handled just a small fraction of the tests then sold to consumers, according to four former employees.

Theranos has since nearly stopped using the lab instrument, named Edison after the prolific inventor, according to the person familiar with the situation. By the time of the FDA inspection, the company was doing blood tests almost exclusively on traditional lab instruments purchased from diagnostic-equipment makers such as Siemens AG , the person says.

In Thursday’s article, the Journal reported that Theranos was using the Edison for just 15 tests as of the end of 2014, citing one former senior employee. The company disputed that its device did only 15 tests but declined to say how many it handled, citing “trade secrets.”

In the “Mad Money” interview, Ms. Holmes didn’t quantify the number of tests run on its proprietary lab instrument when asked. She is the company’s chairman and chief executive, and her ownership stake in Theranos is valued at more than $4.5 billion. Investors have pumped more than $400 million into Theranos.

Ms. Holmes has been widely hailed for her vision to create new technology that offers consumers more than 240 blood tests, ranging from cholesterol to cancer. Ms. Holmes, 31 years old, has publicly said she built Theranos around her self-professed phobia of needles.

The Journal reported Thursday that Theranos recently changed some of the wording used on its website. For instance, the company deleted a sentence that said: “Many of our tests require only a few drops of blood.” Theranos also dropped a reference to collecting “usually only three tiny micro-vials” per sample, “instead of the usual six or more large ones.”

Ms. King, Theranos’s general counsel, said before the article was published that the wording changes were made for “marketing accuracy.”

Those wording changes are consistent with the outcome of the FDA’s surprise inspection. The company’s outside lawyer, David Boies, said in an email Sunday that the changes “did not result from any recommendation, request or complaint about the website from any regulator.”

Most of Theranos’s blood-drawing sites, which it calls “wellness centers,” are located inside Walgreens Boots Alliance Inc. drugstores. Forty of the blood-drawing sites are at Walgreens stores in the Phoenix area, and two more are in Walgreens stores in northern California.

James Cohn, a spokesman for Walgreens, referred questions from the Journal about the FDA inspection and any changes in Theranos’s blood-drawing methods to Theranos. A blood-drawing technician at a Walgreens in the Phoenix area, reached by phone late Thursday, said Theranos had “temporarily suspended” finger-prick draws and was only drawing blood from patients’ arms with needles at that store.

During the FDA’s inspection, federal officials told Theranos that it will have to resubmit data for many of the proprietary blood tests it has previously sought clearance for from the FDA, according to the person familiar with the matter.

The FDA concluded that data Theranos submitted before the inspection and additional data gathered during the examination were insufficient to prove the accuracy of many of its tests, this person said.

Theranos has previously said it has submitted data for tests using its proprietary technology to the FDA in an effort to be rigorous and transparent.

In a news release, Theranos called the Journal article Thursday “factually and scientifically erroneous and grounded in baseless assertions.” Theranos said the Journal had “declined an opportunity” to get a demonstration of the company’s proprietary technology.

A Journal spokeswoman said The Wall Street Journal “fully stands by Thursday’s article about Theranos, which was richly sourced and thoroughly researched.” She added that the newspaper had sought permission to visit Theranos’s offices to view the technology since late April.

"Today’s Wall Street Journal story about Theranos is factually and scientifically erroneous and grounded in baseless assertions by inexperienced and disgruntled former employees and industry incumbents. Theranos presented the facts to this reporter to prove the accuracy and reliability of its tests and to directly refute these false allegations, including through over 1,000 pages of statements and documents," according to the statement.

"Disappointingly, the Journal chose to publish this article without even mentioning the facts Theranos shared that disproved the many falsehoods in the article."

Elizabeth Holmes, the founder of Theranos, has also been tweeting about the Journal's story. She responded to one software developer's tweet, saying that Theranos offered to show the Journal its technology and they "declined."

Theranos, according to the Journal, went to great lengths to make sure the Journal's report wouldn't be published. The Journal, which spoke to former Theranos employees, their families, a number of experts, and the company's lawyers for its story, said Theranos fought the paper throughout the entire investigation.

Theranos even visited some of the people who spoke to the Journal for the Theranos story, and requested they "sign prepared statements that said the Journal mischaracterized their comments."

The Journal provided Business Insider with this response to Theranos' statement: "The Wall Street Journal fully stands by John Carreyrou’s article about Theranos, which was richly sourced and thoroughly researched."

Theranos has previously drawn skepticism from the scientific community in part because Theranos is cagey about how its tests actually work.

The private and public worlds of technology collided this week with a set of stories about two very different companies: one a large business in its fourth decade, seeking to adjust to a new world; the other a much touted Silicon Valley start-up whose ambitious scientific claims were questioned in a devastating newspaper article. The former, Dell, and the latter, Theranos, illustrate the benefits and perils of life as a private company.

Michael Dell had experienced many years as the head of a publicly traded company, which included some close encounters of the worst kind and a bruising battle with some dissident shareholders, before delisting in a leveraged buyout in 2013.

Since then, relieved from the merciless roasting of the quarterly earnings call, he has had the freedom to undertake a long-term restructuring of his business. Mr Dell emerged from the shadows this week to announce his intention to purchase EMC, the large storage provider, in what would be the biggest technology takeover in history.
If Mr Dell illustrated the benefits of privacy, Elizabeth Holmes, the chief executive and founder of Theranos, has just learnt that even for the head of a high-profile, secretive Silicon Valley company valued at $9bn, a light will eventually illuminate dark places.

Ms Holmes formed Theranos in 2003 to provide health tests from a few drops of blood rather than what gushes out of several tubes. Ms Holmes ingeniously convinced some very accomplished people (including Oracle’s Larry Ellison) to furnish her company with about $400m and has persuaded two former US secretaries of state, a former US defence secretary and the former chairman of the Senate Armed Services Committee to join her board of directors.

That feat of persuasion may have been even more impressive than it seemed. The Wall Street Journal this week reported claims that the company’s proprietary technology — whose co-inventor committed suicide two years ago after telling his wife that it was not effective — is used only in a small fraction of the company’s tests, with others performed using standard laboratory equipment in a way that might produce inaccurate results. Former employees of Theranos told the newspaper they had been instructed to deal with regulatory checks on its test results in a way that might amount to cheating.

Theranos contests these suggestions of scientific trickery and legerdemain. However, if they turn out to be true, the company could be mortally wounded — a development that might make technology investors sit up straight and be less credulous as they scrutinise investments.

Life in the shadows of the private market has many benefits for emerging companies. It allows them to experiment, work out kinks in a product, lure talented people with attractively priced stock options, shield themselves from the scrutiny of predatory competitors and stutter in private until they can speak fluently in public. It is also a refuge to which people such as Mr Dell can retreat once their companies no longer offer public investors either the growth or predictability for which they yearn.

But there is also a false sense of security provided by the private markets at a time when interest rates are negligible and many investors, particularly those who are either new to technology or have short memories, are all too willing to back start-ups whose premises house several baristas and where a dozen blends of tea (not to mention the sea-salt flavoured chocolate bars and bio-dynamically raised Anjou pears) are de rigueur. It is easier to conceal weaknesses, present an aura of invincibility and confound investors as a private company that can escape by making fewer disclosures than as a publicly traded one.

One glance at the list of so-called unicorns — those private technology companies valued at more than $1bn — illustrates this point. A handful of these businesses will become the great, enduring companies of tomorrow. But a good number seem the flimsiest of edifices. Forget the fact that some of these valuations are illusory because the most recent investors have structured their investments as debt in all but name, meaning that they will stand to profit even if the company is worth far less.

The more salient point is that for the past three or four years private investors have just been more forgiving than their public market counterparts, who, had they been presented with the most recent financial reports of a good number of these companies, would have decimated the stocks. In the past few quarters, the founders of several technology companies have discovered a far chillier reception as they tramped around on initial public offering roadshows than they were accorded in the private shadows.

Most of the leaders of the subprime unicorns who continue to enjoy the fruits of the private market delude themselves about the difference between control and discipline. Some say that if their companies become public they will lose control. Google, Facebook and a raft of other companies with dual-class stocks put paid to that argument. What the heads of the subprime unicorns really mean is that the sort of disclosure required of a public company is the picture they do not want to view. But as Ms Holmes of Theranos discovered this week, eventually there is no place to hide.

"I read this and was like duh. People are throwing at Altman and he needs to find a way to invest, more startups through YC is going to lower the quality so better to invest in bigger names.

The moralizing about nuclear power is interesting. A lot of VCs are trying to pretend they are more than just hustlers between rich people and entrepreneurs... As if they are visionary technologists - the real visionaries of the future. This kinda looks like a lame claim when you are invested in Snapchat and your top entrepreneurs don't have that visionary tech stench.

I call it - deep tech wash - investing in one deep tech so you can pretend you are really investing in something that is meaningful. Cynical me."

"Theranos always seemed a little too good to be true. I hope they can do what they say they will.

But I know that there is a lot of money out there. And sometimes hope triumphs over reality. So maybe this was a lot of hype - justly created by people who invested a LOT of money.

Maybe we'll see a successful product. But I wasn't completely surprised by the articles. And I'm inherently suspicious of the billionaire who's made her money by starting a company that hasn't produced anything yet."

Theranos Inc. is a Silicon Valley start-up that over the past year had been acquiring immense attention, and a valuation of billions of dollars, for a blood-testing technology that was poised to revolutionize the field — cheap, easy, informative blood tests obtainable on demand at your corner pharmacy.

That changed last week, when articles in the Wall Street Journal reported that the firm has struggled to show that its technology works, and suggested that it may have been misleading the public, and possibly government regulators, about the effectiveness and accuracy of its technology. Now it's showing what happens when Silicon Valley hype outpaces reality.

Theranos called the Journal's findings "factually and scientifically erroneous and grounded in baseless assertions by inexperienced and disgruntled former employees and industry incumbents."

Silicon Valley is often lauded as an ecosystem that fosters high-tech growth through the interaction of venture capital, technological know-how, and yes, PR. Theranos points to the downside of the same phenomenon, in which interest by venture investors feeds on itself, and the publicity machine may gloss over how much work needs to be done to actually bring a "revolutionary" breakthrough to fruition.

A common adage is that venture capital is expensive money, but smart money; by contrast, stock market capital is cheap money but dumb money. The idea is that stock investors throw money at you but expect unrealistic results; venture investors demand big chunks of your company, but their wisdom and experience help you grow.

Theranos may demonstrate the flaws in this generalization. If the rap on the firm's technology is even partly true, then its $9-billion venture valuation reflects investor's hopes and fantasies rather than the technical knowledge and rigorous financial assessment for which the venture community prides itself.

More than the reputation of Theranos and that of its entrepreneurial founder, 31-year-old Elizabeth Holmes, is at stake. Venture investors have poured a reported $400 million into Theranos on terms that value the firm at $9 billion; Holmes' stake is said to be worth more than half that.

Yet much of the excitement about Theranos has always been based on irrelevant or misleading markers of success — or on Holmes as a personality. A profile in Inc. magazine this summer called her "America's coolest billionaire" and featured such nuggets as a letter she supposedly wrote to her father at age 9 attesting, "What I really want out of life is to discover ... something that mankind didn't know was possible to do." She dropped out of Stanford in her sophomore year, Business Insider reported, because she decided that "her tuition money could be better put to use by transforming healthcare." Her evocation of the image of Steve Jobs, down to her wardrobe of black turtlenecks, rarely went unremarked.

The most recent profile of her appeared just last week in a glossy feature supplement to the New York Times naming her among "Five Visionary Tech Entrepreneurs Who Are Changing the World." The article focused not on the technological robustness of Theranos' product, which outsiders haven't been able to assess, but on the premasticated life history of Holmes, who "has always been a bit of an outlier. As a child, she studied with a tutor to become fluent in Chinese..." And so on.

(The article's author, Laura Arrillaga-Andreessen, is the wife of Silicon Valley venture investor Marc Andreessen, though Theranos isn't listed as a portfolio company of Andreessen Horowitz, his venture firm.)

What about that transformation of healthcare? In a widely viewed video of a talk she delivered last year at TEDMED, Holmes describes on-demand blood tests as an issue of personal empowerment. "When people have access to information about their own bodies," she said, "they can change outcomes."

That sounds unexceptionable, even laudable, but healthcare is more complicated. As John P.A. Ioannidis of Stanford Medical School observed for an article in the Journal of the American Medical Assn., Holmes' talk ignored the drawbacks to expanded consumer-driven blood testing, such as "overdiagnosis, false-positive findings, or the potential for ... misplaced and perhaps overly zealous diagnostic and screening efforts."

As it happens, questions had been raised about Theranos' claims for months — but they had been swamped by a tide of fawning publicity. Ioannidis noticed that information about Theranos had appeared in the Wall Street Journal, Business Insider, Fortune and Forbes, "but not in the peer-reviewed biomedical literature. A few articles mentioned Theranos' policy of keeping data and technical details out of public view. The New Yorker acknowledged that the secrecy "troubled" some observers, but then quoted an expert calling that "the Steve Jobs way."ture."

In many articles, the company's choice to develop its technology secretly, as "stealth research," was treated as a virtue. But to Ioannidis, it presented a risk: "Stealth research creates total ambiguity about what evidence can be trusted in a mix of possibly brilliant ideas, aggressive corporate announcements, and mass media hype."

A few articles mentioned Theranos' policy of keeping data and technical details out of public view. The New Yorker acknowledged that the secrecy "troubled" some observers, but then quoted an expert calling that "the Steve Jobs way."

Writing in a peer-reviewed journal of clinical chemistry, Eleftherios P. Diamandis, a clinical pathology expert at the University of Toronto, asserted that the company's pitch was based not merely on exaggerated claims for its own technology, but unwarranted criticism of competing technologies —traditional blood tests offered by companies such as Quest Diagnostics and Laboratory Corp. of America. Most of their tests cost as little and could be done as quickly as those Theranos was offering, he said

One other aspect of Theranos' publicity is the question of sexism — or, to be precise, reverse sexism. The youthful Holmes is a glamorous figure, tailor-made for the mass culture promotional machine. Part of her appeal is the supposed incongruity of someone of her youth, gender and charm achieving so much so quickly.

The received origin story of Theranos includes her friendship with former Secretary of State George Shultz, who was said (by Fortune) to have been "captivated" by her "purity of motivation," among other qualities.

Now 93, Shultz joined the Theranos board and recruited many of his high-profile friends, including former Defense Secretary William Perry, former Sen. Bill Frist, and Henry Kissinger. Few of the board members had any real experience in the biomedical field. (Frist, a heart surgeon, hadn't practiced in decades.) But their eminence was seen as validation of the company's pitch.

It's unquestionably possible that the questions about Theranos really do reflect inflated expectations about a truly transformative technology still in its developmental phase, as the company's outside lawyer, David Boies, told the Wall Street Journal, and that in full bloom it really will change everyday diagnostics. But such transformations appear more rarely than one would conclude from the ease with which the term "revolutionary" is tossed around in Silicon Valley.

The lesson of Theranos may turn out to be that when investors and PR firms are all selling the same story, the proper response may be to "think different," as Steve Jobs' Apple ads used to say.

"As you know, hype is everywhere . It can sometimes be useful to get people excited about a concept but many times it's harmful (e.g Dr. Oz). Most CEOs are full of hype and it seems as if the more hype they dish out, the more they get paid around here."

Ontario Premier Kathleen Wynne suggested Tuesday that her government would drop the idea of a provincial pension plan if Liberal Leader Justin Trudeau becomes the next prime minister.

Wynne couldn’t convince the Harper government to enhance the Canada Pension Plan, so her Liberal government introduced an Ontario Retirement Pension Plan that would mirror the CPP, essentially doubling deductions and benefits.

If Trudeau wins the Oct. 19 election and is willing to improve the CPP, that would address her concerns about people without a workplace pension plan not having enough money to live on when they retire, said Wynne.

“If we have a partner in Justin Trudeau to sit down and work out what they’re looking at as an enhancement to CPP, that was always my starting point, that was the solution,” she said.

Trudeau is campaigning on a promise to expand the CPP and to return the age of eligibility for old age security to 65 from 67, and said he’d begin talks with the provinces on improving the CPP within three months of taking office.

New Democrat Leader Tom Mulcair also promises to enhance the CPP, and says he’d convene a First Ministers’ meeting on improving the pension plan within six months of forming government. Like the Liberals, the NDP would also return the age for OAS eligibility to 65.

Ontario’s pension plan, scheduled to begin Jan. 1, 2017, will require mandatory contributions of 1.9 per cent of pay from employers and a matching amount from workers — up to $1,643 a year — at any company that does not offer a pension.

As Wynne campaigned with federal Liberal candidates in the Toronto area Tuesday, she insisted she was not worried her attacks on Stephen Harper’s Conservatives will make it hard to work with them if they’re re-elected.

“Well, you know, it seems to me that before the federal election campaign started there was a little bit of a challenge working with Stephen Harper, but obviously I will continue to try to do that if Stephen Harper is the prime minister,” she said to cheers and laughter from Liberal supporters.

Wynne, who has been the most vocal premier in the federal campaign and has clashed repeatedly with Harper over the Ontario pension plan, said the provinces need a government in Ottawa that will work with them on retirement security, climate change, infrastructure and the Syrian refugee crisis.

“I will work with whomever is the prime minister, but I really believe that in this country, at this moment, we have an opportunity to elect a prime minister who understands that working with the provinces and territories is in the best interests of the country,” she said.

Ontario voters historically have supported different parties in government at the federal and provincial levels, but Wynne isn’t worried about campaigning herself out of a job in the next provincial election.

“I think the opportunity we have right now is to have a federal government and a provincial government that are on the same page, that are actually pulling in the same direction, and that’s exactly what I’m looking forward to,” she said.

Wynne also defended her decision to campaign heavily for her Liberal cousins in the federal election as “standing up for the people of Ontario,” and said she didn’t need to take a vacation day from her duties as premier to do it.

“I work seven days a week, so this is part of the work that I do.”

The problem for politicians and policymakers is that the negative terms of trade shock comes from outside Canada, not from changes in the behaviour of domestic consumers, corporations or governments. The current terms of trade shock has many causes, including the development of new technologies that have lowered the cost of producing oil; the decision by Saudi Arabia and other OPEC countries to continue to pump oil at a high rate rather than cut production to support the oil price; and the slowdown in China's economy which has lowered demand and prices for a broad range of commodities.

Whether or not the downturn in the global commodity super-cycle causes a business-cycle recession measured by GDP and employment is not the most important issue. The most important point to grasp is that Canada is facing a period in which the combined real income of households, corporations and governments are declining and are unlikely to rebound quickly. Even if real GDP resumes growing in the second half of 2015 and employment continues to rise, we will be producing and working more but receiving less real income for our efforts.

What the Economic Debate Should be About

The real economic issue that politicians should be facing is not whether Canada has slipped into a modest business cycle recession, but rather what is the appropriate economic policy response to a lasting negative shock to our national income caused by the fall in the prices of the commodities that we produce.

The Conservative Party wants to stay the course, keeping taxes low, encouraging home-ownership, and pursuing a balanced budget. That is a reasonable start, but does not go far enough in providing incentives to boost growth outside the resource industries.

The Liberal Party wants to raise taxes on high income earners including high-income small business owners, reshuffle child benefits to favour the "middle class", and incur deficits to fund infrastructure projects. The difficulty in this approach will be to maintain business confidence and to control deficit spending in an environment of weak GDP growth.

The New Democratic Party (NDP) wants to raise corporate taxes, impose carbon taxes, expand government's role in child care, and pursue a balanced budget. This is a difficult if not impossible set of promises to deliver on during a period of weak commodity prices.

The worst election outcome, but perhaps the most likely according to current polls, would be a coalition government of the NDP and Liberals. Coalition economic policies would likely result in higher taxes on high income earners, small businesses and corporations, increased spending on government provided child-care and infrastructure, and an early loss of control of budget deficits.

All three political parties and all Canadian voters would be well advised start thinking about what kind of pro-investment, pro-growth policies Canada needs to pursue in a period when the main economic engine and source of national prosperity has stalled and shifted into reverse.

"Unfortunately, there is a major flaw in the Liberal Party of Canada's resolution regarding an expansion of the Canada Pension Plan, which is that their proposal would exclude from coverage the first $30,000 of employment earnings.

Indeed, although the LPC's proposal would well address the second more important goal of a pension plan, which is to optimize the maintenance into retirement of the pre-retirement standard of living, it would completely fail to address the first most important goal of a pension plan, which is to alleviate poverty among Canadian seniors."

Americans in their 20s and 30s are facing a retirement crisis that could plunge them back into the Great Depression, Blackstone President and Chief Operating Officer Tony James said Wednesday.

"Social Security alone cannot provide enough for these people to retain their standard of living in retirement, and if we don't do something, we're going to have tens of millions of poor people and poverty rates not seen since the Great Depression," he told CNBC's "Squawk Box."

The solution is to help young people save more by mandating savings through a Guaranteed Retirement Account system, he said. Right now, young people cannot save enough on their own because they face stagnant incomes and heavy student-debt burdens.

The Guaranteed Retirement Account was proposed by labor economist Teresa Ghilarducci in 2007 as a solution to the problem of retirement shortfalls that inevitably arise when contributions are voluntary.

A GSA system would require workers to make recurring retirement contributions, which would be deducted from paychecks. Employers would be mandated to match the contribution, and the federal government would administer the plan through the Social Security Administration.

Ghilarducci has proposed a mandatory 5 percent contribution, but James said a 3 percent requirement rolled into GRAs could outperform retirement savings vehicles like IRAs and 401(k)s.

He noted that a 401(k) typically earns 3 to 4 percent, while a pension plan yields 7 to 8 percent. The average American pension plan has a 25 percent allocation to alternative investments — including real estate, private equity and hedge funds — with the remainder invested in markets, he said.

"The trick is to have these accounts invested like pension plans, so the money compounds over decades at 7 to 8 percent, not at 3 to 4," he said.

A 25-year-old who earns 3 to 4 percent per year would retire with $75,000, not nearly enough to annuitize and live on, James said. A 7-percent-per-year investment would yield $200,000 at retirement, he said.

Under the plan James is proposing, the government would offer a 2 percent guarantee on GRAs.

"The key to it is taking that capital, setting up the Guaranteed Retirement Accounts and investing it well for the very long term," he said. "We have to do that and we have to do that professionally."

James spoke ahead of the Center for American Progress's conference on creating more inclusive prosperity and promoting long-term planning in the private sector.

Blackstone Group President and Chief Operating Officer Hamilton “Tony” James called for a national retirement savings plan to address inadequate retirement preparedness that will hit the next generation of Americans particularly hard.

“We absolutely have to start now,” Mr. James said at a Center for American Progress conference in Washington on Wednesday. “It has to be mandated. Nothing short of a mandate will provide future generations a secure retirement.”

Mr. James recommended a proposal by Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at The New School in New York, to create a retirement savings plan for everyone based on 3% annual salary contributions shared equally among employees and employers. The federal government would guarantee a 2% return, through a modest insurance premium on such accounts. “With corporate profits at an all-time high, this should be a manageable burden,” he said, adding that the approach “is going to require us to look beyond the next election cycle.”

Mr. James also called for redirecting $120 billion in annual retirement tax deductions to give every worker a $600 annual tax credit to save for retirement.

Speaking at the same event on creating long-term value, Treasury Secretary Jacob Lew said the corporate tax system “is broken” and that capital gains rates should be higher. “But we also have to realize that that is not the whole answer,” Mr. Lew said.

Let be clear here, I don't like multiemployer pension plans because they are poorly governed which is why many risk insolvency unless comprehensive reforms are implemented. But the problem here is much bigger than multiemployer plans. U.S. retirement policy needs a drastic overhaul to properly cover all Americans, most of which have little or no savings whatsoever.

I've shared some of my thoughts on what needs to be done when I examined whether Social Security is on the fritz:

...politics aside, I'm definitely not for privatizing Social Security to offer individuals savings accounts. The United States of pension poverty has to face up to the brutal reality of defined-contribution plans, they simply don't work. Instead, U.S. policymakers need to understand the benefits of defined-benefit plans and get on to enhancing Social Security for all Americans.

One model Social Security can follow is that of the Canada Pension Plan whose assets are managed by the CPPIB. Of course, to do this properly, you need to get the governance right and have the assets managed at arms-length from the federal government. And the big problem with U.S. public pensions is they're incapable of getting the governance right.

So let the academics and actuaries debate on whether the assumptions underlying Social Security are right or wrong. I think a much bigger debate is how are they going to revamp Social Security to bolster the retirement security of millions of Americans. That's the real challenge that lies ahead.

Yes folks, it's high time the United States of America goes Dutch on pensions and follows the Canadian model of pension governance. Now more than ever, the U.S. needs to enhance Social Security for all Americans and implement the governance model that has worked so well in Canada, the Netherlands, Denmark and Sweden (and even improve on it).

I know, for Americans, these are all "socialist" countries with heavy government involvement and there is no way in hell the U.S. will ever tinker with Social Security to bolster it. Well, that's too bad because take it from me, there is nothing socialist about providing solid public education, healthcare and pensions to your citizens. Good policies in all three pillars of democracy will bolster the American economy over the very long-run and lower debt and social welfare costs.

If U.S. policymakers stay the course, they will have a much bigger problem down the road. Already, massive inequality is wiping out the middle class. Companies are hoarding record cash levels -- over $2 trillion in offshore banks -- and the guys and gals on Wall Street are making off like bandits as profits hit $11.3 billion in the last six months.

Good times for everyone, right? Wrong! Capitalism cannot sustain massive inequality over a long period and while some think labor will rise again as the deflationary supercycle (supposedly) ends, I worry that things will get much worse before they get better.

So after reading all my comments, let's go back to Dan McCrum's question above, where are the pension fund heroes? I'd say most of them are in Canada where plans like OTPP and HOOPP keep delivering stellar returns as they match assets and liabilities with or without external hedge funds and pension funds like CPPIB bringing good things to life on a massive scale, which is why it's also posting great returns.

In fact, all of Canada's top ten are performing well and providing great benefits to the Canadian economy which is why I'm a stickler for enhancing the CPP here. If the U.S. got its governance right, I would also recommend it enhances Social Security for all Americans.

Let me be crystal clear here. I don't think the Liberals can afford to squander a golden opportunity and not introduce mandatory CPP enhancement for all Canadians. Anything short of this would be a historical travesty and it would dishonor Pierre-Elliott Trudeau's legacy and set us back decades in terms of retirement and economic policy. 

Why am I so passionate on this topic? Because I've worked at the National Bank, Caisse, PSP Investments, the Business Development Bank of Canada, Industry Canada and consulted the Treasury Board of Canada on the governance of the public service pension  plan. I've seen first-hand the good, the bad and ugly across the private, public and quasi-public sector. I know what makes sense and what doesn't when it comes to retirement policy which is why I was invited to speak on pensions at Parliament Hill and why the New York Times asked me to provide my thoughts on the U.S. public pension problem.

I've also put my neck on the line with this blog and have criticized and praised our largest public pension funds but one thing I know is that we need more defined-benefit plans covering all Canadians and we've got some of the very best public pensions in the world. Our top ten pensions are global trendsetters and they provide huge benefits to our economy. That's why you'll find a few pension fund heroes here in Canada.

Are the top ten Canadian pensions perfect? Of course not, far from it. I can recommend many changes to improve on their "world class governance" and make sure they're not taking excessive and stupid risks like they did in the past. The media covers this up; I don't and couldn't care less if it pisses off the pension powers.

But when thinking of 'real change' to our retirement policy and economy, we can't focus on past mistakes. We need to focus on what works and why building on the success of our defined-benefit plans makes sense for bolstering our retirement system, providing Canadians with a safe, secure pension they can count on for the rest of their life regardless of what happens to the company they work for.

In my ideal world, we wouldn't have company pension plans. That's right, no more Bell, Bombardier, CN or other company defined-benefit plans which are disappearing fast as companies look to offload retirement risk. The CPP would cover all Canadians regardless of where they work, we would enhance it and bolster its governance. The pension contributions can be managed by the CPPIB or we can follow the Swedish model and create several large "CPPIBs". We would save huge on administrative costs and make sure everyone has a safe, secure pension they can count on for life.

This week’s new data from the Employee Benefits Research Institute adds a new dimension to the vital question of the country’s retirement readiness.

In the report, researchers show that often, 401(k) plans can do a better job of replacing income in retirement than defined benefit plans can.

The report simulates savings outcomes for workers currently age 25 to 29, with at least 30 years of eligibility in a 401(k) plan.

It measures how often replacement rates of 60, 70, and 80 percent can be achieved by workers in four income quartiles if they participate in a 401(k) plan, compared to those levels of income replacement rates for participants in defined benefit plans.

When measured against a 60 percent income replacement rate, traditional pensions beat 401(k) for all workers, except those in the highest income quartile.

But as replacement rates are increased, 401(k) participants fare better, according EBRI.

Under the 70 percent replacement rate, workers in the top two income quartiles do resoundingly better than their counterparts in defined benefit pension plans.

Only 46 percent of workers in the second-highest income quartile can expect to replace 70 percent of income from a defined benefit plan, compared to 75 percent who contribute to a 401(k) plan.

When benchmarking against an 80 percent income replacement rate, workers in the top two income quartiles stand little chance of replacing as much income with traditional pension benefits, whereas 61 percent of workers in the second highest income quartile will be able to do so with distributions from a 401(k), and 59 percent of the best-paid workers will be able to do so through 401(k) savings, according to the modeling.

The take away: traditional defined benefit plans seem better for lowest income workers, especially the lower the income replacement rate.

Many 401(k) proponents will no doubt see the new data as supportive of their core argument: that participating in a defined contribution plan throughout the lion’s share of one’s working life will reap sufficient savings for a secure retirement.

Of course, others will disagree. Here is a look at four stakeholder views on the question of 401(k)’s efficacy, or inadequacy, in preparing the country for retirement.

Daniel Bennett, Managing Director, Advanced Pension Strategies

Bennett’s Southern California-based advisory provides specialized pension and tax-advantaged solutions for small employers.

He has real issues with EBRI’s new report. For starters, he says it’s based on generous return assumptions—the study uses an average annual return of 10.9 percent in 401(k) plans, which the institute tracked in plans between 2007 and 2013.

He also questions the validity of a 401(k) assessment that assumes 30 years of contributions, as EBRI’s report does.

Bennett tells BenefitsPro he is not partial to a defined benefit option to a 401(k), or vice versa, but he does admit to having a bias for small businesses.

“My field experience strongly indicates that 401(k)s are very deficient in providing positive retirement outcomes for anyone, owner and worker alike, in all but the largest firms and even then typically only for the higher wage earners,” said Bennett.

Selling 401(k) plans to the small business market is a “loss leader” for firms like Bennett’s.

He says providers are not incentivized to service the market, given the thin margins. He thinks the Department of Labor’s “draconian” fiduciary proposal will only make matters worse.

Defined contribution plans are part of the solution, he says, but don’t expect him to be in the camp that says 401(k)’s superiority is an open and shut case.

“Retirement Income outcomes are really the only thing that matters,” believes Bennett. “So when I read studies assuming 30 years of contributions and 10.9 percent growth rates, I can only sit there and scratch my head wondering what these guys are smoking.”

“They need to get out of the ivory tower and down in the trenches with me to see what is really happening,” he added.

Tony James, President and COO, Blackstone

A leader of one of world’s biggest private equity firms went on CNBC this week and said that the retirement crisis facing savers in their 20s and 30s will ultimately lead to a breakdown of the country’s financial structure.

“If we don't do something, we're going to have tens of millions of poor people and poverty rates not seen since the Great Depression,” James told CNBC.

He advocated a government-mandated Guaranteed Retirement Account system, of the kind famously recommended by labor economist Teresa Ghilarducci almost a decade ago.

Private equity firms like Blackstone have been trying to break into the 401(k) market for several years, with little documented success to date.

While James’ comments to CNBC were made outside the context of the EBRI report, he clearly would take issue with its assumptions.

He said 401(k)s typically earn 3 to 4 percent, while pension plans, which James said have an average allocation of 25 percent to alternative investments such as ones his firm manages, yield closer to 7 and 8 percent.

"The trick is to have these accounts invested like pension plans, so the money compounds over decades at 7 to 8 percent, not at 3 to 4," said James.

Economic Policy Institute

The self-described non-partisan think tank advocates on economic issues affecting low- and moderate-income Americans (Teresa Ghilarducci sits on its board, as do several of the country’s largest labor leaders).

This week it published its own report, claiming in 2014, “distributions from 401(k)s and similar accounts (including Individual Retirement Accounts (IRA), which are mostly rolled over from 401(k)s) came to less than $1,000 per year per person aged 65 and older.”

“On the other hand, seniors received nearly $6,000 annually on average from traditional pensions,” according to EPI’s blog post.

Its post was also independent of EBRI’s new study.

“Though 401(k) and IRA distributions will grow in importance in coming years, the amounts saved to date are inadequate and unequally distributed, and it is unlikely that distributions from these accounts will be enough to replace bygone pensions for most retirees, who will continue to rely on Social Security for the bulk of their incomes,” according to the institute.

Peter Brady, Senior Economist, Investment Company Institute (ICI)

The ICI, a trade group representing the interests of the mutual fund industry (Blackstone is a member), also works with EBRI to coordinate data on 401(k) savings rates.

Brady published a post, also independent of EBRI, calling to question the Economic Policy Institute’s defense of defined benefit plans.

“EPI has it wrong,” writes Brady. Its analysis is “highly misleading” for the following reasons, he argues.

• It’s using unreliable data. Its source, the Bureau of Labor Statistics’ Current Population Survey (CPS), has consistently undercounted the income that retirees receive from employer-sponsored retirement plans and IRAs.
• It’s backward looking. The people whose income it’s measuring, today’s retirees, haven’t enjoyed the benefits of today’s well-developed 401(k) system.
• It’s gotten the math wrong. EPI’s analysts simply mishandled the data in ways that minimized the value of 401(k) plan and IRA distributions.

Take the time to read the research report by the Canadian Public Pension Leadership Council. The research paper, Shifting Public Sector DB Plans to DC – The Experience so far and Implications for Canada, examines the claim that converting public sector DB plans to DC is in the best interests of taxpayers and other stakeholders by studying the experience of other jurisdictions, including Australia, Michigan, Nebraska, New York City, Saskatchewan and Texas and applying those lessons here in Canada. I thank Brad Underwood for bringing this paper to my attention.

I'm glad Canada's large public pension funds got together to fund this new initiative to properly inform the public on why converting public sector defined-benefit plans to private sector defined-contribution plans is a more costly option.

Skeptics will claim that this new association is biased and the findings of this paper support the continuing activities of their organizations. But if you ask me, it's high time we put a nail in the coffin of defined-contribution plans once and for all. The overwhelming evidence on the benefits of defined-benefit plans is irrefutable, which is why I keep harping on enhancing the CPP for all Canadians regardless of whether they work in the public or private sector.

And while shifting to defined-contribution plans might make perfect rational sense for a private company, the state ends up paying the higher social costs of such a shift. As I recently discussed, trouble is brewing at Canada's private DB plans, and with the U.S. 10-year Treasury yield sinking to a 16-month low today, I expect public and private pension deficits to swell (if the market crashes, it will be a disaster for all pensions!).

Folks, the next ten years will be very rough. Historic low rates, record inflows into hedge funds, the real possibility of global deflation emanating from Europe, will all impact the returns of public and private assets. In this environment, I can't underscore how important it will be to be properly diversified and to manage assets and liabilities much more closely.

And if you think defined-contribution plans are the solution, think again. Why? Apart from the fact that they're more costly because they don't pool resources and lower fees --  or pool investment risk and longevity risk -- they are also subject to the vagaries of public markets, which will be very volatile in the decade(s) ahead and won't offer anything close to the returns of the last 30 years. That much I can guarantee you (just look at the starting point with 10-year U.S. treasury yield at 2.3%, pensions will be lucky to achieve 5 or 6% rate of return objective).

Public pension funds are far from perfect, especially in the United States where the governance is awful and constrains states from properly compensating their public pension fund managers. But if countries are going to get serious about tackling pension poverty once and for all, they will bolster public pensions for all their citizens and introduce proper reforms to ensure the long-term sustainability of these plans.

Finally, if you think shifting public sector DB plans into DC plans will help lower public debt, think again. The social welfare costs of such a shift will completely swamp the short-term reduction in public debt. Only economic imbeciles at right-wing "think tanks" will argue against this but they're completely and utterly clueless on what we need to improve pension policy for all our citizens.

The brutal truth on defined-contribution plans is they're more costly and not properly diversified across public and private assets. More importantly, they will exacerbate pension poverty which is why we have to enhance the Canada Pension Plan (CPP) for all Canadians allowing more people to retire in dignity and security. These people will have a guaranteed income during their golden years and thus contribute more to sales taxes, reducing public debt.   

Denmark and the Netherlands are the only two countries with pension systems that could be regarded as “first class”, according to a comprehensive global pensions study.

The two countries rank first and second in the Melbourne Mercer Global Pension Index, which measures the health of the pension systems in 25 countries to assess whether they will be able to deliver adequate future provision.

The report, produced jointly by Mercer, the consultancy, and the Australian Centre for Financial Studies in Melbourne, says that big reforms are required to improve the pension systems of some of the world’s most populous countries, including China, India, Indonesia and Japan.

Japan, Austria and Italy score poorly in the report. They have high levels of government debt, inadequate pension assets and ageing populations, finds the study.

David Knox, senior partner at Mercer, says: “There is no easy solution, but the sooner action is taken, the better. Reforms take time and good transition arrangements are required, as implementing new policies might stretch over 10 or even 20 years.”

Pension systems in other advanced economies including the US, Germany, France and Ireland were also found to face large risks that could endanger their long-term health.

The UK’s score was marked down following the recent removal of the requirement for retirees to buy an annuity that would provide a guaranteed income until death. Even Australia’s highly regarded pension system, ranked third in the report, could be improved by requiring part of any retirement benefit to be taken as an income stream, rather than a single lump sum, the report finds.

The report shows average years in retirement have risen from 16.6 in 2009 to 18.4 in 2015. Mercer forecasts this will increase to 19.2 by 2035.

Only Australia, Germany, Japan, Singapore and the UK have raised their state pension age to counteract increases in life expectancy.

“Living to 90 and beyond will become commonplace. More countries should automatically link changes in life expectancy to the state pension age,” says Mr Knox. The Netherlands has already taken this step.

Amlan Roy, head of pensions research at Credit Suisse, the bank, adds: “It is necessary to get rid of fixed retirement ages.”

Mercer also recommends that governments make greater efforts to ensure older workers remain active. Participation rates among workers aged 55 to 64 differ considerably, from 77 per cent in Sweden to just 40 per cent in Poland. The pace of improvement in activity rates for older workers has also varied significantly over the past five years.

Mr Roy says: “Unsustainable promises on pensions have been made the world over and will have to be renegotiated in response to increasing longevity.”

He points out that pensioners aged 80 and above represent the fastest-growing cohort globally and annual healthcare costs for this group are around four times higher than the rest of the population.

This raises great concerns for younger people. Mr Knox says: “Most civilised governments will offer retirement benefits to the poor and infirm but some young people are asking if there will be any state pension provision by the time they retire.”

The weightings used are 40 percent for the adequacy sub-index, 35 percent for the sustainability sub-index and 25 percent for the integrity sub-index. The different weightings are used to reflect the primary importance of the adequacy sub-index which represents the benefits that are currently being provided together with some important benefit design features. The sustainability sub-index has a focus on the future and measures various indicators which will influence the likelihood that the current system will be able to provide these benefits into the future. The integrity sub-index considers several items that influence the overall governance and operations of the system which affects the level of confidence that the citizens of each country have in their system.

This study of retirement income systems in 25 countries has confirmed that there is great diversity between the systems around the world with scores ranging from 40.3 for India to 81.7 for Denmark.

The heads of the four largest pension funds in Sweden have written an open letter to the government condemning proposed changes to the country’s public pension system.

The letter is an embarrassment for the Swedish finance ministry, which said in June it would close one of the country’s five state pension funds and shut down the SKr23.6bn ($2.7bn) private equity-focused fund, known as AP6, to cut costs.

The funds, which were set up to meet potential shortfalls within the state pension system, have long been criticised for producing lacklustre returns and for their expensive management structure.

But the chief executives and chairmen of four of the funds have called the changes “short term” and “politically motivated” and said the overhaul would have a negative impact on investment performance, which would ultimately harm pensioners.

It is the strongest rebuttal yet of the government’s proposals for reform and the first time there has been a public, co-ordinated response from AP1, AP2, AP3, and AP4, which manage $142bn of pension assets.

The group attacked the proposals for lacking a proper assessment of costs.

The heads of the four funds wrote in the letter: “During the reorganisation, planned to start in 2016 and continue for almost two years, there is a risk that the AP funds will lose their focus on long-term asset management, which will have a negative effect on results.

“If this were to lead to even a 0.1 per cent decrease in returns this would amount to about SKr1.2bn.”

Per Bolund, Sweden’s financial markets minister, previously rejected the suggestion that the proposals could jeopardise Sweden’s pension framework. He told FTfm in August: “That is exaggerated. We would never suggest something that would harm the pension system.”

The AP funds were originally split into several smaller groups due to fears that one large scheme would become too dominant an investor in Sweden and too much of a political temptation.

The four funds fear the government’s plan to also create a national pension fund board to determine return targets and the investment strategy of the remaining funds would revive the threat of political interference.

“The proposed governance of the funds is unclear and bureaucratic,” they said. “The proposals to establish a national pension fund board and the ability for the government to have an influence . . . will present the prospect of short-term political micromanagement.”

In my ideal world, we wouldn't have company pension plans. That's right, no more Bell, Bombardier, CN or other company defined-benefit plans which are disappearing fast as companies look to offload retirement risk. The CPP would cover all Canadians regardless of where they work, we would enhance it and bolster its governance. The pension contributions can be managed by the CPPIB or we can follow the Swedish model and create several large "CPPIBs". We would save huge on administrative costs and make sure everyone has a safe, secure pension they can count on for life.

Some countries have begun to take action. Sweden, Denmark and the Netherlands have all permitted the local pension industry to use a fixed discount factor of 4.2%, and in the U.S. the regulator now allows the industry to use the average rate over the last 25 years when discounting future liabilities back to a present value.

Although initiatives such as these have the effect of reducing the present value of future liabilities and thus the amount of unfunded liabilities overall, they do absolutely nothing
in terms of addressing the core of the problem – low expected returns on financial assets in general and low interest rates in particular.

Traders have been using junk to bet against the possibility that the Federal Reserve will raise interest rates anytime soon.

Exchange-traded funds that track high-yield bond indexes have been the beneficiaries of a cash surge in recent weeks as market participants figure the central bank probably won't raise rates in 2015, and it could be well into 2016 before anything happens.

In just the past week alone, three bond-related ETFs pulled in $2.4 billion. Two are focused on high-yield, or junk, bonds, according to ETF.com, despite repeated warnings on Wall Street that the segment of the market is headed for the rocks.

The iShares iBoxx $ Investment Grade Corporate Bond, the iShares iBoxx $ High Yield Corporate Bond and the SPDR Barclays High Yield Bond have been hugely popular.

During October, the group has pulled in $6.6 billion, with the two junk funds attracting about $4.3 billion of the total.

By contrast, in August, when the market was still anticipating that the Fed might raise its key interest rate in September, the two high-yield funds lost a net $344 million.

Since then, a sputtering economy and lackluster inflation have changed Wall Street's perception of when the central bank's Federal Open Market Committee will enact its first hike since taking its funds rate to zero in late 2008. Traders now put just a 7 percent chance of a rate move at Wednesday's FOMC meeting and a 36 percent probability for the final one of the year in December, according to the CME's tracking tool. Current expectations are for a March 2016 hike, with a 59 percent chance.

The Fed's rate posture is critical to the bond market because yields and prices move in opposite directions. A Fed hike would be expected to trigger responses across credit markets, driving rates higher and eating into bondholder principle.

Moreover, corporate America has been dependent on low rates to finance the trillions of debt issuance it has taken on during the era of zero interest rate policy, or ZIRP. The $8.1 trillion in net outstanding debt has grown by 8.4 percent in 2015.

The quality of that debt has eroded as well, making high yield particularly sensitive to rate increases and the possibility for an elevated level of defaults.

Ratings agency Moody's reported Monday that the rolls of "potential fallen angels," or issuers with investment-grade debt currently in danger of becoming junk, swelled by 17 in the third quarter, while no companies fell into the opposite category, called "potential rising stars." It's just one measure by which bond quality has declined, another being the continuing erosion in covenants, or the conditions companies must meet to their bondholders.

Still, ETF buyers are willing to take a shot at the market, believing that in addition to the Fed staying dovish with rates the default level will remain low.

In addition to junk funds, the ETF market in general has been flocking to fixed income. The Vanguard Intermediate-Term Bond fund also was in the top 10 over the past week in terms of flows, taking in $484.5 million, while the iShares Core U.S. Aggregate Bond ETF pulled in $416.8 million, according to ETF.com and FactSet.

Companies have been increasing their buybacks and dividends to please investors for years. Total payouts from S&P 500 companies surged 84% in the past decade to $934 billion in 2014, from $507 billion in 2005, according to a report by S&P Capital IQ.

While getting cash is great for investors, there's two sides to the thank-you's that companies are giving out.

On one hand, they can be a healthy sign that reflects a company's confidence in its future and willingness to share the cash its business is generating. But increasingly they're seen as a gimmick to distract investors from problems like struggling sales growth and lack of ideas in how to invest its cash.

As a rout in Chinese stocks this year erased $5 trillion of value, investors fled for safety in the nation’s red-hot corporate bond market. They may have just moved from one bubble to another.

So says Commerzbank AG, which puts the chance of a crash by year-end at 20 percent, up from almost zero in June. Industrial Securities Co. and Huachuang Securities Co. are warning of an unsustainable rally after bond prices climbed to six-year highs and issuance jumped to a record. The boom contrasts with caution elsewhere. A selloff in global corporate notes has pushed yields to a 21-month high, and credit-derivatives traders are demanding near the most in two years to insure against losses on Chinese government securities.

While an imminent collapse isn’t yet the base-case scenario for most forecasters, China’s 42.2 trillion yuan ($6.7 trillion) bond market is flashing the same danger signs that triggered a tumble in stocks four months ago: stretched valuations, a surge in investor leverage and shrinking corporate profits. A reversal would add to challenges facing China’s ruling Communist Party, which has struggled to contain volatility in financial markets amid the deepest economic slowdown since 1990.

“The Chinese government is caught between a rock and hard place," said Zhou Hao, a senior economist in Singapore at Commerzbank, Germany’s second-largest lender. "If it doesn’t intervene, the bond market will actually become a bubble. And if it does, the market could crash the way the equity market did due to fast de-leveraging.”

The slide in stocks is one reason why corporate bonds have done so well, prompting a 91 percent jump in issuance last quarter. Many investors who sold shares during the Shanghai Composite Index’s 38.4 percent drop from its June high have plowed the proceeds into debt, viewing the market as a haven given its history of almost negligible defaults. Five interest-rate cuts since November have also fueled gains as the People’s Bank of China seeks to revive growth with lower borrowing costs.

Yields on top-rated corporate notes due in five years have declined 79 basis points, or 0.79 percentage point, this year to 4.01 percent. The yield premium over similar-maturity government securities has dropped to 97 basis points, near the lowest since 2009.

By contrast, the yield on corporate notes globally has increased 26 basis points to 2.92 percent. Credit-default swaps on China’s sovereign debt jumped to a more than two-year high of 133 basis points in September and were last at 113 basis points.

Risks Rise

A reversal in the bond market would do more damage to China’s economy than the drop in shares and exacerbate capital flight from the biggest emerging market, according to a worst-case scenario projected by Banco Bilbao Vizcaya Argentaria SA. The Spanish lender more than doubled its first-quarter profit by selling holdings in a Chinese bank.

“The equity rout merely reflects worries about China’s economy, while a bond market crash would mean the worries have become a reality as corporate debts go unpaid," said Xia Le, the chief economist for Asia at Banco Bilbao. "A Chinese credit collapse would also likely spark a more significant selloff in emerging-market assets.”

For all the concerns about a bond rout, default levels in China have so far been remarkably low, thanks in part to government-orchestrated bailouts for troubled firms. Just four companies have defaulted on onshore bonds, including Shanghai Chaori Solar Energy Science & Technology Co., which became the first to renege on its debt in 2014.

Government Firepower

China has the wherewithal to stave off a crisis in its credit markets, according to Ken Hu, chief investment officer for Asia-Pacific fixed income at Invesco Ltd. "Unlike most other emerging-market countries, China has high domestic saving rates, little government debt, healthy fiscal balances, strong trade and current account surpluses, and most of its corporate debts are domestic," he said.

Policy makers went to unprecedented lengths to combat the tumble in share prices, including compelling state-owned firms to buy equities and preventing major stockholders from selling. The Shanghai Composite rose 1.27 percent on Friday, its second straight day of advance after a week-long national holiday.

A recovery in the equity market could be the trigger for a selloff in bonds as money managers liquidate their holdings to catch the rally in stocks, according to Thomas Kwan, the Hong Kong-based chief investment officer at Harvest Global Investments Ltd., whose Chinese unit offers funds through the Qualified Domestic Institutional Investor program.

Warning Signs

The risk of a downward spiral in debt prices has increased after investors took on leverage to amplify their returns, according to Ping An Securities Co. The monthly volume of bond repurchase agreements -- a form of borrowing used by investors to increase their buying power -- has jumped 83 percent from January to 39 trillion yuan in September, according to data from the Chinamoney website.

About 16 percent of companies on the Shanghai stock exchange lost money in the past 12 months, double the proportion last year, and the number of firms with debt levels twice their equity has doubled to 347 since 2007. Profits at Chinese industrial companies sank 8.8 percent in August from a year earlier, the biggest decline since the government began releasing monthly data in 2011.

Baoding Tianwei Yingli New Energy Resources Co., a maker of solar components, could become the latest Chinese company to default on local-currency notes after its parent said it’s unlikely to meet a deadline next week on a 1 billion yuan bond.

“Global investors are looking for signs of a collapse in China, which itself could increase the chances of a crash,” Commerzbank’s Zhou said. “This game can’t go on forever."

The Canada Pension Plan Investment Board has opened an office in Mumbai to support and expand on $2 billion of investments made in India since 2010.

The new Mumbai office joins a list of seven international hubs including London, Hong Kong, New York and Sao Paulo. As with the others, the office in India will allow the pension giant’s management team to develop local expertise and partnerships, and will provide access to investment opportunities that “may not otherwise have been available,” said chief executive Mark Wiseman.

He noted that Canada’s largest pension has already made investments in the country in segments including infrastructure, real estate and financial services.

These include a 3.9 per cent stake in Kotak Mahindra Bank, India’s third-largest private sector bank by market capitalization, and a US$332-million investment in L&T Infrastructure Development Projects, the unlisted subsidiary of India’s largest engineering and construction company.

On Tuesday, the same day the new Mumbai office was announced, CPPIB issued a separate announcement saying it would take a US$400-million stake in U.S. cable operator Cablevision Systems Corp.

Toronto-based CPPIB is teaming up with a group of investors, including funds advised by BC Partners and BC European Capital IX, to provide 30 per cent of the equity in Altice’s proposed acquisition of Cablevision, one of the largest cable operators in the United States with millions of customers in greater New York.

The transaction is expected to close in the first half of 2016, subject to regulatory approvals.

The Canada Pension Plan Investment Board, one of the country's largest pension fund managers, opened an office in Mumbai on Tuesday as it scouts for investment opportunities on the Indian subcontinent.

CPPIB, which has already committed to invest more than $2 billion in India, sees its long investment horizon aligning with the financing needs of India's economy.

The Toronto-based fund owns a nearly 4 percent stake in Kotak Mahindra Bank, one of the largest private sector banks in India. It has also committed to investments in infrastructure projects in India, office buildings, and to providing structured debt financing to residential projects in major Indian cities.

"The opening of an office in Mumbai allows CPPIB to develop local expertise, build important partnerships and access investment opportunities that may not otherwise have been available," CPPIB head Mark Wiseman said in a statement.

India, despite its enormous manpower, is facing a shortage of qualified skilled professionals due to lack of adequate public education system. The wage rates, hence, are going higher and higher eroding the cost advantage that has served India for a decade now.

Infrastructure is another field where India has to pull up its socks. Foreign investors, in their day-to-day course of business deal with PIO. But when these foreign investors come to India, they witness inadequate and not up-to-the-mark airports, seaports, roads, power grids, communication system and facilities, health care and education.

If India has to become a superpower, her government has to work with full commitment and dedication in all the fields mentioned above. Indirection, uncertainty and revisiting settled issues eternally characterise business negotiations in India.

Corruption is another huge predicament that has to be minimised as much as possible if India is to become an apple of the investors’ eyes. The Indian courts have huge backlog of more than 27 million cases, with many cases taking more than a decade to get solved! Unfriendly labour laws, difficulty in getting patent rights, and various other legal and ethical challenges add to India’s affliction. What officials put forth is not exactly how the true picture is.

India, no doubt, is a tough place to do business. But all said and done, we cannot deny the fact that India is a strong contender for the post of ‘economic superpower of the future’ and its strategic location works in its favour abundantly. We at NriInvestIndia.com believe that the ginnie has been let out of the bottle and soon the world would realize the potential of the Indian financial markets: including both stock markets and mutual funds. And if the challenges are taken care of, then it is a heavenly abode for all investors.

Altice, the European cable and telecoms group which last month announced it will buy US cable television company Cablevision for $17.7bn including debt, said on Tuesday that the two would take a 30 per cent stake in the company for around $1bn.

Altice, known for being acquisitive, has previously bought rivals in France, the US and Israel. Following the announcement of the Cablevision deal it announced a new equity capital raising exercise of around €1.8bn.

From the announcement:

Altice N.V. (Euronext: ATC, ATCB) today announced that funds advised by BC Partners ("BCP") and Canada Pension Plan Investment Board ("CPPIB") have entered into a definitive agreement to acquire 30% of the equity of Cablevision Systems Corporation (NYSE: CVC) (for approximately $1.0 billion).

Together with the recent Cablevision debt financing and the Altice equity issuance, the acquisition of Cablevision is fully funded.

Justin Trudeau came to town Tuesday and managed to achieve, in a 30-minute meeting with the premier, what 18 months of effort had previously failed to do.

Trudeau removed one of the biggest obstacles to the progress of Ontario’s retirement pension plan, namely the issue of how to the collect the premiums and keep track of what is owed in payments.

It’s an unexciting piece of bureaucratic process, but it’s also absolutely vital. If the government can’t keep accurate records, the plan will fail.

This missing piece is one reason why there’s been little visible movement in the past year on the Ontario Retirement Pension Plan (ORPP). The plan's outline is this: The ORPP is coming in 2017, starting with larger employers. The plan is aimed at those Ontarians who lack a company pension plan; at its best, it will replace about 15 per cent of income to maximum earnings of $90,000, or $13,500 a year. It will be in addition to a Canada Pension Plan payment.

The ORPP couldn’t easily move ahead without federal co-operation, and the Harper Conservatives offered none.

Trudeau unlocked the jam Tuesday by making a promise to Wynne. According to Wynne’s spokesperson Zita Astravas, Trudeau said that once he takes office, he will direct the Canada Revenue Agency and departments of finance and national revenue to work with Ontario officials on the registration and administration of the ORPP, The Star’s Robert Benzie reported.

This is the same pension-administration help that Ottawa had extended to Quebec and Saskatchewan, but denied to Ontario.

This week’s news is important because it means the ORPP can move ahead on its own, while Ontario participates in talks to expand the CPP. The Ontario plan hedges against the fact that expanded CPP talks will fail, but if they succeed, the province’s effort isn’t wasted because its plan would be folded into the improved CPP.

Nothing has so far been said about CPP talks. But at a campaign stop in Toronto, Trudeau said he’d get going with the provinces within 90 days of becoming prime minister.

That gives him until Jan. 17 to make good on his promise, a tight schedule given the long list of things on the new government’s plate. But given Trudeau’s nod to Wynne just a week after winning the election, the odds have improved that the CPP will be high on the new finance minister’s list.

Polls show that Canadians are worried about retirement security and support a better national pension plan. They trust the CPP, seeing it as well run and reliable. They often quibble with the amount they are paid, but that’s a political decision, not something the CPP Investment Board controls.

Research carried out by the Gandalf Group for the Healthcare of Ontario Pension Plan (HOOPP) in the middle of the election campaign confirms that Trudeau and Wynne are moving with public opinion.

The research looks at attitudes toward workplace pensions, and in particular defined benefit pension plans. These plans are on the retreat in the private sector, but still widely available in the public sector.

Among the findings:

• 77 per cent support increasing CPP costs and benefits;
• 54 per cent say any contribution changes to the CPP should be mandatory;
• 70 per cent support the idea of the ORPP to increase pension benefits;
• 74 per cent said higher pension contributions are a form of savings, and an investment in the future. Only 20 per cent saw the higher premiums as a tax, which is how the Conservatives painted the cost of a better CPP.

In a world of economic uncertainty and powerful global forces, stronger public pensions protect workers against forces outside their control. After a decade of inaction and small thinking, it seems the will is there to do something. All that remains is finding the way.

ORPP at a glance

• It will be mandatory for 3 million Ontarians without company pensions.
• Contributions begin in 2017, with larger employers going first.
• Modelled after CPP. Has survivor benefit, but is not transportable. There is no opt out.
• Workers and employers each contribute 1.9 per cent of earnings up to a maximum annual income of $90,000.
• At its best, the pension aims to replace 15 per cent of income.
• The fund would collect $3.5 billion a year, which would be invested at arm’s length.

Source: Ontario Ministry of Finance

My regular readers know my thoughts on the Canadian economy. I've been short Canada and the loonie for almost two years and I've steered clear of energy and commodity shares despite the fact that some investors are now betting big on a global recovery. I think the crisis is just beginning and our country is going to experience a deep and protracted recession. No matter what policies the Liberals implement, it will be tough fighting the global deflationary headwinds which will continue wreaking havoc on our energy and commodity sectors and also hurt our fragile real estate market. When the Canadian housing bubble bursts, it will be the final death knell that plunges us into a deep recession.

Having said this, I don't want to be all doom and gloom, after all, this blog is called Pension Pulse not Greater Fool or Zero Hedge. I'd like to take some time to discuss why I think the new Liberal government will be implementing some very important changes to our retirement system, ones that will hopefully benefit us all over the very long run regardless of whether the economy experiences a very rough patch ahead.

Unlike the Conservatives led by Stephen Harper who were constantly pandering to Canada's financial services industry, ignoring the brutal truth on DC plans, both the Liberals and the NDP were clear that they want to enhance the CPP for all Canadians, a retirement policy which will curb pension poverty and bolster our economy providing it with solid long-term benefits.

Of course, as always, the devil is in the details. Even though I agree with the thrust of this retirement policy, I don't agree with the Liberals and NDP that the retirement age needs to be scaled back to 65 from 67. Why? Because Canadians are living longer and this will introduce more longevity risk to Canada's pension plan.

But longevity risk isn't my main concern with the Liberals' retirement plan. What concerns me more is this notion of voluntary CPP enhancement. I've gotten into some heavy exchanges on this topic with Jean-Pierre Laporte, a lawyer who founded Integris, a firm that helps Canadians invest for their future using a smarter approach.

Jean-Pierre is a smart guy and one of the main architects of the Liberals' retirement policy, but we fundamentally disagree on one point. As far as I'm concerned, in order for a retirement policy to be effective, it has to be mandatory. For me, any retirement policy which is voluntary is doomed to fail. Jean-Pierre feels otherwise and has even written on what forms of voluntary CPP enhancement he's in favor of.

There are other problems with the Liberals' retirement policy. I disagree with their stance on limiting the amount in tax-free savings accounts (TFSAs) because while most Canadians aren't saving enough, TFSAs help a lot of professionals and others with no pensions who do manage to save for retirement (of course, TFSAs are no substitute to enhancing the CPP!).

More importantly, Bernard Dussault, Canada's former Chief Actuary shared this with me:

"Unfortunately, there is a major flaw in the Liberal Party of Canada's resolution regarding an expansion of the Canada Pension Plan, which is that their proposal would exclude from coverage the first $30,000 of employment earnings.

Indeed, although the LPC's proposal would well address the second more important goal of a pension plan, which is to optimize the maintenance into retirement of the pre-retirement standard of living, it would completely fail to address the first most important goal of a pension plan, which is to alleviate poverty among Canadian seniors."

I thank Bernard for sharing his thoughts with my readers and take his criticism very seriously.

Let me be crystal clear here. I don't think the Liberals can afford to squander a golden opportunity and not introduce mandatory CPP enhancement for all Canadians. Anything short of this would be a historical travesty and it would dishonor Pierre-Elliott Trudeau's legacy and set us back decades in terms of retirement and economic policy. 

Why am I so passionate on this topic? Because I've worked at the National Bank, Caisse, PSP Investments, the Business Development Bank of Canada, Industry Canada and consulted the Treasury Board of Canada on the governance of the public service pension  plan. I've seen first-hand the good, the bad and ugly across the private, public and quasi-public sector. I know what makes sense and what doesn't when it comes to retirement policy which is why I was invited to speak on pensions at Parliament Hill and why the New York Times asked me to provide my thoughts on the U.S. public pension problem.

I've also put my neck on the line with this blog and have criticized and praised our largest public pension funds but one thing I know is that we need more defined-benefit plans covering all Canadians and we've got some of the very best public pensions in the world. Our top ten pensions are global trendsetters and they provide huge benefits to our economy. That's why you'll find a few pension fund heroes here in Canada.

Are the top ten Canadian pensions perfect? Of course not, far from it. I can recommend many changes to improve on their "world class governance" and make sure they're not taking excessive and stupid risks like they did in the past. The media covers this up; I don't and couldn't care less if it pisses off the pension powers.

But when thinking of 'real change' to our retirement policy and economy, we can't focus on past mistakes. We need to focus on what works and why building on the success of our defined-benefit plans makes sense for bolstering our retirement system, providing Canadians with a safe, secure pension they can count on for the rest of their life regardless of what happens to the company they work for.

In my ideal world, we wouldn't have company pension plans. That's right, no more Bell, Bombardier, CN or other company defined-benefit plans which are disappearing fast as companies look to offload retirement risk. The CPP would cover all Canadians regardless of where they work, we would enhance it and bolster its governance. The pension contributions can be managed by the CPPIB or we can follow the Swedish model and create several large "CPPIBs". We would save huge on administrative costs and make sure everyone has a safe, secure pension they can count on for life.

The federal budget deal could speed the long, lingering death of old-fashioned defined-benefit pension plans, in which employers reward years of service by providing a guaranteed stream of income in retirement.

The deal could affect any pre-retiree in a former employer's pension plan by increasing the per-head premiums that plan sponsors must pay to the Pension Benefit Guaranty Corp. If it goes through as written, every person in a plan will get more expensive at the stroke of a pen.

Employers are already deeply concerned about the extent and uncertainty of future pension liabilities and are trying to shed them. The proposed increase in the budget legislation would push even more pension plans to manage costs any way they can, including reducing participant head count, said Alan Glickstein, a senior retirement consultant with Towers Watson.

The budget deal calls for a 22 percent hike, spread out over three years, in flat-rate, single-employer premiums paid to the PBGC, which acts as a backstop to a company's pension liability should the company become insolvent. Those premiums will already have risen from $31 in 2007 to $64 in 2016; by 2019 they will reach $78.

An increasingly common way companies get rid of those liabilities is by offering participants a chance to take their pensions all at once, as lump sums based on the present value of their future benefits. After strong years for such offers in 2013 and 2014, the activity rose dramatically in 2015, said Matt McDaniel, who leads Mercer’s U.S. defined-benefit risk practice.

More lump-sum deals aren't good news for employees, about 40 percent to 60 percent of whom take the deals. Most who take lump sums of less than $50,000 cash those retirement funds out rather than roll them into an IRA, paying income tax and a 10 percent penalty if they aren't at least 59½. While it depends on individual circumstances, it usually makes more financial sense to leave the money in the plan and have it trickle out during retirement.

Perversely, the premium hikes could wind up hurting, not helping, the Pension Benefit Guaranty Corp., because they may not fully offset shrinking head count in pension plans. Benefit consultants are frustrated. "This has nothing to do with pension policy, but is simply a device to raise revenue," said Towers Watson's Glickstein. Higher premiums "would be a factor that causes a move away from these plans, and the whole point of the PBGC is to strengthen the employer pension system, so it's kind of ironic."

A statement by the Erisa Industry Committee, an association that advocates for the employee benefit and compensation interests of large employers, said it was "outraged." Its Oct. 27 statement quoted the committee's president as saying that "even the PBGC’s own analysis does not call for an increase in premiums on single-employer defined benefit plans. PBGC premium increases like the one announced today do nothing to encourage single-employers to continue defined benefit plans or improve benefits for retirees; in fact, the increases only work to further weaken the private retirement system.”

In response to the criticism, an Obama administration official spoke with Bloomberg BNA's Pension & Benefits Daily, telling David Brandolph that with the underfunding in the PBGC's single-employer program, "the proposed premium increases are necessary to ensure that PBGC will be able to pay retiree benefits when pension plans fail. Even with these changes, premiums would likely remain a relatively small percentage of a company's annual pension contribution and a tiny fraction of total compensation costs." The official noted that the increases take effect over three years to allow companies to plan for the new costs.

The Center for Effective Government found that the 100 biggest nest eggs of corporate chiefs added up to $4.9 billion, or 41 percent of what American families have saved for retirement. David Novak, the former CEO of Yum Brands, the company that owns Taco Bell, Pizza Hut and KFC, had the largest nest egg, worth $234.2 million, or enough money to provide an annuity check of about $1.3 million a month starting at age 65.

By contrast, almost three in 10 Americans approaching their golden years have no retirement savings at all, the study said, and more than half between 50 and 64 will have to depend on Social Security alone, which averages $1,233 per month.

Aside from fatter paychecks, CEOs get two other perks to help them grow their retirement funds faster than their employees can. Companies and business groups argue that CEO retirement packages are tied to executive performance and necessary to be able to attract top executives.

Special Pensions

More than half of Fortune 500 CEOs receive supplemental executive retirement plans (SERPs), a type of tax-deferred defined-benefit plan for the C-suite. These plans have come under heat from shareholders as expensive and unnecessary.

CEOs enjoy these plans even as companies eliminate regular defined-benefit plans for employees. Only 10 percent of companies provide defined-benefit pension plans, covering just 18 percent of private sector workers, according to the Bureau of Labor Statistics. In the early 1990s, more than a third of private sector workers had pension plans.

Executive Tax-Deferred Compensation Plans

Almost three-fourths of Fortune 500 companies offer their senior executives tax-deferred compensation plans. Unlike 401(k) plans offered to regular workers, these special plans have no limits on annual contributions. That allows CEOs to invest a lot more in their retirement than everyday Americans. For example, last year, 198 CEOs running Fortune 500 companies were able to invest $197 million more in these plans because they were not hamstrung by limitations on defined compensation plans, the study found.

American workers over 50 can contribute only $24,000 a year to 401(k) plans, while younger employees have an $18,000 limit.

In short, I believe that now is the time to introduce real change to Canada's retirement system and enhance the CPP for all Canadians.

I'm also a big believer that the same thing needs to happen in the United States by enhancing the Social Security for all Americans, provided they get the governance right, pay their public pension fund managers properly to manage the bulk of the assets internally and introduce a shared risk pension model in their public pensions.

It's high time the United States of America goes Dutch on pensions and follows the Canadian model of pension governance. Now more than ever, the U.S. needs to enhance Social Security for all Americans and implement the governance model that has worked so well in Canada, the Netherlands, Denmark and Sweden (and even improve on it).

And some final thoughts for all of you confused between defined-benefit and defined-contribution plans. Nothing, and I mean nothing, compares to a well-governed defined-benefit plan. The very essence of the pension promise is based on what DB, not DC, plans offer. Only a well-governed public DB plan can offer retirees a guaranteed income for the rest of their life.  

What are the main advantages of well-governed DB plans? They pool investment risk, longevity risk, and they significantly lower costs by bringing public and private investments and absolute return strategies internally to be managed by well compensated pension fund managers. DB plans also offer huge benefits to the overall economy, ones that will bolster the economy in tough times and reduce long-term debt.

In short, there shouldn't be four, five or more views on DB vs DC plans. The sooner policymakers accept the brutal truth on DC plans, the better off hard working people and the entire country will be over the very long run.

You've heard about income inequality—about how, for example, the top 10 percent of Americans control more than half of all income.

But we've heard less about inequality when it comes to retirement savings. According to a report released this week by the Center for Effective Government and the Institute for Policy Studies, just 100 CEOs have retirement accounts that total $4.6 billion—that's more than the retirement assets of 41 percent of Americans, or 116 million people. The authors used SEC filings to examine the 100 largest retirement accounts among Fortune 500 CEOs, and found that the average CEO has saved up $49.3 million for retirement. By contrast, the median balance in 401(k) accounts at the end of 2013 was $18,433.

Even more than the overall disparity, what caught my eye was the race and gender inequality, both at a CEO level and in the general population. The CEOs with the 10 largest retirement funds were all white men, and their retirement assets dwarfed those of the top 10 CEOs who were women or people of color. (Two women are counted in both of the latter groups: Indra Nooyi of Pepsi, and Ursula Burns of Xerox. Click on image)

And the majority of people of color and female heads of household have no retirement assets.Without a pension, IRA, or 401(k) account, these individuals will be completely dependent on Social Security when they do retire—and the average Social Security benefit is $1,223 per month (click on image).

So, what's going on here? Nari Rhee, a researcher who studies retirement disparities at the University of California-Berkeley Labor Center, says a number of factors make the retirement gap so big. First, of course, is the income gap: Full-time, working women make 78 percent of what men do; the median wealth of white households is 10 and 13 times that of Latino and black households, respectively. And with less money, there's less to stow away for the future.

But in addition, people of color are more likely to invest the money that they do save on housing or a business than in stocks, bonds, or mutual funds. The fallout: People of color were hit harder by the collapse of the housing market in 2008.

And finally, says Rhee, people of color are less likely to work in jobs that offer retirement benefits, particularly since so many jobs are concentrated within low-wage or part-time work in the private sector (think food service or manufacturing, construction, manufacturing, or janitorial staff).

All of this together helps create financial disparity during retirement: one in five retired Latino Americans and about one in six retired blacks live under the poverty line, compared with about 1 in 15 whites.

The report calls for a cap on deferred compensation and an expansion of Social Security benefits and public pensions. Without changes, says Anderson, "We're really looking at a retirement crisis where you’re going to have millions of seniors with unmet basic needs and, on the other hand, a privileged few corporate executives with platinum pensions."

An e-book containing the papers and presentations from the European Central Bank's central banking forum conference in Sintra, Portugal, is now available. ECB President Mario Draghi and his colleagues are to be greatly commended for running a forum that is so open to profound challenges to central banking orthodoxy.

The volume contains a paper by Olivier Blanchard, Eugenio Cerutti and me on hysteresis — and separately some of my reflections asserting the need for a new Keynesian economics that is more Keynesian and less new.

Here, I summarize these two papers.

Hysteresis effects

Blanchard, Cerutti and I look at a sample of over 100 recessions from industrial countries over the last 50 years and examine their impact on long-run output levels in an effort to understand what Blanchard and I had earlier called hysteresis effects. We find that in the vast majority of cases, output never returns to previous trends. Indeed, there appear to be more cases where recessions reduce the subsequent growth of output than where output returns to trend. In other words “super hysteresis,” to use Larry Ball’s term, is more frequent than “no hysteresis."

This finding does not in-and-of-itself establish the importance of hysteresis effects. It might be that when underlying growth rates fall, recessions follow, but that recessions have no causal impact going forward. In order to address this issue, we look at the impact of recessions with different precursors. We find that even recessions that are associated with disinflationary monetary policies or the drying up of credit have substantial long-run output effects suggesting the presence of hysteresis effects.

In subsequent work, Antonio Fatas and I have looked at the impact of fiscal policy surprises on long-run output and long-run output forecasts, using a methodology pioneered by Blanchard and Daniel Leigh. Since fiscal policy effects operate primarily through aggregate demand, this provides a way to avoid the causation question. We find that fiscal policy changes have large continuing effects on levels of output suggesting the importance of hysteresis.

I was struck that in a vote taken at the conference, close to 90 percent of the participants indicated that they believe there are significant hysteresis effects. While there is much more work to be done, I believe that, as of right now, the right presumption is in favor of hysteresis effects, despite their exclusion from the standard models used in almost all central banks.

Towards a new macroeconomics

My separate comments in the volume develop an idea I have pushed with little success for a long time. Standard new Keynesian macroeconomics essentially abstracts away from most of what is important in macroeconomics. To an even greater extent, this is true of the dynamic stochastic general equilibrium (DSGE) models that are the workhorse of central bank staffs and much practically oriented academic work.

Why? New Keynesian models imply that stabilization policies cannot affect the average level of output over time and that the only effect policy can have is on the amplitude of economic fluctuations, not on the level of output. This assumption is problematic at a number of levels.

First, if stabilization policies cannot affect average levels of employment and output over time, they are not nearly as important as if they can. Beginning the study of stabilization with this assumption takes away much of the motivation for doing macroeconomics.

Second, the assumption is close to absurd. It is surely reasonable to assume that better policy could have avoided the Depression or the huge output losses associated with the financial crisis without having shaved off some previous or subsequent peak.

Third, contrary to the now common view that macroeconomics is best understood by studying the stochastic properties of stationary time series, the most important macroeconomic events are in some sense one off. Think of the Depression or the Great Recession or the high inflation of the 1970s.

The problem has always been that it is difficult to beat something with nothing. This may be changing as topics like hysteresis, secular stagnation, and multiple equilibrium are getting more and more attention.

As well they should. U.S. output is now about 10 percent below a trend estimated through 2007. If one attributes even half of this figure to the effects of recession and assumes no catch up on this component until 2030, the cost of the financial crisis in the U.S. is about one year’s gross domestic product. And matters are worse in the rest of the industrial world.

As macroeconomics was transformed in response to the Depression of the 1930s and the inflation of the 1970s, another 40 years later it should again be transformed in response to stagnation in the industrial world.

Maybe we can call it the Keynesian New Economics.

The unemployment rate is falling, but that traditional sign of health for the American worker can be misleading. A larger share of the U.S. population is now out of the labor force than at any time since 1977 -- an era when manufacturing was king and most women didn’t have jobs.As the drop in workforce participation continues to vex economists and policymakers alike, Goldman Sachs economists are projecting the trend will roll on.

Researchers for the investment firm say they expect the current labor force participation rate of 62.4 percent to fall by about a quarter of a percentage point annually in the coming years, reaching 61.8 percent by 2018.

Declining labor force participation, in turn, will help drive down the unemployment rate, according to the research note. Goldman economists expect that number to reach 4.5 percent by 2018, down from its current 5.1 percent. Six years ago, unemployment hit its recessionary peak of 10 percent.

The cause of the decline in labor force participation is a source of much debate. Many economists agree it’s in large part a structural phenomenon, driven by the mass retirement of baby boomers. Others point to its cyclical roots in the Great Recession. Goldman economists also drew attention to the ongoing decline among so-called prime-age workers, noting “the underlying cause is unclear.” Some have pointed to the dearth of decent paying jobs and lack of paid parental leave as contributing factors.

Goldman analyst David Mericle stressed that ongoing labor market slack should weigh on any decision from the Federal Reserve to hike interest rates. “Although our baseline forecast remains for December liftoff,” Mericle wrote, “we therefore still see a solid case for either delaying the normalization yet again or at least moving the funds rate higher only very gradually in the early stages of the normalization process.”

The United States unemployment rate now stands just above five percent, though the real jobless figure is in the teens. The Federal Reserve-induced economic expansion continues, and everyone is rejoicing. But is the labor market really in such a rosy state?

A new report from the Goldman Sachs Group suggests that the unemployment rate will dip below 4.5 percent by the end of 2018 as a growing number of people will drop out of the workforce.

Today, the labor force participation rate, or the share of the working population, is at a 37-year low (SEE: U.S. labor force participation rate falls to 1977 levels at 62.6%). The share of the U.S. population in the workforce – individuals over 16 who have a job or who are looking for a job – declined to 62.4 percent last month.

There has been a strong debate over the past couple of years as whether the trend of a falling workforce participation is part of a potential long-term shift in the overall economy or the business cycle. Whatever the case, the Goldman Sachs analysts say the trend won’t reverse because an exponential number of Baby Boomers are retiring.

“The retired share of the population has increased more than we expected,” Goldman economists Jan Hatzius and David Mericle said in a report that was obtained by Newsmax. “There has been an increase in the share of prime-age workers who report that they do not want jobs.”

According to the report, the labor force participation rate will dip each year by a quarter of a percent for the next several years. Due to the fact that individuals who exit the workforce are not counted as unemployed by the U.S. Bureau of Labor Statistics (BLS), the unemployment rate will continue the downward trend. (SEE: Americans not in the labor force could exceed number of people working by 2017.)

This is important data for the Federal Reserve when it debates whether or not to raise interest rates.

“The downward revision to our participation forecast has directionally hawkish implications for monetary policy,” according to Goldman. “At the margin, this is consistent with the greater desire to start normalizing the funds rate that many Fed officials have recently expressed. It is also worth keeping in mind that our results still show a considerable amount of remaining labor market slack, which is consistent with the continued softness of wage and price inflation.”

Some say the only areas of the economy that are growing are ones that rely on government transfer payments or Fed stimulus.

"I see this as more of a warning, a red flag that there's something going on here that isn't in the models, that we maybe don't understand as well as we think, and we should dig down deep deeper and try to figure this out better," he said during a panel discussion at the Brookings Institute in Washington.

Williams, who is a voting member of the Fed's policy-setting panel through the end of the year, has said the central bank should begin to raise interest rates soon but thereafter go at a gradual pace.

He added that the low neutral interest rate had "pretty significant" implications for monetary policy, and put more focus on fiscal policy as a response.

"If we could come up with better fiscal policy, find a way to have the economy grow faster or have a stronger natural rate of interest, then that takes the pressure off of us to try to come up with other ways to do it, like through a large balance sheet or having a higher inflation target," Williams said. "It also means we don't have to turn to quantitative easing and other policies as much."

On Wednesday, the Fed held interest rates near zero but signaled that a December rate rise remains firmly in play.

The latest effort by Congress to save your pension may be putting it further at risk.

Tucked away in last week's bipartisan budget deal was a provision to sharply raise the premiums on a government-run fund to backstop private pension funds that go bust. With the fund falling deeper in the red, the higher premiums charged to companies offering traditional defined benefit pensions are intended to help put the Pension Benefit Guaranty Corp. back on a solid financial footing.

But critics say the higher premiums — set to rise from $57 per covered worker this year to $78 in 2019 — could prompt even more companies to freeze or close out their traditional defined benefit pensions that pay retirees a guaranteed monthly check for life.

"The premium increase is just another unnecessary burden on employers who sponsor defined benefit plans, giving them more reasons to consider exit strategies," said Annette Guarisco Fildes, president of the ERISA Industry Committee, which advocates for large companies that offer pensions.

Long before premiums began rising, companies that offer defined benefit pensions plans had been moving to freeze them (fixing participants' retirement benefits no matter how much longer they work) or closing them to new workers.

A survey released earlier this year by benefits consultant Aon Hewitt of nearly 250 employers representing 6 million employees found that, of the roughly three-quarters who still offer a defined benefit plan, a third were closing them and another third had frozen them.

Of the companies with plans that remained open, 14 percent of companies said they were "very likely" to close them this year, 9 percent said they were "very likely" to freeze them and 5 percent said there were very likely to terminate them. (Companies terminating plans typically offer participant a lump sum payout to replace the monthly defined benefit income.)

The trend continues a decade-long decline in defined benefit plans in favor of defined contribution plans like 401(k) retirement plans. That historic shift has been cited by some retirement researchers as a major reason for the deficit in retirement savings estimated by the Employee Benefits Research Institute at more than $4 trillion for U.S. households in which the breadwinner is between ages 25 and 64.

Companies that still offer their workers defined pension benefits are facing their own funding shortfall, with too little money set aside in pension assets to cover the cost of paying current and future retiree benefits.

Both public and private pension funds were hit hard by the 2008 financial crisis, which wiped out trillions of dollars in investments that were used to pay retiree benefits. Since then, low interest rates have cut returns and increased the amount of money needed to generate enough income to write monthly checks to retirees.

Underfunded pensions, of course, represent the biggest potential liability for the Pension Benefit Guaranty Corp., which steps in when a pension fund can no longer cover what it owes its participants. Many of the biggest shortfalls have hit older companies with declining profits and large pools of older workers and retirees. Of the 10 biggest pension takeovers by the agency in the last four decades, five were plans offered by airlines and four were pension plans for steel companies.

Since 2000, the cost of backstopping failed pension plans has overtaken the money set aside to cover that cost, leaving the corporation with a deficit of more than $60 billion. Without the higher premiums, agency officials say, the fund will run eventually out of money.

Estimating when that might happen is not easy, especially given the move by pension plan sponsors to reduce their liabilities by closing or freezing plans. A lot also depends on how quickly companies move to shore up pensions that are underfunded.

Since the Great Recession ended, and the economy and stock market have recovered, many private plans have gained ground and raised funding levels. But they still face a multi-billion-dollar gap.

The defined benefit plans offered by 100 large companies tracked by benefits consultant Milliman face a $366 billion pension funding shortfall, based on the latest data available. On average, they've set aside less than 82 cents for every dollar in obligations to current and future retirees.

The recently enacted budget also includes a higher tax penalty for underfunded pensions, starting in 2017.

Those single employer sponsors, who manage pension assets for workers of only one company, are in much better shape than so-called multi-employer plans, which cover workers from more than company.

About a quarter of the roughly 40 million workers who participate in a traditional defined benefit plan are covered by these multi-employer plans, according to the Bureau of Labor Statistics.

Those plans, which typically cover smaller companies and unions, face an even tougher set of financial challenges than larger plans that can spread risk over a bigger pool of workers. Declining union enrollments, for example, mean there are fewer active workers to cover the cost of paying retirees, many of whom are living longer than was expected when these plans were established.

Multi-employer plans also face an added burden of their shared pension liabilities. When one company in the plan fails to keep up with contributions, for example, the burden on the other members increases. In the last four years, the Department of Labor has notified workers in more than 675 of these plans that their plans are in "critical or endangered status."

[...] the knee-jerk move by many plan sponsors to offload their pension risks may be a little hasty. While there may be a natural inclination to want to rid themselves of their pension obligations as soon as financially possible, now may not necessarily be the best time to do it.

Mark Firman, a pension lawyer with McCarthy Tetrault, notes that by buying up annuities, some firms may be trading in one type of risk for two others — what he refers to as reputation risk and regret risk. 

The idea, says Mr. Firman, is that companies — particularly those in booming sectors like energy — who purchase annuities as a first step toward winding down their defined-benefit pensions, may find they are harming their image as progressive employers among current and prospective talent, labour bargaining units and socially conscious institutional investors. That’s the reputation risk. For those who prefer cold, hard numbers to less definitive, warm and fuzzy aspects of business management, the regret risk will likely have deeper resonance.

Purchasing an annuity today when interest rates are low means getting an insurance company to buy a greater liability and to do so for a higher fee. That higher fee goes toward protecting the insurance company not only from the longevity risk it’s buying but also the likely risk of future interest rate hikes.

“If and when interest rates rise down the road, not only will the liabilities become scaled back but if you did want to de-risk at that point, the annuities will be cheaper,” says Mr. Firman. “Employers who are de-risking today may find out that they may miss out on the opportunity for substantial pension surpluses, which is a situation that we were more used to seeing in the 1990s than we’re seeing today.”

However, unlike the 1990s, pension legislation (in Canada) now allows plan sponsors greater access to those surpluses, which could be used for myriad business-development initiatives and investments.

The good news is there may be a happy medium for plan sponsors who are looking to de-risk in the short term but not necessarily with the intent to wind down their plans entirely or imminently.

According to the Towers Watson data, of the $2.2-billion in annuities purchased in 2013, $850-million was made up of what the consulting firm refers to as “buy-in” transactions. While very similar to the more traditional “buy out” annuities, buy-ins vary on a number of important levels, not least of which is a reversal clause that allows plan sponsors to countermand the transaction down the road — for a fee, of course.

Towers Watson recently closed a buy-in deal worth approximately $500-million — perhaps the largest single annuity transaction in Canadian history — but the plan sponsor preferred to remain anonymous. A similar, $150-million dollar deal was finalized between Sun Life Financial Inc. and the Canadian Wheat Board last year.

David Burke, Canadian retirement leader for Towers Watson, says his practice has been trying to steer pension sponsors away from de-risking and toward what he refers to as “right-risking” — a more sophisticated strategy that takes into account each individual sponsor’s solvency and liability scenarios, their future intentions with respect to the lifespan of the plan and prospective market conditions – to better gauge if, when and how they should limit pension-related risks.

“I’m going to be very curious to see what plan sponsors do in the next few years assuming the funding status is 100%,” says Mr. Burke. “My guess is some are going to get out … and some might say I’m going to … take my risk in a different way but I’m not going to de-risk.”

His comments are echoed by Mr. Forestell, who believes basic annuity buy-outs will quickly evolve into more complex transactions. “What I expect to see in the next year or year and a half is more creative deals in how to do the annuities,” he says.

In the interim, the movement to de-risk is likely to intensify and understandably so given the nail biting that has taken place in recent years. The pity is there will likely be more than a few sponsors stricken with buyer’s remorse a decade from now. Then again, by that point the idea of a defined-benefit pension may very well be an abstract and quasi-historical concept in the private sector.

The success of the early post-war public and private pensions were the result of them being aligned with the political environment of the time. There is little political consensus on many important contemporary issues, and so pensions represent just another area of policy incoherence. This incoherence means that it is unclear what reforms would be seen as successful. I hope to discuss such reforms in later articles.

The Fed doesn't care about about Republicans or Democrats, only about big banks and their elite hedge fund and private equity clients. Interestingly, while the Fed needed to lower rates and engage in QE to prevent another Great Depression, ZIRP and QE ended up exacerbating inequality via several channels. First, companies were incentivized to borrow big and repurchase shares to pad the bloated compensation of their top brass. Second, U.S. public pensions were forced to take on more risk investing in hedge funds and private equity funds to make their 8% pension rate-of-return fantasy. Lastly, historical low rates punish savers and reward financial speculators as people who need to rely on a fixed income can't invest in fixed income assets that yield enough.

This is why I've long argued that U.S. Social Security needs to move the way the Canada Pension Plan has moved which has assets managed by the Canada Pension Plan Investment Board, a national pension fund which directly invests in public and private markets and is supervised by a qualified, independent investment board. But first you need to get the governance right and unfortunately, the U.S. will never get the governance right because there are too many powerful interests milking public pension funds dry. All this to say, there is a conspiracy which is going on at the Fed but it has nothing to do with what the Republicans or Democrats are claiming. 

Shorting Glencore PLC was a painful bet for some hedge funds.

Big-name European funds, including ones run by Odey Asset Management LLP and Lansdowne Partners (UK) LLP, were among those that lost money on big bets against the battered commodities firm.

The company’s stock has lost nearly two-thirds of its value this year and slumped in September. But it was up more than 20% in October, leaving some funds on the wrong foot.

London-based Odey, which oversees $11.4 billion in assets, had a 19% drop in its OEI Mac fund in the first two weeks of October, leaving it down about 20% on the year as of Oct. 14. Odey’s European fund lost 15.7% for October as of that date, taking losses this year to 16.3%, according to a hedge-fund investor.

Founder Crispin Odey, who made millions correctly calling the bull market in 2009, told The Wall Street Journal in an interview that he remains bearish on stocks and expects the major stock markets to lose around 40% but is now adjusting his positions rather than sticking with his large short bets whether the market is rising or falling. “The rallies are so painful,” he said, referring to sudden spikes in stocks during an otherwise falling market. “I’ve decided that in bear markets, you’ve essentially got to trade them.”

Mr. Odey said his funds have reduced their shorts, or bets against falling stocks, and had made back some of their losses since the middle of October. As well as Glencore, it has been betting against casino operator Las Vegas Sands, whose shares are up nearly 30% in October, according to a presentation to investors reviewed by the Journal.

Mr. Odey said he expects the next downward move in markets to be “much more painful” and is looking for capacity in the economy to be removed—a process hindered by central-bank money printing—before he buys back into stocks aggressively.

Energy and commodity markets, and shares in the oil producers and miners exposed to them, have been big losers since the spring. But they snapped back in early October. The MSCI World Metals and Mining index jumped 25% between Sept. 29 and Oct. 9.

“It’s been a joyless bounce” for hedge funds, said Antonin Jullier, global head of equity-trading strategy at Citigroup.

Lansdowne Partners, one of the world’s biggest equity hedge funds with about $20 billion in assets, had a 5.7% drop in its European Equity fund in the month through Oct. 16, reducing gains this year to 16.5%, according to numbers sent to investors and reviewed by the Journal. Its flagship $12 billion Developed Markets fund is down 1.9% in October as of that date, leaving it up 12.2% this year.

Lansdowne declined to comment. According to regulatory filings, the fund has been betting against energy and basic-materials stocks, including Glencore, and against gold and silver producer Fresnillo PLC, which rose 25% in October.

“We feel that commodity prices assumed in valuations (especially in energy) are most unlikely to be met,” managers Peter Davies and Jonathon Regis wrote in their most recent letter to investors, which was reviewed by the Journal.

The managers said the fund was exposed to sharp reversals in the market. But they added that corporate profits were coming under pressure and they hadn’t put on any new bets on rising stocks of any scale so far this year, while they had spotted at least 10 new attractive bets on falling stocks.

Horseman Capital Management Ltd., which runs $2.6 billion in assets, had a 7.9% drop in its Global fund in October as of Wednesday, reducing gains this year to 13.9%, according to numbers sent to investors and reviewed by the Journal. Horseman declined to comment.

“I struggle to contain my bearishness,” Horseman fund manager Russell Clark said in an October letter to investors, also reviewed by the Journal, adding that he believed a global recession had already started. The fund has been running a large bet against stocks, including bets against those in the oil, financial and auto sectors.

Hedge funds on average are up 1.1% for October but down 2% this year to Oct. 27, according to early numbers from data group Hedge Fund Research. That puts them on track for a third calendar year in the red since the onset of the credit crisis.

Equity hedge funds, which are typically able to capitalize on rising stock prices, are up just 1.1% for the month to Oct. 27, compared with a 7.6% gain in the S&P 500 over that period. They are still down 2% for the year.

“Nobody expected this move,” said the head of prime brokerage at a major bank, referring to October’s rally. “There’s no doubt people were underinvested on the way up.”

For some large U.S. hedge funds, October may be replacing April as the proverbial cruelest month.

Last month brought an 8.4 percent rally in the S&P, the best performance for that and other major indexes since 2011. Yet while average hedge-fund performance figures haven't yet been tabulated, anecdotal evidence suggests that some major money managers struggled to even come close to those levels.

Through Oct. 27, Pershing Square, the long-short hedge fund managed by Bill Ackman, had fallen 3.8 percent for the month, according to its website, and was down 15.9 percent this year. Through Oct. 26, Glenview Capital, the health care-oriented fund run by Larry Robbins, was down 7.3 percent for the month and 20.25 percent for the year, according to an investor letter, prompting Robbins to show remorse for a period that in which "I've failed to protect your capital, and mine." In an effort to rebuild investor goodwill, Robbins is offering to "work for free to recover the losses I created for you" by initiating a new, fee-free investment product that focuses on more easily-traded stocks.
Other key funds had flat or upside performance for October, but still fell shy of the broad market — and remained in lackluster territory. Greenlight Capital, David Einhorn's long-short stock fund, managed 0.7 percent returns for October, but remained 16.3 percent in the red for the year. Dan Loeb's Third Point Offshore fund did better, rising 4.7 percent in October but staying flat for the year through then. Even Citadel's flagship Wellington fund, which is up an impressive 12.15 percent for the year, was flat for the month.

Some hedge-fund managers remain optimistic, while acknowledging that their clients may be disappointed with this year's showing. In a late-October letter to investors, for instance, Einhorn spoke of re-examining his losing positions and electing to reduce Greenlight's gross exposure, covering some short, or bearish positions, and "modestly" increasing the firm's net long positions. The fund continues to see future upside in some of its more battered holdings, including Consol (CNX) and SunEdison (SUNE), Einhorn wrote.

Loeb, however, went the opposite direction, saying in an Oct. 30 letter that the short-selling environment was full of opportunity and that Third Point has "more single short names than long positions in our book today." While Loeb said he he does not see another U.S. recession as imminent, the market will remain volatile and stock valuations will be curtailed.

The drugmaker's shares had been a big performance driver for Rosenstein's Jana Partners.

The fund first bought 4.3 million shares of Valeant in the fourth quarter of 2014. In spring 2015, the fund pared back its position to 1.57 million shares. Jana held 1.34 million shares of Valeant at the end of the second quarter, regulatory filings show.

His September exit came at the right time.

Here's Jana, in its quarterly letter to investors (emphasis at the end is ours):

When the facts do change, we react. A case in point is Valeant Pharmaceuticals International, INC (VRX). We established our position in the fourth quarter of 2014, and closed out the position in September. Year to date, Valeant has been the biggest positive contributor to performance. The situation for Valeant changed dramatically in September, when its drug pricing practices were called into question by Hillary Clinton. Valeant had been under scrutiny for months, and in retrospect we should have been more acutely attuned to the importance of the inquiry into the price increases on certain Valeant's drugs by Senator Sanders and Representative Cummings that surfaced in August. We had reduced our Valeant position meaningfully earlier in the spring and summer as it approached our price target, and we felt more comfortable with our smaller position. When Valeant's business practices were conflated with those of Turing, whose founder painted himself and his company (and by extension Valeant) as a nearly political target, we recognized that Valeant's business model would be forced to change in ways we could neither anticipate nor forecast and decided to exit completely, thereby avoiding an approximately 40% further drawdown in the stock.

Valeant had been a hedge fund favorite, but lately it's been a hedge fund horror. It ranked No. 10 on Goldman Sachs' stocks that "matter most" to hedge funds list for the second quarter. According to Goldman, 32 funds had the stock as one of their top-10 stock holdings.

Some of the stock's big holders include Bill Ackman of Pershing Square and long-time activist investor Jeff Ubben of ValueAct. Ackman, founder of Pershing Square, has lost around $1.9 billion on paper since taking a large stake in the first quarter of this year.

The story of Valeant Pharmaceuticals has come full circle.

After all of the controversy around accusations that the company engaged in accounting fraud; after Valeant revealed its use of a mysterious business to drive sales; and after investors have knocked a full 50% off of the company's stock price, the biggest question about the company is something raised almost two years ago: Is Valeant able to generate real growth?

The charge is that Valeant, a pharmaceutical company that has been one of Wall Street's darlings over the past several years, is a roll-up — a company that uses aggressive accounting and serial acquisitions to hide its lack of growth.

This criticism has been leveled for almost two years by Kynikos Associates founder Jim Chanos, who thinks Valeant's reliance on debt-fueled acquisitions and price increases (which has also come under fire from politicians) is unsustainable.

Now that Valeant's shares have been crushed and bond investors have grown wary of the drugmaker's $31 billion debt load, this view has been given more credence. Standard and Poor's on Friday downgraded its outlook on Valeant's credit to negative.

It's not that Wall Street didn't know that Valeant — whose annual revenue is over $8 billion — was aggressive, it's that now investors are starting to ask themselves why.

And now that government officials at both the federal and the state levels have started asking questions, investors are starting to wonder whether Valeant's aggression will stand.

Last week, one of Wall Street's elder statesmen, Berkshire Hathaway vice chairman Charlie Munger, told Bloomberg thatValeant had relied on "gamesmanship" to show value and had a "phony growth record."

Those allocations are generally in the high single digits and can be as much as 20 percent, Bruce Amlicke, CIO at UBS Hedge Fund Solutions, said in an interview in Singapore. Five years ago, that share was “a couple of percent less,” he said without elaborating.

“Monetary policy responses to drive interest rates lower pushed fixed-income markets and yields to a level where you can look at hedge funds as an alternative to fixed income,” Amlicke said. “It’s a global phenomenon.”

Companies added new jobs in October at the fastest pace of 2015, knocking the U.S. unemployment rate down to a seven-year low and setting the stage for the Federal Reserve to raise interest rates before the year ends.

The economy generated 271,000 new jobs last month, with all but 3,000 coming in the private sector, the government said Friday, topping the MarketWatch-compiled economist consensus for 180,000 jobs created. Almost every major industry boosted payrolls.

Just as important, a long-awaited acceleration in wages might finally be happening. Hourly pay rose at the fastest year-over-year pace since the U.S. exited recession in mid-2009. Economists have been expecting a faster increase in pay amid a deep drop in unemployment and the creation of millions of new jobs over the past several years.

The unemployment rate, meanwhile, fell to 5% from 5.1%, marking the lowest level since April 2008. More people also entered the labor force in search of work, a sign that jobs are available.

The sharp rebound in hiring last month eases worries about a softening labor market after job creation suddenly slowed in August and September. Employment gains were a combined 12,000 higher in those two months than previously reported, the Labor Department said.

The latest employment report offers concrete evidence the U.S. remains on a solid growth path despite turmoil in the global economy and tougher times for some domestic industries such as manufacturing and energy.

The Fed is prepared to raise its benchmark short-term rate for the first time since 2006, and the October jobs report will likely bring policy makers to the precipice. Top officials won’t meet again until after the November jobs report, however, so the Fed can wait for more confirming evidence.

Stock futures soured after the report, while yields on Treasurys climbed.

Inside the report

The rebound in hiring in October was driven almost entirely by companies that offer services such as software design, banking, health care, shopping and eating out.

White-collar businesses added 78,000 profession jobs. Health care added 45,000 positions. Retailers took on 44,000 new workers, and restaurants hired 42,000 people.

Builders also beefed up employment by 31,000, reflecting an upturn in construction over the past year.

The only two industries that continue to struggle are energy and manufacturing, reflecting the diverging fortunes of companies that produce goods and those that offer services.

Export-intensive manufacturers that make goods such as heavy machinery and companies that extract fossil fuels have been battered by a strong dollar and plunging oil prices. Employment in the manufacturing sector was unchanged in October, and energy producers cut jobs for the 10th month in a row (click on image).

The labor market as a whole, however, is still the healthiest it’s been in years. The U.S. has added an average of 206,000 jobs a month in 2015.

As a result, the number of people who can’t find work or who can only get part-time jobs continues to shrink. The so-called U6 unemployment rate that takes these people into account dropped to 9.8% in October, the first time it’s fallen below 10% since May 2008.

The labor market is still not fully healed, however. Some 15.6 million Americans who want a full-time job can’t find one, an unusually high number after more than six years of economic recovery.

The percentage of able-bodied people 16 or older in the labor force also sits at a 42-year low. The labor force participation rate was unchanged at 62.4% in October.

The American economy added 271,000 jobs in October, the government reported Friday, a very strong showing that makes an interest-rate increase by the Federal Reserve much more likely when policy makers meet next month.

The unemployment rate dipped to 5 percent, from 5.1 percent in September. Average hourly earnings also bounced back, rising 0.4 percent in October after showing no increase in September; that lifted the gain to 2.5 percent over the last 12 months, the healthiest since 2009.

The combination of the surge in job creation, rising wages and the falling unemployment rate all increase the pressure on the Fed to finally move on rates after months of debate and uncertainty amid economic turmoil overseas. It also largely puts to rest any lingering fears of a new recession and suggests that the economy is likely to continue to improve as the nation heads into an election year.

“At last, a payroll report which makes sense,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. After two relatively weak reports that were hard to explain, given other, healthier economic data, he said, “this is consistent with all the advance indicators.”

“Barring a disaster in November,” Mr. Shepherdson said, “rates are going to rise in December.”

At 5 percent, the unemployment rate is very close to what would normally be considered the threshold for full employment by the Fed and many private economists.

The slack that built up in the labor market after the recession, however, has altered traditional calculations of how far unemployment can fall before the job market tightens and the risk of inflation rises.

The proportion of Americans who are in the labor force, which fell to a 38-year low of 62.4 percent for September, was unchanged last month.

This week, Janet L. Yellen, the chairwoman of the Fed, told a panel on Capitol Hill that an increase in December was a “live possibility” if the economy continued to perform well.

Ms. Yellen left herself and the rest of the Open Market Committee of the Fed plenty of wiggle room, emphasizing that no decision had been made on whether to raise rates for the first time in nearly a decade. They will have an additional jobs report for November in hand by the time they gather for their last meeting of the year, on Dec. 15 and 16.

But the surprising strength of the economy in October puts the Fed on track to finally bring to an end an eight-year period of near-zero interest rates. Although the initial interest rate increase would be small, most likely a quarter of a percentage point, any increase would represent a new era for investors and borrowers here and abroad.

The Labor Department’s broadest measure of unemployment, which includes workers forced to take part-time jobs because full-time work is unavailable, fell to 9.8 percent in October from 10 percent in September. A year ago, it was over 11 percent.

With the strong October data, economists are already beginning to look beyond the first move to the question of how fast the Fed will have to make subsequent rate increases if the labor market continues to tighten.

“Regardless of the exact timing of the first rate hike, we still believe that the big story next year will be an unexpectedly strong pickup in wage growth and price inflation,” said Paul Ashworth, chief United States economist at Capital Economics. This trend, he said, “will force the Fed into a much more aggressive policy-tightening cycle than the Fed’s projections currently suggest.”

Before the report on Friday, economists had been anticipating a payroll increase of about 180,000 jobs, with the unemployment rate remaining unchanged from September’s level. The Labor Department revised upward the total number of jobs created in August and September by 12,000.

The picture of labor market strength evident in the data sent bond yields surging in the minutes after the release of the report, as traders rapidly adjusted for the likelihood of a December move.

Although a small proportion of total employment, manufacturing has been one source of weakness, losing more than 25,000 jobs over the summer amid softening demand from Asia and other export markets. The mining and logging sector has also been shedding jobs, cutting more than 100,000 positions this year as prices of oil, iron and other commodities have plunged.

Still, many other areas of the economy — like professional and business services, health care, and leisure and hospitality — have been very strong, with employment in each of those three sectors increasing by more than 30,000 jobs in September.

The pattern persisted in October: Factory jobs were unchanged, while mining and logging lost 4,000 positions. Professional and business services, meanwhile, recorded a huge 78,000 increase in jobs. Health care hiring was also robust, with a 56,700 increase.

White-collar employers like Ernst & Young, the accounting and consulting giant, have been on something of a hiring binge. Over the course of the company’s 2016 fiscal year, which began in July, Ernst & Young plans to hire just over 17,000 new employees in the United States, with roughly 10,000 joining straight out of college.

In July, August, and September, the firm added 2,500 more experienced accountants and consultants, said Dan Black, director of recruiting for the Americas.

“Whether it’s dealing with taxes, regulations or technology, our clients want help,” Mr. Black said.

Nearly all the positions, whether entry-level or for more experienced workers, require at least a bachelor’s degree, underscoring how crucial credentials and specialized skills have become in today’s job market.

Starting salaries for holders of newly minted degrees in fields like accounting, finance and computer sciences frequently range above $50,000 or $60,000, Mr. Black said. Veteran workers in hot fields like cloud computing and cybersecurity can command much more.

“For experienced talent, it’s a dogfight,” he said. “In 2008 and 2009, as companies cut back, we had our pick of the litter. Now it’s much more competitive.”

After a disappointing third quarter, which saw the smallest net job creation in three years, the US labour market got its mojo back. At least that the message sent out by October’s consensus-topping employment reports. The establishment survey not only showed a mind-blowing 271K increase for non-farm payrolls, the biggest increase this year, but also the best diffusion of private sector jobs in months, i.e. job gains were broad based. Also encouraging is the fact that state government employment was up again which means public finances are on the right track, i.e. a positive for the implementation of much-needed infrastructure projects.

In other words, the observed surge in construction employment has room to run. Similarly, the household survey, in addition to showing the largest increase in jobs since January and the lowest unemployment rate in seven and a half years, also put full-time employment at a record 122 million. All in all, the stellar employment reports will likely convince the FOMC to raise interest rates in December for the first time in nine years. But that’s not to say the Fed is about to embark on a tightening cycle à la 2004-06. The strong dollar raises risks for the US economy next year with regards to both growth and inflation, the latter already far below the Fed’s target. Also, despite appearances, not all is rosy the labour market. 

As today’s Hot Charts show, wage inflation, despite rising slightly in October, remains well below pre-recession levels capped in part by weak productivity gains (click on image). 

"Before going to bed last night, I calculated that any jobs number over 150,000 would be sufficient. And I think importantly because the Fed views the economy and future inflation through a Taylor Rule and a Phillips curve lens that speaks to low unemployment and a new NARU that somewhere around 5.25 percent, which is now below that at five percent."

"I think the Fed fears it…They took it out of their statement last month. But prior to that, they were cognizant of the fact that a very strong dollar has negative implications for emerging markets… It’s certainly a negative for the global financial system because there are many bets and much dollar denominated debt in terms of emerging market corporations and sovereigns will be impacted by this."

I'm not going to get all technical on you but from a fundamental perspective the strength in the USD doesn't surprise me. The U.S. economy is recovering nicely while the rest of the world is languishing, especially in the euro zone where German factory orders plunged the most since 2009, underlining the risk of a slowdown in Europe’s largest economy.

I've been warning my readers of the euro deflation crisis and having just visited the epicenter of this crisis, I came away convinced that the euro will fall further. In fact, I wouldn't be surprised if it goes to parity or even below parity over the next 12 months. There will be countertrend rallies in the euro but investors should short any strength.

What is my thinking? First and foremost, the European Central Bank (ECB) is falling way behind the deflation curve. Forgive the pun, but as long as Draghi keeps dragging the inevitable, meaning massive quantitative easing, the market will continue pounding the euro. The fall in the euro will help boost exports and more importantly, import prices, fighting the scourge of deflation.

Once the ECB starts ramping up its quantitative easing (QE), there will be a relief rally in the euro and you will see gold prices rebound solidly as inflation expectations perk up. This is counterintuitive because typically more QE means more printing which is bearish for a currency -- and longer term it will weigh on the euro -- however over the short-run, expect some relief rally.

But the problem is this. You can make a solid case that the ECB has fallen so far behind the deflation curve that no matter what it does, it will be too little too late to stave off the disastrous deflation headwinds threatening the euro zone and global economy.

Now, if you ask me, there is another reason why the USD is rallying strongly versus all other currencies and it has little to do with Fed rate hikes that might come sooner than the market anticipates. When global investors are worried about deflation and another crisis erupting, they seek refuge in good old U.S. bonds. This has the perverse effect of boosting the greenback (USD) and lowering bond yields, which is why I'm not in the camp that warns the bond market is more fragile than you think.

What does the strong USD mean for the U.S. economy? It means oil and import prices will drop and exports will get hurt. Ironically, lower oil and import prices will reinforce deflationary headwinds, which isn't exactly what the Fed wants. But the stronger USD might also give the Fed room to push back its anticipated rate hikes. Why? Because the rise in the USD tightens up financial conditions in the U.S. economy, acting as a rate increase.

In a CNBC interview shortly after the Labor Department released the jobs report, Evans said the data support his 2016 economic outlook of 2.5 percent growth.

Addressing whether the Fed should hike interest rates next month, the dovish Fed official acknowledged, "We've indicated that conditions look like they could be ripe of an increase."

"[But] my continued preference for more delay or a shallower path ... [is] my uncertainty over whether ... inflation is going to get up to our 2 percent objective within reasonable amount of time," he said on " Squawk Box ."

He added he's also a "little bit worried about downside risk with the weak foreign economy."

Evans, a voting member this year on the central bank's policymaking panel, wants financial markets to focus on the path for rates, not the exact timing of the initial move.

The Fed needs to have communications that "indicate the path is going to be gradual," he said.

It seems unlikely that the dollar could move far enough over the next month to derail a rate hike. U.S. inflation is not that sensitive to the currency, so it is unlikely that any plausible moves in the currency would move the inflation rate by enough to worry the Fed.

Even if the dollar moves, financial market price changes can rapidly reverse; we saw that with equities many times over the past few years. The Fed needs to ignore financial market volatility.

The cost of pensions for retired EU civil servants and MEPs has seen the EU's estimated pension responsibilities soar by more than £8.6billion last year.

UK taxpayers will have to pay a staggering £5billion over the coming decades because of the swelling pensions bill - which also includes an extortionate £4.5billion in private sickness insurance.

European auditors have previously identified the pensions of retired Brussels bureaucrats as a major influence in increasing contributions from national governments towards the EU.

Pawel Swidlicki, from the think tank Open Europe, slammed Brussels for failing to control the rocketing EU pensions bill - despite enforcing brutal cuts on pensioners in EU countries like Greece.

He said: "The spiralling bill for EU officials' pensions is the legacy of years of inefficient management and overly generous terms and conditions.

"The UK and many other countries have introduced tough reforms to make public sector pensions sustainable. It is high time the EU follows suit."

David Cameron is aiming to reduce the EU's administrative bill as part of his renegotiation of the UK's relationship with Brussels.

However pensions pose a major problem for the Prime Minister.

Last year, the UK hopelessly failed to halt a cut to the contribution paid by Brussels bureaucrats towards their pensions - which reduced from 11.6 per cent to 10.6 per cent.

It came despite the fact the cost of servicing EU pensions will increase by a staggering 5.2 per cent next year.

The number of retired EU staff claiming a pension worth 70 per cent of their final basic salary is also expected to increase by 4 per cent in 2016 - which will take the annual bill to £1.1billion.

A spokeswoman for the European Commission said the dramatic increase was caused by a "significant decrease in the interest rate".

She said: "This is an estimate of the value of the total liability at a given point in time."

"It probably will never be paid as it stands."

Increasing numbers of retired MEPs are also paid under the EU pensions bill - despite of not contributing towards their own pension.

The pension is currently worth £13,760 for each five-year term served as MEP, while the schemes liabilities have grown to more than £230 million over the last five years.

Joseph D. Rush, Jr. joined the beach patrol in Atlantic City when qualifying tests were conducted in stormy weather at sea to judge an applicant’s mettle, local Republican leaders signed off on each hire and lifeguards attended movies free by flashing their badge. He retired in 2000 with an annual lifeguard’s pension of $30,000.

Lifeguard pension?

That’s right, lifeguard pension. It’s one of those relics from the lavish and loud Prohibition-era Atlantic City depicted in television and film. Despite just a four-month beach season and a battered casino industry, lifeguards who work 20 years, the last 10 of them consecutively, still qualify at age 45 for pensions equal to half their salaries. When they die, the payments continue to their dependents.

About 100 ex-lifeguards and survivors collected anywhere from $850 to $61,000 from the city’s general fund last year, according to public records. In all, it comes to $1 million this year. That’s a significant chunk of cash for a municipal government with annual revenue of about $262 million and, more importantly, it’s emblematic of the city’s broader struggle to downsize spending and contain a budget deficit that has soared as the local economy collapsed.

Kevin Lavin, the emergency manager appointed by New Jersey Governor Chris Christie to stabilize the finances of the city of 39,000, has cited lifeguard pensions as a possible item for “shared sacrifice” in a community already forced to fire workers and raise taxes. He intends to reveal more about his plans in a report that could come as early as this week.

Retired lifeguards don’t intend to sit idly by and watch their pensions carried away by the political and economic tide.

“We worked under the precept that we were going to get a pension, and that’s a certain amount of money,” said the 84-year-old Rush. “I’m not responsible for the mismanagement of the politicians, and I’m not responsible for the casinos leaving.”

As formerly-bankrupt Detroit was home to auto making, Atlantic City for decades was a one-industry gaming haven, the Las Vegas of the East Coast. Along the marina and beaches, patrolled by lifeguards, casinos shook money loose from their guests, generating a bounty for the city to subsidize the pensions for the part-timers and bankroll a municipal workforce well above the national average.

Budget Deficit

Today, the junk-rated city, where more than a third of its residents live in poverty, is struggling to avoid bankruptcy. Four ocean-side casinos -- one in three -- shuttered last year. Its tax base has eroded by 64 percent over the past five years. Investors in May demanded a lofty 7.75 percent yield on bonds maturing in 2040 even though the state could divert aid to make the payments if needed. The city closed a $101 million deficit this year partly by plugging in casino revenue it hasn’t received yet.

“Cities on a downward spiral have these legacy costs that are very difficult to eliminate,” said Howard Cure, director of municipal research in New York at Evercore Wealth Management, which oversees $5.9 billion in investments. “There are only so many people you can fire.”

Atlantic City, developed as a resort community in 1854, drew revelers long before its first casino opened in 1978. People eager to escape the stifling summer heat of nearby cities such as Philadelphia thronged its beaches, and drank and gambled illegally in back rooms during the Prohibition era with the complicity of city officials.

Keeping bathers safe was an important enough consideration that nearly from its start the resort city hired “constables of the surf” to watch over them, according to Heather Perez, archivist at the Atlantic City Free Public Library. In 1892, they were organized into the beach patrol.

Golden Era

The pension plan is the product of a 1928 state law sponsored by an Atlantic City Republican legislator named Emerson Richards, who lived in a palatial apartment near the lifeguard headquarters and threw parties, such as an annual Easter eggnog celebration, attended by political wheelers and dealers.

The statute creating the lifeguard pensions hasn’t been changed since 1936, according to state library records. Four percent of pay is deducted to help cover the benefit, which nonetheless needs to be subsidized by city taxpayers.

While many on patrol moved on after stints as high school and college students, others hung on to their positions year after year, particularly teachers who had the summers free, said Democratic state senator Jim Whelan, a former city mayor.

“What we call ‘teach and beach,’” said Whelan, who was also a lifeguard and teacher but fell short of qualifying for the lifeguard pension. “Not a bad life.”

Half Century

Rush was one of the longer lifers, working the beach for 52 years before, during and after a teaching career in Wilmington, Delaware. After retiring from that job in 1985, he extended the lifeguard season by working the winter months repairing boats and re-splicing rescue ropes.

“It’s a rough ocean,” Rush, who estimates he participated in 1,000 rescues, said. “You go save somebody, it’s a hard job. Just ask someone who was saved to see how important the job is.”

As part of his review, Lavin, the emergency manager installed in January, is looking at whether the benefit is in the community’s best interest, said Bill Nowling, his spokesman. “The city has limited resources and needs to make tough decisions about how it funds programs going forward,” he said.

The system wouldn’t be a burden if the city had managed it properly, said Michael Garry, president of the beach patrol union. He said he’s talking to lawmakers and Lavin on how to cut costs for the city.

“Nobody ever sits there and says, ’why do we need the police. Why do we need fire,’” he said. “We’re a little accustomed to having to justify everything about us."

Giving MPs the pink slip is going to cost Canadians an estimated $220 million, according to figures released this week.

There were 180 MPs who either didn’t run or were defeated in Monday’s election and are now set to collect very generous pensions and severances, the Canadian Taxpayers Federation (CTF) said in its report.

About $5.3 million per year will go out in pension payments to MPs who failed to get re-elected or retired, collectively totalling $209 million by the time they all reach 90 years of age, the report’s author Aaron Wudrick found.

Twenty-one of the former MPs are expected to collect more than $3 million each in lifetime pension earnings thanks, in part, to a plan that had taxpayers contribute $17 for every $1 an MP put in.

At the top of the list is Peter MacKay, who stepped down earlier this year after 18 years and four months in the House of Commons, where he held high-profile posts including Foreign Affairs, National Defence, Justice and Attorney General.

The 50-year-old could collect up to $5.9 million on his total contributions of $254,449.

MP pensions accrue at between 3 and 5 per cent per year — more if they serve as cabinet ministers, party leaders or committee chairs.

The CTF’s lifetime estimates are based on pension payments up to age 90, using a “conservative” annual indexation of 2 per cent.

So Liberal Gerry Byrne, who served as MP for 19 years and six months, contributed $211,504 to his pension. By age 90, he will have collected $5.2 million.

Because they are under the pension kick-in age of 55, MacKay and Byrne also stand to collect severance cheques: $123,750 and $86,650, respectively, or half their annual salary.

In fact, 27 MPs will receive an estimated total of just over $11 million in severance payments even though they chose to leave the job, CTF calculations show.

And perhaps those who were sent packing shouldn’t be compensated with severance either, Wudrick says.

“It isn’t fired without cause, it’s fired with cause — people don’t want you anymore,” he says. “You’re elected — it’s like voters are handing you a four-year fixed-term contract.”

Regardless, he says, the fact they receive a half-year salary seems overly generous, especially when many of the departing MPs only served one term.

But Canadians won’t have to be so generous with the current crop of MPs thanks to pension reforms passed by Parliament in 2012.

MPs’ contributions have been gradually increasing so that by Jan. 1, 2017, they will reach a more equitable ratio, much closer to the type of scheme typical in the private sector: at that point, taxpayers will end up paying about $1.60 for every $1 an elected official contributes. The full-pension age has also been raised to 65 from 55.

For its report, the CTF used information from the Members of Parliament Retiring Allowances Act and from the MPs’ official biographies.