There’s Lightspeed, whose software helps 40,000 businesses across the world manage their sales. Hopper, whose successful use of big data predicts the best time to buy a plane ticket. Rodeo FX, whose special effects in Game of Thrones have won Emmys. There are researchers like Yoshua Bengio, whose work is pushing the boundaries of artificial intelligence. And Moment Factory, whose productions dazzle the planet.

Whether it’s big data or new media, artificial intelligence or virtual reality, Montreal is laying the foundations for its future, thanks to a new generation of entrepreneurs and researchers who think and work differently.

Thinking differently is what we try to do every day at la Caisse. And our Réseau électrique métropolitain project is a good example of thinking differently in undertaking a major public transit initiative.

Why is this project important? Because it’s vital that Greater Montreal propel itself into the economy of tomorrow. Because if we are to succeed as a city, we need infrastructure that moves the city forward rather than slowing its progress. Efficient public transit is essential in enabling Montreal to become a metropolis as dynamic as its entrepreneurs.

As a city, we have a unique opportunity to build an electric train network that will change the face of Greater Montreal. It’s a big responsibility that matches the scale of this almost $6 billion investment.

No matter their point of view on specifics, I think everyone agrees on one thing: Montrealers have waited too long for a transit system that meets their needs.

Rain or shine, they want to get to the airport without worrying about missing their plane due to traffic on Décarie or Highway 20. They want to make the Brossard-Central Station trip in 15 minutes flat. They want trains to run every six minutes during their rush-hour commute from Deux-Montagnes to downtown.

That said, the REM is much more than an effective public transit network. The project will create some 8,500 direct and indirect jobs annually during the four years of its construction. It will inject $3.7 billion of financial adrenaline to boost the local economy. That’s over and above the $5 billion in real estate investments expected along the project’s route, including transit-oriented development within walking distance of stations.

At la Caisse, we estimate that the REM will increase the overall public transit budget for the Greater Montreal area by about 2 to 4 per cent. That includes all capital expenditures — that is a first for Quebec. Put another way, for a comparable annual budget, the Greater Montreal area gets the equivalent of a second métro system.

***

Because the REM is such a transformative project for Greater Montreal, it’s perfectly reasonable that the project be closely scrutinized, and the subject of lively discussion. It’s the opposite that would be surprising.

Legitimate questions are being asked. Our goal at la Caisse is always to find better ways to answer them and to work hard to find the best solutions we can. That’s why I think it is important for us to better explain our timetable and the way we’re working to deliver the project on time and on budget.

We have committed to put the first REM trains in service by the end of 2020. First, because we are absolutely convinced it’s doable. And second, because by getting on with the job, we can more easily integrate into the new Champlain Bridge and help relieve chronic traffic jams in Montreal.

Of course, in Quebec we have had more than our fair share of substantial delays and chronic cost overruns in major infrastructure projects. And that’s precisely why we’ve chosen a different approach for the REM — one that allows us to deliver the project in a much more efficient way. We’re working methodically, with utmost rigour, using a continuous engineering approach. What does that mean? It means we’re always listening to suggestions and working on improvements, non-stop.

So far, we have organized 12 open-door meetings where we heard the views of some 3,000 citizens. We’ve discussed the project with hundreds of city officials, transit administrators and community groups. Many worthwhile improvements have resulted from these exchanges.

To broaden access to the REM for all Montrealers via the main métro lines, we accelerated the opening of three new stations at Édouard-Montpetit, McGill and Bassin Peel. To protect wetlands, we decided to extend a tunnel under the Sources Nature Park. To preserve historical buildings in Griffintown, we will be using elevated tracks. And so on.

This openness has guided us since the beginning, and it will continue to do so in the months ahead. In that spirit, we are currently working with the Environment Ministry to follow up on the recommendations of the BAPE environmental review board, despite our differences on certain issues raised in the report.

We are also using a continuous improvement approach to encourage the bidders who have responded to our call for tenders to deliver their most innovative solutions and technologies. Our open and flexible call for tenders is designed to draw on the very best ingenuity that these consortia have to offer.

This approach, based on flexibility and continuous engineering, is in widespread use elsewhere in the world. It’s an efficient way to continuously improve a project, while ensuring it meets expectations. This way of working — collaboratively and iteratively — is inherent in how the new economy works. That said, it is different from the traditional ways used in Quebec to deliver infrastructure.

As our work continues, we will continue to work with municipalities, remain open and receptive to suggestions from the public, and keep you informed of the progress made as we’ve done in recent months.

The REM was never intended to solve all of Greater Montreal’s transportation problems. But it will make a difference. That’s why those of us at la Caisse are working hard every day to plan and build a transit network that meets the needs of Montrealers. Because, for la Caisse and for me personally, there is only one Montreal. A Montreal of the possible.

Canada’s pension funds are among the world’s biggest investors in private equity, according to a new report.

Preqin’s The Private Equity Top 100, issued today, found that three of the 10 largest PE limited partners are Canadian.

Sitting atop the list is Canada Pension Plan Investment Board.

CPPIB, which invests on behalf of Canada’s public retirement system, earned the ranking with a current PE asset allocation of about US$44 billion, Preqin said. That’s just ahead of Abu Dhabi’s sovereign-wealth fund, which oversees a pool of about US$40 billion.

Not far behind, in the No. 6 spot, is Ontario Teachers’ Pension Plan. It’s closely followed by Caisse de dépôt et placement du Québec.

Ontario Teachers’ and CDPQ are reported to have current PE allocations of US$21 billion and US$20 billion, respectively. That puts them just behind Singapore’s GIC, California Public Employees’ Retirement System and the Netherlands’ APG.

Several other Canadian pension funds also appeared on the list.

Public Sector Pension Investment Board, Ontario Municipal Employees Retirement System, Alberta Investment Management Corp and British Columbia Investment Management Corp, for example, are ranked among the world’s 50 largest LPs.

Preqin says the 100 largest PE LPs managed an aggregate investment pool of US$791 billion last year. On average, they have a PE allocation of 12.1 percent of total assets and are targeting an overall allocation of 12.5 percent.

Two-thirds of the 100 largest are located in North America. They consist of a wide variety of institutional fund types, with public pension funds accounting for the biggest share (43 percent).

Europe, North America and Asia are the preferred investment locales of the 100 largest PE LPs. They also tend to prefer funds focused on buyout, growth and venture capital opportunities.

Canada’s largest pension funds typically invest in the global PE market through a mix of fund and direct strategies. For many, direct deals account for a growing share of allocations. Directs are done either independently or as co-investments and co-sponsorships alongside fund partners.

Preqin told PE Hub Canada estimates of the current asset allocations of the 100 largest PE LPs reflect a range of direct-fund investment strategies.

The entire Preqin report can be viewed here.

• Private equity is an important asset class, making up on average 12% of the total assets at Canada's large public pensions. 
• All of Canada's large public pensions invest in private equity primarily through external funds which they pay big fees to and are then able to gain access to co-investment opportunities where they pay no fees. In order to gain access to these co-investments, Canada's large pensions need to hire professionals with the right skill set to analyze these deals in detail and have quick turnaround time when they are presented with opportunities to co-invest.
• Some of Canada's large public pensions, like Ontario Teachers and OMERS, engage in purely direct (independent) private equity deals where they actually source deals on their own and then try to improve the operational efficiency of that private company. The added advantage of this approach is that unlike PE funds who try to realize gains in three or four years, pensions have a much longer investment horizon (ten+ years) and can wait a long time before these companies turn around.
• However, the performance of these type of purely direct (independent) deals is mixed with some successes and plenty of failures. Also, we simply don't have independently verified information on how much is truly allocated in independent direct deals versus fund investments and co-investments, and how well these independent direct deals have done over the long run.
• The reality is that despite their long investment horizon, Canada's large public pensions will never be able to compete effectively with the large private equity titans who are way more plugged into the best deals all around the world.
• This is why CPPIB, Canada's largest pension, focuses purely on fund investments and co-investments all around the world in their private equity portfolio. They will never engage in independent direct deals like they do in infrastructure. Their philosophy, and I totally agree with them, is that they simply cannot compete on direct deals with premiere private equity funds and it's not in the best interests of their beneficiaries.
• Under the new leadership of André Bourbonnais, PSP Investments is also moving in this direction, as Guthrie Stewart's private equity team sells any independent direct stakes to focus its attention solely on fund investments and co-investments to reduce overall fees (again, I agree with this approach in private equity).
• CPPIB and PSP will be the world's top private equity investors for a very long time as they both have a lot of money coming in and they will be increasingly allocating to top credit and private equity funds that can make profitable long-term private investments all over the world. 
• Ontario Teachers, the Caisse, bcIMC, OMERS and other large Canadian pensions will also continue to figure prominently on this list of top global private equity investors for a long time but they will lag CPPIB and PSP because they are more mature pensions with less cash coming in. Still, private equity will continue to be an important asset class at these pensions for a long time.

The Canada Pension Plan Investment Board reported a decline in Canada Pension Plan assets to $298.1-billion in its third fiscal quarter, as a major drop in North American fixed income markets hampered investment results.

CPPIB, which manages the Canada Pension Plan investment portfolio, said Friday that the $2.4-billion decrease in assets through the quarter ended Dec. 31 was caused by a swell in CPP payments made to cover benefits at the end of the calendar year that exceeded the $1.7-billion in investment income the fund produced. The investment portfolio’s return in the quarter was 0.56 per cent, after factoring in all costs.

“The fund’s modest return this quarter reflects the largest quarterly decline in North American fixed income markets since CPPIB’s inception coupled with the Canadian dollar strengthening against most major currencies except for the U.S. dollar, partially offsetting gains in our public equity portfolio,” said Mark Machin, CEO of the CPPIB, in a statement.

The end of 2016 and the election of U.S. president Donald Trump brought broad declines to the bond market, projecting investor expectation of inflation and economic growth in the U.S. CPPIB also takes the strategic position not to not to hedge its investment portfolio against currency fluctuations, which means foreign exchange changes can generate big gains or losses.

Mr. Machin has cautioned in recent months to expect more short-term volatility in the fund’s investment results, as the pension fund adjusts its approach to risk in a way it expects will lead to higher long-term gains. So far, in the nine months of CPPIB’s current fiscal year, the fund has produced a 6.9 per cent investment return, after factoring costs.

The CPPIB said that it expects to see more CPP contributions flow into the CPP Fund during the first part of the 2017 calendar year, which will help to make up payments exceeding contributions at the end of 2016. The fund noted that it receives more contributions annually than it pays out.

On the investment front, the pension fund was highly active in the quarter, particularly in real estate. CPPIB invested in student housing, office buildings and retail. The fund also sold a large stake in a Manhattan office tower.

“Income was generated across investment programs and our teams continue to invest in assets in line with our long-term objectives to deliver solid results,” Mr. Machin added.

The breakdown of CPPIB’s investment portfolio shifted only slightly in the quarter. Equity investments made up 56 per cent of assets at the end of December, and 22.1 per cent of assets are in fixed-income investments such as bonds. Infrastructure and real estate assets made up the remaining 21.9 per cent.

CPPIB reported a 10-year annualized return of 4.8 per cent after factoring inflation, which exceeds the standard set by Canada’s Chief Actuary.

I just got off the phone with the president of a major Canadian pension fund who told me that they had another solid year last year. He said they sold US Treasuries in mid-year when the 10-year yield approached 1% "because we didn't see any more upside" and right before Christmas were itching to buy some 30-year Treasuries when yields popped back over 3.3%. He added: "If yields on the 10-year Treasuries rise back to 3%, we'll be buying."

What else did he share with me? Stocks are somewhat over-valued here by a factor of seven on their scale, with ten being significantly over-valued. "This silliness can last a little while longer but people forget the same thing happened back when Ronald Reagan won the elections. Stocks took off then too but after the inauguration, they sank 20% that year."

No kidding! As I've repeatedly stated, most recently in my Outlook 2017: The Reflation Chimera, the best risk-reward in these markets is US Treasuries. I don't care what Bill Gross, Ray Dalio, Paul Singer, Jeffrey Gundlach say in public, in a deflationary environment, I would be jumping on US long bonds (TLT) every time yields back up violently.

Also, take the time to read my comment on the 2017 US dollar crisis where I painstakingly go over the main macro trends and why all that is happening right now is the US is temporarily shouldering the world's deflation problems through a higher dollar. There is nothing structural going on in terms of solid long-term growth.

What else? The global pension crisis is alive and well which is why I don't see yields on the 10-year Treasuries rising anywhere near 3%. Most smart institutional fund managers took my advice and jumped on US long bonds when they yield on the 10-year hit 2.5%.

The latest labour market data from the United States remain consistent with my view that the rate of growth is not enough to greatly reduce the mass underemployment that is the reality of the labour market. That said, the market implications are limited, as this is already priced into the curve. The Fed may wish to step up its anemic pace of rate hikes, but they will remain dependent upon the data.

The former head of one of the country's largest pension funds is being tapped to help build a new federal infrastructure bank.

The Liberals are naming Jim Leech as a special adviser to help design the proposed arm's-length lending machine that could leverage billions in public money and turn it into new highways, bridges and transit projects.

The Liberals plan to infuse the bank with $35 billion in funding to financially backstop projects, with the details of how it will work to be outlined in this year's federal budget.

The government says Leech will guide the bank's implementation team and help recruit board members.

The former head of the Ontario Teachers' Pension Plan has experience investing pension money in profit-generating infrastructure projects.

The Liberals hope that large pension funds like the teachers' plan will invest in the bank, which will use federal funds to attract private- sector dollars for major projects, possibly generating $4 to $5 in private funding for every $1 of federal money.

Canada could finance some future infrastructure projects entirely through private sources, without using government funds, the special advisor for its new infrastructure bank said after his appointment on Friday.

Canada's Liberal government announced last November it would set up the agency to supplement government investment in projects like new roads and bridges with funding from private investors such as pension and sovereign wealth funds.

The government advisory panel that recommended its creation had said it could look to raise C$4 to C$5 of private funding for every C$1 provided by taxpayers to fund projects.

However, Jim Leech, the pension executive recruited on Friday to advise the government on the bank, said it could go further with private investment on some projects.

"I'm sure that there are many projects that won’t need any investment from taxpayer money. They can be totally funded by the private sector," Leech said.

New U.S. President Donald Trump has said he would launch a $1 trillion infrastructure spending program financed entirely by private sources. Infrastructure products are traditionally funded by a mix of private and public investment.

Leech said one of the challenges for the infrastructure bank will be that institutional investors such as pension funds traditionally prefer to invest in 'brownfield' assets which have already been built, while the greatest infrastructure need is for 'greenfield' assets which have yet to be built.

"I think that’s where the logjam is. You have, on the one hand, on a global basis, a lot of money looking for infrastructure to invest in but it doesn’t have the talent within those institutions to be able to assume greenfield."

The Caisse de depot et placement du Quebec is the only Canadian pension fund making large-scale 'greenfield' investments, having agreed to construct one of the world's largest light rail networks in Montreal, a project which could become a test case.

"I think what the Caisse is doing is very encouraging. I was impressed to see they are building a team within the Caisse which knows how to assess some of this risk. I think that's good innovation and there are things we can learn from it," Leech said.

He said the bank would look at ways to make projects "risk tolerable" for financial institutions but declined to specify how they might do that. Infrastructure experts say they could provide guarantees on future returns or backstop some construction risk.

Prime Minister Justin Trudeau has named Jim Leech special advisor for the new Canada Infrastructure Bank.

Leech is a former CEO of one of the world's largest pension funds, the Ontario Teachers' Pension Plan. Since his retirement in 2014, he's been an adviser to the Ontario Liberal government, leading a review of the sustainability of the province's electricity sector pension.

In a release from the Prime Minister's Office Friday, Trudeau referred to Leech's "immense knowledge and experience," saying he was "confident that he will help ensure a smooth and successful launch of the Canada Infrastructure Bank."

The release said Leech will work with the Privy Council Office and the offices of Infrastructure Minister Amarjeet Sohi and Finance Minister Bill Morneau to build an implementation team and get the new organization off the ground. It promises an "open and transparent process" to recruit future board members.

Leech said in a statement Friday he was honoured to be asked to contribute to moving the bank from concept to reality.

"I believe that, if done right, an infrastructure bank will give Canada a competitive advantage in the global quest for infrastructure funding and development," he said in a release issued by Queen's University in Kingston, Ont., where he currently serves as chancellor.

The creation of the infrastructure bank was announced in Morneau's fall economic statement as part of the government's overall infrastructure investment plans.

Although touted as an effective way to ensure more projects get built quickly across Canada, very little about the new entity has been revealed in the months since.

Bank may manage up to $35B

Legislation to create the bank will come after the federal budget, expected in the coming few weeks.

The bank is intended to work with other levels of government to "further the reach" of federal infrastructure spending using a broad range of financial instruments, including loans and equity investments.

Last fall, the government suggested the bank would manage up to $35 billion: $15 billion from the federal infrastructure funding announced last year and an estimated $20 billion sought from private investors.

The public money, the government said, would fund projects that wouldn't normally be able to provide a return for private investors.

For other more profitable projects, the bank may attract "as much as four or five dollars in private capital for every tax dollar invested," Morneau said last fall.

"Potential investors have said projects need to be worth $500 million or more for them to invest," said Conservative infrastructure critic Dianne Watts Friday. "That's a lot of risk to put on taxpayers for something that will only benefit the large urban centres."

The Liberals have touted the new bank as an innovative way to put private capital to work building much-needed infrastructure.

Leech was credited with innovative decision-making during his tenure at Teachers, a highly-influential public pension manager because of its large size and investment scope. He eliminated the plan's funding deficit and its returns performed among the top-ranked funds of its kind internationally during his tenure.

My role is as advisor (pro bono) to help "stand up" the bank. Will focus on governance (board, management), talent (org structure, skill sets, hiring Chair and top management), and process (how projects prioritized/evaluated). Lots to do like what G/L to adopt, risk management, location etc.

It is absolutely essential that they hire the right mix of people from both the pension fund industry and from infrastructure.

They also need to hire Canadians who have experience working with institutions in different geographic markets. The Europeans and Japanese are light years ahead of us in this respect.  We need to learn from some of their models, transform the models to make them uniquely Canadian, and then execute.  

• Andrew told me that OTPP, CPPIB, OMERS and the rest of Canada's large pensions are not interested in small DMBF/ PPP projects which are typically social infrastructure like building schools, hospitals or prisons. Why? Because they're small projects and the returns are too low for them. However, he said these are great projects for construction companies and lenders because you have the government as your counterparty so no risk of a default.
• Instead, he told me they are interested in investing in "larger, more ambitious" infrastructure projects which are economical and make sense for pensions from a risk/ return perspective. In this way he told me that they are not competing with PPPs who typically focus on smaller projects and are complimenting them because they are focusing on much larger projects.
• Here is where our conversation got interesting because we started talking about Australia being the model for privatizing infrastructure to help fund new infrastructure projects. He told me that while Australia took the lead in infrastructure, the Canadian model being proposed here takes it one step further. "In Australia, the government builds infrastructure projects and once they are operational (ie. brownfield), they sell equity stakes to investors and use those proceeds to finance new greenfield projects. In Canada, the government is setting up this infrastructure bank which will provide the bulk of the capital on major infrastructure greenfield projects and asks investors to invest alongside it" (ie. take an equity stake in a big greenfield project).
• Andrew told me this is a truly novel idea and if they get the implementation and governance right, setting up a qualified and independent board to oversee this new infrastructure bank, it will be mutually beneficial for all  parties involved. 
• In terms of subsidizing pensions, he said unlike pensions which have a fiduciary duty to maximize returns without taking undue risk, the government has a "financial P&L" and a "social P & L" (profit and loss). The social P & L is investing in infrastructure projects that "benefit society" and the economy over the long run. He went on to share this with me. "No doubt, the government is putting up the bulk of the money in the form of bridge capital for large infrastructure projects and pensions will invest alongside them as long as the risk/ return makes sense. The government is reducing the risk for pensions to invest alongside them and we are providing the expertise to help them run these projects more efficiently. If these projects don't turn out to be economical, the government will borne most of the risk, however, if they turn out to be good projects, the government will participate in all the upside" (allowing it to collect more revenues to invest in new projects).
• He made it a point to underscore this new model is much better than the government providing grants to subsidize large infrastructure projects because it gets to participate in the upside if these projects turn out to be very good, providing all parties steady long-term revenue streams.

Basically Andrew Claerhout explains why pensions are not competing with DBFM/ PPPs and are looking instead to invest alongside the federal government in much larger, more ambitious greenfield infrastructure projects where they can help it make them economical and profitable over the long run.

Andrew added this: "Most infrastructure investors focus on brownfield opportunities while the government is most interested in seeing more infrastructure built (i.e., greenfield). The infrastructure development bank is meant to help bridge this divide - hopefully it is successful." 

The Ontario Liberals have an extra $1.5 billion to spend between now and the next election and can still keep their promise to balance the provincial budget by 2018, thanks to a helpful ruling on how to handle surpluses in a couple of big provincial pension funds.

What does $1.5 billion buy? It’s more than the money the province gave up by taking sales tax off electricity bills starting this month. For $1.5 billion, the Liberals could cut bills by that much again and probably buy labour peace with Ontario’s restive doctors and have some left. They could stop pressuring boards of education to close half-empty schools — more than twice over. They could replace half a dozen small hospitals. They could even cut taxes.

The point is, we’re talking serious money — the stakes in what’s otherwise the most arcane public-accounting battle ever to spill out of a comptrollers’ seminar and into the streets.

The Liberals like to promise big before elections. Premier Kathleen Wynne is especially keen on governing from “the activist centre,” which in 2014 meant picking her moments with some care but roaring in with cash for infrastructure, early-childhood educators and personal-support workers, industrial subsidies and northern development. But she and Finance Minister Charles Sousa have also sworn up and down that Ontario will finish 2018 with a balanced provincial budget.

So they got a shock last fall when Bonnie Lysyk, the province’s auditor general, told them she thought it was wrong to count money held by the pension plans for the Ontario Public Service Employees Union and Ontario’s teachers’ unions as provincial assets. Specifically, about $11 billion in surpluses in those funds, the government’s share of which had been treated as government assets for as long as they’d been there. That stripped billions of dollars off the government’s balance sheet.

More importantly, it meant $1.5 billion in excess income that the government had treated as a form of revenue could no longer be handled that way. That produced a nasty spat between the auditor-general and Liz Sandals, the minister who, as president of the treasury board, is in charge of how the province keeps its books. Sandals presented the legislature with an unaudited financial report because Lysyk wouldn’t sign off on it, an unprecedentedly brazen way of handling an ordinarily dull part of running the government.

The money’s there either way — the only question is which ledger it should be inscribed in. But if it’s in this ledger here, it makes the Liberals’ budget-balancing promise $1.5 billion easier to keep; if it’s in that ledger there, the promise is $1.5 billion harder.

(That says something about how arbitrary the goal of a balanced budget by a certain date is, you’ll note. But a balanced budget by 2018 is what Wynne and Sousa have promised.)

The government appointed an expert panel to make a ruling, a four-person group led by Tricia O’Malley, former chair of the Canadian Accounting Standards Board — a job she had twice, with a long stint helping set international accounting standards in between. The others are a benefits lawyer, an actuary who consults for Ernst & Young on pensions, and the Province of New Brunswick’s chief accountant.

What they say doesn’t have the force of a judge’s order, but they have cred. And they say the government can count the money as a provincial asset.

Without getting too deeply into it (I promise), the provincial government co-sponsors the pension plans, so it’s effectively a half-owner. That said, the government can’t directly draw on the surpluses the plans have just now; the money has to stay in the plans. If the government can’t take the money, Lysyk’s reasoning goes, the money isn’t really a government asset.

Nevertheless, the panel’s report volleys back, those surpluses work in the government’s favour.

“It is reasonable to expect that the plan sponsors will be able to benefit from lower contribution levels in the future, if the plans have surplus assets,” the panel’s report says.

Then follows several dozen pages of detailed reasoning, drawing on generally accepted accounting principles and guides, paragraph by paragraph.

Ultimately: “The surpluses in the plans can be used by reducing the contributions the government is required to make to the plans, freeing cash that would otherwise be required to make contributions to be used for other purposes.”

Purposes like, well, whatever the Liberals think is a good idea.

Sandals and Sousa refrained from crowing.

“We are committed to implementing the advice of this independent panel and will use it in preparing the province’s financial statements,” Sandals said in a written statement.

And in campaigning for 2018.

A panel of accounting experts has concluded that $10.7 billion in government-sponsored pension plans should count toward the province’s bottom line.

As first disclosed by the Star last week, the finding undermines auditor general Bonnie Lysyk’s surprise interpretation that the funds are not a public asset.

“There was a difference of a professional opinion between the professional accounting staff of government and the staff at the office of the auditor general on how the surpluses of these two plans ought to be dealt with in the public accounts,” panel chair Tricia O’Malley said Monday.

“We believe that an asset does exist — the net pension asset meets the definition of an economic resource, which is what an asset is,” said O’Malley, chair of the Canadian Actuarial Standards Oversight Council.

The panel’s conclusion is significant because the government’s share in the Ontario Public Service Employees’ Union Pension Plan and the Ontario Teachers’ Pension Plan is worth $1.5 billion of the annual budget.

Last fall, the auditor unexpectedly decreed the pension surpluses shouldn’t be considered an asset because the government did not have ready access to the funds.

But O’Malley, whose panel was asked by Queen’s Park to weigh in, likened the joint-sponsorship to co-owning a home that could not be sold off unless both partners agreed.

“Many government assets are not accessible. A road is an asset to a government because it allows it to provide public services of transportation, but you can’t move a road or you can’t sell a road unless it’s a toll road, but it’s still an asset,” she said.

Lysyk, who was briefed on the expert panel’s review on Feb. 3 and has had the report for about two weeks, had no comment Monday on whether she would accept the findings.

In a statement, her office said she “will be reviewing the report being made public this morning by the provincial government’s pension asset advisory panel regarding two of Ontario’s jointly sponsored pension plans.”

“Once her office and her expert advisers have finished reviewing this final report, the auditor will then provide comment to the media later in the week.”

Treasury Board President Liz Sandals said the government is “committed to implementing the advice of this independent panel and will use it in preparing the province’s financial statements.”

Finance Minister Charles Sousa, who has promised to finally balance the books in the spring budget, also welcomed O’Malley’s review.

“As a result of the expert assessment of the independent advisory panel, we now have additional advice on how to account for these jointly sponsored pension plans as assets,” said Sousa.

“This advice will help us continue to present the province’s finances fairly and accurately as we work toward balancing the budget in 2017-18. We will provide a full update on the province’s fiscal situation in the near future.”

Introduction

The Pension Asset Expert Advisory Panel (the Panel) was appointed to provide advice and recommendations to the Ontario government on the application of public sector accounting standards to Ontario’s jointly sponsored pension plans. The need for this advice arose as a result of a difference of professional opinion between the government’s professional accounting staff and the Office of the Auditor General (OAG).

The Panel has specifically considered whether the government should include an asset in its financial statements representing its share of the surplus in two pension plans – Ontario Teachers’ Pension Plan (OTPP) and Ontario Public Sector Employees’ Union Pension Plan (OPSEUPP). This is an important question because including or excluding the asset affects the picture the Public Accounts provide of the government’s financial position at the year end and how it has managed its resources over the year (the annual surplus or deficit).

The Panel received and reviewed background information, including the governing documents of the plans and related agreements. It received analyses from both the government and the OAG, setting out their respective understanding of the facts and their conclusions. The Panel met with both the government’s professional accounting staff and the Auditor General and her Public Accounts staff responsible for the pension issue to ensure we fully understood their thinking. The Panel then performed its own independent analysis of the documents and of the legal, actuarial and accounting issues using the expertise and experience of its members related to those issues.

The full report sets out in detail the Panel’s analysis and the reasons for its conclusions. This summary gives the overall conclusions and the main considerations that influenced the Panel’s thinking.

Panel conclusions and considerations

Both OTTP and OPSEUPP are jointly sponsored defined benefit plans. In these plans, the risks and rewards are shared between an Employee Sponsor (in these cases, the Ontario Teachers Federation or OPSEU) and an Employer Sponsor (the government). In accordance with the terms of the Plans, the Sponsors must agree on all decisions about the important features of the plan, including valuation assumptions, how shortfalls (deficits) are to be made up and how the benefits of overfunding (surpluses) are to be shared.

The Panel’s analysis concludes that an asset exists for the government in both OTTP and OPSEUPP because:

• the accounting surplus in the plan has a future economic benefit– the surpluses in the plans can be used by reducing the contributions the government is required to make to the plans, freeing cash that would otherwise be required to make contributions to be used for other purposes.
• the government controls access to that accounting surplus– the government shares control of the surplus with the Employee Sponsors. In OTPP, the Sponsors must agree on how the surplus will be used. If they don’t agree, the process to be followed to reach a decision is set out in the plan. The only condition is that the surplus must be shared “equitably,” or fairly. Historically, surpluses have been shared approximately 50/50 over time, though not necessarily in each period. In OPSEUPP, funding surpluses are allocated 50/50, and each sponsor is free to use its allocation for benefit improvements or contribution reductions as it sees fit. This indicates 50/50 sharing of surpluses is the principle.
• the accounting surplus exists as the result of past transactions and events – service rendered by the employees, contributions made by both the employees and employer, and investment earnings.

The public sector pension accounting standard notes that the sponsors could benefit from a surplus by taking assets out of the Plans as well as by reducing their contributions. The standard includes several specific conditions for a sponsor to recognize an asset based on withdrawal. The Panel concluded that these conditions are not relevant to assessing the ability of a sponsor to reduce contributions because:

• The legal requirements for taking assets out of a plan and those for reducing contributions are very different. Removing assets requires permission to do so in the terms of the plan, agreement with plan members or approval of the joint sponsor, as well as approval of the Financial Services Commission of Ontario. In contrast, the joint plan sponsors are free to decide on their own level of required contributions as long as they comply with the terms of the plan and with the Pension Benefits Act. All that is required is for the joint sponsors to agree. No external approvals are needed. The Panel concluded that the accounting answer should reflect the significant differences between the legal regimes that apply to contribution reductions and asset withdrawals.
• In the case, of OPSEUPP, the terms of the plan explicitly prohibit asset withdrawals. However, they also explicitly provide that contribution reductions are not asset withdrawals. The terms of the OTTP are not as explicit when it comes to asset withdrawals. However, the Sponsors have agreed on a policy to guide the use of surpluses in the plan – once previous reductions in pension benefits have been restored, the next priority is to reduce contributions for both members and the government. Thus, the government does not currently have an intention or ability to benefit by taking assets out of the Plans.

The Panel also concluded there is no accounting standards requirement for any agreement to be in place specifying when and by how much contributions will be reduced for the government to record an asset beyond the agreements already in place (i.e., legislation and the various plan documents). The public sector accounting standards are clear that the benefits from the surplus need only be expected. In these cases, benefits can reasonably be expected based on the law, the terms of the Plans and the policies and past actions of the joint Sponsors in fulfilling their responsibilities to act fairly. Given all the uncertainties and estimates required in accounting for pensions, virtually nothing can be considered certain.

Because of those estimation uncertainties, like accounting for all other assets, the public sector pension accounting standard requires the government to consider whether the benefits it expects will be enough to recover the entire amount of the surplus asset. The standard provides specific guidance on how to measure the expected benefit of the asset based on reduced contributions. No contribution requirements are fixed because they must be renegotiated regularly. Following the guidance in the standard shows that the government will be able to benefit by the entire amount of the asset.

Stepping back

It is reasonable to expect that the plan Sponsors will be able to benefit from lower contribution levels in the future, if the plans have surplus assets. While the government (or teachers/OPSEU members) may not expect to receive refund cheques, it is reasonable for them to expect that fewer contributions will need to be made if there are surplus assets in the plans. On the other hand, all parties would expect that benefits will be reduced or additional contributions will need to be made should deficits emerge.

Established mechanisms exist to put these expectations into practice. History shows examples of plan sponsors benefiting from surpluses in these plans. Expecting that the joint sponsors will benefit from the surplus assets in the future is also reasonable. In fact, it would be unreasonable, absent any changes, to assume otherwise.

Given that the government can be expected to benefit from surplus assets, those assets have real economic value. It would be misleading not to recognize its share of them in the Public Accounts.

Panel advice

The Government should record an asset in the Public Accounts for its share of the surplus reported in the accounting valuations of OTTP and OPSEUPP. The estimated future benefit of the recorded asset should continue to be evaluated following the requirements of the public sector pension accounting standard each year.

Ontario Premier Kathleen Wynne would do well to remember who owns the assets of the province's jointly trusteed public pension plans, the President of the Ontario Public Service Employees Union said today.

"The current dispute between the Government of Ontario and Auditor General Bonnie Lysyk over accounting practices is not just a paper war," Thomas said. "It's a fight over who owns billions of dollars earned by workers and invested on their behalf.

"I'm telling the Premier right now: the money in those plans belongs to plan members. It is not hers to play with."

Thomas said he "unequivocally supports" the Auditor General's position that surpluses in plans like OPTrust, the pension plan for 87,000 current and former OPSEU members, are not government assets because the government does not "control or have unilateral access to those funds," as Lysyk wrote in October 2016.

"OPTrust and other public sector pension plans exist for one reason, and one reason only: to provide people with the means to live decently in retirement," Thomas said. "That money is not there to pay for Liberal boondoggles or pay off Liberal deficits."

Pension surpluses are invariably temporary and are a necessary part of pension plans' long-term planning to ride out market downturns, the OPSEU President said.

He expressed concern that the government's recent appointment of an expert panel to back its views on accounting rules was "step one in a two-step dance."

"My fear is that the Liberals will try to move money out of public pension plans to help wipe out the provincial deficit in time for the 2018 provincial election," Thomas said. "I'm calling on the Premier to come out and say she won't."

The average retired OPTrust member is 70.2 years old and earns a pension worth $20,868 a year, according to the plan's 2015 annual report. OPTrust members work in the Ontario Public Service, at the Liquor Control Board of Ontario, and at other agencies of government.

SOURCE: Ontario Public Service Employees Union (OPSEU)

Hedge fund managers jumped on the Trump train in the last three months of 2016, boosting their stakes in financial companies and reducing their holdings in technology firms.

Financial institutions have risen 22 percent since Donald Trump won the U.S. presidential election on Nov. 8, on optimism that his administration will reduce regulations, cut taxes and spur deal making. Shares of Goldman Sachs Group Inc. hit a record high Tuesday. Technology shares, meanwhile have risen just 9.3 percent since the election, as measured by the S&P 500 Information Technology Index, about the same as the overall market.

The biggest new buys at Stephen Mandel’s Lone Pine Capital in the fourth quarter included a $493 million purchase in PayPal Holdings Inc., a $491 million stake in PNC Financial Services Group Inc. and a $479 million stake in Bank of America Corp, according to government filings Tuesday. Louis Bacon’s Moore Capital Management increased its exposure to financials and lenders including a new $94 million position in the exchange-traded Financial Select Sector SPDR Fund.

The sector accounted for a third of the firm’s U.S. equity holdings at the end of the year. Tudor Investment Corp. continued to boost its stake in financial companies to 26 percent of its equity allocation from about 15 percent a year ago.

Bullish on Banks

The value of hedge fund stakes mostly rose in the fourth quarter on the promise of less regulation and more fiscal spending (click on image).

By comparison, the reduction in holdings of tech companies by several firms was a reversal from the third quarter, when many of the marquee money managers added to their holdings in expectation of a Hillary Clinton win helping the industry.

In the fourth quarter, Third Point, Millennium Management, Melvin Capital Management and Moore Capital were among firms that slashed their stakes in Facebook Inc. Viking Global Investors decreased its stake in Amazon.com Inc. by $1.23 billion. Shares of the online retailer fell about 10 percent last quarter.

Apple Inc., long a hedge fund favorite, lost the love of Chase Coleman’s Tiger Global Management and Aaron Cowen’s Suvretta Capital Management. The two firms sold out of their stakes, worth $407.6 million and $293.9 million at the end of last year, respectively. Coatue Management, the technology-focused hedge fund led by Philippe Laffont, halved its position, leaving it with 3.2 million shares as of Dec. 31.

Bearish on Tech

The value of hedge fund stakes mostly fell in the fourth quarter on concerns that immigration restrictions would set back hiring (click on image).

Och-Ziff Capital Management Group LLC, Discovery Capital Management and PointState Capital were also among funds that cut holdings of gaming company Activision Blizzard Inc. during the fourth quarter as holiday video-game sales disappointed.

One exception to the tech selloff was Salesforce.com. Jana Partners and Sachem Head Capital Management bought 3.2 million and 2.1 million shares, respectively, during the quarter.

In contrast to many industry peers, George Soros’s family office added a new position in Facebook, and increased its stake in Alphabet Inc. and Netflix Inc., but it exited Intel Corp. and some other technology companies.

While Time Warner Inc. and AT&T Inc. announced one of the year’s biggest deals during the fourth quarter, most managers declined to bet on its completion through risk-arbitrage trades. One possible reason: Trump in a campaign speech vowed to block the takeover on the same day it was unveiled by the two companies. 

Even managers who did bet on the deal’s completion did so in relatively small doses. Paulson & Co. bought 2.86 million Time Warner shares during the fourth quarter, while Third Point acquired 3 million shares and Abrams Capital Management purchased 3.05 million, according to filings.

Paulson also cut its stake again in insurer American International Group Inc.

Even as the future of health-care stocks have been less clear since Trump’s victory, David Tepper’s Appaloosa Management added to investments in the sector. His largest new buys were in Teva Pharmaceutical Industries Ltd., Pfizer Inc. and Mylan NV. He also added to his holding in Allergan Plc, which was worth almost $900 million at the end of the quarter.

Several big-name U.S. hedge fund investors in the fourth quarter moved significant parts of their portfolios into financial and pharmaceutical stocks that are expected to benefit under the Trump administration, helping to power the sector to its best January performance in four years.

Omega Advisors, run by Leon Cooperman and Steven Einhorn, increased its stake in insurance broker Fidelity & Guaranty Life by 343 percent compared with the quarter before, and added a new position in regional bank Renasant Corp, according to securities filings released Tuesday.

Both companies are up 16 percent or more since President Donald Trump's surprising November election victory, compared with a 9.6 percent gain in the broad Standard & Poor's 500.

Jana Partners, one of the largest U.S. activist investors, added six new healthcare companies to its portfolio, and increased its stake in 11 other companies in the sector by 50 percent or more, including biotechnology holdings such as Nuvasive Inc and Acadia Pharmaceuticals Inc. Shares of Acadia are up 72 percent since Election Day, while shares of Nuvasive are up 24 percent.

Appaloosa Asset Management, run by billionaire David Tepper, nearly tripled its stake in pharmaceutical company Allergan PLC, to 15.8 percent of its portfolio, according to filings. Shares of the company are up 24.6 percent since the Nov. 8 election.

The winning bets come as equity hedge funds gained 2.1 percent in January, the strongest start to a calendar year for the industry since 2013, according to Hedge Fund Research. Total assets under management in the hedge fund industry reached $3.02 trillion at the end of the fourth quarter, the first time that hedge fund assets surpassed $3 trillion, the research firm said.

Trump's administration is expected to slash financial regulation, helping push the financial companies in the S&P 500 up 22.3 percent since Election Day. Pharmaceutical companies, meanwhile, have rallied on Trump's pledge to speed drug approvals.

The quarterly disclosures of manager stock holdings, in what are known as 13F filings with the U.S. Securities and Exchange Commision, are closely watched as investors look to divine what well-known hedge fund managers are buying and selling. However, the filings are backward looking and come out 45 days after the end of each quarter, meaning that funds could have added to or sold their positions since.

While the position information from the filings does not reflect January activity, fund managers have said they continued to play the same trends.

But not every hedge fund manager made savvy bets in the fourth quarter.

Tiger Global, known in part for taking concentrated positions in companies, sold all of its shares in Apple Inc during the fourth quarter, a position that made up 5.8 percent of its portfolio the quarter before. Shares of the iPhone maker hit a record high Tuesday and are up 16.5 percent since the start of the year.

Warren Buffet's Berkshire Hathaway, meanwhile, more than tripled its position in the company over the same time, to 4.5 percent of its portfolio.

[...] given my views on the reflation chimera and US dollar crisis, I would be actively shorting emerging markets (EEM), Chinese (FXI), Industrials (XLI), Metal & Mining (XME), Energy (XLE)  and Financial (XLF) shares on any strength here (book your profits while you still can). The only sector I like and trade now, and it's very volatile, is biotech (XBI) and technology (XLK) is doing well, for now. If you want to sleep well, buy US long bonds (TLT) and thank me later this year. 

[...] in an exclusive interview with Fortune in the fall, Cohen reiterated his desire to not only beat the market, but to be the best among money managers—despite the fact that he doesn't currently compete for business in that industry. "There may be firms out there that are happy being middle-of-the-pack and having modest returns, and maybe don’t work as hard as other people and are perfectly acceptable. That’s not me," he said. "If I’m going to be mediocre—if I’m going to be mediocre, I’m going to question whether I should stay in this business."

Indeed, if Cohen wants to begin managing outside money again starting next year — and the consensus in the industry is that he does— investors will want to look closely at how Cohen performed managing his own money these last few years, during which he has implemented strict new compliance procedures and been under the additional close watch of a government-mandated monitor stationed in his own offices. After all, it's Cohen's legacy of best-in-class returns that will lure investors back despite the stigma of the insider trading scandal, provided he can still deliver them.

That's going to be harder, though, if the market continues to behave the way Cohen expects. "The reality is growth is slow, valuations are high—that’s sort of a mix where it's going to be hard to see great returns going forward," he told Fortune during the interview. "If there’s a crash or significant correction, then you have an opportunity again because valuations are more reasonable. But right now, at this point, given the way the world looks, I would say returns are going to be pretty meager for the next couple years."

And Cohen is clearly feeling the pressure. In October, he announced a new bonus structure for his traders, upping the potential payout to 25% of their profits (from 20% previously) but only if they outperform certain benchmarks chosen by the firm. Meanwhile, traders who underperform will receive a lower proportion than they used to.

The additional incentive is designed to attract new talent to Point72, which has recently stepped up its recruiting efforts as Cohen himself focuses more on training and mentoring and less on trading stocks himself. After long managing the "big book"— the largest portfolio at his firm — Cohen has lately pared back his personal allocation. His trades still account for as much as 5% of Point72's profits, but that's down from 15% some 10 years ago.

Early last year, Cohen blamed a specific phenomenon for a patch of poor performance: Hedge fund crowding —or too many other hedge fund managers piling into the stocks he owned.When those other funds sold out en masse, Cohen said his "worst fears were realized" as he became "collateral damage," losing 8% in just four days in February 2016.

Cohen managed to recover during the remainder of the year, but only just enough to stay in positive territory.

The top executive at Canada's largest retirement fund is in Beijing today to help grow the fund's relationship with Chinese pension officials.

Mark Machin was on hand for the official launch of a Chinese translation of "Fixing the Future"— a book tracing the political and financial hurdles that were overcome when the Canada Pension Plan Investment Board was created in the 1990s.

Machin says the translation of the 380-page book was a Chinese initiative that complements a previously announced "pooling of resources" planned by the CPP Investment Board and China's National Development and Reform Commission.

He says Canada and China face similar challenges as the number of retired people grows faster than the number of working people paying into the retirement system.

Machin says CPP Investment Board will be leading efforts to co-ordinate Canadian pension expertise and share it with Chinese government officials and other pension experts.

He anticipates the book — written by a former Globe and Mail reporter under a commission from CPPIB — will be used as a textbook in China to help teach about pension reform.

Canada Pension Plan Investment Board (CPPIB) today launched the Chinese edition of “Fixing the Future: How Canada's Usually Fractious Governments Worked Together to Rescue the Canada Pension Plan.” Written by Bruce Little, Fixing the Future describes how Canada addressed the looming demographic crunch and its impact on the Canadian pension system in the mid-1990s. Today, the CPP Fund totals $300 billion and is projected to be sustainable for the next 75 Years. CPPIB, the manager of the Fund, is a leading global institutional investor and invests in more than 45 countries through eight offices around the world.

In the mid-1990s, the Canada Pension Plan (CPP) was underfunded and faced an uncertain future. Experts predicted that the CPP Fund would be exhausted by today, and a major overhaul was urgently needed to ensure the sustainability of the CPP for future generations of Canadian retirees. Canada’s federal and provincial finance ministers made some difficult decisions and introduced a set of reforms to the CPP, including the creation of CPPIB, which effectively ended the funding crisis.

“We are honoured to share Fixing the Future, the story of Canada’s pension reform, with China,” said Mark Machin, President & Chief Executive Officer, CPPIB. “Many of the issues that Canada faced in reforming their pension system are shared between our two countries. With China’s pension reform now well under way, we hope that some of the lessons learned in Canada are of value to policymakers in China as they work to secure the pension system for many generations to come.”

On September 22, 2016, during the visit of Premier Li Keqiang to Canada, CPPIB’s CEO, Mark Machin, signed a Memorandum of Understanding with Xu Shaoshi, Chairman of the National Development and Reform Commission. Through this memorandum, CPPIB has agreed to assist Chinese policymakers in addressing the challenges of China’s ageing population. The translation of Fixing the Future into Chinese is just one way CPPIB is delivering on this agreement.

“Fixing the Future is inspiring to policy makers and academia in thinking about establishing a coordinated policy-making mechanism for the pension reform currently taking place in China. Demographics and pension management is an important subject for China’s future, and we believe CPPIB’s successful model will set a precedent for the academia and policy makers in China as they are striving to build a sustainable social security system,” said Professor Zheng Bingwen, the translator of the book and Director of Center for International Social Security Studies, Chinese Academy of Social Sciences (CASS).

The new edition of Fixing the Future includes a foreword by the Right Honourable Paul Martin, former Prime Minister of Canada and federal Finance Minister, who was intimately involved in the reforms, and an afterword by renowned pension expert Keith Ambachtsheer. The Chinese edition also includes a foreword from Mr. Lou Jiwei, former Finance Minister of China and now Chairman of National Council for Social Security Fund, highlighting the relevance of the book to Chinese readers.

The translated version of the book was launched at an event in Beijing, co-hosted by CPPIB, the Embassy of Canada to China, CASS Center for International Social Security Studies, China Human Resources and Social Security Publishing Group and China Council for the Promotion of International Trade.

Thank you for having me here today to discuss and answer questions regarding the Canada Pension Plan Investment Board and how we are helping ensure the CPP remains sustainable for future generations of Canadians.

To my right is Michel Leduc, our Senior Managing Director of Public Affairs and Communications, and to my left is Ed Cass, our Chief Investment Strategist.

I joined CPPIB four and a half years ago as the first President of Asia and then became Head of International in 2013. Prior to that, I worked for Goldman Sachs for twenty years in Europe and Asia. While I am a new resident to Canada, so far I’ve had the pleasure of travelling across the country meeting with finance ministers, the stewards of the CPP and some of our contributors.

I was enormously honoured to be chosen by CPPIB’s Board of Directors to lead such an important professional investment organization with a compelling public purpose. International organizations such as the OECD, the World Bank, Harvard Business School and The Economist, have all praised the ‘Canadian model’ of pension management due to its strong governance and internal investment management capabilities.

Our governance structure is a careful balance of independence and accountability, enabling professional management of the CPP Fund while ensuring that we are accountable to the federal and provincial governments, and ultimately the Canadian public. We know that contributions are compulsory and so we are motivated to work even harder to earn that trust.

New research finds longevity for Canadian pensioners is lower than anticipated – which may actually be costing defined benefit (DB) plan sponsors.

Canadian male pensioners are living about 1.5 years less than expected from age 65, according to the latest data from Club Vita Canada Inc. – the first dedicated longevity analytics firm for Canadian pension plans and a subsidiary of Eckler Ltd. Female pensioners are living about half a year less than expected.

"Based on our data, some DB plans are overestimating how long their members are currently living and are therefore taking an overly conservative approach to funding their liabilities," explains Ian Edelist, CEO of Club Vita Canada. "Correcting that overestimation could reduce actuarial reserves by as much as 6% – improving Canadian pension funds' and their plan sponsors' balance sheets just by using more accurate, granular and up-to-date longevity assumptions."

The data comes from Club Vita Canada's first annual and highly successful longevity study completed in 2016 – one of the largest, most rigorous research studies on the impact of longevity on defined benefit pension and post-retirement health plans.

The newly created "VitaBank" pool of longevity data (provided by Club Vita Canada members) spans a wide range of industries and geographic regions in both the public and private sectors. VitaBank is currently tracking more than 500,000 Canadian pensioners from over 40 pension plans. Unlike the most widely used study to set longevity expectations – the Canadian Pensioners' Mortality (CPM) study, which relies on data up to 2008 – VitaBank includes fully cleaned and validated data up to 2014.

The Club Vita Canada study brings to the Canadian pension market leading-edge modelling techniques already used by the insurance industry and in other countries. Club Vita U.K. recently released similar results, noting £25 billion could be wiped off the collective U.K. DB deficit by using more accurate longevity assumptions.

"Naturally, the ultimate cost of a pension plan will be determined by how long its members actually live. But assumptions made today really do matter for such long-duration commitments," explains Douglas Anderson, founder of Club Vita in the U.K. "Club Vita's data gives DB plan sponsors the tools they need to evaluate their willingness to maintain their longevity risk or offload that risk to insurers."

About Club Vita Canada Inc. (clubvita.ca)

Club Vita Canada Inc. was created by Eckler Ltd. It is an extension of Club Vita LLP, a longevity centre of excellence launched in the U.K. in 2008 by Hymans Robertson LLP. By pooling robust data from a wide range of pension plans, Club Vita provides its members with leading-edge longevity analytics helping them better measure and manage their retirement plan.

About Eckler Ltd. (eckler.ca)

Eckler is a leading consulting and actuarial firm with offices across Canada and the Caribbean. Owned and operated by active Principals, the company has earned a reputation for service continuity and high professional standards. Our select group of advisers offers excellence in a wide range of areas, including financial services, pensions, benefits, communication, investment management, pension administration, change management and technology. Eckler Ltd. is a founding member of Abelica Global – an international alliance of independent actuarial and consulting firms operating in over 20 countries.

Statistics are a funny thing, they can be used in all sorts of ways, to inform and disinform people by stretching the truth. Let me give you an example. Over the weekend, I went to Indigo bookstore to buy Michael Lewis's new book, The Undoing Project, and skim through other books.

One of the books on the shelf that caught my attention was Daniel J. Levitin's book,A Field Guide to Lies: Critical Thinking in the Information Age. Dr. Levitin is a professor of neuroscience at McGill University's Department of Psychology and he has written a very accessible and entertaining book on critical thinking, a subject that should be required reading for high school and university students.

Anyways, there is a passage in the book where he discusses the often used statistic that the average life expectancy of people living in the 1850s was 38 years old for men and 40 years old for women, and now it's 76 years old for men and 81 for women (these are the latest US statistics which show life expectancy declining for the first time since 1993. In Canada, the latest figures from 2009 show the life expectancy for men is 79 and for women 83, but bad habits are sure to impact these figures).

You read that statistic and what's the first thing that comes to your mind? Wow, people didn't live long back then and now that we are all eating organic foods, exercising and have the benefits of modern medical science, we are living much longer.

The problem is this is total and utter nonsense! The reason why the life expectancy was much lower in 1850 was that children were dying a lot more often back then. In other words, the child mortality rate heavily skewed the statistics but according to Dr. Levitin, a man or woman reaching the age of 50 back then went on to live past 70. Yes, modern science has increased life expectancy somewhat but not nearly as much as we are led to believe.

Here is another statistic that my close friend, a radiologist who sees all sorts of diseases told me: all men will get prostate cancer if they live long enough. He tells me a 70 year old man has a 70% chance of being diagnosed with prostate cancer, an 80 year old man has an 80% chance and a 90 year old man has a 90% chance."

Scary stuff, right? Not really because as my buddy tells me: "The reason prostate cancer isn't a massive health concern is that it typically strikes older men and moves very, very slowly, so by the time men are diagnosed with it, chances are they will die from something else."

Of course, the key word here is "typically" because if you're a 50 year old male with high PSA levels and are then diagnosed with prostate cancer after a biopsy confirms you have it, you need to undergo surgery as soon as possible because you might be one of the unlucky few with an aggressive form of the disease (luckily, it can be treated and cured if caught in time).

I actually forwarded [John] Mauldin's comment to my pension contacts yesterday to get some feedback. First, Bernard Dussault, Canada's former Chief Actuary, shared this with me:

True, longevity is a scary risk, but not as much as most think, the reason being that the calculations of pension costs and liabilities in actuarial reports take into account future improvements in longevity.

For example, as per the demographic assumptions of the latest (March 31, 2011) actuarial report on the federal public service superannuation plan (http://www.osfi-bsif.gc.ca/Eng/Docs/pssa2011.pdf), the longevity at age 75 in 2011 is projected to gradually increase by about 1 year in 10 years (2021). For example, if longevity at age 75 was 12.5 in 2011, it is projected as per the PSSA actuarial report to be about 13.5 in 2021

This 1 year increase at age 75 over 10 years is much less than the average 1year increase at birth every 4 years over the 20th century reported by the Society of Actuaries (SOA). However, this is an apple/orange comparison because longevity improvements are always larger at birth than at any later age and were much larger in the first half of the 20th century than thereafter than at any later age.

Bernard added this in another email correspondence where he clarified the above statement:

Annual longevity improvement rates are assumed to apply for the whole duration of the projection period under any of the periodical actuarial reports on the PSSA, i.e. for all current and future contributors and pensioners.

Moreover, the federal public service superannuation plan is actuarially funded, which means that each generation/cohort of contributors pays for the whole value of all of its accrued benefits.In other words, the financing of the plan is such that there is essentially no inter-generational transfer of pension debt from any cohort to the next.

Second, Jim Keohane, President and CEO of the Healthcare of Ontario Pension Plan (HOOPP), sent me his thoughts:

I am not sure how longevity improvements will play out over the coming decades and neither does anyone else. I wouldn't dispute the facts being quoted in this article, but what I would point out is that these issues are not exclusive to DB plans. They are problems for anyone saving for retirement whether they are part of a DB plan a DC plan or not in any plan. DB plans get benchmarked against their ability to replace a portion of plan members pre-retirement income (typically 60%). If you measured DC plans on the same basis they are in much worse shape, in fact, they only have about 20 to 25% of the assets needed to produce that level of income.

I would also add that Canadian public sector pension plans are in much better shape than their U.S. Counterparts. We use realistic return assumptions and are in a much stronger funded position.

Third, Jim Leech, the former CEO of Ontario Teachers' Pension Plan (OTPP) and co-author of The Third Rail, sent me this:

Very consistent with my thoughts/observations. It is a shame that "short term" motivations (masking reality by manipulating valuations, migration from DB to DC, elimination of workplace plans altogether, kicking the can down the road, etc) have taken over what is supposed to be a "long horizon" instrument (pension plan).

But Jim Keohane makes a good point - this applies ONLY to DB valuations. Anyone with DC (RRSP), ie. most Canadians, is really jiggered by longevity increases.

No doubt about it, the Oracle of Ontario, HOOPP and other Canadian pensions use much more realistic return assumptions to discount their future liabilities. In fact, Neil Petroff, CIO at Ontario Teachers once told me bluntly: "If U.S. public pensions were using our discount rate, they'd be insolvent."

Mauldin raises issues I've discussed extensively on my blog, including what if 8% is really 0%, the pension rate-of-return fantasy, how useless investment consultants have hijacked U.S. pension funds, how longevity risk is adding to the pressures of corporate and public defined-benefit (DB) pensions.

Mauldin isn't the first to sound the alarm and he won't be the last. Warren Buffett's dire warning on pensions fell largely on deaf ears as did Bridgewater's. I knew a long time ago that the pension crisis and jobs crisis were going to be the two main issues plaguing policymakers around the world.

And I've got some very bad news for you, when global deflation hits us, it will decimate pensions. That's where I part ways with Mauldin because longevity risk, while important, is nothing compared to a substantial decline in real interest rates.

Importantly, a decline in real rates, especially now when rates are at historic lows, is far more detrimental to pension deficits than people living longer.

What else did Mauldin conveniently miss? He ignores the brutal truth on DC pensions and misses how the 'inexorable' shift to DC pensions will exacerbate inequality and pretty much condemn millions of Americans to more pension poverty.

I still do not understand why "suddenly" investment experts (including Keith Ambachtsheer) think that the expected/assumed long term real rate of return will decrease compared to what it has been expected/assumed for so many years in the past.

I look forward to Bourbonnais' and the Chief Actuary's rationale if they were to reduce the 4.1% rate below 4.0%.

The rationale I used for the 4% I assumed for the CPP and the PSPP when I was the Chief Actuary is briefly described as follows in the 16th actuarial report on the CPP:

The CPP Account is made of two components: the Operating Balance, which corresponds in size to the benefit payments expected over the next three months, and the Fund, which represents the excess of all CPP assets over the Operating Balance.

In accordance with the new policy of investing the Fund in a diversified portfolio, the ultimate real interest rate assumed on future net cash flows to the Account is 3.8%. This rate is a constant weighted average of the real unchanged rate of 1.5% assumed on the Operating Balance and of the real rate of 4% which replaces the rate of 2.5% assumed on the Fund in previous actuarial reports.

The long term real rate of interest of 4% on the Fund was assumed taking into account the following factors:

• from 1966 to 1995, the average real yield on the Québec Pension Plan (QPP) account, which has always been invested in a diversified portfolio, is close to 4%;
• as reported in the Canadian Institute of Actuaries' (CIA) annual report on Canadian Economic Statistics, the average real yield over the period of 25 years ending in 1996 on the funds of a sample of the largest private pension plans in Canada is close to 5%, resulting from a nominal yield of about 11.0% reduced by the average increase of about 6% in the Consumer Price Index;
• using historical results published by the CIA in the Report on Canadian Economic Statistics, the real average yield over the 50-year (43 in the case of mortgages) period ending in 1994 is 4.03% in respect of an hypothetical portfolio invested equally in each of the following five areas: conventional mortgages, long term federal bonds (Government of Canada bonds with a term to maturity of at least 20 years), Government of Canada 91-day Treasury Bills, domestic equities (Canadian common stocks) and non‑domestic equities (U.S. common stocks). The assumed real rate of 4% retained for the Fund is therefore deemed realistic but erring on the safe side, especially considering that:

 Ø replacing federal bonds by provincial bonds in this model portfolio would increase the average yield to the extent that provincial bonds carry a higher return than federal bonds; and

Ø the 3-month Treasury Bills, which bear lower returns, would normally be invested for the Operating Balance rather than the Fund.

From a larger perspective, assuming a real yield of 4% on the CPP Fund means that the CPP Investment Board would be expected to achieve investment returns comparable to those of the QPP and of large private pension plans.

On the other hand, I think I heard Bourbonnais saying last year at a presentation of the PSP annual report to the Public Service Pension advisory Committee (and I could well have misheard or misinterpreted what he said) that he was reducing the proportion of equities in the PSP fund in order to reduce the volatility/fluctuation of the returns.

If he is really doing this, then that would be a valid reason for reducing the expected 4.1% return. Besides, if he is doing this, I opine that this is not consistent with the PSP objective to maximize returns. Indeed, a more risky investment portfolio carries higher volatility though BUT it is coupled with a higher long term average return (which both the CPP and the PSP funds have achieved on average over at least the last 15 years).

We’ve said for the last couple of years that private equity has not been earning enough to compensate for its extra risks, that of high leverage and lack of liquidity.

One of the core tenets of finance is that extra risk-taking should be rewarded with higher returns over time. But for more than the last decade, typical investor portfolios of private equity funds haven’t delivered the additional returns, typically guesstimated at 300 basis points over a public equity benchmark like the S&P 500.

We’ve pointed out that even that widespread benchmark is too flattering. Private equity firms invest in companies that are much smaller than the members of the S&P 500, which means they are capable of growing at a faster rate over extended periods of time. The 300 basis point (3%) premium is a convention with no solid analytical foundation. Some former chief investment officers, like Andrew Silton, have argued that a much higher premium, more like 500 to 800 basis points (5% to 8%) is more appropriate. And that’s before you get to other widespread problems with measuring private equity returns, such as the fact that they are routinely exaggerated at certain times, namely right before a new fund is being raised by the same general partner, late in a fund’s life, and during bear markets, all of which goose overall results.

And that’s before you get to the fact that some investors use even more flattering benchmarks. As Oxford professor Ludovic Phalippou pointed out by e-mail, in the last two years, more and more investors have switched from using the already-generous S&P 500 to the MSCI World Index as their benchmark. Why? Per Phalippou: “Because the S&P 500 has been doing very well over the last three years, unlike the MSCI World Index.”

So why hasn’t private equity been producing enough over the past decade to justify the hefty fees? The short answer is too much money chasing deals. Private equity’s share of global equity more than doubled from 2005 to 2014.

And you can see how this looks in CalPERS’ latest private equity performance update, from its Investment Committee meeting last week (from page 14 of this report). In fairness, CalPERS does have a more strict private equity benchmark than many of its peers (click on image):

Since that chart is still mighty hard to read (by design?), let’s go through the sea of read ink.

The only period in which CalPERS beat its benchmark was for the month before the measurement date of December 31, 2016, and that by a whopping 3 basis points. In all other measurement periods, the shortfall was hundreds of basis points:

3 months (219)
Fiscal YTD (283)
1 year (994)
3 years (132)
5 years (479)
10 years (286)

To its credit, CalPERS has been cutting its private equity allocation. CalPERS had a private equity target of 14% in 2012 and 2013; it announced last December it was reducing it from 10% to 8%. Like so many of its peers, CalPERS hoped that private equity would rescue it from its underfunding, which came about both due to the decision to cut funding during the dot com era, when CalPERS was overfunded, and to the damage it incurred during the crisis. At least CalPERS is finally smelling the coffee.

However, even with these appalling results, CalPERS does have another avenue: it could pursue private equity on its own, which would virtually eliminate the estimated 700 basis points (7%) it is paying to private equity fund managers. CalPERS confirmed this estimate by Ludovic Phalippou in its November 2015 private equity workshop. Since at that point it had gathered private equity carry fee data, that means the full fees and costs are at least that high; it would presumably have reported a lower number or flagged the figure as an high plug figure. Getting rid of the fee drag would mean much more return to CalPERS and its retirees, and would make private equity more viable.

CalPERS has two ways it could go. One would be a public markets replication strategy, which would target the sort of companies private equity firms buy.Academics have modeled various implementations of this idea, and they show solid 12-14% returns. However, as we’ve discussed at length, and some pubic pension funds have even admitted, one of the big attractions of private equity is…drumroll…the very way the mangers lie about valuations, particularly in bad equity markets! Private equity managers shamelessly pretend that the value of their companies falls less when stocks are in bear territory, giving the illusion that private equity usefully counters portfolio volatility. Anyone with an operating brain cell knows that absent exceptional cases, levered equities will fall more that less heavily geared ones. So the reporting fallacy of knowing where you really stand makes this idea unappetizing to investors.

The other way to go about it would be to have an in-house team that does private equity investing. A group of Canadian public pension funds has gone this route and not surprisingly, reports markedly better results net of fees than industry norms. And this is becoming more mainstream, as Reuters reported last Friday (hat tip DO):

Some of the world’s biggest sovereign wealth funds are increasingly striking their own private equity deals rather than relying on external fund managers, in a drive to cut costs and gain more control.

With some $6.5 trillion in assets, sovereign investors already account for 19 percent of capital committed to private equity, according to data from research firm Preqin.

But mega-funds such as the Abu Dhabi Investment Authority (ADIA), Saudi Arabia’s Public Investment Fund (PIF) and Singapore’s GIC, are hiring specialists to find or vet deals – enabling them to negotiate with private equity firms from a position of strength or to go it alone.

In 2012 sovereign investors participated in just 77 direct private equity deals. By 2016, that had risen to 137, Thomson Reuters data shows. Deal value more than trebled to $45.2 billion from $14.8 billion….

This allows funds to better protect their interests when markets go south. One sovereign investor who spoke on condition of anonymity said that during the global financial crisis, some external funds behaved irrationally.

“They had different liability streams than us, so they were under pressure to sell at a time when they should have been investing more,” the source said. “Going more direct means you don’t have to worry about whether your interests are aligned with other investors’.”

And to its credit CalPERS is considering joining this trend…after having been deterred from leading it. From a 2016 post:

In 1999, CalPERS engaged McKinsey to advise them as to whether they should bring some of their private equity activities in house. My understanding was that some board members thought this issue was worth considering; staff was not so keen (perhaps because they doubted they had the skills to do this work themselves and were put off by the idea of being upstaged by outside, better paid recruits).

In hearing this tale told many years later, I was perplexed and a bit disturbed to learn that the former managing partner of McKinsey, Ron Daniel, presented the recommendations to CalPERS of not to go this route. Only a very few directors (as in the tenured class of partner) continue at McKinsey beyond normal retirement age; one was the head of the important American Express relationship at the insistence of Amex. Daniel served as an ambassador for the firm as well as working on his former clients. Why was he dispatched to work on a one-off assignment that was clearly not important to McKinsey from a relationship standpoint, particularly in light of a large conflict of interest: that he was also the head of the Harvard Corporation, which was also a serious investor in private equity?

Although the lack of staff enthusiasm was probably a deal killer in and of itself, the McKinsey “no go” recommendation hinged on two arguments: the state regulatory obstacles (which in fact was not insurmountable; CalPERS could almost certainly get a waiver if it sought one), and the culture gap of putting a private equity unit in a public pension fund. Even though the lack of precedents at the time no doubt made this seem like a serious concern, in fact, McKinsey clients like Citibank and JP Morgan by then had figured out how to have units with very divergent business cultures (investment banking versus commercial banking) live successfully under the same roof. And even at CalPERS now, there is a large gap between the pay levels, autonomy, and status of the investment professionals versus the rank and file that handles mundane but nevertheless important tasks like keeping on top of payments from the many government entities that are part of the CalPERS system, maintaining records for and making payments to CalPERS beneficiaries, and running the back office for the investment activities that CalPERS runs internally.

Why do I wonder whether McKinsey had additional motives for sending someone as prominent as Daniel to argue forcefully (as he apparently did) that CalPERS reject the idea of doing private equity in house? Clearly, if CalPERS went down that path, then as now, the objective would be to reduce the cost of investing in private equity. And it would take funds out of the hand of private equity general partners.

The problem with that is that McKinsey had a large and apparently not disclosed conflict: private equity funds were becoming large sources of fees to the firm. By 2002, private equity firms represented more than half of total McKinsey revenues. CalPERS going into private equity would reduce the general partners’ fees, and over time, McKinsey’s.

In keeping, as we pointed out in 2014, McKinsey acknowledged that the prospects for private equity continuing to deliver outsized returns were dimming. That would seem to make for a strong argument to get private equity firms to lower their fees, and the best leverage would be to bring at least some private equity investing in house, both to reduce costs directly and to provide for more leverage in fee discussions. Yet McKinsey hand-waved unconvincinglyabout ways that limited partners could contend with the more difficult investment environment, and was discouraging about going direct despite the fact that the Canadian pension funds had done so successfully.

Better late than never. Let’s hope CalPERS pursues this long-overdue idea.

Lastly, and most importantly, let's go over CalPERS's news release, CalPERS Reports Preliminary 2015-16 Fiscal Year Investment Returns:

The California Public Employees' Retirement System (CalPERS) today reported a preliminary 0.61 percent net return on investments for the 12-month period that ended June 30, 2016. CalPERS assets at the end of the fiscal year stood at more than $295 billion and today stands at $302 billion.

CalPERS achieved the positive net return despite volatile financial markets and challenging global economic conditions. Key to the return was the diversification of the Fund's portfolio, especially CalPERS' fixed income and infrastructure investments.

Fixed Income earned a 9.29 percent return, nearly matching its benchmark. Infrastructure delivered an 8.98 percent return, outperforming its benchmark by 4.02 percentage points, or 402 basis points. A basis point is one one-hundredth of a percentage point.

The CalPERS Private Equity program also bested its benchmark by 253 basis points, earning 1.70 percent.

"Positive performance in a year of turbulent financial markets is an accomplishment that we are proud of," said Ted Eliopoulos, CalPERS Chief Investment Officer. "Over half of our portfolio is in equities, so returns are largely driven by stock markets. But more than anything, the returns show the value of diversification and the importance of sticking to your long-term investment plan, despite outside circumstances."

"This is a challenging time to invest, but we'll continue to focus on our mission of managing the CalPERS investment portfolio in a cost-effective, transparent, and risk-aware manner in order to generate returns for our members and employers," Eliopoulos continued.

For the second year in a row, international markets dampened CalPERS' Global Equity returns. However, the program still managed to outperform its benchmark by 58 basis points, earning negative 3.38 percent. The Real Estate program generated a 7.06 percent return, underperforming its benchmark by 557 basis points. The primary drivers of relative underperformance were the non-core programs, including realized losses on the final disposition of legacy assets in the Opportunistic program.

"It's important to remember that CalPERS is a long-term investor, and our focus is the success and sustainability of our system over multiple generations," said Henry Jones, Chair of CalPERS Investment Committee. "We will continue to examine the portfolio and our asset allocation, and will use the next Asset Liability Management process, starting in early 2017, to ensure that we are best positioned for the future market climate."

Today's announcement includes asset class performance as follows (click on image):

Returns for real estate, private equity and some components of the inflation assets reflect market values through March 31, 2016.

CalPERS 2015-16 Fiscal Year investment performance will be calculated based on audited figures and will be reflected in contribution levels for the State of California and school districts in Fiscal Year 2017-18, and for contracting cities, counties, and special districts in Fiscal Year 2018-19.

The ending value of the CalPERS fund is based on several factors and not investment performance alone. Contributions made to CalPERS from employers and employees, monthly payments made to retirees, and the performance of its investments, among other factors, all influence the ending total value of the Fund.

The Board has taken many steps to sustain the Fund as part of CalPERS'Asset Liability Management Review Cycle (PDF) that takes a holistic and integrated view of our assets and liabilities.

You can read more articles on CalPERS's fiscal 2015-2016 results here. CalPERS's comprehensive annual report for the fiscal year ending June 30, 2015 is not yet available but you can view last year's fiscal year annual report here.

I must admit I don't track US public pension funds as closely as Canadian ones but let me provide you with my insights on CalPERS's fiscal year results:

• First, the results aren't that bad given that CalPERS's fiscal year ends at the end of June and global equity markets have been very volatile and weak. Ted Eliopoulos, CalPERS's CIO, is absolutely right: "When 52 percent of your portfolio is achieving a negative 3.4 percent return, that certainly sets the main driver for the overall performance of the fund." In my last comment covering why bcIMC posted slightly negative returns during its fiscal 2016, I said the same thing, when 50% of the portfolio is in global equities which are getting clobbered during the fiscal year, it's impossible to post solid gains (however, stocks did bounce back in Q2).
• Eliopoulos is also right, CalPERS and the entire pension community better prepare for lower returns and a lot more volatility ahead. I've been warning about deflation and how it will roil pensions for a very long time. 
• As far as investment assumptions, all US public pensions are delusional. Period. CalPERS and everyone else needs to lower them to a much more realistic level. Forget 8% or 7%, in a deflationary world, you'll be lucky to deliver 5% or 6% annualized gains over the next ten years. CalPERS, the government of California and public sector unions need to all sit down and get real on investment assumptions or face the wrath of a brutal market which will force them to cut their investment assumptions or face insolvency. They should also introduce risk-sharing in their plans so that all stakeholders share the risks of the plan equally and spare California taxpayers the need to bail them out.
• What about hedge funds? Did CalPERS make a huge mistake nuking its hedge fund program two years ago? Absolutely not. That program wasn't run properly and the fees they were doling out for mediocre returns were insane. Besides, the party in hedge funds is over. Most pensions are rightly shifting their attention to infrastructure in order to meet their long dated liabilities. 
• As far as portfolio returns, good old bonds and infrastructure saved them, both returning 9% during the fiscal year ending June 30, 2016. In a deflationary world, you better have enough bonds to absorb the shocks along the way. And I will tell you something else, I expect the Healthcare of Ontario Pension Plan and the Ontario Teachers' Pension Plan to deliver solid returns this year because they both understand liability driven investments extremely well and allocate a good chunk into fixed income (HOOPP more than OTPP).
• I wasn't impressed with the returns in CalPERS's Real Estate portfolio or Private Equity portfolio (Note: Returns in these asset classes are as of end of March and will end up being a bit better as equities bounced back in Q2). The former generated a 7.06 percent return, underperforming its benchmark by 557 basis points and suffered relative underperformance in the non-core programs, including realized losses on the final disposition of legacy assets in the Opportunistic program. CalPERS Private Equity program bested its benchmark by 253 basis points, earning 1.70 percent, but that tells me returns in this asset class are very weak and the benchmark they use to evaluate their PE program isn't good (they keep changing it to make it easier to beat it). So I'm a little surprised that CalPERS new CEO Marcie Frost is eyeing to boost private equity.

In a nutshell, those are my thoughts on CalPERS fiscal 2015-16 results. Is CalPERS smearing lipstick on a pig? No, the market gives them and everyone else what the market gives and unless they're willing to take huge risks, they need to prepare for lower returns ahead.

But CalPERS and its stakeholders also need to get real in terms of investment projections going forward and they better have this conversation sooner rather than later or risk facing the wrath of the bond market (remember, CalPERS is a mature plan with negative cash flows and as interest rates decline, their liabilities skyrocket).

• Private equity is an important asset class, making up on average 12% of the total assets at Canada's large public pensions. 
• All of Canada's large public pensions invest in private equity primarily through external funds which they pay big fees to and are then able to gain access to co-investment opportunities where they pay no fees. In order to gain access to these co-investments, Canada's large pensions need to hire professionals with the right skill set to analyze these deals in detail and have quick turnaround time when they are presented with opportunities to co-invest.
• Some of Canada's large public pensions, like Ontario Teachers and OMERS, engage in purely direct (independent) private equity deals where they actually source deals on their own and then try to improve the operational efficiency of that private company. Apart from paying no fees, the added advantage of this approach is that unlike PE funds who try to realize gains in three or four years, pensions have a much longer investment horizon on these investments (ten++ years) and can wait a long time before these companies turn around.
• However, the performance of these type of purely direct (independent) deals is mixed with some successes and plenty of failures. Also, we simply don't have independently verified information on how much is truly allocated in independent direct deals versus fund investments and co-investments, and how well these independent direct deals have done over the long run.
• The reality is that despite their long investment horizon, Canada's large public pensions will never be able to compete effectively with the large private equity titans who are way more plugged into the best deals all around the world.
• This is why CPPIB, Canada's largest pension, focuses purely on fund investments and co-investments all around the world in their private equity portfolio. They will never engage in independent direct deals like they do in infrastructure. Their philosophy, and I totally agree with them, is that they simply cannot compete on direct deals with premiere private equity funds and it's not in the best interests of their beneficiaries.
• Under the new leadership of André Bourbonnais, PSP Investments is also moving in this direction, as Guthrie Stewart's private equity team sells any independent direct stakes to focus its attention solely on fund investments and co-investments to reduce overall fees (again, I agree with this approach in private equity).
• CPPIB and PSP will be the world's top private equity investors for a very long time as they both have a lot of money coming in and they will be increasingly allocating to top credit (private debt) and private equity funds that can make profitable long-term private investments all over the world. 
• Ontario Teachers, the Caisse, bcIMC, OMERS and other large Canadian pensions will also continue to figure prominently on this list of top global private equity investors for a long time but they will lag CPPIB and PSP because they are more mature pensions with less money coming in. Still, private equity will continue to be an important asset class at these pensions for a long time.

• Real estate is an important asset class to "protect against inflation and it generates solid cash flows" but "cap rates are at historic lows and valuations are very stretched." In this environment, PSP is selling some of their real estate assets (see below, my discussion with Neil Cunningham) but keeping their "trophy assets for the long run because if you sell those, it's highly unlikely you will be able to buy them back."
• Same thing in private equity, they are very disciplined, see more downside risks with private companies so they work closely with top private equity funds (partners) who know how to add operational value, not just financial engineering (leveraging a company us to then sell assets).
• PSP is increasingly focused on private debt as an asset class, "playing catch-up" to other large Canadian pension funds (like CPPIB where he worked for ten years prior to coming to PSP). André said there will be "a lot of volatility in this space" but he thinks PSP is well positioned to capitalize on it going forward. He gave an example of a $1 billion deal with Apollo to buy home security company ADT last February, a deal that was spearheaded by David Scudellari, Senior Vice President, Principal Debt and Credit Investments at PSP Investments and a key manager based in New York City (see a previous comment of mine on PSP's global expansion). This deal has led to other deals and since then, they have deployed $3.5 billion in private debt already (very quick ramp-up).
• PSP also recently seeded a European credit platform, David Allen‘s AlbaCore Capital, which is just ramping up now. I am glad Miville asked André about these "platforms" in private debt and other asset classes because it was confusing to me. Basically, hiring a bunch of people to travel the world to find deals is "operationally heavy" and not wise. With these platforms, they are not exactly seeding a hedge fund or private equity fund in the traditional sense, they own 100% of the assets in these platforms, negotiate better fees but pump a lot of money in them, allowing these external investment managers to focus 100% of their time on investment performance, not marketing (the more I think about, this is a very smart approach).
• Still, in private equity, PSP invests with top funds and pays hefty fees ("2 and 20 is very costly so you need to choose your partners well"), however, they also do a lot of co-investments (where they pay no fees or marginal fees), lowering the overall fees they pay. André said "private equity is very labor intensive" which is why he's not comfortable with purely direct investments, owning 100% of a company (said "it's too many headaches") and prefers investing in top funds where they also co-invest alongside them on larger transactions to lower overall fees (I totally agree with this approach in private equity for all of Canada's mighty PE investors). But he said to do a lot of co-investments to lower overall fees, you need to hire the right people who monitor external PE funds and can analyze co-investment deals quickly to see if they are worth investing in (sometimes they're not). He gave the example of a $300 million investment with BC Partners which led to $700 million in co-investments, lowering the overall fees (that is fantastic and exactly the right approach).

On private equity fees, he agreed with André Bourbonnais, PSP doesn't have negotiating power with top PE funds because "let's say they raise a $14 billion fund and we take a $500 million slice and negotiate a 10 basis reduction on fees, that's not 10 basis points on $500 million, that's 10 basis points on $14 billion because everyone has a most favored nation (MFN) clause, so top private equity funds don't negotiate lower fees with any pension or sovereign wealth fund. They can just go to the next fund on their list."

Gotham Asset Management, the $6 billion money manager run by Joel Greenblatt and Robert Goldstein, is exploring a new fee structure that ties more of the fund’s pay to performance.

The firm is in talks with some investors for its Gotham Neutral Strategies hedge fund about charging one fee: the greater of a 1 percent management fee or 30 percent of returns that exceed the fund’s benchmark, according to two people familiar with the matter. The equity fund currently charges 1.5 percent of assets in management fees and 20 percent of profits, one of the people said.

Hedge funds have been trimming and altering their fees amid a backlash over lackluster returns and criticism that the standard model of charging a 2 percent management fee and a 20 percent incentive fee is too expensive. Most hedge funds charge investors too much for the performance they deliver, Greenblatt, who is Gotham’s co-chief investment officer, told Bloomberg Television in a May 2014 interview.

The Gotham Neutral Strategies fund gained 7.5 percent last year, according to another person familiar with the matter. The HFRI Market Neutral Index was up about 2 percent in that time. Since inception in July 2009, the fund has gained an annualized 7 percent.

If the new fee structure is adopted, Gotham would join Hong Kong-based hedge fund Myriad Asset Management and others in moving to the 1-or-30 model, which has been championed by investors including the Teacher Retirement System of Texas.

As of mid-February, at least 16 multi-billion-dollar hedge funds worldwide are either in the process of implementing or have implemented the 1-or-30 fee structure that was introduced to the industry in the fourth quarter of 2016, Jonathan Koerner of Albourne Partners said in a telephone interview on Feb. 16.

“The objective of ‘1 or 30’ is to more consistently ensure that the investor retains 70 percent of alpha generated for its investment in a hedge fund,” Koerner wrote in a white paper published in December by Albourne, which advises clients on more than $400 billion of alternative investments globally. The management fees charged in a year when the fund underperforms the benchmarks are deducted from the following year’s performance fee payment, making it, in effect, a prepaid performance fee credit, he said last month.

The Gotham Penguin Fund, which wagers on and against U.S. stocks, gained 25 percent last year, according to one of the people familiar with the matter, compared with a 5.4 percent rise in the HFRI Equity Hedge Index. Since inception in 2013, the fund has returned an annualized 15 percent.

A representative for the firm declined to comment.

La Caisse de dépôt et placement du Québec today released its financial results for the year ended December 31, 2016. The annualized weighted average return on its clients’ funds reached 10.2% over five years and 7.6% in 2016.

Net assets totalled $270.7 billion, increasing by $111.7 billion over five years, with net investment results of $100 billion and $11.7 billion in net deposits from its clients. In 2016, net investment results reached $18.4 billion and net deposits totalled $4.3 billion.

Over five years, the difference between la Caisse’s return and that of its benchmark portfolio represents more than $12.3 billion of value added for its clients. In 2016, the difference was equivalent to $4.4 billion of value added.

Caisse and benchmark portfolio returns

“Our strategy, focused on rigorous asset selection, continues to deliver solid results,” said Michael Sabia, President and Chief Executive Officer of la Caisse. “Over five years, despite substantially different market conditions from year to year, we generated an annualized return of 10.2%.”

“On the economic front, the fundamental issue remains the same: slow global growth, exacerbated by low business investment. At the same time, there are also significant geopolitical risks. Given the relative complacency of markets, we need to adopt a prudent approach.”

“However, taking a prudent approach does not mean inaction, because there are opportunities to be seized in this environment. Through our global exposure, our presence in Québec, and the rigour of our analyses and processes, we’re well-positioned to seize the best opportunities in the world and face any headwinds,” added Mr. Sabia.

RETURNS BY ASSET CLASS

HIGHLIGHTS OF THE ACCOMPLISHMENTS

The strategy that la Caisse has been implementing for seven years focuses on an absolute-return management approach in order to select the highest-quality securities and assets, based on fundamental analysis. La Caisse’s strategy also aims to enhance its exposure to global markets and strengthen its impact in Québec. The result is a well-diversified portfolio that generates value beyond the markets and brings long-term stability.

Bonds: performance in corporate credit stands out

The Bonds portfolio, totalling more than $68 billion, posted a 3.9% return over five years, higher than that of its benchmark. The difference is equivalent to value added of $1.6 billion. Securities of public and private companies and the active management of credit spreads in particular contributed to the portfolio’s return.

In 2016, despite an increase in interest rates at year-end, the portfolio posted a 3.1% return. It benefited from continued investment in growth market debt and from the solid performance of corporate debt, particularly in the industrial sector.

Public equity: sustained returns over five years and the Canadian market rebound in 2016

Over the five-year period, the annualized return of the entire Public Equity portfolio reached 14.1%. In addition to demonstrating solid market growth over the period, the return exceeded that of the benchmark, reflecting the portfolio’s broad diversification, its focus on quality securities and well-selected partners in growth markets. The Global Quality, Canada and Growth Markets mandates generated, respectively, annualized returns of 18.6%, 10.6% and 8.1%, creating $5.8 billion of value added.

For 2016, the 4.0% return on the Global Quality mandate reflects the depreciation of international currencies against the Canadian dollar. The mandate continued to be much less volatile than the market. The Canada mandate, with a 22.7% return, benefited from a robust Canadian market, driven by the recovery in oil and commodity prices and the financial sector’s solid performance, particularly in the second half of the year.

Less-liquid assets: globalization well underway and a solid performance

The three portfolios of less-liquid assets – Real Estate, Infrastructure and Private Equity – posted a 12.3% annualized return over five years, demonstrating solid and stable results over time. During this period, investments reached more than $60.1 billion. In 2016, $2.4 billion were invested in growth markets, including $1.3 billion in India, where growth prospects are favourable and structural reforms are well underway. The less-liquid asset portfolios are central to la Caisse’s globalization strategy, with their exposure outside Canada today reaching 70%.

More specifically, in Real Estate, Ivanhoé Cambridge invested $5.8 billion and its geographic and sector-based diversification strategy continued to perform. In the United States, the Caisse subsidiary acquired the remaining interests in 330 Hudson Street and 1211 Avenue of the Americas in New York and completed construction of the River Point office tower in Chicago. In the residential sector, the strategy in cities such as London, San Francisco and New York and the steady demand for residential rental properties generated solid returns. In Europe, Ivanhoé Cambridge and its partner TPG also completed the sale of P3 Logistic Parks, one of the largest real estate transactions on the continent in 2016. In Asia-Pacific, Ivanhoé Cambridge acquired an interest in the company LOGOS, its investment partner in the logistics sector, alongside which it continues to invest in Shanghai, Singapore and Melbourne.

In Private Equity, la Caisse invested $7.8 billion over the past year, in well-diversified markets and industries. Through the transactions carried out in 2016, la Caisse developed strategic partnerships with founders, families of entrepreneurs and operators that share its long-term vision. In the United States, it acquired a significant ownership stake in AlixPartners, a global advisory firm. La Caisse also acquired a 44% interest in the Australian insurance company Greenstone and invested in the European company Eurofins, a world leader in analytical laboratory testing of food, environmental and pharmaceutical products. In India, la Caisse became a partner of Edelweiss, a leader in stressed assets and specialized corporate credit. It also invested in TVS Logistics Services, an Indian multinational provider of third-party logistics services.

In Infrastructure, la Caisse partnered with DP World, one of the world’s largest port operators, to create a $5-billion investment platform intended for ports and terminals globally. The platform, in which la Caisse holds a 45% share, includes two Canadian container terminals located in Vancouver and Prince Rupert. In India’s energy sector, la Caisse acquired a 21% interest in Azure Power Global, one of India’s largest solar power producers. Over the year, la Caisse also strengthened its long-standing partnership with Australia’s Plenary Group by acquiring a 20% interest in the company. Together, la Caisse and Plenary Group have already invested in seven social infrastructure projects in Australia.

Impact in Québec: a focus on the private sector

In Québec, la Caisse focuses on the private sector, which drives economic growth. La Caisse’s strategy is built around three main priorities: growth and globalization, impactful projects, and innovation and the next generation.

Growth and globalization

In 2016, la Caisse worked closely with Groupe Marcelle’s management team when it acquired Lise Watier Cosmétiques to create the leading Canadian company in the beauty industry. It also supported Moment Factory’s creation of a new entity dedicated to permanent multimedia infrastructure projects, and worked with Lasik MD during an acquisition in the U.S. market. Furthermore, by providing Fix Auto with access to its networks, la Caisse facilitated Fix Auto’s expansion into China and Australia where the company now has around 100 body shops.

Impactful projects

In spring 2016, CDPQ Infra, a subsidiary of la Caisse, announced its integrated, electric public transit network project to link downtown Montréal, the South Shore, the West Island, the North Shore and the airport. Since then, several major steps have been completed on the Réseau électrique métropolitain (REM) project, with construction scheduled to begin in 2017.

In real estate, Ivanhoé Cambridge and its partner Claridge announced their intention to invest $100 million in real estate projects in the Greater Montréal area. La Caisse’s real estate subsidiary also continued with various construction and revitalization projects in Québec, including those underway at Carrefour de l’Estrie in Sherbrooke, Maison Manuvie and Fairmont The Queen Elizabeth hotel in Montréal, as well as at Place Ste-Foy and Quartier QB in Québec City.

Innovation and the next generation

In the new media industry, la Caisse made investments in Triotech, which designs, manufactures and markets rides based on a multi-sensorial experience; in Felix & Paul Studios, specialized in the creation of cinematic virtual reality experiences; and in Stingray, a leading multi-platform musical services provider. La Caisse also invested in Hopper, ranked among the top 10 mobile applications in the travel industry. Within the electric ecosystem, la Caisse reinvested in AddÉnergie to support the company’s deployment plan, aimed at adding 8,000 new charging stations across Canada in the next five years.

In the past five years, la Caisse’s new investments and commitments in Québec reached $13.7 billion, with $2.5 billion in 2016. These figures do not include the investment in Bombardier Transportation and the $3.1-billion planned commitment by la Caisse to carry out the REM project. As at December 31, Caisse assets in Québec totalled $58.8 billion, of which $36.9 billion were in the private sector, which is an increase in private assets compared to 2015.

FINANCIAL REPORTING

La Caisse’s operating expenses, including external management fees, totalled $501 million in 2016. The ratio of expenses was 20.0 cents per $100 of average net assets, a level that compares favourably to that of its industry.

The credit rating agencies reaffirmed la Caisse’s investment-grade ratings with a stable outlook, namely AAA (DBRS), AAA (S&P) et Aaa (Moody’s).
ABOUT CAISSE DE DÉPÔT ET PLACEMENT DU QUÉBEC

Caisse de dépôt et placement du Québec (CDPQ) is a long-term institutional investor that manages funds primarily for public and parapublic pension and insurance plans. As at December 31, 2016, it held $270.7 billion in net assets. As one of Canada's leading institutional fund managers, CDPQ invests globally in major financial markets, private equity, infrastructure and real estate. For more information, visit cdpq.com, follow us on Twitter @LaCDPQ or consult our Facebook or LinkedIn pages.

The Bonds portfolio, totalling more than $68 billion, posted a 3.9% return over five years, higher than that of its benchmark. The difference is equivalent to value added of $1.6 billion. Securities of public and private companies and the active management of credit spreads in particular contributed to the portfolio’s return.

In 2016, despite an increase in interest rates at year-end, the portfolio posted a 3.1% return. It benefited from continued investment in growth market debt and from the solid performance of corporate debt, particularly in the industrial sector.

OMERS, the pension plan for Ontario’s municipal employees, posted an investment return of 10.3 per cent for 2016, net of all expenses.

The return beat both the benchmark of 7.9 per cent and the previous year’s return of 6.7 per cent. Net assets grew to $85.2 billion, up $8.1 billion.

“Our strong investment returns in 2016 reflect the value of our well-diversified portfolio of high-quality assets, which we are continuously building,” said Michael Latimer, chief executive of OMERS. “All of our asset classes produced solid returns.”

One of Canada’s largest defined benefit pension plans, OMERS invests and administers pensions for more than 470,000 members from municipalities, school boards, emergency services and local agencies across Ontario.

The pension’s funded status improved last year for the fourth year in a row, increasing to 93.4 per cent. It was boosted by both the strong investment returns and member and employee contributions.

The OMERS portfolio includes investments in public markets, private equity, infrastructure and real estate.

Latimer said OMERS is content with a mix of 45 per cent private and 55 per cent public investments, adding that he feels no pressure to make investments in increasingly competitive sectors such as real estate and infrastructure where many pension, private equity and sovereign wealth funds are chasing the same assets.

Jonathan Simmons, the pension fund’s chief financial officer, said OMERS would be open to investing in infrastructure in Canada under the federal government’s ambitious plan, but only if certain conditions are met.

The projects would have to have scale, the pension fund would need to have governance rights over the asset, and there would have to be specific risk criteria, he said, adding that these specifications have been communicated to the government.

“These are political decisions that need to be made at the political level,” Simmons said.

OMERS executives said diversification will be the key to maintaining a sustainable pension in the current climate of geopolitical uncertainty.

This could involve selling assets in situations where valuations are high.

“We could sell into that markets place — crystallize real capital gains for the fund,” Latimer said.

OMERS executives also plan to continuing pushing into growth areas, such as funding small and medium-sized business loans. The fund’s credit book has grown to $15 billion from $9 billion.

Another large Canadian pension fund, the Caisse de depot et placement du Quebec, reported solid investment gains for 2016. On Friday, the Caisse disclosed a 7.6 per cent gain for the year ended Dec. 31.

Net investment results were $18.4 billion and net deposits totalled $4.3 billion. The fund’s assets totalled $270.7 billion at year end.

The pension plan for Ontario municipal employees is mapping out a strategy to invest in developing economies, after retooling its investment portfolio to produce a 10.3-per-cent return in 2016.

The Ontario Municipal Employees Retirement System (OMERS) said Friday that broad increases in both its public and private market portfolios strengthened the plan last year, narrowing its funding shortfall.

After rejigging its investment portfolio through the addition of more private assets such as infrastructure, as well as rethinking its public-market investment strategy, the pension plan is mulling the best approach for expanding into new markets.

“What we’re undertaking today is thinking about just what do emerging markets mean to us,” said Michael Latimer, chief executive officer of OMERS. Once the pension fund identifies the regions that hold the most opportunity, the next step will be to decide where to put people on the ground to source investments. It will also assess which asset classes the capital should flow into.

OMERS has built up an investment portfolio heavily weighted toward North America, with 40 per cent based in Canada, 37 per cent in the United States, 17 per cent in Europe and 6 per cent everywhere else.

That amounts to, “for now, a developed market strategy,” said Jonathan Simmons, OMERS chief financial officer, adding that the fund is content with the investments that it has made in these markets. Now, OMERS is actively looking to expand globally.

OMERS is looking to diversify its investments geographically after undergoing a retooling of its public-markets portfolio in the past year. The fund’s total returns got a boost from public market holdings, which produced a 9.5-per-cent return last year, up from just 0.7 per cent in 2015.

To achieve that, the fund reduced its investments in low-yielding government bonds, while boosting its stake in higher-yielding credit investments. It also zeroed in on stable individual stock investments that pay healthy dividends.

OMERS has also worked to spread its assets more evenly between public investments, which now make up 55 per cent of the portfolio, and private investments, which account for 45 per cent. Net assets grew by $8.1-billion in to $85.2-billion as of Dec. 31.

Private investments, including infrastructure, real estate and private equity produced a 12 per cent return in 2016, down from 14.5 per cent in 2015.

“There’s no question that the flow of capital into alternative asset classes continues,” Mr. Latimer said, adding he expects competitive conditions to persist.

OMERS, which manages assets and administers pensions for 470,000 Ontario employees and retirees, paid out $3.6-billion in monthly benefits last year.

The plan also continued to reduce its funding shortfall and is now 93.4 per cent funded as a result of investment returns and member and employer contributions, compared with 91.5 per cent the year before. In 2010, OMERS said it planned to eliminate the deficit by 2025 and this is the fourth consecutive year that the fund has moved towards closing the shortfall gap.

C’est vrai que le rendement pour 2016 peut paraître un peu décevantà 7,6 %. C’est une troisième année de baisse, la stratégie d’investissements en actions mondiales a déçu au cours de la dernière année, les obligations rapportent peu et la Caisse fait moins bien que le fonds ontarien OMERS, ce qui est assez rare.

"2016 marks the fourth consecutive year that our funded status has improved," said Jonathan Simmons, Chief Financial Officer. "Good investment performance enabled us to strengthen our balance sheet. We have also reduced the discount rate on our pension obligations by five basis points."

...

"I am proud of the strong progress OMERS made in 2016 to deliver on our five-year strategy – the key objective being to ensure the long-term sustainability of the Plan for our members," said Mr. Latimer.

OMERS is looking to diversify its investments geographically after undergoing a retooling of its public-markets portfolio in the past year. The fund’s total returns got a boost from public market holdings, which produced a 9.5-per-cent return last year, up from just 0.7 per cent in 2015.

To achieve that, the fund reduced its investments in low-yielding government bonds, while boosting its stake in higher-yielding credit investments. It also zeroed in on stable individual stock investments that pay healthy dividends.

Billionaire investor Warren Buffett told CNBC he can't see any reason for investors to buy 30-year bonds right now.

"It absolutely baffles me who buys a 30-year bond, the chairman and CEO of Berkshire Hathaway said on "Squawk Box" on Monday. "I just don't understand it."

"The idea of committing your money at roughly 3 percent for 30 years ... doesn't make any sense to me," he added.

Buffett said he wants his money in companies, not Treasurys — making the case throughout CNBC's three-hour interview that he sees stocks outperforming fixed income.

"When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients," said Buffett's letter.

"The problem simply is that the great majority of managers who attempt to overperform will fail. The probability is also very high that the person soliciting your funds will not be the exception who does well," Buffett wrote.

"Both large and small investors should stick with low-cost index funds," he added.

"If a statue is ever erected to honor the person who has done the most for American investors, the hands- down choice should be Jack Bogle," Buffett writes, adding:

"For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing – or, as in our bet, less than nothing – of added value.

"In his early years, Jack was frequently mocked by the investment-management industry. Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me."

[..] bolstering pensions is critically important all over the world, not just China. A friend of mine is in town from San Francisco this long US weekend and we had an interesting discussion on technological disruption going on in Silicon Valley and all over the United States.

My friend, a senior VP at a top software company, knows all about this topic. He told me flat out that in 20 years "there will be over 100 million people unemployed in the US" as computers take over jobs -- including lawyers and doctors -- and make other jobs obsolete at a frightening and alarming rate (Mark Cuban also thinks robots will cause mass unemployment and Bill Gates recently recommended that robots who took over human jobs should pay taxes).

"It's already happening now and for years I've been warning many software engineers to evolve or risk losing their job. Most didn't listen to me and they lost their job" (however, he doesn't buy the "nonsense" of hedge fund quants taking over the world. Told me flat out: "If people only knew the truth about these algorithms and their limitations, they wouldn't be as enamored by them").

He agreed with me that rising inequality is hampering aggregate demand and will ensure deflation for a long time, but he has a more cynical view of things. "Peter Thiel, Trump's tech pal, is pure evil. He wants to cut Social Security and Medicare and have all these people die and just allow highly trained engineers from all over the world come to the US to replace them."

The US and EU are facing the same [pension] problem, and that has much to do with why the global elites are so big on immigration. The Davos crowd know that unless there's a large influx of immigrants to pick up the slack in payroll taxes, the govt. is going to come after the elites because global wealth is overly concentrated among the elites, the vulgar masses haven't got anything to tax.

In the US, the top 20% of the population controls 93% of the wealth. Small wonder the global elites have $30 trillion+ socked away in tax havens. Greed will always be a part of the human condition. If I had their money, I'd probably be doing the same thing, nobody enjoys paying taxes.

Their plan won't work because AI, technology and continued offshoring of jobs are going to put many more millions of people out of work in the coming future.

Buffett and Gates were interviewed in late January by Charlie Rose, and Buffett stated that these people that are displaced by technology, and are 55+ years old (read: too old to be re-educated), they need to be "taken care of". By who? I assume Buffett means the US government because Buffett shuttered the Dexter Shoe Co. plant in Dexter, ME in 2003 putting 1500 employees out of work. The workers were told on a Thursday morning that Friday (the next day) was to be their last day of work. I've heard on good authority (The CEO of another shoe Co. in Dexter, ME, Maine Sole) that only the top 35 employees received any compensation upon being terminated.

Buffett, Gates and their ilk have so much of their wealth socked away in tax free foundations, where is the money going to come from to take care of these displaced workers?

I see in the not too distant future the elites in the US putting excess pressure on Congress to reform entitlements (Medicare and Social Security), because these are unfunded liabilities that if you were to properly account for them like they do the $20 trillion national debt, total US debt would exceed $100 trillion. Let's just say it's a national shit sandwich that only the elites can afford to eat, but obviously don't want to.

• The global jobs crisis: Jobs are vanishing all around the world at an alarming rate. Worse still, full-time jobs with good wages and benefits are being replaced with part-time jobs with low wages and no benefits.

• Demographics: The aging of the population isn't pro-growth. As people get older, they live on a fixed income, consume less, and are generally more careful with their meager savings. The fact that the unemployment rate is soaring for younger workers just adds more fuel to the fire. Without a decent job, young people cannot afford to get married, buy a house and have children.
• The global pension crisis: A common theme of this blog is how pension poverty is wreaking havoc on our economy. It's not just the demographic shift, as people retire with little or no savings, they consume less, governments collect less sales taxes and they pay out more in social welfare costs. This is why I'm such a stickler for enhanced CPP and Social Security, a universal pension which covers everyone (provided governments get the governance and risk-sharing right).
• Rising inequality: Rising inequality is threatening the global recovery. As Warren Buffett once noted, the marginal utility of an extra billion to the ultra wealthy isn't as useful as it can be to millions of others struggling under crushing poverty. But while Buffett and Gates talk up "The Giving Pledge", the truth is philanthropy won't make a dent in the trend of rising inequality which is extremely deflationary because it concentrates wealth in the hands of a few and does nothing to stimulate widespread consumption.
• High and unsustainable debt in the developed world: Government and household debt levels are high and unsustainable in many developed nations. This too constrains government and personal spending and is very deflationary.
• Technology: Everyone loves shopping on-line to hunt for bargains. Technology is great in terms of keeping productivity high and prices low, but viewed over a very long period, great shifts in technology are disinflationary and some say deflationary (think Amazon, Uber, etc.).

Billionaire hedge fund manager David Tepper told CNBC on Monday he remains bullish on the stock market rally.

"Still long stocks. Still short bonds," Tepper told CNBC's Scott Wapner.

The founder of Appaloosa Management said: "Why are stocks and bonds acting differently? It's as if they're reacting to two different economies."

Since the election, bond prices have been falling, and bond yields have been rising. Stock prices, meanwhile, have been hitting new highs.

But more recently, as of mid-February, bond prices and stock prices have been moving higher together again.

Tepper also asked: "Could be there's too much monetary policy still around the globe? Reaction in markets suggests it's affecting the bond market more."

After Friday's late comeback, the Dow Jones industrial average was riding an 11-day win streak for the first time since 1992, with 11 record closes in a row for the first time since 1987.

Tepper's comments come on the same day as another billionaire investor, Warren Buffett, talked up stocks and bashed bonds.

U.S. stock prices are "on the cheap side" with interest rates at current levels, Buffett told CNBC's "Squawk Box" on Monday morning.

The Berkshire Hathaway chief also said: "It absolutely baffles me who buys a 30-year bond. I just don't understand it."

The clock is ticking for 71 penniless union pension funds that rely on a federal insurance company to support their retirees — because the agency itself is also running out of cash, its director said Wednesday.

The Pension Benefit Guaranty Corporation’s limited liquidity is part of the spiraling U.S. pension crisis that threatens to wipe out the retirement savings of more than a million Americans.

The PBGC talked about its reduced circumstances Wednesday as it announced that it is now officially making pension payouts for Teamsters Local 707.

The New York union’s pension fund — covering 4,000 retired truckers across the city and Long Island — hit rock bottom in February.

The PBGC stepped in, as it has with 70 other bankrupt union pensions.

But PBGC only has about a decade’s worth of cash in its coffers, director Tom Reeder warned.

“This is a big issue for us. It’s a big issue for Local 707 and it’s a big issue for others in the same situation across the country,” Reeder said.

“We’re projected to run out of money in eight to 10 years. Many union pension plans are projected to run out in 20 years,” he explained.

“There are going to be people in plans who run out of money after we do, and there will be no water in the well.”

Right now, PBGC has $2 billion in assets built up over 42 years, Reeder said.

The company makes its money through premiums charged to unionized multi-employer pension funds — many of which are caught in an unprecedented financial crunch that’s decimated thousands of union retirees.

Last year, when PBGC was supporting 65 bankrupt plans, it paid out $113 million a month, agency officials said.

In 2017, with even more insolvent plans on its books, PBGC is shelling out even more.

Local 707 alone, with its 4,000 retirees, costs PBGC $1.7 million a month, agency officials said.

In order to keep afloat, PBGC doesn’t try to match a retiree’s union pension. The payouts are cut, often down to about one-third of what the worker is due.

Ex-truckers with Local 707 shared their new financial reality with the Daily News last week.

Ray Narvaez, 77, retired in 2003 after more than 30 years as a Teamster with a $3,400 monthly pension.

Now his monthly take home is $1,100 before taxes.

Narvaez is actually one of the luckier ones in 707.

According to PBGC officials, the average 707 retiree was getting $1,313 a month from the union pension fund.

Now that the fund is broke and dependent on PBGC’s insurance payouts, the average monthly take home is $570, agency officials said.

But that’s nothing compared to the cuts that would hit union retirees if the PBGC went under, said Reeder.

If that were to happen, PBGC would have to rely solely on what it earned from incoming premium payments.

Retirees could expect to see their benefits slashed by 80% . In other words, less than one-eighth of the $570 average check PBGC is able to give Local 707 retirees now.

“The amounts would be negligible. Their retirement payouts would be very low,” a PBGC official said.

The disaster that’s struck Local 707 is looming for several other, much larger Teamster pension funds.

Retirees in construction, mining and the retail and service industries have been hard-hit too.

All of the critically underfunded pensions are multi-employers plans — meaning they were created by various companies that all employed union workers across the same industry. The Teamsters, predominantly a trucking union, has seen its pension funds devastated by stock market crashes and a shrinking employer base.

Two of the largest union pension funds teetering on the brink of insolvency — the Central States Pension Fund and the New York State Teamsters Pension Fund in the Albany region — cover Teamsters.

If the Central States Pension fund goes broke, it could swamp PBGC — if it hasn’t gone broke first.

The majority of union multi-employer pension funds are doing well, as are single-employer union pension funds, Reeder said.

“It’s a minority, but a significant minority, of the multi-employer plans that are in trouble,” he said.

Reeder and many of the union pension funds are pinning their hopes on Congress.

The PBGC is looking for an increase in the premiums it can charge the union funds, which requires Congressional approval.

“It won’t be painless” to shore up the insurance fund, Reeder said.

But it will be far cheaper to do it now than to wait until the last minute, he said.

“We are fairly confident that we will be insolvent on the multi-employer side by 2022 or 2028 barring a legislative change,” he said.

For Edward Hernandez, 67, a retired Local 707 trucker whose monthly pension just got slashed $2,422 to $902 before taxes, the time to sound the alarm was nearly two decades ago.

“I was saying back then to Local 707, ‘Why don’t we do something about it now, let’s go to Washington,’” he said. “Even 15 years ago we were getting letters that our fund was becoming insolvent. Why couldn’t anyone find a way to fix this then?”

Amidst my crusade for the protection of Defined Benefit (DB) pension plans, I opine that contingency funds are more harmful than helpful for both plan members and sponsors because:

1. they unduly increase the pension expenditures of all concerned DB plans with the objective of safeguarding the pensions accrued through only the small proportion of plan sponsors eventually going bankrupt;
2. not only do contingency funds protect the concerned plans against a risk that improperly relates to business (i.e. bankruptcy) as opposed to pension (i.e. mainly insufficient investment returns),
3. but human nature being what it is, I surmise that the protection provided by a contingency fund might, in order to contain current estimates of pension costs and liabilities, induce the concerned:

• valuation actuaries, colluding or not with their plan sponsors, to be complacent about the soundness of valuation assumptions, e.g. by assuming an aggressive (i.e. too liberal) rate of return on investments;
• investment officers, colluding or not with the plan sponsor, to take undue risks in the selection of investments.

This does not mean that I do not care about the protection of pensions lost pursuant to a bankruptcy. Indeed, as stated in my attached proposed financing policy for DB plans, in such cases:

1. DB plan members shall have priority over secured creditors to amounts covered by a deemed trust, no matter when the security was granted to the lender;
2. The outstanding investment fund shall be maintained of rather than used to buy annuities because:

• the cost of future benefit payments if less expensive if paid from the pension fund;
• after the sponsor’s bankruptcy, the market value of the deficient fund would normally improve.

It's a fast-paced, risk-taking industry glamorised by Hollywood and writers alike, but when one Wall Street trader left the floor he identified a huge market being ignored by the business world.

Canada-based businessman Rich Donovan worked as a trader for Merrill Lynch for 10 years after he graduated from the prestigious Columbia Business School. It was competitive enough, but with cerebral palsy he felt he had more to prove.

"I was told to my face that I would never be a trader. They were wrong, but that's just the reality of having a disability. You figure out how to work around it."

He says he was asked at every job interview, "Can you physically do this job?" His answer was always the same: "I don't know, but we're going to find out."

Donovan was offered every job he went for and says there was "never a time that I hit a barrier, largely because I was 10 steps ahead of what I needed to be".

It is this attitude that has led him to identify a market worth $8 trillion (£6.4tn) and brimming with untapped talent: the disability market.

After he left the trading floor, Donovan set up the Return on Disability Group (ROD). The firm helps companies improve their products, customer experience and recruitment for disabled clients, as well as alerting investors to companies that target that market. Its slogan is "translate different into value".

He estimates the market comprises about 1.3 billion people with disabilities worldwide, plus an additional 2.42 billion people once their friends and family are taken into account, which Donovan describes as "huge".

It seems hard to believe that such a market could be overlooked, but he says it has largely gone unseen because people look at it from the wrong angle.

The key, he says, is not to consider disability a niche market, but as an "emerging market" - and to challenge the conventional because "companies and governments have no clue how to convert that size into value".

Donovan says traditional government schemes to get more disabled people into work or bespoke products made for disabled people fail to properly utilise the market.

For that, you need to think beyond lunches and motivational talks and remember business is always about money.

"Most companies think they need to be perfectly ready to provide an 'accessible' space for disabled workers. The reality is disabled people know what they need to be successful. Companies only need to listen and adjust to those needs," he says.

"Quotas and equity laws do not cause hiring, it's the promise of future profits that does. Companies, by their very nature, act in their shareholders' best interests, doing what will grow revenue in the fastest way possible."

Therefore, Donovan says, companies should "attack the market" as they would any other.

"Find out the desires of disabled consumers as they relate to your profitable enterprise, adjust your product and messaging to attract their business then execute this in line with your company's process and culture."

Donovan believes mistakes are often made when companies try to "disable" their business or do just enough to comply with regulations.

"Disabled people don't want 'special' products," he says. "But they are hungry to be included in the mainstream consumer experience.

"Most companies today look at this as a government regulatory mandate; they're not looking at this as a profitability opportunity, they're not looking at this as an innovation opportunity to improve products for users.

"They're looking at this as a charity effort," he says.

Donovan believes the key to cracking this market is to flip the disabled consumer experience to ultimately benefit the mainstream audience.

"We've learnt that people with disabilities use things very harshly, they use them in extreme ways, and if you can learn how they use things and use that information it makes that core product better for everyone. That way the returns really take off."

The former trader says there is one company that already does this: Google.

"The core of what they do is innovation and in most of their products there is some disability component. It's at the very core of what they do.

"Look at the Google [self-driving] car - you can imagine the head engineer walking into his team and saying 'OK, build me a car that a blind guy can drive' and that's exactly what they did.

"They're very focused on leveraging disability to make the core product experience better for everyone."

Donovan says the disability market has only really existed within the past decade continues to develop.

"They're still grappling with what that looks like and that process historically takes a few years," he says. "You look back at women and race and it takes a little bit of time to adjust to that reality and disability has just started to do that."

But it is not just the disability market that Donovan's company has been tasked with growing.

His clients have also asked him to apply the same ideas to sexuality and poverty.

Donovan's ambition is to move away from government regulations and to help companies serve non-traditional markets with the aim of ultimately increasing profitability - a process he describes as "figuring out how to 'eat that elephant'".

1. Google: Pension news
2. Google: Hedge Fund news
3. Google: Private Equity news
4. CNBC
5. Bloomberg
6.  Reuters Business News

OPTrust’s investment return for 2016 decreased to six per cent, compared to its return of eight per cent in 2015.

Its 2016 funded status report, released on Monday, shows the fund outperformed its actuarially projected discount rate of 5.5 per cent. It also outperformed its benchmarks in its alternative asset classes, which are internally managed. Private equity earned 20.6 per cent, infrastructure yielded an 11.1 per cent return and real estate came in at 10.8 per cent.

“We had a strong year and reduced the amount of risk that we have in the plan,” says OPTrust president and chief executive officer Hugh O’Reilly.

Still, O’Reilly chose to emphasize the fact that the $19 billion OPTrust, which manages the OPSEU pension plan, remained fully funded on a regulatory filing basis for the eighth consecutive year.

“What matters most to ourselves and our members is the funded status of the plan,” he said. “So we are changing the conversation by changing the name of our filing from an ‘annual report’ to a ‘funded status report’.”

On a market value basis, OPTrust is 110 per cent funded, a slight improvement over 2015 when it was 101.1 per cent funded. The funding valuation confirmed deferred investment gains of $681 million, which will be recognized over the next four years.

“Our results mean that contributions and benefits will stay at current levels at least through 2020, which meets our goal of providing current benefit levels at current costs with a high degree of probability,” says O’Reilly. “We remain the only jointly sponsored plan with guaranteed indexing that is fully funded.”

In terms of demographics, OPTrust has an equal proportion of active and inactive members, even as the long-term decline in the ratio of active members to retirees continues. By law, the pension fund cannot decrease benefits if it sustains losses, with the sole alternative being to increase contribution levels.

“But we don’t want to be in the position of having to do that because it would put a heavier burden on our active members,” says O’Reilly.

OPTrust reduced its real discount rate from 3.55 per cent in 2015 to 3.4 per cent in 2016. The rate change increased fund liabilities by $502 million, adding greater conservatism to the its risk margins.

“This change reflects the expectation of lower long-term investment returns and reduces the risk of future losses due to investment returns falling short of the expected cost of members’ and retirees’ future pensions,” states the report.

OPTrust also diversified in 2016 by reducing its exposure to equity risks and increasing its exposure to absolute return strategies. The strategy follows the introduction in 2015 of OPTrust’s member-driven investment strategy, which focuses on harvesting different types of risk premium in a diversified manner.

“We see ourselves not as asset allocators but as risk allocators,” says O’Reilly. “Our goal is to balance the generation of short-term returns with the need to manage long-term risk effectively, and to seek stability rather than volatility.”

OPTrust released its 2016 Funded Status Report, which details the Plan's eighth consecutive, fully funded position and financial results. In 2016, OPTrust achieved an investment return of six per cent for the total fund, net of external management fees and outpaced all of its benchmarks. The organization received high scores with members and retirees rating their satisfaction with a score of 9.1 out of 10.

"The measure of success that matters the most is the Plan's fully funded status," said Hugh O'Reilly, President and CEO of OPTrust. "We are risk allocators, not asset allocators. That's why the true goal behind short-term performance is the long-term funded position. OPTrust has decreased risk and strengthened its fully funded status. That ensures our ability to pay pensions today and preserve pensions for tomorrow."

The Plan remained fully funded in 2016 on a regulatory filing basis, while the organization continued to strengthen its actuarial assumptions to enhance the long-term funding health of the Plan. The Plan's real discount rate was lowered to 3.4 per cent, net of inflation, from 3.55 per cent in 2015, reflecting increased actuarial margins and reducing the risk of future losses due to investment returns falling short of the expected cost of members' future pensions. The funding valuation confirmed deferred investment gains of $681 million at the end of 2016, which should further improve funded status in the years to come.

OPTrust introduced its member-driven investing (MDI) strategy in 2015 with a singular focus to increase the likelihood of plan certainty by balancing the objectives of sustainability and stability to better align the Plan's outcomes with members' needs. During 2016, OPTrust began implementing MDI through dynamic portfolio construction of the total fund with its illiquid and liquid strategies. The Plan's net assets increased to $19 billion at year-end ($18.4 billion as at December 31, 2015).

More detailed information about OPTrust's 2016 strategy and results is available in its Funded Status Report.

About OPTrust

With net assets of $19 billion, OPTrust invests and manages one of Canada's largest pension funds and administers the OPSEU Pension Plan, a defined benefit plan with almost 90,000 members and retirees. OPTrust was established to give plan members and the Government of Ontario an equal voice in the administration of the Plan and the investment of its assets through joint trusteeship. OPTrust is governed by a 10-member Board of Trustees, five of whom are appointed by OPSEU and five by the Government of Ontario.

• While markets reacted favourably to the U.S. election, we remain cautious due to continued uncertainty. Given we are late in the economic cycle, the potential for policy mistakes is high, while the geopolitical risk has also risen. 
• Valuations remain stretched and debt levels remain elevated. Our focus is on building a robust portfolio that is not overly reliant on equities as the generator of investment performance. We seek broad diversification that will allow us to harvest risk premia in different economic environments. Our goal is to increase pension certainty, not earn outsized returns by taking excessive risk.
• In 2017, we will continue to reposition our total fund portfolio towards a more balanced set of risk factor exposures. Increased exposure to absolute return strategies will help during heightened market volatility and a challenging macroeconomic environment. We expect to grow this part of our portfolio over time.
• Over the course of 2016, we saw a modest rebound in the Canadian dollar, in response to higher oil prices. Our unhedged currency exposure, which is mostly in U.S. dollars, resulted in a drag on performance of -0.7%.