Canadian public pension funds and pension plans are regarded as among the best in the world, but they underwent an evolution of changes to get to where they are today. Because of their success, the World Bank Group partnered with four Canadian pension funds, Alberta Investment Management Corporation (AIMCo), Caisse de dépôt et placement du Québec (CDPQ), Healthcare of Ontario Pension Plan (HOOPP), and OPTrust, as well as the Government of Ontario on a report that studies the evolution of these plans.

The World Bank Group will use the report, authored by Toronto-based firm Common Wealth, to inform its work to strengthen retirement security in emerging economies and increase dialogue on successful pension models in Canada.

World Bank CFO Joaquim Levy attended the launch of the report "The Evolution of the Canadian Pension Model" today at The Omni King Edward Hotel. Hosted by the Canadian Club Toronto, a panel discussion showcased the evolution and endeavours of the pension funds and offered lessons for emerging economies seeking to improve their retirement systems and public pension institutions.

Based on in-depth interviews with some of Canada's top pension leaders and case studies of four funds (AIMCo, CDPQ, HOOPP, and OPTrust), the detailed World Bank report covers the essential components of pension plan organizations – governance, people and organization, investments, administration, plan design and funding, and regulation and public policy – and presents a four-phase framework for the evolution of pension organizations. It outlines 14 key lessons and draws out several success factors including:

• Strong collaboration between diverse stakeholders – labour, government, business, and finance – and a sustained relationship built on trust
• Strong, independent governance
• Singularity of purpose – to run the organization like a business and focus on delivering retirement security for plan members
• Presence of strong, ethical leadership at the top and throughout the organization
• Recruitment and retention of top global talent with a competitive and performance-based compensation framework
• Critical "founding" stage of a new or reformed pension organization
• Governments creating the right regulatory environment
• Investments managed in-house rather than outsourced to third-party fund managers

The report also highlights seven challenges that will shape the future of the Canadian pension model.

Download the Report (PDF): https://openknowledge.worldbank.org/handle/10986/28828

Remarks were given by:

• Joaquim Levy, Managing Director and Chief Financial Officer, World Bank Group
• Christine Hogan, Executive Director for Canada, Ireland and the Caribbean, World Bank Group

Panelists included:

• Jim Keohane, President and CEO, HOOPP
• Hugh O'Reilly, President and CEO, OPTrust
• Kim Thomassin, Executive Vice-President, Legal Affairs and Secretariat, CDPQ
• Kevin Uebelein, CEO, AIMCo

The panel discussion was moderated by Terrie O'Leary (EVP, Business Strategy and Operations, Toronto Global).

World Bank Group – Managing Director and Chief Financial Officer, Joaquim Levy

"The responsibilities in designing and managing pension funds are immense and long-lasting. Learning from successful experiences is thus extremely valuable for those setting up new systems, as we see in many developing countries that the World Bank is working with. In designing its system, Canada has tackled many of these crucial issues. I am pleased that some of the Canadian funds are among those looking to partner with pension funds in developing countries and help them invest their assets efficiently, productively, and for the long term."

AIMCo – CEO, Kevin Uebelein

"AIMCo is pleased that the World Bank is acknowledging the important advantages the Canadian Model of investment management offers pension plans in its latest research, and that it has chosen to include AIMCo among the leaders in this space. Canadian pension plans, as evidenced by those represented in this paper, offer several unique advantages to meet the long-term objectives of clients. The progress these plans have made in the last 10 years is remarkable, and AIMCo looks forward to continuing the important role we play in ensuring the long-term sustainability of our clients' investments."

CDPQ – Executive Vice-President, Legal Affairs and Secretariat, Kim Thomassin

"The report helpfully documents and explains the stages in the evolution of Canadian pension fund investors who, despite their differences, all fit within the Canadian pension model. The narrative resonates with particular saliency for CDPQ, where the evolution continues to this day with our innovative model for infrastructure investments and our expansion into emerging markets."

HOOPP – President and CEO, Jim Keohane

"HOOPP is honoured to be recognized by the World Bank for our role in the evolution of the Canadian Pension Model. We are strong proponents of the importance of independent governance, scale and in-house investing as well as a balance of risk management, investment success and low administrative costs. This allows us to deliver 80 cents of every pension dollar from investments while achieving a 122% fully funded status that ensures HOOPP delivers on its pension promise."

OPTrust – President and CEO, Hugh O'Reilly

"The Canadian pension model has much to offer the ongoing international discussion on pension funding, governance and management. As good pension citizens, OPTrust is pleased to be recognized by the World Bank and to be part of this effort to enhance retirement income security for all."

Ontario Ministry of Finance - Minister of Finance, Charles Sousa

"Canada's pension plans are world leaders in ensuring strong retirement security, and Ontario's pension plans are at the forefront of this evolution. It is no mistake that the World Bank has recognized the strength of our framework, identifying our plans as models for global retirement security."

Common Wealth – Founding Partners, Alex Mazer and Jonathan Weisstub

"Our collaboration on this World Bank report aligns with our mission to expand access to high-quality retirement security. We believe that making the principles and lessons from the best Canadian pension organizations available to stakeholders around the world will have a material impact on retirement security across continents."

ABOUT THE WORLD BANK

The World Bank Group is one of the world's largest sources of funding and knowledge for developing countries. It comprises five closely associated institutions: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), which together form the World Bank; the International Finance Corporation (IFC); the Multilateral Investment Guarantee Agency (MIGA); and the International Centre for Settlement of Investment Disputes (ICSID). Each institution plays a distinct role in the mission to fight poverty and improve living standards for people in the developing world. For more information, please visit www.worldbank.org, www.miga.org, andwww.ifc.org.

ABOUT COMMON WEALTH

Founded in 2015, Common Wealth is a Toronto-based firm focused on expanding access to retirement security. It has advised pension organizations with collective assets exceeding $800 billion, as well as unions, associations, and governments, on issues of strategy, governance, regulation, and the design and implementation of retirement plans, products, and institutions. In partnership with the Service Employees International Union, Common Wealth recently created the first retirement plan in Canada for lower- and moderate-income earners. The firm is currently working with a variety of partners to create portable, value-for-money, community-based retirement plans within sectors where most workers lack pension coverage.

ABOUT ALBERTA INVESTMENT MANAGEMENT CORPORATION

Alberta Investment Management Corporation (AIMCo) is one of Canada's largest and most diversified institutional investment fund managers. The Corporation manages more than $95.7 billion for Alberta pensions, endowments and government funds and is governed by an experienced Board of Directors. AIMCo's goal is to inspire the confidence of Albertans by achieving superior risk-adjusted investment returns. The Corporation was established as a Crown corporation on January 1, 2008. The sole shareholder is the Province of Alberta. Our assets were previously managed by a division of Alberta Treasury Board and Finance.

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 C$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.

ABOUT THE HEALTHCARE OF ONTARIO PENSION PLAN

Created in 1960, HOOPP is the pension plan of choice for Ontario's hospital and community-based healthcare sector more than 321,000 members and retired members and 500 employers. With more than $70 billion in assets, HOOPP is one of the largest DB pension plans in Ontario, and in Canada. HOOPP is governed by a Board of Trustees with representation from the Ontario Hospital Association (OHA) and four unions.

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.

Media invited to attend
Event Details:

The Evolution of Canadian Pensions - "Lessons Learned: The Emergence and Evolution of the Canadian Pension Model"
Date: Wednesday, November 22, 2017
Time: 7:10am
Location: The Omni King Edward Hotel, 37 King St. East, Toronto, Ontario
Event website: https://www.canadianclub.org/Events/EventDetails.aspx?id=3402

Summary/Backgrounder on the World Bank Report on the Evolution of the Canadian Pension Model  November 22, 2017

____________________________________________________________________________

• Canadian public pension funds and pension plans are regarded as among the best in the world today. They also play a significant role in the Canadian financial system, accounting for $1.2T in assets under management with more than 20 million contributors and beneficiaries.
• It is a reputation that has been built over many years. Just 20 to 30 years ago, many of the pension plans were funded on a pay-as-you-go basis or had funding deficits. They were largely or entirely invested in domestic government bonds, lacked independent governance, and were administered in an outdated and error-prone fashion.
• A report commissioned by the World Bank – working in collaboration with four participating Canadian pension funds (AIMCo, CDPQ, HOOPP and OPtrust), the Government of Ontario, and Toronto-based retirement security firm Common Wealth – examines the evolution of the Canadian pension model. The purpose of the report was to identify practical lessons learned that could benefit a range of stakeholders in emerging economies looking to design and deliver retirement security systems in a more efficient and sustainable manner.
• The detailed report covers the essential components of pension plan organizations – governance, people and organization, investments, administration, plan design and funding and regulation and public policy – and presents a four-phase framework for the evolution of pension organizations. It outlines 14 key lessons and draws out several success factors including:
• Strong collaboration between diverse stakeholders – labour, government, business, and finance – and a sustained relationship built on trust
• Strong independent governance (possibly the most important element)
• Singularity of purpose – to run the organization like a business and focus on delivering retirement security for plan members
• Presence of strong, ethical leadership at the top and throughout the organization
• Recruitment and retention of top global talent with a competitive and performance-based compensation framework
• Critical "founding" stage of a new or reformed pension organization
• Governments creating the right regulatory environment
• The report highlights that the Canadian pension funds did not take an identical path in their development. A number of them encountered significant missteps, but were able to overcome them over a period of time.
• Despite the success of the Canadian public pension plans to date, virtually all of them understand and are seized with the challenges and risks that lie ahead and are actively developing and deploying strategies to address these issues. The following are of particular concern:
• A "low for longer" environment
• Maturity of plans and ensuring intergenerational equity
• "Pension envy" sentiments
• Complexity and competitiveness for good investment opportunities
• Increasing demands for accountability, transparency and ethical measures
• Reforms in the regulatory environment
• Preparation for the next market downturn or financial crisis
• The report defines the "Canadian model" of public pension as a Canadian public pension plan or public pension asset manager that is typically defined-benefit, has a public-sector sponsor or sponsors, and has the following characteristics:
• Governance– the funds operate at arm's length of governments and sponsors and are overseen by independent boards with strong accountability and transparency frameworks
• Scale – assets under management exceed $10 billion and are often significantly higher
• In-house management by professionals– a significant portion of investment management and/or pension administration is performed by in-house professionals who receive competitive compensation
• Diversification– the funds' investments are highly diversified by both geography and asset class, including a significant allocation to alternative asset classes such as real estate, private equity, and/or infrastructure, and significant direct investments in such asset classes
• Talent – the ability to attract and retain top talent at both the board and management level
• Long time horizon– long-term investors are able to withstand short-term market volatility

SOURCE OPSEU Pension Trust (OPTrust)

Canada is home to some of the world's most admired and successful public pension organizations. This was not always the case. As recently as the mid-1980s, many Canadian public pensions were invested largely or entirely in domestic government bonds, were funded primarily on a pay-as-you go basis, lacked independent governance, and were administered in an outdated and error-prone fashion. Over the past three decades, a Canadian model of public pension has emerged that combines independent governance, professional in-house investment management, scale, and extensive geographic and asset-class diversification. This report aims to document the emergence and evolution of this Canadian model, distilling practical lessons for stakeholders in emerging economies working to improve their pension arrangements and retirement systems. Although a growing body of literature exists on the Canadian model of pension organization, this report is unique in two respects: its emphasis on the evolutionary journey of Canadian pension organizations (as opposed to their current state) and its in-depth focus on Canadian pension funds that have received less attention than some of their peers.

• OTPP: A full discussion on the evolution of the Canadian pension model cannot take place without a case study of the Ontario Teachers' Pension Plan (OTPP). I suggest the authors of this report look into my conversation with Jim Leech to get some more historical context.
• Compensation: There is a discussion on competitive compensation at Canada's large pensions but little in the way of details (see my discussion here). 
• Leverage: Canada's large pensions are piling on the leverage, which is a benefit they have over their global peers. There is a reason why they're able to lever up, namely, they run great operations with a tight focus on risk management and enjoy triple-A credit ratings. 
• Shared-risk model: When it comes to fully-funded pensions, it's worth focusing on why some of Canada's successful defined-benefit plans like OTPP, HOOPP and CAATT are jointly sponsored and fully funded plans because there is risk sharing going on, meaning when the plans run into trouble, contribution rates are increased, benefits cut, or both. HOOPP and OTPP have fully or partially removed inflation protection in the past to restore their respective plan's funded status. OPTrust and OMERS are fully-funded or close to it but unlike HOOPP and OTPP, they don't have the capaibility to cut benefits when their plans run into trouble. I wish there was a detailed discussion on the shared-risk model and its importance in keeping these plans fully funded.

1. What is the role of risk management in any pension plan?
2. How does OTPP address risk in public markets?
3. How does OTPP address risks in private markets?
4. How does OTPP address liquidity risk?
5. How does OTPP address funding risk?
6. How does OTPP address benchmark risks (risks that benchmarks do not accurately reflect risks being taken)?
7. How does OTPP use leverage to reduce overall risk?
8. How important is qualitative risk assessment as opposed to quantitative risk assessment in your overall monitoring of portfolio risks?
9. How critical are risk systems to monitor all risks, including operational risks?
10. How does risk factor into OTPP's compensation scheme?

• Change contribution rates
• Change the level of inflation protection for pension credit earned after 2009
• Change other pension benefits members will earn in future years
• Adopt a combination of these options

“We don’t support divestment; we’re much more in the camp of supporting engagement– working with companies, understanding what they are doing, how they are managing these risks, backing them when they are putting things in place,” Barbara Zvan, senior vice-president for asset mix and risk at Teachers, said in an interview.

“Those are conversations we did not have four or five years ago that we are starting to have today. … I don’t think we generally take the activist route. We would rather work privately with engagement.”

Ms. Zvan said climate risk cuts across a number of sectors – not just oil and gas companies or coal-burning utilities – and long-term investors such as pension plans are working hard to get a better understanding of the vulnerabilities. Clear guidance from policy-makers on carbon pricing and other climate strategies is critical, she added.

Teachers agreed last summer to pay $3.3-billion for oil and gas holdings owned by Calgary-based Cenovus Energy Inc., but it has also purchased renewable energy companies, including Calgary-based Blue Earth. For its part, the CPPIB is leading a group that agreed to purchase Encana Corp.’s DJ Basin oil and gas assets in Colorado for $900-million (U.S.), but that deal has been delayed for six months.

Ms. Zvan said the Teachers fund assesses each transaction on its merits, with a clear eye to long-term risks as the world transitions to a low-carbon economy. “It’s really about trying to embed it in a broader risk framework,” she said. Pension funds are particularly vulnerable to disruption in the fossil-fuel sector because they invest for the long term to safeguard retirement funds for people who are not even in the work force yet.

Teachers has also balked at proposals from a United Nations-supported group called Principles for Responsible Investing that is urging institutional investors to disclose their own “carbon footprint” and their plans to reduce investments in fossil fuels. Ms. Zvan said such high-level reporting “is not that informative” because it lacks context, and that the pension fund prefers to be guided by its statement of principles by which it manages risks and takes advantage of investing opportunities.

The silence of the bears is deafening. And who can blame them? The last 2 years have been absolutely brutal for any fans of price discovery, volatility and anything analytical mattering. Nothing matters. Be it divergences, valuations, earnings misses, slowing data, yield curve, equal weight, internals, catastrophes in nature, slowing loan growth, slowing auto sales, slowing real estate, retail apocalypse, debt levels, etc…I can drone on. Nothing matters. Markets keep drifting higher despite it all.

Price discovery as we used to know it, the back and forth of buyers and sellers engaging in the argument of forward valuations based on expected earnings growth, has ended with the disappearance of sellers as part of the normal market functioning:

Corrections as a means of price discovery don’t exist any more. Every day we don’t have a 3% correction is a new record in length of time without any such correction. And the chart above illustrates this adequately. It is a global phenomenon, it’s not only US based.

5% corrections, what also used to be regular part of markets and a bare minimum at that, have also disappeared:

Not quite at a record, yet the message is nevertheless clear: There’s not much happening in these markets on a day to day basis.

The abomination of what passes for intra-day trading ranges these days illustrates the point quite nicely:

Whatever downside does occur can’t sustain itself for more than minutes, a couple of hours at best. Case in point: The $DAX was only negative for 1 hour 16 minutes after the surprise collapse of German coalition talks on Monday. Nothing matters.

Hence it is no surprise sentiment is as bullish as it is. Recall allocations are all bullish, people, funds, even central banks all own the same shrinking universe of stocks.

Indeed there is not even a sense that anything could change this program:

This chart of the global Dow Jones, more than any other, shows how historically out of balance this rally has been. Red bars don’t exist and this is the steepest uninterrupted ascent ever accompanied by the steepest volatility compression ever.

In this context yesterday’s capitulation by Goldman Sachs was classic. They were the investment bank that kept citing valuations as a major concern and were the most bearish on 2017. Then they capitulated. Now their mid range target is 2850 for 2018.  with little to no downside risk:

That’s if the exuberance stays rational they say, if it goes irrational they covered themselves with an irrational scenario of 5300.

As I said classic. It is notable how both Monday and Tuesday were suddenly flooded with bullish forecasts. I won’t bother to recite them all here, I gave you a glimpse yesterday.

I’m just highlighting this as a latest example of the complete lack of any divergent views remaining in the marketplace. Which is fine. It simply illustrates market sentiment, but also again underscores the extent of the bubble.

Bulls will counter that growth is solid. I’ve documented variant signs of a slowdown in the works (Caution: Slowdown). And I’m not the only one to notice:

Growth in Developed Economies Slowed in Third Quarter, OECD Says

And yet while bulls cite supposed great growth figures the ECB keeps printing like we’re in the middle of the financial crisis:

The numbers behind the chart via Holger Zschaepitz: “#ECB ramps up balance sheet expansion despite booming #Eurozone economy. Total assets rose by another €24.1bn to a fresh life-time high of €4,411.9bn on QE program, equals to 40.9% of Eurozone GDP.”

Now that’s just intellectually insulting. If things are so great we wouldn’t need this level of intervention or any intervention.

But this is what they are doing. Every day. I keep asking: What is the organic market price balance without intervention? The answer remains the same: Nobody knows as we haven’t seen markets without intervention other than the brief moments were they produced full out panic. 2011 and early 2016 are examples coming to mind.

So I continue to view price extensions and disconnects to be a direct result of trillions of dollars in ongoing intervention and exacerbated by record ETF inflows.

Let’s be clear: I don’t know how or when it ends, but it will end. Our primary mission here is to figure out what we consider good risk/reward set-ups knowing that we are finding ourselves in the most one way focused and technically disconnected markets in decades:

But this is precisely the point in time when the Goldman Sachs capitulation takes place and all the bullish forecasts are coming out. And I understand why they are coming out. No corrections have taken place and we are in a bullish seasonal part of the year.

Now that we have entered the seasonally most bullish time of the year I can certainly understand the silence of the bears. What is there to say? No rationally reasoned argument has mattered, prices keep going up and there appears absolutely nothing on the horizon to stop this train.

Indeed, not only are bulls bullish, but some of the remaining bears I still see floating about have resigned themselves to talk blow-off top coming and are busily identifying higher upside targets from 2700-3000. Funny that. Bulls are bulls and bears are bulls.

But this is the lay of the land folks.

Add some oversold signal charts coinciding with new all time highs and I could easily argue 4 to 5 weeks of upside coming:

The message: Markets cannot possibly go down. There is no risk. Everybody is bullish, join the party.

Bottom line: Fading this action and sentiment is the most contrarian thing anyone can do here and for that reason it can also be the most dangerous. I have no illusions about that.

Folks are piling in long at the technically most disconnected market ever since the 2000 Nasdaq bubble. But that doesn’t mean it will stop here.

Are there any issues with the bull case here other than technical disconnects and divergences that don’t matter?

Well, here’s a few considerations I wanted to share:

This chart doesn’t tell us we can’t go higher. We can. But it suggests something disturbing and I’ve made reference to it in the past, but the overlay with the 10 year gives additional context: It could be argued that these waves of bullish action were driven by one primary factor: Cheap money. Artificial low rates and debt.

Furthermore it could be argued that the bearish break on the S&P 500 in 2008 was never technically repaired. Yes, massively higher prices as a result of over $20 trillion in central bank intervention, zero rates and a global explosion in debt levels to the tune of above $145 trillion in the non financial sector. All made possible by cheap money:

The lower the rates the higher the debt:

So the big question is simply this: What if that downtrend in the 10 year yield bursts above its trend line for the first time since 1987?

As you can see in the S&P 500 chart above we have never seen a break above trend to the upside. Yet the entire market advance has been dependent on its declining trend. All of it. To fix any downside in markets rates had to be lowered and lowered.

None of this tells us anything about this week or next, but it highlights perhaps the precarious nature of the construct.

While the ECB keeps printing $DAX remains at a critical long term juncture:

And the quarterly chart also raises red flags:

The ECB is scheduled to slow down their QE program in 2018, but not end it nor will they raise rates at any time during Mario Draghi’s reign. The ECB remains in full policy panic mode. Because that’s what NIRP is. Panic mode. And you know why they keep pressing? Because inherently they know prices could not sustain themselves. They have to keep rates low.

The yield curve keeps flattening, but it matters not, it is now at the flattest level since 2007:

We are told not to worry of course:

We can only go up and nothing matters.

The only thing that matters is that people keep piling long into these markets.

ETF inflows have now reached an all time history high of $400B of inflows just in 2017:

There’s a QE program right there.

I’ve been mentioning the weekly 5 EMA:

As you can see from the chart: No weekly close below the weekly 5EMA is permitted. Any break lower is saved by the end of the week.

This is what we need to see change before a change in trend can be considered.

For now, markets can only go up and growth is wonderful.

Now, who’s going to tell the bond market?

The screaming of the bears has ended. Their silence is deafening.

And perhaps that should worry bulls more than anything.

Some policymakers want to close participation in a public pension plan to all new hires, cut benefits and increase employee contributions, or convert defined benefit (DB) plans pensions into defined contribution (DC) plans. They usually cite the underfunding of public pension plans as the reason for these ideas.

New research shows that funding status has little correlation with a pension fund’s ability to pay its promised benefits. Michael Kahn, director of research for the National Conference on Public Employee Retirement Systems (NCPERS) used data from the annual survey of public pensions by the U.S. Census Bureau for 1993 to 2016 and other data and found that during the last quarter century or so, state and local pension plans have always been able to meet their benefit and other payment obligations.

In four years (2002, 2008, 2009 and 2012), income from contributions and investment earnings was less than benefit obligations, but in the remaining 20 years, when income from contributions and investment earnings was more than benefit obligations, pension funds were building up a cushion that enabled them to weather the 2001 recession, the Great Recession of 2008, and other economic downturns. Today, state and local pension funds have about $3.9 trillion that will provide a cushion during future economic recessions, the NCPERS analysis says.

While assets have grown, so have pension obligations. During 2012 to 2016, state pension obligations grew from $3.52 trillion to $4.19 trillion. Other sources of data show that pension obligations have steadily grown since 2000, when plans were almost 100% funded. NCPERS analysis shows that despite rising liabilities during the last quarter century, pension plans have been able to meet their annual benefit payments from contributions and investment income due to the cushion they built up in good years.

The analysis shows four states—Illinois, Kentucky, New Jersey, and Connecticut—had pension funds whose liabilities were more than twice their assets (that is, they were less than 50% funded) in 2016. On the other end of the funding spectrum are New York, Tennessee, South Dakota, and Wisconsin, which were all more than 94% funded. The majority of states’ pension plans were more than 70% funded. Twenty-eight out of 50 states (56%) had pension funding levels that were 70% or above. Overall, the 299 state plans had total assets of $3.05 trillion and pension obligations of $4.2 trillion—which translates into a funding level of 72.6%. However, using quarterly earnings data for 2016, the assets for the 299 state plans were $3.26 trillion, which results in a funding level of 77.6%.

According to the analysis, states in both top- and bottom-funded groups on average experienced situations in which contributions and investment income was not enough to meet annual benefit obligations about six out of 24 years during 1993 to 2016. The cash flow shortfalls were caused by the 2001 and 2008 recessions as well as other economic downturns. But both types of funds—partially and almost fully funded public pension plans—had adequate cushions to cover the cash flow shortfall.

The experience of the last quarter century suggests that state and local pension funds will face economic recessions in the next quarter century and beyond. To strengthen the ability of these pension funds to weather future recessions, NCPERS suggests state and local policymakers may consider the following policy options:

• Stop dismantling public pensions because they aren’t 100% funded;
• Strengthen funding mechanisms by adhering to principles that help determine the appropriate levels of required employer contributions;
• Establish a pension stabilization fund that can set aside money from a certain revenue stream to be used in special circumstances such as a recession; and
• Implement a mechanism to ensure that full employer contributions are made on a timely basis, perhaps by making employer contributions a nondiscretionary part of the budget.

“Our analysis demonstrates that pension plans can tolerate ups and downs in the markets and still meet their current obligations,” says Hank H. Kim, NCPERS’ executive director and counsel. “While funding ratios are an important actuarial tool, they are not a proxy for a plan’s ability to pay benefits here and now.”

Critics of public pensions often cite funding ratios of less than 100% as evidence of pressing financial problems, but this is faulty logic, Kim says. Contributions and earnings continue to flow into plans even as benefits are being paid out, he notes. “Shutting down a pension plan because it is not fully funded is … an incredibly short-sighted action that destabilizes workers and their communities, and we want it to stop,” Kim says.

• Stop dismantling public pensions because they aren’t 100% funded;
• Strengthen funding mechanisms by adhering to principles that help determine the appropriate levels of required employer contributions;
• Establish a pension stabilization fund that can set aside money from a certain revenue stream to be used in special circumstances such as a recession; and
• Implement a mechanism to ensure that full employer contributions are made on a timely basis, perhaps by making employer contributions a nondiscretionary part of the budget.

• US public pensions need a wholesale change in their governance model. They can learn a lot from the evolution of the Canadian pension model. 
• Introduce a shared-risk model in all US public pensions which means contributions can be raised or benefits cut when these pension plans experience a deficit. Public-sector unions need to accept that pensions are all about managing assets and liabilities and investment income alone won't be enough to sustain public pensions over the long run. When plans run into trouble, contributions need to be raised, benefits cut or both.

Despite State Treasurer Dale Folwell’s agency slashing millions in outside management fees, North Carolina’s $96 billion pension fund is going to need to do more to remain solvent and satisfy retirements of its nearly 1 million state employees.

While Folwell delivered on his campaign promise to make heavy cuts on the fees to the tune of $600 million, drawing some praise from his peers, he faced some criticism for his decision to transfer funds to low-earning, short-term accounts. WRAL.com reports that critics argue that while safe, keeping the transfer funds in savings accounts cost the pensions “tens of millions” in earnings during this year’s market growth.

However, despite these cuts and the fund being commonly referred to as one of the best-funded in the country, as per WRAL, it must still pay out $6 billion per year.

In addition, state government and employees only pay in roughly half of what the fund pays out, and there is no minimum retirement age. Of the state citizens receiving pension checks, the latest statistics show that nearly 100,000 are under age 65, while roughly 7,000 are age 90 and above.

“Fees have gone up, payouts have gone up, life expectancy has gone up, and interest rates have gone down,” Folwell told WRAL. “That’s what I inherited.”

As life expectancy increases, a possible solution debated to prevent the potential insolvency is raising the retirement age. While some see it as a logical step, others argue that it does nothing for public workers, as investment managers are the only ones benefitting.

“As age goes up, the working life should go up as well, I would think,” CPA and financial advisor Ron Elmer, a former Democratic candidate for treasurer, told WRAL.

“It might sound good. It might even be well-intentioned, but it’s not going to solve any problems,” Ardis Watkins, director of government relations for the State Employees Association of North Carolina, told WRAL. “The only thing that solves problems is to stop giving huge amounts of money away in multiple levels of fees to investment managers.”

Folwell was unable to provide comment.

The NCPERS analysis is somewhere between embarrassing and incompetent. The findings are true but largely irrelevant.

A pension plan that is 50% funded may have enough money to pay pensions for 10 years while simultaneously declaring a contribution holiday. This doesn't prove that the plan is in good shape. It is basically living on borrowed time. After 10 years there will be no money in the pension fund. At that point the plan can still be sustained by raising contribution rates to the "pay as you go" level, which would typically be around 40% of pay for a mature public sector DB plan. The plan can be sustained, but will anyone want to sustain it at that price?

The CPP (Canada Pension Plan) is a good example of the consequences of low funding levels. The CPP is currently about 20% funded - but the 20% is slowly trending up, not down as is the case for many badly funded U.S. public sector pension plans. The CPP can be sustained for a very long time as long as we are willing to pay the 9.9% contribution rate. Canadians don't notice that the CPP is expensive because they are accustomed to paying 9.9% for a benefit that would cost 5% to 6% if the CPP was fully funded. According to the CPP actuarial report, the pension fund needs to earn a 4% real return in order to give future members a 2% real return on their contributions. If the CPP was fully funded, members would earn the same rate of return as the pension fund.

Badly funded pension plans are not a good thing. They may be sustainable - but only at a price. People may be prepared to pay the price but the plan will not do a good job for whoever ends up footing the bill (members or taxpayers).

The release of the so-called “Paradise Papers” touched off new scrutiny of how moguls, celebrities and politicians stash their cash in offshore tax havens. The practice, though, is hardly limited to the global elite. In fact, government documents show that state and local officials have sent hundreds of billions of dollars of public sector workers’ retirement savings to a tiny archipelago most famous for white-sand beaches — and laws that shield investors from taxes.

Operating outside the U.S. legal system, the offshore accounts in the Cayman Islands give Wall Street firms leeway to make complex international investments and to earn big fees off investors' capital. But with offshore accounts featuring prominently in high-profile Ponzi schemes, some critics warn that the use of tax havens can endanger the retirement savings of millions of teachers, firefighters, cops and other public workers— a situation that could put taxpayers on the hook for losses if the investments go bust, or the money goes missing.

The tidal wave of cash has flowed from public pension systems into so-called “alternative investments”: private equity, hedge funds, venture capital firms and real estate. While many alternative investment firms operate in Lower Manhattan, more than a third of all the cash in those private funds flows through vehicles domiciled in the Caymans, according to Securities and Exchange Commission records reviewed by International Business Times. Those same records show that public pension plans, university endowments and other nonprofits have funneled a massive $1.8 trillion into alternative investments.

“Based on SEC data, it appears that public pensions alone hold around $300 billion offshore in the Cayman Islands in hedge funds and private equity,” said Chris Tobe, a former state pension trustee and author of the book “Kentucky Fried Pensions.”

In recent years, SEC regulators have tried to crack down on alternative investment firms’ fee schemes that regulators say can end up enriching money managers at the expense of investors. At the same time, state officials and investor groups have pushed for more transparency in the alternative investment industry as a whole.

But with so many of the investments now running through a maze of shell companies in lightly regulated tax havens, some experts say the outflow creates the conditions for rampant fee abuse and financial shenanigans — and prevents pension officials and law enforcement officials from even knowing exactly where billions of dollars of public money is being held.

“The additional risks related to investing in funds established, regulated and custodied in tax havens are real,” former SEC attorney Edward Siedle haswarned.

A trove of confidential hedge fund documents reviewed by IBT shows that major financial industry players acknowledge some of the potential risks that can arise when money is invested outside the United States. The documents show that in the fine print of their agreements, the firms admit that shifting cash to less-well-regulated foreign locales can end up putting money into brokerages that may not adhere to traditional banking regulations. They also acknowledge that moving money into international securities can reduce basic protections for investors and ultimately increase the risk of significant losses.

“How does investing in funds established in loosely regulated offshore tax havens benefit government workers — participants in a pension that doesn’t even pay taxes?” Siedle has written.

One answer to that question, say lawyers, involves pension systems seeking to preserve their existing tax exemptions. Under laws passed in the 1960s, those tax-exempt entities would have to pay taxes on the kinds of debt-financed earnings involved in private equity and hedge fund investments — but they can avoid those levies if they first route their investments through “blocker” corporations in tax-free jurisdictions like the Caymans.

“This is very standard planning — it’s a plain vanilla technique,” said the Tax Policy Center’s Steven Rosenthal, a former partner at the global law firm Ropes & Gray LLP, who advised universities on investments.

Public pension systems vary in how they report their investments. Many simply list the firms that are managing retirees’ money, but not where the firms are located, or whether the funds are ultimately being moved offshore. However, occasional references to offshore funds are scattered throughout public filings.

In South Carolina, for instance, the annual report for the government workers’ retirement system listed nearly $60 million invested in a Cayman-based fund run by Reservoir Capital Partners, which received more than $2 million in fees from the state last year. In New Jersey, state investment officials have in recent years committed more than a quarter-billion dollars of state pension money to hedge funds based in the Cayman Islands and Bermuda, the country at the center of the Paradise Papers controversy. And in Texas, a 2015 report from the teachers retirement system showed the state paying a combined $13 million in fees to Cayman-based funds run by Bain Capital and Soroban Capital Partners.

Siedle told IBT that Wall Street firms may set up shell corporations in tax havens “not to help public pension fund investors, but really to protect the managers from taxes and regulations.”

A 2008 Government Accountability Office report detailed some of the potential benefits financial managers can glean from domiciling their operations in the Caymans. The agency found that “some U.S. persons can minimize their U.S. tax obligations by using Cayman Islands entities to defer U.S. taxes on foreign income.” GAO also warned that “some persons have conducted financial activity in the Cayman Islands in an attempt to avoid discovery and prosecution of illegal activity by the United States.”

Law firms openly promote the benefits of offshore investment vehicles.

“The tax exempt, tax transparent, non-regulated and highly flexible nature of the [exempted limited partnership] and the absence of regulatory or licensing requirements touching the general partner, together with the flexibility of the Cayman Islands exempted limited company, combine to make the Cayman Islands the preeminent jurisdiction for offshore private equity funds,” said a recent memo from Mourant Ozannes, an offshore law firm whose website says it is “advising many of the world's foremost financial institutions” on the laws in the Caymans, British Virgin Islands, Guernsey and Jersey.

“The American People Are Not Against Offshore Wealth”

In the political arena, members of both parties have offered varied messages about the flow of American capital offshore.

Republicans faced Democratic attacks over Mitt Romney’s involvement with Cayman funds, but four years later, Republican Donald Trump ran for president promising to discourage the use of offshore tax havens. Some Democrats have sponsored legislation designed to try to stop the use of offshore tax havens. During the 2012 election, though, the Cayman Islands Journal reported that longtime Democratic Party official Donna Brazile told investors at a Cayman Islands conference that “the American people are not against offshore wealth, offshore ‘tax havens’, but they’re often told that, you know, this is taking something away from them."

When it comes to billions of dollars of public pension money leaving the country, Rosenthal said there is nothing inherently problematic about tax exempt organizations using offshore accounts to avoid taxes.

“If you thought the rules about debt-financed income make a lot of sense, then sure, you could get worked up about how this kind of tax planning contravenes congressional intent,” he told IBT. “But I don’t think those rules make a lot of sense, and this is an alternative way to structure investments to sidestep those rules.”

Some lawmakers have disagreed.

In 2007, Michigan Rep. Sander Levin, a Democrat, proposed a bill to allow tax-exempt organizations such as pension systems to invest directly in private equity and hedge funds, without incurring the tax on debt-financed income — a move designed to discourage the use of foreign blocker corporations.

Two years later, his brother, then-Sen. Carl Levin, introduced legislation that would have subjected offshore blocker corporations to U.S. taxes. Both measures were designed to keep investments within the domestic financial system and to discourage the use of offshore vehicles, but some lawyers who help financial firms navigate tax laws warned that the Senate legislation would harm the alternative investment industry.

“If enacted [the bill] could significantly reduce investment in U.S. hedge and private equity funds,” wrote Steve Bortnick of Pepper Hamilton, a compliance law firm. “The provision would tax income that simply should not be taxed in the U.S. (i.e., foreign source income) or tax it at inappropriate rates. This likely would force these funds to restructure in a manner that nevertheless would alienate tax-exempt and foreign investors. At a time when the U.S. economy is struggling, these provisions appear to establish an unnecessary impediment to investment in U.S. investment funds.”

Proponents of the legislation argued that offshore vehicles were being abused to help financial managers shield themselves from taxes.

“This would prevent companies (notably hedge funds) that are American for all practical purposes from avoiding U.S. taxes by claiming to be a foreign company simply because it did certain paperwork and maintains a post office box in a tax haven country,” declared Citizens for Tax Justice when the senate initiative was launched.

The Managed Funds Association, the self-described“voice of the global alternative investment industry,” was among the universities, foundations and advocacy groups lobbying Congress and the Internal Revenue Service on Sander Levin’s bill, federal lobbying forms show. The organization also lobbied throughout 2009 on Carl Levin’s bill. Other financial industry players that lobbied on the bill included the Blackstone Group LP, Credit Suisse, the American Bankers Association, the Investment Company Institute, the Cayman Islands Financial Services Association and the Private Equity Council.

The legislation never passed.

“A Number Of Unusual Risks, Including Inadequate Investor Protection”

As public pension money continues to move offshore, taxes are not the only policy question at issue. There is also the matter of potential risks associated with investments outside of the United States.

One set of risks has to do with regulations — or lack thereof.

“Tax havens generally have laxer laws and oversight than in the United States,” wrote researchers Norman Silber and John Wei in a recent Hofstra University study of offshore investments. “The use of foreign blocker corporations also reduces the amount of information available to the government and the public.”

Some potential risks are outlined in documents from major hedge funds that have managed public pension money. While those documents are confidential — and have been exempted from state open records laws, at the behest of the financial industry — IBT reviewed some that show hedge fund managers admitting the potentially enormous risks of shifting retirees’ money outside the U.S. financial system.

For instance, 2015 documents from a Canyon Partners fund based in the Caymans tell investors that the fund is registered under a Cayman law that “does not involve a detailed examination of the merits of the fund or substantive supervision of the investment performance of the fund by the Cayman Islands government.” It also tells investors that “there is no financial obligation or compensation scheme imposed on or by the government of the Cayman Islands in favor of or available to the investors in the fund.”

A similar 2015 document from a Cayman-based Fir Tree Partners fund notes that while there is a Monetary Authority in the Caymans, “the fund is not subject to supervision in respect of its investment activities or the constitution of its investment assets by the Authority or any other governmental authority.”

The Cayman-based funds say they can move investors’ money into foreign assets. In separate disclosures applying more broadly to those assets, the hedge funds acknowledge the risk of international investing in emerging markets. These specific risk disclosures apply only to the international assets that the Cayman funds are investing in — and not the Cayman funds themselves. However, the disclosures appear to illustrate the general risks pension systems may face when they move money outside the U.S. financial system. For example:

• Canyon’s documents warn that international investments in emerging markets can involve the risk of “lack of uniform accounting, auditing and financial reporting standards and potential difficulties in enforcing contractual obligations.” The same document later notes that those international investments can also expose investors “to a number of unusual risks, including inadequate investor protection.”
• The Fir Tree Partners documents note that “accounting and financial reporting standards that prevail in foreign countries generally are not equivalent to U.S. standards and, consequently, less information is available to investors...There is also less regulation, generally, of the financial markets in non-U.S. countries than there is in the United States.”
• A 2013 documents from a Cayman-based Mason Capital fund warn that risks of international investments include “difficulties in pricing securities and difficulties in enforcing favorable legal judgments in court.”
• A Cayman-based Och-Ziff fund’s offering documents from 2014 note that “there is generally less government supervision and regulation of exchanges, brokers and issuers outside the United States” and that “the fund might have greater difficulty taking appropriate legal action in non-U.S. courts.”
• Even though public pension trustees are legally obligated to adhere to United States fiduciary standards, Canyon’s Cayman-based fund points out that when it comes to its international investments, “anti-fraud and anti-insider trading legislation, and the concept of fiduciary duty, may be less developed or limited compared to those in more developed markets.” A 2014 offering document from Cayman-based AQR Capital fund similarly warns that foreign investments can expose assets to “less stringent laws regarding the fiduciary duties of officers and directors and protection of investors.”

Government records and reports from the financial analysis firm Preqin show that public pension systems in Rhode Island, Texas, Florida, California, Florida, Arizona, Oregon, Illinois, Washington, Louisiana, New York and New Jersey have invested in at least one of these aforementioned hedge funds.

“Shareholders May Be Unable To Liquidate Their Investment"

There is also the issue of investor rights. Last year, Rhode Island retirees sounded an alarm about the prospect of their state pension system’s financial managers allowing certain anonymous investors to receive more favorable terms from the same funds in which the pension system puts its money. They asserted that such schemes could end up enriching anonymous investors and financial managers at the pension fund's expense. Other experts have warned that because firms’ investments are not independently valued by third-parties, managers can use their own valuation process to fleece investors.

Those potential dangers were spelled out in 2015 documents from Luxor Capital and AQR funds in the Caymans, where, according to the Tax Policy Center’s Rosenthal, foreign investors and managers can avoid filing IRS disclosure paperwork and exposing themselves to U.S. transparency laws.

The Luxor fund, said the documents, had signed “side letter” agreements that allow the firm to provide certain shareholders “access to more frequent and/or more detailed information regarding the fund’s securities positions...performance, finances, and management.” That includes “notification of the commencement of certain disciplinary actions, legal proceedings, investigations or similar matters against the fund...possibly enabling such shareholders to better assess the prospects and performance of the fund.”

The documents also said “the fund may give certain shareholders the right to redeem all or a portion of their shares on shorter notice and/or with more frequency,” and that “shareholders may be unable to liquidate their investment promptly in the event of an emergency or for any other reason.”

The AQR fund, meanwhile, warns that it could put investors’ money into assets that “may be extremely difficult to value accurately.” That means “there is a risk that an investor that makes a redemption while the Fund holds such investments will be paid an amount significantly less than it would otherwise be paid if the actual value of such investments is higher than the value designated.”

Preqin data show pension funds in Texas have invested in Luxor’s Cayman-based fund, and government records show the state teachers’ retirement system has paid the offshore fund more than $21 million in fees between 2013 and 2015.

Most Cayman-based hedge fund firms managing pension money — including those whose documents IBT reviewed — are registered with the SEC. However, that does not necessarily mean the agency or American courts have as much power over them as they do over onshore funds.

“The Cayman Islands’ strong bank secrecy laws help shield assets,” wrote University of Hawaii accounting professor Thomas Pearson in a 2009 paper. “Therefore, because of concern that not all the assets are apparent or accessible, a U.S. bankruptcy court may refuse to provide assistance to liquidation of hedge funds domiciled in the Cayman Islands. Although the SEC has tried to collaborate with authorities offshore, hedge funds’ use of the Cayman Islands or another tax haven country lowers their risk that the SEC or other major securities regulators can acquire the real identity of certain traders and properly enforce insider trading laws.”

Taken together, the risks of investing offshore are significant, said Deborah Hicks Medanek, whose firm, the Solon Group, advises corporations on restructuring.

“If I were a fiduciary responsible for a large pension fund, I would be very careful not to assume that the legal environment in Cayman or Curacao or the British Virgin Islands was really similar to the legal environment I’m used to,” Medanek told IBT. “You cannot assume that the same kind of investor protections are out there. If I’m sitting there as a fiduciary of a public pension fund, my ass is already seriously on the line for people who can’t afford not to have pensions when they come due — so I don’t think I’m going to go take those risks, unless I am utterly convinced that the offshore investment gives pensioners access to an attractive manager that’s otherwise not available onshore.”

None of the hedge funds whose documents IBT reviewed offered any on-the-record comments for this story.

“The Fund Will Not Maintain Custody”

Out of all the risks of moving pensioners’ money overseas, few raise as much concern as “custody,” or where pensioners' money and assets are ultimately stored and accounted for, said South Carolina State Treasurer Curtis Loftis. He noted that whereas state and local governments’ investments in stocks and bonds are typically held in U.S.-regulated banks, offshore funds can hold money in opaque accounts and brokerages across the globe.

“Custody was a pretty big part of the Bernie Madoff and Jon Corzine problems,” Loftis told IBT, referring to high-profile cases where investors lost their money. “Those guys were custodying money all over the world, allowing them to do all sorts of things with it because offshore does not have the same protections as in the United States. So when public pensions are investing offshore, they are agreeing to have their money custodied in ways that are very risky.”

The hedge fund documents reviewed by IBT underscore Loftis’s assertion.

Under the heading “Absence of Regulatory Oversight,” a Cayman-based Governors Lane vehicle says “the fund will not maintain custody of its securities or place its securities in the custody of a bank or a member of a U.S. securities exchange in the manner required of registered investment companies under rules promulgated by the SEC.” Governors Lane has managed money for the Kentucky public pension system.

Och-Ziff’s documents include similar language, and note that the custody methods means that a bankruptcy “might have a greater adverse effect on the Fund than would be the case if it maintained its accounts to meet the requirements applicable to registered investment companies.”

In its section on custody risk, Mason Capital’s Cayman-based fund says it “may use counterparties and other financial institutions located in various jurisdictions outside the United States” and that “financial institutions may use sub-custodians and disclaim responsibility for any losses.” The firm warns that “investors should assume that the insolvency of any non-U.S. counterparty or other financial institution would result in a loss.”

The custody risks relate to other concerns about the overall governance of Cayman-based investment vehicles. A 2011 Financial Times investigation found that “a small group of Cayman Islands ‘jumbo directors’ are sitting on the boards of hundreds of hedge funds” based there. These directors are supposed to be watching over investors’ money and protecting their interests, but some experts have questioned whether they are adequately independent and able to provide oversight when they are working for so many different funds. Those questions, which have been simmeringfor years, have resurfaced in a recent hedge fund case in the Caymans.

“With perhaps two-thirds of all hedge funds domiciled in the Cayman Islands, Bermuda, and British Virgin Islands, a web of ‘independent directors’ has developed in these island paradises,” wrote George Mason University professor Janine Wedel, who has studied corruption and corporate governance. “Officially, these directors are independent watchdogs who protect the interests of investors, such as pension funds. The problem is that some appear to be little more than ‘paper directors,’ with perhaps billions of retirement dollars exposed to funds with weak oversight and potentially conflicted governance.”

While these risks of offshore investing may seem hypothetical, a landmark case in Louisiana suggests the opposite. There, three public pension systems found themselves unable to withdraw their collective $144.5 million in investments and earnings from a Cayman Islands-based hedge fund of New York City-based Fletcher Asset Management in 2011. The funds than had to rely on a Cayman court to force the fund to relinquish the money, the Wall Street Journal reported.

The following year, a Louisiana state legislative auditor produced a report urging the three pensions to better document any risk that stemming from an inability to quickly and easily withdraw their investments at market price. In 2013, trustees of the pensions sued affiliates of Fletcher, along with a law firm and an financial services firm involved, for overstating the fund’s value and liquidity.

Months after the case moved to a U.S. federal court, a trustee the pensions appointed — who, after on-site examination in the Cayman Islands, found the fund to be insolvent — placed the fund and its affiliates into bankruptcy in 2014. The case — which is ongoing  — is exactly the kind of situation that Loftis says he fears for states and cities all over America.

“I’m sure some of these firms set up offshore in order to offer pensions a way to avoid paying taxes, but I’ve always believed it is mostly about the managers creating a way in which they can limit their own taxes and their own legal liability and do whatever they want with the public’s money,” he told IBT. “The custody issue is one of the biggest problems: these offshore accounts mean we don’t really know where all of this money actually is. If we have another economic downturn, I’m not sure the money custodied all over the world ever makes it back home.”

“When a company in financial difficulties is giving $1.4 billion to shareholders and handing executives millions of dollars in bonuses, it’s ridiculous to claim that legislation to protect pensions will affect the ability of the company to survive. What legislation to give pension plans priority in bankruptcy proceedings will do is protect workers and retirees from greed and incompetence.”

— Larry Brown, NUPGE President

Ottawa (27 Nov. 2017) — A private member's bill, Bill C-384, introduced by Scott Duvall, NDP MP for Hamilton Mountain, shows that it is possible to protect pensions when companies enter bankruptcy proceedings.

In the last few years there has been a growing trend where workers and pensioners are seeing significant cuts to their pension plans after the companies they worked for went bankrupt. Sears Canada is just the most recent example. US Steel, Nortel, and Can-west are the better known of the other companies where pensions were cut after the companies went bankrupt.

There are 2 reasons pensions are being cut when companies enter bankruptcy proceedings. When pension plans are under-funded, companies find it easy to delay making the payments necessary to ensure they are fully funded. Then, when companies enter bankruptcy proceedings, workers and pensioners are at the back of the line when the company is wound up or restructured.

“Current pension rules make it far too easy for companies to put off dealing with pension plan deficits. Then if the company enters bankruptcy proceedings it is retirees who pay the price,” said Larry Brown, President of the National Union of Public and General Employees (NUPGE).

Bill C-384 would put workers and retirees first

Bill C-384 would amend the Bankruptcy and Insolvency Act (BIA) and the Companies' Creditors Arrangement Act (CCAA) so that a company going through bankruptcy proceedings would have to make sure its pension plan was fully funded before other creditors could be paid. The bill would also prevent companies going through BIA or CCAA proceedings from cancelling benefits for workers or retirees.

Sears Canada liquidation an example of why Bill C-384 needed

People who worked at Sears Canada could see their pensions cut by 20 per cent because the pension plan was not fully funded when the company entered bankruptcy proceedings. Extended health and dental benefits were cancelled. People who have worked at Sears for decades are being laid off without getting the severance pay they are owed.

But while low- and middle-income pensioners will see their pensions cut, pensions they worked decades to earn, some select executives and senior managers are getting $6.2 million in retention bonuses. Existing bankruptcy laws protect retention bonus payments to executives, even though the company is being liquidated.

Excessive payments to shareholders in the years leading up to bankruptcy proceedings are also not a problem under current legislation. At the same time that the workers’ pension plan slid into deficit, Sears Canada spent $1.4 billion on payments to shareholders.

“When a company in financial difficulties is giving $1.4 billion to shareholders and handing executives millions of dollars in bonuses, it’s ridiculous to claim that legislation to protect pensions will affect the ability of the company to survive. What legislation to give pension plans priority in bankruptcy proceedings will do is protect workers and retirees from greed and incompetence. That’s why NUPGE is joining with other unions to support Bill C-384,” said Larry Brown, NUPGE President.

Sue Earl, a 38-year Ontario-based Sears Canada employee, was shocked when she found out she would only initially receive 81 per cent of the value of her pension as part of the company's insolvency process.

The 64-year-old from Cobourg, Ont., had assumed her defined-benefit pension was "money in the bank," a guaranteed amount she'd receive in retirement regardless of the financial health of the failing retailer.

But then, she also didn't think Sears would cancel the severance payments she'd been receiving since her store was closed last year — that's what happened after it filed for court protection from creditors in June.

She said the other 19 per cent of her defined-benefit pension is "up in the air."

"Our letter said it would be paid out to us in the next five years, but that depends what they do with it, whether they wind it up or what's going to happen," Earl said.

Severance gone, pension under threat

"It's just one more slap, really. You lose your severance and then you find out you might not get all of your pension money."

Personal finance experts say the Sears case shows the risk of depending too much on a defined-benefit pension plan to provide income in retirement if the plan is not fully funded and the sponsor goes bust.

James McCreath, an associate portfolio manager with BMO Nesbitt Burns in Calgary, says employer-sponsored pension plans are a good thing because they force people to save for retirement, but when a company isn't healthy enough to fund them, it can result in a lot of stress for employees.

"If I had a defined benefit plan, I'd certainly sharpen my pencil on reviewing it to see if there's an unfunded liability and how that perhaps would impact my retirement," he said.

Tony Salgado, director of CIBC Wealth Strategies in Toronto, says many don't even know what kind of pension plan they have, much less what their retirement income might be.

"Incorporate some wiggle room," he advises.

"If you were to take a 10 per cent haircut on what you have through your retirement pension plan, what other sources of income will you have available?"

Promise of retirement income

Defined-benefit plans promise members a retirement income usually based on salary and years of service. But an aging population that is living longer has increased the cost of the plans at the same time that low interest rates have also increased funding requirements, leaving many plan sponsors with a shortfall.

Sears has been paying $3.7 million a month to top up its underfunded defined-benefit plan, as required by Ontario provincial law, but has asked a court to allow it to suspend those payments while it restructures.

Meanwhile, Ontario has proposed new rules that would see defined-benefit pension plans it regulates not require topping up as long as they are 85 per cent funded, down from the current 100 per cent.

In Cobourg, Sue Earl says she is receiving employment insurance benefits and has started her Canada Pension Plan payments early to top up her RRSPs and pay down debt.

Remaining pension goes to locked-in account

She has received a payout on the defined-contribution pension plan Sears started in 2008, but is still waiting for payout of the defined benefit plan it replaced — both have to be reinvested in locked-in accounts until retirement.

Her husband, Ralph, has a small pension and, after a "hard look at our finances," she thinks they'll be OK.

"I mean, we're not driving Mercedes, we're going to drive our car into the ground. If we take a trip we're going to be budgeting for it. I mean, we're going to have to be careful with our money."

Stocks fell Friday on a report that Michael Flynn was directed by President Trump to talk to Russians.

ABC News reported that Flynn, the former national security adviser, would testify that he was directed to make contact with Russians during the presidential campaign in 2016. Flynn pleaded guilty to lying to the FBI about his postelection contacts with Russia's ambassador to the U.S.

ABC News’ @BrianRoss reports that Flynn is prepared to testify President Trump directed him to make contact with Russians https://t.co/Mtt1n8DYi0

— Joy Lin (@joyindc) December 1, 2017

In a statement, Flynn said he agreed to "cooperate with the Special Counsel's Office reflect a decision I made in the best interests of my family and of our country."

"If you believe the market has been rallying in the last 13 months [on Trump, this report] potentially unravels all of that," said Jeremy Klein, chief market strategist at FBN Securities. "Markets don't like uncertainty and this is the ultimate uncertainty."

The major averages hit their session lows on the report, with the Dow Jones industrial average briefly dropping more than 350 points before trading 133 points lower.

The S&P 500 declined 0.7 percent after falling more than 1 percent. The Nasdaq composite lagged, dropping 1.1 percent

Gold and Treasuries spiked higher following the ABC report as investors fled to market safe havens.

"It comes down to did trump obstruct justice in any way," said Peter Boockvar, chief market analyst at The Lindsey Group. "It's another potential political blindside. We've gotten a lot of those," he said.

But it appears many investors were willing to bet that the Flynn report does not mean the Mueller probe would lead directly to Trump and derail his presidency and economic agenda. Stocks pared their losses after Senator Mitch McConnell told reporters that they had the votes to pass the Senate tax bill.

Senate had Republicans delayed voting on their tax bill Thursday, sending stock futures lower. The setback concerned a fiscal "trigger" that forced lawmakers to patch up the plan only hours before a planned final vote.

But futures cut their losses as the Senate showed signs of progress on coming to an agreement on a tax measure.

Republican Senators Steve Daines and Ron Johnson — two of the last GOP holdouts on the bill — said they would support the measure, increasing the likelihood of it passing.

Expectations of lower corporate taxes have been a boon for U.S. stocks since President Donald Trump got elected, helping the major indexes reach all-time highs. Jeff Carbone, managing partner of Cornerstone Financial Partners, said that, without a corporate tax cut, stocks could suffer a 3-to-5 percent pullback in the short-term.

If the Senate's bill passes, House and Senate members would have to work on a new bill to reconcile differences between their two tax bills.

Bruce Bittles, chief investment strategist at Baird, said the market realizes "the Republican party wants to get this done one way or the other," but added that "the big question is how much of this is already built into the market."

"We're sitting at all-time highs and I wouldn't be surprised if we took some [gains] off the table" after the corporate taxes are cut, Bittles said.

In corporate news, shares of Mylan jumped 4.6 percent after CNBC reported that Amazon has held preliminary talks with generic drug makers about a potential entry into pharmaceuticals.

Ulta Beauty was the worst-performing stock in the S&P 500, falling 7.5 percent after the cosmetics retailer issued weaker-than-expected guidance for the current quarter.

The dollar is falling on reports that Michael Flynn is prepared to testify against Trump. pic.twitter.com/OYktj5jJOJ

— Lisa Abramowicz (@lisaabramowicz1) December 1, 2017

30-year Treasuries also responding to the Flynn reports, with yields notably falling. pic.twitter.com/QQRy23U7XI

— Lisa Abramowicz (@lisaabramowicz1) December 1, 2017

Now, what are the top funds doing? Are there any interesting moves worth noting? Sure, I noticed that Julian Robertson cut his big losses in Teva Pharmaceuticals (TEVA) last quarter but David Abrams, the one-man wealth machine, initiated a new position last quarter right before the stock got slammed hard a few weeks ago (click on image):

Now, Teva's shares are up nicely today but I can tell you from experience, that's not a chart you want to buy, more often than not, you will be disappointed (it is oversold but can become even more oversold).

And while David Abrams and his mentor Seth Klarman are great value investors, when it comes to timing, they're far from perfect. They have both been sitting on shares of Keryx Biopharmaceuticals (KERX) for a long time and they're losing money on them so far.

Still, these guys have conviction, they're excellent value investors who don't typically churn their portfolio, so if they're accumulating a position, it's worth paying attention.

Goldman joins Pimco in worrying that bonds won't provide the same kind of hedge against falling stock prices as they have in the past. https://t.co/Umv2ZlIpWJ

— Lisa Abramowicz (@lisaabramowicz1) November 29, 2017

I completely disagree, in a deflationary storm, bonds will outperform and be the ultimate diversifier

— Leo Kolivakis (@PensionPulse) November 30, 2017

This week, my colleagues at Alpine Macro and I sat down with a mutual friend who used to manage a large pension fund. We talked about financial markets, portfolio construction and diversification strategies. The big topic was what to do with government bonds. With yields so low, most pension funds are being crunched and are under enormous pressure to increase their risk guidelines.

But in my mind, the key question is what kind of returns can be reasonably expected over the next decade or so from principal asset classes? With interest rates at historical lows and multiples having expanded quickly in the U.S. equity market, returns from traditional assets will likely diminish. As such, asset allocation must be more imaginative and dynamic.

For Japan, it is multiples expansion that drives the estimated returns for equities. This is consistent with our view that Japan has recently become a value play where equity multiples are significantly lower than where they should be relative to Japan’s current and expected future levels of interest rates. For European equities, dividends and multiples expansion account for about two-thirds of expected returns, while nominal earnings growth explains the remaining third.

This is primarily because the P/E ratio would be compressed significantly, and the ERP would rise, both undercutting expected returns for stocks. For example, if we assume that steady-state inflation in the U.S. were to rise to 3.5%, with 2.5% steady-state real growth, equilibrium bond yields would be 6%. With the ERP at 200 basis points, the expected total return for U.S. stocks would be 3.2%. After inflation, the real return will be -0.3%.

• December 1, 2017- Weekly Report: Asset Allocation In A Brave New World
• November 24, 2017- Weekly Report: A Pause Coming Soon?
• November 17, 2017- Macro Monthly: Macro Monthly
• November 10, 2017- Weekly Report: Debt Creation: What is the limit?
• November 3, 2017– Weekly Report: It's Not Too Late To Go International
• October 27, 2017– Inaugural Report: Echoes of the 1990s…

Wall Street banks are known to fiercely compete for hedge-fund clients because of the lucrative trading profits they provide.

The U.S. Securities and Exchange Commission is now investigating whether some banks crossed the line to win business by offering hedge funds bogus price quotes on hard-to-value bonds, said two people familiar with the matter. The SEC’s concern: As a reward for helping hedge funds make money -- by submitting quotes at requested levels -- banks got trades steered their way.

As part of its probes, the regulator is reviewing at least a dozen banks and brokerage firms to determine whether they provided inflated prices on debt securities that funds used to pump up the value of their investments, said the people who asked not to be named because the inquiries aren’t public.

JPMorgan Chase & Co. and Citigroup Inc. are among the banks being looked at, said one of the people who added that the SEC is also scrutinizing other large firms and several smaller ones. The investigations, which won’t necessarily lead to any allegations of wrongdoing, focus on valuations of mortgage securities and other thinly traded bonds where swings of just a few cents can have a big impact on hedge fund returns, the people said.

“It doesn’t take much to manipulate a bond price,” said Charles Geisst, a finance professor at Manhattan College in New York who has written books on the history of Wall Street. “It’s sort of an alternate reality. No one really knows the price of a bond until it’s traded.”

Spokesmen for the SEC, JPMorgan and Citigroup declined to comment.

The probes show the SEC isn’t letting up in its multi-year push to try to uncover illicit conduct in one of Wall Street’s most opaque markets. Bonds tied to home loans and other debt aren’t bought and sold on exchanges, and the securities can go months without trading. That lack of transparency prompts investors to value bonds by relying on estimates from brokers and other third parties, a system the SEC believes is ripe for abuse.

Hedge fund firms typically task internal committees with valuing thinly traded bonds, a process that prevents conflicted portfolio managers from assigning favorable prices to their own investments.

Still, portfolio managers can push back if they feel prices don’t reflect the current market. In such instances, they sometimes tap brokers at banks for additional, higher estimates.

The portfolio manager might argue that the higher valuation is more accurate because it comes from an actual market participant. If the hedge fund’s valuation committee accepts the broker quote in pricing a bond, it might make the difference between a good month or a bad one for money managers depending on the size of the position in their portfolio.

Significant Clout

Portfolio managers at hedge funds have significant clout with brokers because they are sought-after customers. Hedge funds engage in frequent buying and selling, they amplify their bets with borrowed money and they are big buyers of derivatives. Banks receive millions in fees from such services.

The SEC’s suspicion that brokers sometimes provide sham prices isn’t just theoretical. In June 2016, the agency accused two portfolio managers at Visium Asset Management of soliciting phony quotes from friendly brokers over an 18-month period to justify inflated valuations on distressed debt holdings.

Due to the scheme, Christopher Plaford and Stefan Lumiere were able to post a 0.68 percent gain in 2011 for the credit hedge fund they ran at Visium, instead of a roughly 4 percent loss, the SEC said. Plaford has pleaded guilty to related criminal charges brought by federal prosecutors, while a judge sentenced Lumiere to 18 months in prison in June for his role in inflating some of the firm’s bond investments.

Undervaluing Bonds

The SEC is also looking at Keri Findley, a former partner at Dan Loeb’s Third Point hedge fund firm, people familiar with the matter have said. The regulator is probing whether Findley, who left Third Point in February, caused mortgage bonds in her portfolio to be undervalued, the people said.

While it’s unclear how she might have benefited from her investments being worth less, it’s possible that undervaluing a position for much of the year could make it easier for a portfolio manager to then mark up the investment to match market prices at year-end when firms calculate fees and bonuses.

A spokesman for Findley has declined to comment. Third Point has said it has a rigorous process for pricing securities and that it is cooperating with the SEC.

Technological advancements have assisted the regulator. In recent years, it has been using computer algorithms to spot bond trades that occur at prices that are suspicious because they don’t reflect recent transactions. SEC officials say the algorithms have helped them to identify billions of dollars of problematic trades.

U.S. prosecutors are investigating one of Wall Street’s darkest markets, focusing on hedge funds suspected of inflating the value of debt securities in their portfolios to juice the fees they collect.

Having prosecuted traders who lied to customers about bond prices, the government is now scrutinizing hedge funds that allegedly solicited bogus price quotes from brokers, according to three people familiar with the matter who asked not to be identified. Such a practice would have enabled the funds to pump up the value of illiquid securities on their books.

The incentive to manipulate valuations has become more pronounced as investors have abandoned hedge funds because of poor returns and high fees. Assets managed by hedge funds declined last year for the first time since the financial crisis, with investors yanking more than $70 billion, according to Hedge Fund Research Inc. The opacity of certain parts of the debt market, with illiquid, sometimes distressed securities, had made it a prime target for deception because of the difficulty of determining prices.

It’s unclear how many funds are under scrutiny by federal prosecutors in New York for possibly seeking bogus quotes from brokers. But a witness testifying for the government this week in an unrelated trial of three former Nomura Holdings Inc. traders in Connecticut may have shed light on the investigation.

The witness, a former broker named Frank DiNucci Jr., said under oath that he provided bogus quotes to a trader at a mortgage bond fund, Premium Point Investments LP. DiNucci agreed to plead guilty last month in Manhattan federal court to conspiracy and fraud and says he has been cooperating with a criminal probe by New York prosecutors into Premium Point.

“I would extend marks to make them seem like they were my own,” DiNucci told the federal jury in Hartford. The goal was to “increase the number of trades we would do with this particular client,” he said.

Steven Bruce, a spokesman for Premium Point, which managed almost $2 billion at its peak and is now closing, declined to comment on DiNucci’s testimony or on whether the fund is under investigation. Nicholas Biase, a spokesman for Acting U.S. Attorney Joon Kim in Manhattan, also declined to comment.

A focus on bond funds would signal a new direction in enforcement. In recent years, prosecutors have brought dozens of high-profile, insider-trading cases against portfolio managers at equity hedge funds, securing more than 80 convictions.

Buy-Side

Their target now appears to be the debt side. The Justice Department charged at least seven bank bond traders since 2013 with lying to customers about prices before shifting to the buy-side of the market. The probes began at the Securities and Exchange Commission’s complex financial instruments group, according to the people familiar, who declined to comment publicly on the confidential investigation. The SEC declined to comment.

Mismarking fraud was at the center of a case against fund managers at Visium Asset Management LP. Jurors returned a guilty verdict this year against one of its portfolio managers in just 90 minutes. Prosecutors have also brought charges over another scheme: lying to investors about bond prices. Former Jefferies LLC trader Jesse Litvak was convicted at a trial in January, and three former Nomura Holdings traders are now on trial in Connecticut, where DiNucci testified.

Some securities, including pools of mortgages, can be especially difficult to price. The debt can go months without trading. Without recent pricing data, funds rely on estimates of brokers and quotes from third parties to value the debt.

By carrying securities on their books at artificially inflated prices, hedge funds can show better performance. They can collect more in management and performance fees -- or hide poor performance for certain holdings.

DiNucci has been testifying against his former colleagues at Nomura, who he said lied to clients about bond prices. They deny wrongdoing. Under cross-examination by defense lawyers, DiNucci was asked about the mismarking of bonds. He said he worked at brokerages Auriga USA LLC and AOC Securities LLC after leaving Nomura. While there, he said he would provide fake quotes to traders including Jeremy Shor, formerly of Premium Point. Shor on Wednesday declined to comment.

Alex Hendrickson, a co-president at Auriga, declined to comment and referred questions to a lawyer, Jeffrey Plotkin, who also declined to comment. A person who answered the phone at AOC said its chief executive, Ronaldo Gonzalez, wasn’t available for comment.

Plea Agreement

As part of an agreement to cooperate in the “Premium Point investigation,” DiNucci said he told prosecutors in New York that there was “a lot more than that.” He didn’t elaborate. A copy of his April 6 plea agreement with New York prosecutors was entered into evidence at the Connecticut trial.

DiNucci’s lawyer, Daniel Zinman, declined to comment. A Nomura representative didn’t immediately return a request for comment.

Before the financial crisis, regulators had a hands-off policy in monitoring the securitized debt market in part because participants were considered sophisticated buyers and sellers. That assumption came undone when the market cratered following rising mortgage delinquencies. To deal with the fallout, the SEC created a specialized unit to examine the market.

The unit got a tip from AllianceBernstein after a spreadsheet was sent to an asset manager revealing that Litvak, then at Jefferies, had lied about the price paid for securities he sold, prosecutors said. Litvak was sentenced last month to two years in prison for securities fraud.

• Florian Stärk: Best Practice in Pricing from a Buy-Side Perspective 
• Quaestio Capital Management: Pricing Policy For Illiquid Assets
• Deloitte: Valuation of Alternative Investments 
• KPMG: Finding Fair Value
• IMA: Guidelines for Fair Value Pricing
• Credit Suisse: Illiquid Assets

The British state pension is now worst in the developed world as it has fallen below Mexico and Chile, data shows.

An average worker entering the UK workforce today can expect to receive less than a third (29 per cent) of their final working salary as a basic pension income after tax, according to a report published every two years by the Organisation for Economic Co-operation and Development.

This is a reduction of around 40 per cent of what their equivalents who entered the labour market back in 2002 could have expected to receive as a percentage (47.6 per cent) of their final salary. Since the study began the UK has consistently ranked low on the list, ranking below Chile and Mexico last year, however it has never come last before.

The reason for the UK falling to the bottom of the league table is down to the earnings-related element of the state pension being removed along with the introduction of the new flat-rate pension, the OECD said.

It means UK retirees who fail to make their own pension provision face a steep income drop when they retire compared with other OECD countries.

By contrast the average worker across the OECD can expect 63 per cent of their salary as a state funded pension.

TUC general secretary Frances O’Grady said: “Working people in Britain face the biggest retirement cliff edge of any developed nation. We are letting down today’s workers if we can’t provide them with a decent retirement income.”

The OECD said that like other countries, the UK is “ageing quickly” and the number of people aged 65 and over for every 100 people of working age will rise from about 30 today to 48 in 2050.

It said: “Already today, poverty among older people is high in the United Kingdom: among those aged 75 and over 18.5 per cent have incomes below the poverty line, most of them women. The main reason is the low level of the state pension.”

The new simplified state pension should improve matters, but there is a long transition period, the report said. While those who are able to save, buy their own home and put money in private pensions may have relatively good incomes, retirees without these types of revenue “are left with few resources,” it said.

The report also suggested that the pension freedoms and the rigidity of the state pension, which cannot be accessed until people reach a certain age, could increase inequality in the UK. It said recent changes enabling older people to withdraw chunks of cash from their retirement pots could lead to further inequality “as not all will be able to finance retiring earlier”.

The OECD also warned that some people using the pension freedoms may be inclined to spend their lump sums early or underestimate their life expectancy, leaving them with limited resources at a very old age.

In July, it was announced that the the state pension age in the UK will rise from 67 to 68 between 2037 and 2039, seven years earlier than previously planned.

The OECD promotes policies aiming to improve the economic and social wellbeing of people globally.

A DWP spokesperson said: “We have taken decisive action to address our changing population through a new, generous State Pension, retaining the Triple Lock and protecting the poorest through Pension Credit - reducing pensioner poverty close to historically low levels.

“But there’s always more to do. Thanks to automatic enrolment, around 11 million people will be newly saving or saving more into a workplace pension by 2018.”

Britain’s workers can look forward to the worst state pension of any major country, according to a report by the developed world’s leading economic thinktank.

The Organisation for Economic Cooperation and Development (OECD) study calculated that a typical British worker will at retirement receive a state pension and other benefits worth around 29% of what they had previously been earning. That compares with an average of 63% in other OECD countries, and more than 80% in Italy and the Netherlands.

The report said this expected “net replacement rate” will be the lowest of any OECD country.

The UK population is ageing rapidly, has relatively high levels of poverty among the over-75s, and a much bigger problem with obesity in old age, said the OECD, with 20% of British over-80s classified as obese, compared with 15% in the US and under 10% in Italy.

The TUC general secretary, Frances O’Grady, said: “Working people in Britain face the biggest retirement cliff edge of any developed nation. We are letting down today’s workers if we can’t provide them with a decent retirement income.”

However, on some measures Britain’s pension system is performing better than many other OECD countries. The OECD noted that the new single-tier pension (currently £159.55) will be worth 30% more than the old state pension (currently £122.30) but added, “there is a long transition period and current retirees will not see a difference”.

The UK also fares well on employment rates among older adults, and with the introduction of auto-enrolment in 2012, the downward trend in private workplace provision has been reversed.

While the UK has the worst “mandatory” entitlements such as the state pension, it has a much bigger private pension system.

The OECD said the UK has $2.2tn in private pension assets, equal to 95% of GDP, one of the highest levels of private saving in the world. While the US, Switzerland, the Netherlands and Denmark had figures above 100% of GDP, in France and Germany, where state pension entitlements are much higher, private pensions are worth less than 10% of GDP.

Once the UK’s private pensions are added to the state pension, the average income in retirement for UK pensioners rises to just over 60% of former career earnings, just below the OECD average.

A Department for Work and Pensions (DWP) spokesman said: “We have taken decisive action to address our changing population through a new, generous state pension, retaining the triple lock and protecting the poorest through pension credit, reducing pensioner poverty close to historically low levels.

“But there’s always more to do. Thanks to automatic enrolment, around 11 million people will be newly saving or saving more into a workplace pension by 2018.”

Caroline Abrahams, the charity director at Age UK, said the report should serve as a “wake-up call”.

She said: “Given the current situation, the state pension undoubtedly remains a vital tool in the fight against pensioner poverty, giving millions of older people a small element of financial security in an increasingly uncertain world.

“But the government must look at how auto enrolment into workplace pensions can work with the state pension to deliver a decent standard of living in retirement for everyone.”

The UK's State Pension is the least generous of all the most advanced economies in the world, according to a new report.

A study by the Organisation of Economic Co-operation and Development (OECD) suggests full-time workers in the UK do relatively poorly.

The report found that the average pensioner can expect to receive just 29% of what they earned at work.

Only South Africa - which isn't a member of the OECD - is less generous.

However, once "voluntary" pensions - such as auto enrolment or workplace pensions - are taken into account, the UK model fares better in comparison.

Even so, the pension systems in Japan, Germany, France, Italy, the United States, Canada, the Netherlands and Ireland all pay out a higher proportion of working income.

When voluntary pensions are included, the average UK pensioner receives 62% of his or her working income. This is still lower than the OECD average of 69%.

'Cliff edge'

The TUC said the government needed to improve the way the pension system works in the UK.

"The OECD has confirmed what we have long suspected - the UK is bottom of the league for pension provision," said Frances O'Grady, the TUC's general secretary.

"Working people in Britain face the biggest retirement cliff edge of any developed nation."

Since 2010 the state pension has been protected by the so-called triple lock, meaning that pension pay-outs have risen by the highest of earnings, inflation or 2.5%.

However the 2.5% element of the triple lock is due to end in 2020.

In response to the OECD report, the government pointed out that 11 million people will be saving into a workplace pension by 2018.

It said the State Pension was now more generous than it was.

"We have taken decisive action to address our changing population through a new, generous State Pension, retaining the triple lock and protecting the poorest through Pension Credit - reducing pensioner poverty close to historically low levels," a spokesperson for the Department of Work and Pensions said.

"But there's always more to do."

Discrimination

A separate report, from the Pension Protection Fund (PPF), declares that defined benefit pension schemes in the UK are increasingly investing in bonds rather than shares.

That suggests such schemes are becoming much more conservative, and risk-averse.

Back in 2006, 61% of scheme assets were invested in equities. By 2017 that number had fallen to 29%.

By contrast the percentage of assets held in bonds has risen from 28% to 56%, making such investments less volatile, but less likely to grow in value.

Some experts are critical of this trend, which they say could discriminate against younger workers in defined contribution schemes.

"Of all investors in the UK, final salary schemes should be able to take the most patient, long-term view of asset allocation and investment risk, yet they have become increasingly short-term and conservative in their strategy," said Nathan Long, pensions expert at Hargreaves Lansdown.

"This comes at the expense of the auto-enrolment generation who desperately need higher levels of contribution directed into their modern day pensions."

Jack Bogle isn’t optimistic about the state of U.S. pensions over the next decade.

The founder of Vanguard Group thinks a conservative portfolio of bonds will only return about 3 percent a year over the next decade, and stocks won’t do much better, with a 4 percent annual gain over a similar period. This is “totally defeating” for pensions, which “are not going to be able to meet their 7.5 percent or 8 percent obligations,” Bogle said in a Bloomberg Radio interview that aired Thursday.

Bogle is well known for first conceiving of low-fee funds for individual investors, pegging strategies to indexes rather than giving managers free reign to buy what they wanted. This philosophy has helped Vanguard grow into a $4.5 trillion behemoth that will likely reach $10 trillion in assets within the next 10 years.

Bogle, 88, also has a self-professed knack for making accurate market calls. His prognostications on stocks have had about an 81 percent correlation to what actually happens, while his bond predictions have been accurate 95 percent of the time, he said.

“The only return you get on a bond is from the interest coupon,” with fluctuations in prices eventually evening out and becoming relatively negligible over the longer term, he said. Given a portfolio of about half corporate bonds and half U.S. Treasuries, the blended yield is about 3 percent today.

“So that’s what you get over the next decade,” he said.

This is a huge problem for pensions, which rely on bonds to provide steady, reliable income needed to cover benefit payments to plan participants. For example, the largest U.S. pension, California Public Employees’ Retirement System, is considering more than doubling its bond allocation to reduce risk and volatility as the bull market in stocks approaches nine years.

Pensions have generally lowered their returns targets over the past few years, but they’re still aiming for annual gains of more than 7 percent on average. To Bogle, that’s an unlikely scenario.

“It is almost a given that it will end badly,” he said.

Interestingly, the Alpine Macro report did discuss return scenarios under the deflation and inflation surprises, which you can see in table 2 below (click on image):

Quite shockingly, the authors conclude higher inflation would result in a worse outcome:

This is primarily because the P/E ratio would be compressed significantly, and the ERP would rise, both undercutting expected returns for stocks. For example, if we assume that steady-state inflation in the U.S. were to rise to 3.5%, with 2.5% steady-state real growth, equilibrium bond yields would be 6%. With the ERP at 200 basis points, the expected total return for U.S. stocks would be 3.2%. After inflation, the real return will be -0.3%.

I say shockingly because for pensions managing assets and liabilities, there is no question that unexpected inflation (which leads to higher rates) is a much better outcome than unexpected deflation.

I guess it all depends on what deflation scenario we're talking about because a prolonged debt deflation scenario I'm worried about will roil assets and make liabilities soar as the yield on the 10-year US Treasury note hits a new secular low. Mild disinflation is fine, prolonged debt deflation is a nightmare.

November's solid jobs gain and modest wage growth shows a strong economy with still low inflation, a perfect recipe for stock market gains.

There were 228,000 jobs added in November, and unemployment remained at a low 4.1 percent rate. Average hourly wage growth at 0.2 percent was a slight disappointment, as economists were hoping to see 0.3 percent, or a 2.7 percent year-over-year rise and a signal that inflation would be picking up.

"This is another addition in the 'Goldilocks' scenario—slightly better jobs, no faster wages, no pressure on inflation. It's not going to change the Fed from increasing rates next week, but there's nothing so dramatic as to accelerate their time table, or at this point ease back," said Ed Keon, managing director and portfolio manager at QMA. "It just shows a robust economy and not one yet that shows inflation pressures."

Stock futures rose after the 8:30 a.m. ET report, and the market opened higher with tech leading the gains. The important monthly jobs report comes after a sloppy period for stocks, but ahead of the time of year when seasonal forces and a "Santa" rally often give the market a boost.

Meanwhile Treasury yields at the short end trended slightly lower, particularly the 2-year note. That area of the yield curve is most affected by Fed rate hikes. The 2-year was at 1.80 percent in morning trading.

Strong areas of hiring included professional and business services, up 44,000; manufacturing, up 31,000; health care, up 30,000, construction up 23,000.

ZipRecruiter's chief economist, Cathy Barrera said manufacturing may be seen as an area that needs help, but it has been doing well.

"Manufacturing is continuing to be called out for a third or fourth month in a row. That usually surprises people. It seems that actually we've seen jobs added there...We've added about 175,000 since last October," she said.

The lack of wage growth may be a concern for economists, but for the markets, it buys more time for a Fed that can slowly increase interest rates.

"We've seen this dance before —strong growth, no inflation. It doesn't change the Fed for December. How much the Fed goes next year is going to be dependent on whether we get inflation pressures picking up," said John Briggs, head of strategy at NatWest Markets. "The fact the economy is doing well and the unemployment rate remains low...means you can keep them on track to gradually raise rates but there is a point where if you do not get inflation pressure, it might give them pause."

The market is now awaiting the Fed's meeting next week, where it is expected to raise interest rates by a quarter point. The Fed also issues its outlook and forecast for interest rates, the last in the Fed headed by Janet Yellen. Fed Governor Jerome Powell takes over as Fed chair in February.

The Fed has forecast three hikes for next year, and it is expected to keep its outlook about the same even though the market has been skeptical it will hike as much as it expects.

"You're starting to enter the transition from Yellen to Powell. I'm not sure this is the time you want to have a huge messaging shift from the Fed," Briggs said.

Economists surveyed by Reuters had expected nonfarm payrolls to grow by 200,000.

A more encompassing measure of joblessness that includes discouraged workers and those holding part-time positions for economic reasons moved up one-tenth of a point to 8 percent. The ranks of those not in the labor force edged higher by 35,000 to 95.4 million.

Closely watched wage data fell short of expectations. Average hourly earnings rose 0.2 percent for the month and 2.5 percent for the year, versus projected increases of 0.3 percent for the month and 2.7 percent for the year.

"The November employment data is largely as expected. For an expansion that began in mid-2009, no negative surprises are welcome," said Mark Hamrick, senior economic analyst at Bankrate.com. "The lingering impacts of recent hurricanes and flooding have reverted back to relative calm in the statistics, meaning that this is a 'cleaner' number."

Federal Reserve policymakers have been concerned over the lack of income growth, though they are still expected to raise the central bank's benchmark interest rate a quarter point next week. The probability dipped a bit after the jobs release but remains above 90 percent, according to the CME FedWatch Tool.

"The jobs number in the report is good news for American workers, but the lack of stronger wage growth is not," said Robert Frick, corporate economist with Navy Federal Credit Union. "Without stronger wage growth, higher inflation remains in doubt, and that takes away one reason for the Fed being more aggressive in hiking rates."

The biggest November job gains came in professional and business services [46,000], manufacturing [31,000] and health care [30,000]. In total, goods-producing occupations rose by 62,000. Construction saw a gain of 24,000, almost all of which were specialty trade contracts, a profession that has added 132,000 jobs over the past year.

Heading into the holiday season, retail jobs also grew by 18,7000.

Markets reacted positively to the news, with major stock indexes opening higher.

Job growth has slowed this year — to 174,000 per month compared with 187,000 a year ago — as the economy edges closer to what officials consider full employment, or the condition where those looking for work have positions. However, Fed officials have been dismayed that the tight labor market has not resulted in significantly higher wages.

"With continued improvement in the labor market, room for continued upward trajectory in 2018 is likely limited because there's not much slack left to hire workers for further growth," said Steve Rick, chief economist at CUNA Mutual Group.

The quality of job creation tilted toward full time, whose ranks grew by 160,000, while part-time positions contracted by 125,000, according to the household survey.

U.S. job growth increased at a strong clip in November, painting a portrait of a healthy economy that analysts say does not require the kind of fiscal stimulus that President Donald Trump is proposing, even though wage gains remain moderate.

Nonfarm payrolls rose by 228,000 jobs last month amid broad gains in hiring as the distortions from the recent hurricanes faded, Labor Department data showed on Friday. The government revised data for October to show the economy adding 244,000 jobs instead of the previously reported 261,000 positions.

Employment gains in October were boosted by the return to work of thousands of employees who had been temporarily dislocated by Hurricanes Harvey and Irma. November’s report was the first clean reading since the storms, which also impacted September’s employment data.

Average hourly earnings rose five cents or 0.2 percent in November after dipping 0.1 percent the prior month. That lifted the annual increase in wages to 2.5 percent from 2.3 percent in October. Workers also put in more hours last month.

The unemployment rate was unchanged at a 17-year low of 4.1 percent amid a rise in the labor force. Economists polled by Reuters had forecast payrolls rising by 200,000 jobs last month.

The fairly upbeat report underscored the economy’s strength and could fuel criticism of efforts by Trump and his fellow Republicans in the U.S. Congress to slash the corporate income tax rate to 20 percent from 35 percent.

“The labor market is in great shape. Tax cuts should be used when the economy needs tax cuts and it doesn’t need tax cuts right now,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. “When politics and economics are mixed in the stew, the policies that are created often have a very awful smell.”

Republicans argue that the proposed tax cut package will boost the economy and allow companies to hire more workers. But with the labor market near full employment and companies reporting difficulties finding qualified workers, most economists disagree. Job openings are near a record high.

The economy grew at a 3.3 percent annualized rate in the third quarter, the fastest in three years, and appears to have maintained the momentum early on the October-December quarter.

The average workweek rose to 34.5 hours in November, the longest in five months, from 34.4 hours in October. Aggregate weekly hours worked surged 0.5 percent last month after October’s 0.3 percent gain.

“A six-minute increase in the work week does not sound like much, but given the size of the labor market, it turns out to be significant in terms of output,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.

The dollar was trading higher against a basket of currencies, while prices for U.S. Treasuries fell. Stocks on Wall Street rose.

FULL EMPLOYMENT

While November’s employment report will probably have little impact on expectations the Federal Reserve will raise interest rates at its Dec. 12-13 policy meeting, it could help shape the debate on monetary policy next year.

The U.S. central bank has increased borrowing costs twice this year and has forecast three rate hikes in 2018.

Employment growth has averaged 174,000 jobs per month this year, down from the average monthly gain of 187,000 in 2016. A slowdown in job growth is normal when the labor market nears full employment.

The economy needs to create 75,000 to 100,000 jobs per month to keep up with growth in the working-age population.

The unemployment rate has declined by seven-tenths of a percentage point this year. A broader measure of unemployment, which includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment, ticked up to 8.0 percent last month from a near 11-year low of 7.9 percent in October.

Economists believe the shrinking labor market slack will unleash a faster pace of wage growth next year. That, combined with the tax cuts, would help to boost inflation.

“Detractors will argue that wage increases are too slow but we have shown in our research that adjusting for demographic effects, wage gains are where one ought to expect them to be,” said John Ryding, chief economist at RDQ Economics in New York.

Assuming that the BLS' estimate of avg hourly warnings growing only 0.2% in November is accurate, it would imply that - as has often been the case - the bulk of job growth in November took place in minimum-paying and other low-wage jobs. However, a breakdown of jobs added by industry shows the contrary to expectations, the bulk of new job creation, and 3 of the 4 top categories, were not in the "low wage" bucket. In fact, as shown below, with the exception of Education and Health jobs which rose by 54K in November, Manufacturing (+31K), Professional and Business Services (+27), and Construction (+24) were the fastest growing occupations in the previous month.

For those wondering, yes waiters and bartenders did hit a new all-time high of 11.783 million in November, an increase of 18.9k for the month.

"When I look at the downward drift in multiple expectations measures, I find it tougher to confidently buy into the idea that inflation today is just temporarily low once again," Evans said in remarks prepared for delivery to the UBS European Conference in London.

To prevent low inflation expectations becoming entrenched, he said, "our public commentary needs to acknowledge a much greater chance of inflation running at 2-1/2 percent in the coming years than I believe we have communicated in the past."

Evans, a voter this year on Fed policy, did not say in his prepared remarks whether he would support an interest-rate hike in December, as many of his colleagues have said they would, and as markets overwhelmingly expect.

But his comments suggest he has become increasingly frustrated with falling inflation, despite an economy he said is headed for "continued solid growth" in 2018.

Evans warned Wednesday that unless the Fed addresses falling inflation expectations, "we could be in for the kind of trouble that Bank of Japan has faced for so long."

Inflation by the Fed's preferred measure, core personal consumption expenditures (PCE), was just 1.3 percent in September, even though the unemployment rate, at 4.1 percent, suggests the U.S. economy is at full employment.

Fed Chair Janet Yellen has said she believes that as the labor market tightens, inflation will rise back toward 2 percent. Evans is not so sure.

"With each low monthly reading, it gets harder and harder for me to feel comfortable with the idea that the step-down last spring was simply transitory," Evans said. "There is a big strategic risk in failing to get core PCE inflation symmetrically around 2 percent before this economic cycle ends."

Regional Fed presidents like Evans have varying degrees of influence on the direction of Fed policy.

In 2010, Evans tried and failed to win support at the Fed for a new strategy of monetary policy known as price-level targeting that at the time he thought could have lifted troublingly low inflation.

In 2012, though, the Fed included a promise to keep rates near zero until unemployment or inflation reached certain thresholds, an idea Evans had publicly championed for a year before it became policy.

1. The global jobs crisis: High structural unemployment, especially youth unemployment, and less and less good paying jobs with benefits.
2. Demographic time bomb: A rapidly aging population means a lot more older people with little savings spending less.
3. The global pension crisis: As more and more people retire in poverty, they will spend less to stimulate economic activity. Moreover, the shift out of defined-benefit plans to defined-contribution plans is exacerbating pension poverty and is deflationary. Read more about this in my comments on the $400 trillion pension time bomb and the pension storm cometh. Any way you slice it, the global pension crisis is deflationary and bond friendly.
4. Excessive private and public debt: Rising government and consumer debt levels are constraining public finances and consumer spending.
5. Rising inequality: Hedge fund gurus cannot appreciate this because they live in an alternate universe, but widespread and rising inequality is deflationary as it constrains aggregate demand. The pension crisis will exacerbate inequality and keep a lid on inflationary pressures for a very long time.
6. Globalization: Capital is free to move around the world in search of better opportunties but labor isn't. Offshoring manufacturing and service sector jobs to countries with lower wages increases corporate profits but exacerbates inequality.
7. Technological shifts: Think about Amazon, Uber, Priceline, AI, robotics, and other technological shifts that lower prices and destroy more jobs than they create.

1. A meltdown unlike anything we've ever seen before, making 2008 look like a walk in the park.
2. A melt-up unlike anything we've ever seen before, making 1999-2000 look like a walk in the park.

Bitcoin has landed on Wall Street with a bang.

Futures on the world’s most popular cryptocurrency surged as much as 26 per cent from the opening price in their debut session on Cboe Global Markets Inc.’s exchange, triggering two temporary trading halts designed to calm the market. Initial volume exceeded dealers’ expectations, while traffic on Cboe’s website was so heavy that it caused delays and temporary outages. The website’s problems had no impact on trading systems, Cboe said.

“It is rare that you see something more volatile than bitcoin, but we found it: bitcoin futures,” said Zennon Kapron, managing director of Shanghai-based consulting firm Kapronasia.

The launch of futures on a regulated exchange is a watershed for bitcoin, whose surge this year has captivated everyone from mom-and-pop speculators to Wall Street trading firms. The Cboe contracts, soon to be followed by similar offerings from CME Group Inc. and Nasdaq Inc., should make it easier for mainstream investors to bet on the cryptocurrency’s rise or fall.

Bitcoin wagers have until now been mostly limited to venues with little or no oversight, deterring institutional money managers and exposing some users to the risk of hacks and market breakdowns.

Bitcoin futures expiring in January climbed to US$17,540 as of 11:29 a.m. in London from an opening level of US$15,000, on 2,798 contracts traded. The spot price climbed 6.4 per cent to US$16,647 from the Friday 5 p.m. close in New York, according to the composite price on Bloomberg.

The roughly US$900 difference reflects not only the novelty of the asset but also the difficulty of using the cash-settled futures to trade against the spot, strategists said.

“In a normal, functioning market, good old arbitrage would settle this,” Ole Hansen, head of commodity strategy at Saxo Bank A/S in Hellerup, Denmark, said by email. “If they were deliverable you could arbitrage the life out of it.”

Proponents of regulated bitcoin derivatives say the contracts will increase market transparency and boost liquidity, but skeptics abound. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon has called bitcoin a “fraud,” while China’s government has cracked down on cryptocurrency exchanges this year. The Futures Industry Association — a group of major banks, brokers and traders — said this month that contracts in the U.S. were rushed without enough consideration of the risks.

So far though, trading has kicked off without any major hiccups.

Dealers said volume was high for a new contract, even though it was tiny relative to more established futures. And the trading halts took effect just as Cboe had outlined in its rules. Transactions stopped for two minutes after a 10 per cent gain from the opening price, and for five minutes after a 20 per cent jump. Another five-minute halt will take effect if the rally extends to 30 per cent, Cboe said in a notice on its website.

“It was pretty easy to trade,” Joe Van Hecke, managing partner at Chicago-based Grace Hall Trading LLC, said in a telephone interview from Charlotte, North Carolina. “I think you’ll see a robust market as time plays out.” For now, Cboe futures account for a tiny slice of the world’s bitcoin-related bets. The notional value of contracts traded in the first eight hours totalled about US$40 million. Globally, about US$1.1 billion of bitcoin traded against the U.S. dollar during the same period, according to Cryptocompare.com.

Some people who would like to trade futures are having a hard time accessing the market because not all brokers are supporting it initially, said Garrett See, chief executive officer of DV Chain. Participation may also be limited because of higher capital requirements and tighter risk limits, See said.

“We’re in the early stages here, and there’s not enough professional liquidity from the big market makers who can provide depth and hold in the movements,” said Stephen Innes, head of trading for Asia Pacific at Oanda Corp. “It’s going to be a learning curve.”

It’s been painful for investors stuck on the sidelines. This year alone, bitcoin is up more than 17-fold. The surge has been driven largely by demand from individuals, with technical obstacles keeping out most big money managers like mutual funds.

The new derivatives contracts should thrust bitcoin more squarely into the realm of regulators, banks and institutional investors. Both Cboe and CME on Dec. 1 got permission to offer the contracts after pledging to the U.S. Commodity Futures Trading Commission that the products don’t run afoul of the law, in a process called self-certification.

Not everyone is happy with the expedited roll out. Exchanges failed to get enough feedback from market participants on margin levels, trading limits, stress tests and clearing, the Futures Industry Association said this month. In November, Thomas Peterffy, the billionaire chairman of Interactive Brokers Group Inc., wrote an open letter to CFTC Chairman J. Christopher Giancarlo, arguing that bitcoin’s large price swings mean its futures contracts shouldn’t be allowed on platforms that clear other derivatives.

Still, Interactive Brokers is offering its customers access to the futures, with greater restrictions. The firm’s clients won’t be able to go short, and Interactive’s margin requirement, or how much investors have to set aside as collateral, will be at least 50 per cent. That’s a stricter threshold than both Cboe’s and CME’s.

The start of futures trading is an important milestone for bitcoin’s shift from the fringes of finance toward the mainstream, but it could be some time before the cryptocurrency becomes a key part of investor portfolios — if it ever does.

“You never say never,” David Riley, who helps oversee US$57 billion as head of credit strategy at BlueBay Asset Management LLP in London, said in an interview on Bloomberg Television. “But I do think we’re quite some way from making cryptocurrencies even a relatively small part of some of the funds we manage at the moment.”

Cryptocurrency fever was already rampant when Evolve Funds Group Inc. on Sept. 22 announced it was the first company to file a prospectus to offer a Canadian bitcoin exchange-traded fund. Since then, investor frenzy has reached a fever pitch.

Over the past two and a half months, bitcoin has more than quadrupled in price. Investors have poured US$1 billion into initial coin offerings, where startups offer cryptocurrencies in exchange for capital. Even digital cats — yes, digital cats — are being bought and sold for six-figure sums on the blockchain of Ethereum, a rival cryptocurrency platform.

Institutional investors will soon be able to join the fun by trading bitcoin futures for the first time, first through Cboe Global Markets Inc. on Sunday and then through rival CME Group Inc. on Dec. 18.

As a result, the amount of capital at risk if the cryptocurrency bubble bursts is probably going to grow exponentially. And the traditional financial system, which some predicted would be obliterated by Bitcoin, will become even further integrated into what was once considered a fringe curiosity.

Despite the potential dangers and an eye-popping trading price, bitcoin is going mainstream.

Evolve chief executive Raj Lala said the demand for a Canadian bitcoin ETF is incredibly strong. He said having a regulated futures market on reputable mainstream exchanges is an important first step before offering the fund, because it eliminates the need for actual bitcoin to change hands.

“Futures have become a great proxy way to participate in a commodity,” Lala said. “This just makes for an easier way for you to participate in the price performance of bitcoin.”

But participating in the price performance of bitcoin is certainly not for the faint of heart.

On Friday, bitcoin surged to a new high of more than US$17,000 overnight, plunged to just under US$14,000 by noon and finally recovered to about US$16,000 by the end of the day. Just one year earlier, a single bitcoin was worth just US$770.

Currently, many institutional investors are unable to buy cryptocurrencies for a variety of regulatory and practical reasons. But futures contracts and ETFs will make it possible for them to place bets on the price of bitcoin going up or down using familiar exchanges and financial tools.

Big-name investors might be anxiously awaiting the opportunity to trade bitcoin futures, but the banks, which have to guarantee those trades, are not so eager.

Walt Lukken, chief executive of the Futures Industry Association, which represents financial institutions that hold customer funds and clear trades, expressed his concern in an open letter on Thursday to the U.S. Commodity Futures Trading Commission.

“A more thorough and considered process would have allowed for a robust public discussion among clearing member firms, exchanges and clearinghouses to ascertain the correct margin levels, trading limits, stress testing and related guarantee fund protections and other procedures needed in the event of excessive price movements,” Lukken said.

“The recent volatility in these markets has underscored the importance of setting these levels and processes appropriately and conservatively.”

The bitcoin futures markets that are about to launch are all cash-settled, which means a trader who buys an option to purchase bitcoin at a certain price in the future and holds the contract to expiration will receive or pay the gain or loss in regular central-bank-issued dollars.

In other words, the futures market won’t directly affect demand for bitcoin for the most part, although some investors might spot arbitrage opportunities or hedge their positions by actually buying the cryptocurrency.

However, bitcoin futures and ETFs will increase the digital asset’s visibility and bring it to the masses. The financial instruments will also further cement bitcoin’s current principal use as a store of value, rather than a censorship-resistant payment network that’s independent of government control.

Anthony Di Iorio, a founder of Ethereum and chief executive and co-founder of Jaxx, a multi-cryptocurrency wallet, and Decentral, a Toronto innovation hub, said bitcoin’s evolution from a proposed payment network to an asset worth holding is not necessarily such a bad thing.

He said the big institutional money moving into bitcoin is likely to further increase the fee that miners charge per transaction — making it even less financially viable to use bitcoin as a means of buying a cup of coffee — but there are hundreds of other cryptocurrencies that may be better suited for that purpose.

“Perhaps Bitcoin is not going to be what people thought,” Di Iorio said. “It might not be Bitcoin for the day-to-day stuff, for the smaller things. But other ones are emerging, other ones will still find gaps.”

At a conference in Riga, Latvia, in late November, Bitcoin security expert and entrepreneur Andreas Antonopoulos said the entry of futures doesn’t necessarily mean the cryptocurrency is about to lose its radical roots and become a speculative playground for Wall Street types.

In a video of his remarks posted to YouTube, Antonopoulos said the futures market will perform a useful function for the Bitcoin ecosystem, allowing the miners who secure transactions to hedge against price swings by taking short positions.

“I think it’s important to recognize the CME is not Wall Street,” said Antonopoulos, who works on the oversight board of the exchange’s bitcoin reference rate. “I don’t think these people are as alien to our culture as many believe.”

The order, which affects about 10,000 accounts, is a narrowing of an earlier effort by the IRS. In a blog on the Coinbase website, the company notes that the first request would have impacted another 480,000 accounts.

The court case arose after the IRS found that for in each year from 2013 to 2015, only about 800 taxpayers claimed bitcoin gains. During that time, the cryptocurrency rose to $430 from about $13.

So how do you determine what you owe?

If you held it for one year or less, it is a considered a short-term gain and is taxed as ordinary income. Depending on your tax bracket for 2017, that could range from a tax rate of 10 percent to 39.6 percent.

Any bitcoin you sold or spent after owning it for more than one year is taxed as a long-term gain. Taxable rates on those gains range from 0 percent to 20 percent, with higher-income households paying the highest rate.

In a nutshell, although bitcoin and its brethren are often viewed as being anonymous, not reporting your gains could be viewed as tax evasion by Uncle Sam.

"I've told clients who own it that it's up to them to track their cost basis, their holding period and their sale price," Boyd said. "It might seem innocuous and veiled and like no one will follow up, but records of those transactions are available."

Canada's national pension fund manager is among a group of Canadian companies that are undermining the federal government's international anti-coal alliance by investing in new coal power plants overseas, an environmental organization says.

Friends of the Earth Canada joined with Germany's Urgewald to release a report today looking at the top 100 private investors putting money down to expand coal-fired electricity — sometimes in places where there isn't any coal-generated power at the moment.

The report lists six Canadian financial companies among the top 100 investors in new coal plants in the world. Together, Sun Life, Power Corporation, Caisse de depot et placement du Quebec, Royal Bank of Canada, Manulife Financial and the Canada Pension Plan Investment Board have pledged $2.9 billion towards building new coal plants overseas.

Urgewald tracks coal plants around the world and reports there are 1,600 new plants in development in 62 nations, more than a dozen of which don't have any coal-fired plants now.

While Environment Minister Catherine McKenna is claiming to be a global leader on phasing out the dirtiest of electricity sources, private investors are "undermining that commitment," says Friends of the Earth senior policy adviser John Bennett.

Canada and the United Kingdom last month teamed up to launch the Powering Past Coal Alliance, trying to bring the rest of the world on side with a campaign pledge to phase out coal as a power source entirely by 2030 for the developed world and 2050 for everyone else.

Twenty national governments and at least seven subnational governments — five of them from Canada — signed onto the alliance last month. The hope is to grow the number to 50 by the time the United Nations 24th climate change conference takes place in November 2018.

McKenna will meet with leaders and officials from the alliance this week in Paris, where French President Emmanuel Macron is hosting a climate change meeting to mark the two year anniversary of the Paris climate change accord. This meeting is largely focused on international climate finance as the world tries to meet the goal to have $100 billion a year to invest in climate change mitigation and adaptation projects in the developing world by 2020.

The accord commits the world to keeping the average global temperature from rising more than two degrees Celsius over pre-industrial levels by the end of the century. To do that, scientists suggest global carbon emissions have to start dropping in less than three years, and the only way that is going to happen is by shutting down coal plants.

Coal is responsible for almost half of global carbon dioxide emissions.

McKenna's office did not respond to a request for comment.

Last week, McKenna was in China where she said she was talking about phasing out coal. While China is trying to cut its own coal use, it uses more coal to make power than the rest of the world combined. Hence, McKenna said it's currently impossible to expect China to commit to eliminating it.

Canada can do more: climate institute


McKenna said she wasn't planning to raise the issue of China investing in new plants outside its borders. Urgewald's data show Chinese-owned companies are behind about 140 new coal plants in development outside China.

Turns out Canadian money is also financing international coal plants, through private investors.

Dale Marshall, national program manager for Environmental Defence, said the Paris meeting this week has a lot of work to do trying to figure out how national governments can increase their commitments but also leverage more from the private sector.

Erin Flanagan, director of federal policy for the Pembina Institute, said Canada can do more to discourage Canadians from investing in coal and encourage investments in clean energy. That could include a national requirement for investment companies to include climate change risks when publishing decisions about investment opportunities.

Today, the German organization Urgewald released a report revealing Canada as the 8^th largest investor in new coal globally.  They provide a list of the top 100 investors in companies developing new coal plants. Canadian institutions on the list include:

• SunLife at #31 with $895 million invested;
• Power Financial Corporation at #53 with $631 million invested;
• Caisse de dépôt et placement du Québec at #71 with $433 million invested;
• Royal Bank at #86 with $356 million invested;
• Manulife Financial at #98 with $282 million invested; and
• the Canada Pension Plan Investment Board just missed making the list with $267 million invested.

Friends of the Earth, using the Urgewald findings and the Canada Pension Plan Investment Board publications, has produced “Canadian Coal Investment: Powering Past the Coal Alliance”.

“Minister McKenna is claiming leadership in the global phase-out of coal but the numbers show investors undermining that commitment,” says John Bennett, Senior Policy Advisor, Friends of the Earth Canada. “This isn’t just about right and wrong. It’s about making risky investments – largely with other people’s money,” said Mr. Bennett.

In the midst of growing evidence of the risks of investing in fossil fuels, initiated by government pronouncements on phasing out coal plants, carbon pricing and climatic events,  Canadian pension funds and financial institution are helping to bankroll the expansion of coal fired power plants in China, India, South Africa and other countries around the world. Link to spread sheets.

The Canada Pension Plan Investment Board’s total investment in coal stands at $12.2 billion CDN. This number is based on CPPIB Direct Investment of $339 million in Urgewald’s top 120 Coal New Developers, CPPIB Investments of $6,939 million in the Urgewald’s 100 Top Investors in New Coal and other CPPIB Coal Investments of $4,969.

“Will the Canada Pension Plan be there for Canadians if it continues ignoring climate change and making risky investments with our money? We need regulations requiring financial institutions to recognize the financial risks associated with climate change and ending investment in fossil fuels starting with new coal plants,” said Mr. Bennett.

Coal investments of $12.2 billion is a great deal of money; however, it is only 3.7% of the CPPIB’s $325 billion fund. Even if all the coal investments were wildly profitable, their divestment would have only a minor impact on returns. On the other hand, assessments by Corporate Knights have shown the Canada Pension Plan likely miss out on US$6.5 billion in profits by sticking with climate polluting industries.

For more information, contact: John Bennett, Senior Policy Advisor, Friends of the Earth Canada, 613 291-6888 johnbennett@foecanada.org

Friends of the Earth Canada (www.foecanada.org) is the Canadian member of Friends of the Earth International, the world’s largest grassroots environmental network campaigning in 75 countries on today’s most urgent environmental and social issues.

The Caisse de dépôt et placement du Québec is setting bold targets to shelter its portfolio against the impact of climate change.

The country's second-largest pension fund is seeking more profitable investment opportunities and means to avoid assets it forecasts will be left behind in a global marketplace being reshaped by an increasingly low-carbon world economy.

The move comes as institutional investors around the world are reassessing climate risks and other so-called environmental, social and corporate governance (ESG) factors in response to stakeholder pressures, marketplace shifts and new regulations.

"The world is changing, frankly, faster than most people expected," Michael Sabia, chief executive officer of the Caisse, said at a Montreal event to discuss the pension fund's new climate policy. "We need to change the way we make investment decisions."

The Caisse is setting measurable targets to guide its investment decisions for the coming years. Most crucially, it plans to reduce the carbon footprint of the overall portfolio by 25 per cent by the year 2025.

Carbon budgets will guide the Caisse in meeting and surpassing that 25-per-cent target, and give it a capacity to assess the performance of individuals and investment teams against the budgets – compensation will be linked to their success.

"We think it's something that we have to take seriously in our time-frames and do more to understand, quantify and figure out whether we're paying the right price," Mark Machin, CEO of CPPIB, said of climate change's impact on investments at a recent conference in Toronto."At the end of the day our mandate is simple. It's not to change the world. It's to maximize returns without undue risk of loss for our 20 million beneficiaries."

A pro-business group released a report last week, saying the California Public Employees Retirement System (CalPERS) is too concerned about going green than it is about making green.

The American Council for Capital Formation (ACCF) said CalPERS board members have overemphasized what are called Environmental, Social and Governance (ESG) investments — and the sluggish returns on those investments are dragging down the pension fund’s bottom line.

The 30-page critique said CalPERS’ ESG investments have not been “translating into wins for its pensioners or the taxpayers who bear the burden for covering shortfalls” and “the use of these funds to advance an environmental agenda has plunged the system and California into a building financial crisis.”

CalPERS officials fired back, defending the financial stability of the fund and the rationale for ESG investments.

“We’re passionate about and fully committed to advocating on behalf of shareowners for the right to have a say in how the companies we invest in are run,” CalPERS information officer Megan White said in an email. “We stand behind our efforts. Any suggestion that we stop engaging with companies on behalf of our members is laughable.”

Established in 1932, the California Public Employees Retirement System (CalPERS) is the nation's largest public pension fund, covering 1.8 million public workers and retirees in California. Earlier this year, the fund reported $326 billion in market value.

But the ACCF report, pointing at CalPERS’ annual report released last month, said the pension fund’s future liability exceeds its assets by $138 billion.

The report takes aim at CalPERS’ nine worst-performing funds, four of which were ESG investments. By contrast, the pension fund’s 25 top-performing funds were not ESG investments.

ACCF criticized CalPERS investments in a number of solar panel manufacturers that soured when the market hit a glut. The report also questioned the pension board’s plans to increase climate-related shareholder proposals from 12 to 17.

The report also takes aim at individual board members. ACCF said a review of public disclosure records of the fund’s chief investment officer and two senior executives did not show any ESG investments, prompting the report to call it“ESG investing for thee — but not for me.”

White at CalPERS said the pension fund’s board members are reflecting the wishes of its constituents.

“We have successfully pushed companies to publicly report on the impact that climate change is having on their business, and we have successfully pushed them to open up their board selection process because companies with a diverse group of talented people on their boards perform better financially,” White said.

ACCF said the CalPERS board’s fiduciary responsibilities should take ultimate priority because shortfalls would ultimately be borne by taxpayers.

“Individual investors have every right to invest in assets, ventures or enterprises that align with causes and issues they deem worthy and important — irrespective of expectations on returns or long-term performance. After all, it’s their money,” the report said.

“But large, public funds like CalPERS should be held to a different standard, and be expected to execute an investment strategy that prioritizes stable, long-term performance for beneficiaries who expect and need these resources to be available to support their retirement.”

Ironically, the ACCF report comes at a time when CalPERS has been criticized by some for not taking a more aggressive stance on environmental, political and social issues.

Activists and some Democrats in the California Statehouse earlier this year called on CalPERS to divest from some companies with investments in projects ranging from the Dakota Access Pipeline to President Donald Trump’s plans to build a border wall.

CalPERS has already stopped investing in coal and tobacco interests.

The largest pension plans held by S&P 500 companies face a $348 billion funding gap. As a result, they’re paying higher annual fees to the U.S. Pension Benefit Guaranty Corp., the government agency that backstops plans. “There’s increased awareness that an underfunded plan imposes risk on employees, it imposes risk on shareholders, and it’s getting more expensive,” says Olivia Mitchell, a professor at the University of Pennsylvania’s Wharton School and executive director of the Pension Research Council.

The fees, called variable-rate premiums, are set by Congress and meant to encourage companies to set aside more money in their pension funds. They’ve more than tripled in four years for companies including General Electric Co. and Boeing Co., according to data obtained by Bloomberg News through a Freedom of Information Act request.

GE’s fees surged more than sixfold, to about $238 million, in 2017 from 2012, according to the PBGC data (that doesn’t include the agency’s flat-rate participation fees). Boeing’s bill was $151.7 million, about four times what it paid in 2014. GE and Boeing had the largest pension shortfalls among S&P 500 companies. GE, whose pension fund is short by about $31 billion, said in November it would borrow $6 billion to fund its plan. After Boeing’s fund fell short by about $20 billion at the end of 2016, the company said in July that it would add $3.5 billion of its shares to a scheduled $500 million pension contribution.

Employers have found it “more and more difficult to offer a pension,” says Dennis Simmons, executive director of the Committee on Investment of Employee Benefit Assets, an industry group. “Part of that is because of rising PBGC fees and more difficult regulations.” Booms and busts in the stock market have made it harder for companies to keep up with their contributions. The pensions have become “big, and they’ve been quite volatile since 2000, when we’ve seen some serious ups and downs in the market,” says Peggy McDonald, a senior vice president who works on pension risk transfers at Prudential Financial Inc.

The rising fees and pending Republican tax overhaul legislation are encouraging some companies to build up their funds. Because pension contributions are tax-deductible, it’s more valuable to contribute to a pension while tax rates are higher.

Employers with the 100 largest defined benefit plans added a combined $43 billion to plans last year, compared with just $31 billion the year before, according to Milliman, an actuarial company. Most are eager to get out of the pension business, preferring 401(k) plans, where the employee bears the risk of falling short at retirement. More are offloading their pension plans, paying insurance companies such as Prudential or MetLife Inc. to take them on instead. Such transactions could exceed $19 billion this year, according to industry group Limra. Only about two dozen companies in the S&P 500 have overfunded pensions. Nine of them are banks.

Offloading risk isn’t on the table for every company. Insurers don’t take on obligations from underfunded plans, McDonald says. That means companies need to better fund their plans, limiting those variable-rate premiums, before they can transfer the obligations. “In the short term, these PBGC premiums are having a really significant impact,” she says. “This is in a way an expense-management exercise.”

A year during which the market exceeded all expectations ends not with investors backing off but rather with them throwing caution to the wind.

The trend was particularly prevalent among those who prefer index funds, as ETFs saw their second-biggest week of inflows ever at $31.4 billion, according to fund flow data from Bank of America Merrill Lynch.

Active strategies, as expressed through mutual funds, saw huge outflows, with the $22.7 billion leaving the fourth-worst week on record. However, the difference of $8.7 billion still left the equity side of the ledger with a big week.

Speculation continues to build that the bull market is running out of steam, even as the major indexes continue to set records. The Dow industrials are threatening to break 25,000 as 2017 winds to a close, with the index up just shy of 25 percent including Friday's gains as of midday. The blue chips would need to pick up just another 1.5 percent or so to break the 25K barrier.

Market strategists worry that the inflow of money could signal that the rally is getting old and finally dragging the last bears in off the sidelines, a classic capitulation sign.

"As the stock market continues to soar, it is attracting more money into stocks. That's what usually happens during melt-ups," Ed Yardeni, founder of Yardeni Research, said in a blog post Friday. "The flow-of-funds case for a melt-up is mounting as more hot money pours into equity ETFs."

BofAML's count shows that stock-focused funds — both ETFs and mutual funds — have pulled in a net $294.7 billion year to date. Excluding mutual funds, the inflows to their passive counterparts have totaled just more than $448 billion. The big shift to passive comes even though stock pickers have had a comparatively good year, with 49 percent of large-cap fund managers beating their benchmarks, according to Goldman Sachs.

The most recent surge in ETFs came from some of the $3.4 trillion industry's most popular names.

The SPDR S&P 500 Trust fund (SPY) pulled in just shy of $10 billion over the past week, the iShares S&P 500 Value ETF (IVE) gained $2.2 billion and the iShares Mid-Cap 400 Value ETF (IJJ) grabbed about $1.4 billion, according to FactSet. Year to date, the iShares Core S&P 500 (IVV) has been the big winner, with $31.6 billion in inflows as the $142.9 billion fund has returned nearly 20 percent.

While pouring money into other areas, investors last week yanked $2.2 billion out of the iShares Russell 2000 ETF (IWM), which tracks the small-cap index.

Professional investors have provided much of the enthusiasm for the market. The Investors Intelligence survey, which gauges sentiment from investing newsletter authors, has found bulls outnumbering bears at around the same level as just before Black Monday in October 1987, when the Dow lost 22 percent in a single day.

In fact, investors continue to hedge their bets, with inflows to bond funds totaling $348.1 billion this year even as performance between stocks and fixed income is at its biggest disparity on record.

[...] as I keep warning you, stocks don't go up forever even if they can go up longer than pessimists and optimists think. There is a lot of money out there fuelling speculative frenzy, and it's coming from central banks, big trading outfits and hedge funds playing the momentum game, hoping to squeeze the very last dollar and get out in time.

The deafening silence of the VIX and bears leads many to erroneously conclude that central banks control these markets and what they say goes. The next generation of "Big Shorts" is anxiously awaiting for something, anything, to blow up (China, Eurozone, etc.) but thus far markets keep soaring higher, steamrolling over them.

Remember what I told you a long time ago, there are two big risks in these markets right now:

1. A meltdown unlike anything we've ever seen before, making 2008 look like a walk in the park.
2. A melt-up unlike anything we've ever seen before, making 1999-2000 look like a walk in the park.

It might shock you to learn that it's the second risk that keeps asset managers awake at night because it forces them to chase risk assets at higher and higher levels knowing that downside risks are multiplying as asset values keep hitting record levels.

In other words, if we first get a melt-up before we get the next huge meltdown, it will buy central bankers some time but ultimately, it will ensure a much longer and deeper recession, and likely lead to that prolonged debt deflation scenario I keep warning of.

So maybe it's not as good as it gets for stocks, maybe there is more "juice" left to squeeze shorts and send stocks a lot higher but the bond market isn't buying any of it and neither should you. Trade stocks but be careful, when the music stops, we will experience the worst bear market ever.

The top securities regulator in Massachusetts on Monday said he has opened an investigation of MetLife Inc after the insurer revealed last week it had failed to pay pensions to potentially thousands of people.

“Retirees cannot afford to have glitches with their pension checks,” Massachusetts Secretary of the Commonwealth William Galvin said in a statement. “I want to uncover why this occurred and how MetLife is going to rectify the problem for the retirees.”

MetLife, which pledged to fully cooperate with regulators, said the standard way for finding retirees who are owed benefits is no longer sufficient.

“While it is still difficult to track everyone down, we have not been as aggressive as we could have been,” MetLife said in a statement.

“When we realized this was a significant issue, we launched an effort to do three things: figure out what happened, strengthen our processes so that we do a better job locating retirees, and promptly pay anyone we find - as we always do,” the company said. “We are now using enhanced techniques within MetLife’s retirement and income solutions business to better locate and promptly pay any group annuitant who may be entitled to benefits.”

MetLife said in a filing on Friday that it believed the group missing out on the payments represented less than 5 percent of about 600,000 people who receive benefits from the company via its retirement business. Those affected generally have average benefits of less than $150 a month, it said.

“We are deeply disappointed that we fell short of our own high standards,” MetLife said. “Our customers deserve better. We are committed to making this right for our customers. We found the issue, we self-reported it, and we are committed to doing better.”

Offloading risk isn’t on the table for every company. Insurers don’t take on obligations from underfunded plans, McDonald says. That means companies need to better fund their plans, limiting those variable-rate premiums, before they can transfer the obligations. “In the short term, these PBGC premiums are having a really significant impact,” she says. “This is in a way an expense-management exercise.”