Wednesday, July 29, 2009

Wooing the Big One?

The NYT reports on how firms wooed a U.S. agency with billions to invest:
As a New York money manager and investment banker at four Wall Street firms, Charles E. F. Millard never reached superstar status. But he was treated like one when he arrived in Washington in May 2007, to run the Pension Benefit Guaranty Corporation, the federal agency that oversees $50 billion in retirement funds.

BlackRock, one of the world’s largest money-management firms, assigned a high school classmate of Mr. Millard’s to stay in close contact with him, and it made sure to place him next to its legendary founder, Laurence D. Fink, at a charity dinner at Chelsea Piers. A top executive at Goldman Sachs frequently called and sent e-mail messages, inviting Mr. Millard out to the Mandarin Oriental and the Ritz-Carlton in Washington, even helping him hunt for his next Wall Street job.

Both firms were hoping to win contracts to manage a chunk of that $50 billion. The extensive wooing paid off when a selection committee of three, including Mr. Millard, picked BlackRock and Goldman from among 16 bidders to manage nearly $1.6 billion and to advise the agency, which Mr. Millard ran until January.

But on July 20, the agency permanently revoked the contracts with BlackRock, Goldman and JPMorgan Chase, the third winner, nullifying the process. The decision was based on questions surrounding Mr. Millard’s actions during the formal bidding process. His actions have also drawn the scrutiny of Congressional investigators and the agency’s inspector general.

An examination of thousands of pages of e-mail messages and other internal documents obtained by The New York Times shows the other side of the story: the two firms aggressively courted Mr. Millard, so extensively that they may have compromised federal contracting rules or at least violated the spirit of the law, contracting experts said. The records also illustrate the clash between Washington’s by-the-letter rules on contracting and the culture of Wall Street, where deals are often struck over expensive meals.

“Both sides should have known better,” said Steven L. Schooner, co-director of the Government Procurement Law Program at the George Washington University, who reviewed some of the material for The Times. “What happened here is wrong, stupid and probably illegal.”

BlackRock and Goldman, as well as Mr. Millard, all said that nothing improper happened either before the formal competition for the contract started last July, or while the competition, which concluded in October, was under way.

“Among the reasons that Mr. Millard was selected to head the P.B.G.C. is his understanding of the industry, his extensive background and the quality of his professional relationships,” said Stanley M. Brand, a lawyer for Mr. Millard. “He correctly separated his personal relationships from his official actions.”

A review of the documents shows that the third winner, JPMorgan Chase, had contacts with Mr. Millard before and during the competition, but did not display the same intensity as the other two.

Goldman and BlackRock saw Mr. Millard’s selection as a major business opportunity, the records show.

“This is a very big fish on the line,” one BlackRock executive wrote to another, discussing the government official.

Mr. Millard had at least seven meetings with Goldman executives in the year before the bidding started, and 163 phone contacts, the documents show. BlackRock had less frequent contact — 39 phone calls in that 12-month period. But one BlackRock executive told another that Mr. Millard had assured him in April, four months before the bidding, that he wanted to hire the company to help manage some of the money, company documents show.

“It sounds like we may have a tiger by the tail here,” one BlackRock executive wrote in an e-mail message.

The agency takes over pension programs when private companies go bankrupt. For years there was talk it might have to be bailed out by the government, and Mr. Millard, like many others, saw shifting from low-yield conservative investments like Treasury bonds to those with higher risks and higher potential returns as a way to solve the problem.

Before coming to Washington Mr. Millard had been a money manager for Prudential Securities and Lehman Brothers, a senior economic development official in New York City while Rudolph W. Giuliani was mayor, a member of the New York City Council and a Republican nominee for Congress.

Within weeks of his arrival at the agency, he told Goldman Sachs about his plans to shake up the agency’s portfolio.

“I just became head of the pension benefit guaranty corp in dc appointed by pres bush,” he wrote in a June 2007 e-mail message to John S. Weinberg, a vice chairman and a member of the family that has helped run Goldman since the 1930s. Mr. Millard told Mr. Weinberg, a longtime acquaintance, that he wanted to revamp the agency’s investment strategy.

“Is there a team at Goldman that does this and that would be interested in pursuing this business?”

“Yes, absolutely!” Mr. Weinberg wrote back.

Almost immediately, Goldman started to work informally for Mr. Millard by providing one of its top pension analysts at no charge to prepare at least six reports over the coming year, based on internal agency data, detailing possible investment strategies.

Goldman also coached Mr. Millard as he sought to sway skeptics in the Bush administration.

“Here is the sound bite we discussed in this morning’s meeting,” wrote Mark Evans, a Goldman managing director, in a January 2008 e-mail message to Mr. Millard, seven months before the formal competition would begin.

Mr. Millard consulted with other industry experts during this period, but none so much as Goldman. George Koklanaris, Mr. Millard’s chief of staff, said in retrospect that the detailed analytical work Goldman did for Mr. Millard, and the repeated contacts, might have created an appearance that Goldman had a competitive advantage. Even so, he says he believes Mr. Millard did nothing improper.

Mr. Millard’s lawyer and a Goldman spokeswoman disputed that the firm gained any advantage from this work. The spokeswoman, Andrea Raphael, said the firm had no way of knowing that Mr. Millard was giving them more attention than other prospective bidders and that it was the agency’s job to identify potential conflicts.

The most important player in BlackRock’s attempt to win the business was David Mullane, who had known Mr. Millard since the two attended the same high school. The friendship continues; they both live in Rye, N.Y., and attend the same church.

In his conversations and e-mail messages with the agency head, Mr. Mullane often mixed family and business, talking about his golf game, his vacations, their children, their church (“Great job at Mass again this week,” he wrote in one), invariably shifting into a discussion of his interest in the government work.

“Hope to see you at the Beefsteak Dinner tomorrow,” he wrote to Mr. Millard, referring to a Friday night gathering at Church of the Resurrection in Rye. “If you’re going perhaps we can catch up business for a few minutes before I thrash you in ping pong again.”

After a February meeting, months before the contract competition began, Mr. Mullane wrote his bosses: “Money in motion by February.”

There were more meetings through the winter and spring of 2008, as Mr. Millard prepared his plans. That April, there was a charity dinner at Chelsea Piers, along the Hudson River. One BlackRock executive wrote to another, “Try to get Larry seated next to Charles Millard,” referring to Mr. Fink, the company’s chairman and chief.

After the dinner, Mr. Millard wrote to Mr. Fink, “A pleasure meeting you. No need to respond. I will follow up with you briefly in future re our investment policy and with your team re other specifics.”

The e-mail messages show that Mr. Mullane, a managing director at BlackRock, understood that the firm needed to move quickly, before the presidential election.

“He is a lame duck political appointee as soon as the November election occurs,” he wrote to one BlackRock colleague last June, as the bidding was about to start. “When the new man comes in at P.B.G.C., all bets are off for us.”

As he prepared to open the competition, Mr. Millard, working with Mr. Mullane, sought to restrict the bidders to the biggest players by stipulating that the winner must have thousands of employees and a global operation, e-mail messages show. That decision cut out many boutique firms hoping to compete and gave BlackRock, Goldman and other large firms an advantage. "Neither the company nor any of its employees did anything improper or illegal," Bobbie Collins, a BlackRock spokeswoman, said.

Mr. Millard, through his lawyer, denied telling BlackRock that he wanted to select the company even before the competition started. Mr. Millard’s lawyer also said he told the agency about his friendship with Mr. Mullane. But Jeffrey Speicher, an agency spokesman, said in a written statement that Mr. Millard “did not disclose his relationship with the BlackRock executive.”

While the competition was getting started, Mr. Millard began his job hunt.

He started by contacting Mr. Weinberg of Goldman Sachs, sending him his résumé after meeting with him in New York last June.

Mr. Millard’s e-mail messages show that, while the bidding was under way last fall, he also spoke with Rick Lazio, a former House Republican who is now a senior executive at JPMorgan Chase, to discuss career options.

In both cases, spokesmen for the executives said that while Mr. Millard was at the agency, they did not take actions to help him find a new job.

The e-mail messages show that within two weeks of the selection of the winners, Mr. Millard sought help from Karen Seitz, a Goldman executive involved throughout the process, in getting interviews with prominent industry players.

“I spoke with Dennis Kass after our meeting,” Ms. Seitz wrote last November, referring to the chief executive of a $60 billion asset management firm, one of half a dozen interviews she arranged. “He would love to meet with you in N.Y.”

To date, Mr. Millard remains unemployed. His lawyer noted that Mr. Millard had honored the one-year prohibition in federal law against negotiating a job with a firm that he helped select as a contractor. While still at the agency, his lawyer said, Mr. Millard also paid his own bill whenever he dined out with industry officials, including Ms. Seitz.

But Mr. Schooner, the government contracting expert from George Washington University, said even asking for career help from a company he had just picked as a contractor raised serious questions.

“As a federal official you are not supposed to be discussing, bartering or leveraging a new job while you are involved with parties in a procurement,” he said. “It is a clear black-and-white rule.”

Senator Herb Kohl, Democrat of Wisconsin, plans to seek legislation to require more intense oversight of the agency by an expanded board.

“The whole process was flawed,” said Mr. Kohl, the chairman of the Senate Special Committee on Aging, which oversees the agency.

More intense oversight of the PBGC? It couldn't come soon enough. We also need stiffer penalties for firms and pension fund managers that routinely cross the ethical boundaries. Remember that old Greek saying, he who has honey on his fingers can't help but lick them.

Tuesday, July 28, 2009

Good News For Hedge Funds?

The Boston Globe reports that Mass. pension fund posts big loss:

Hurt by the steep decline in the stock market last summer, the Massachusetts state pension fund reported its worst year in its modern history.

The fund lost 23.6 percent, or $12.8 billion, in the fiscal year that ended June 30, according to Michael Travaglini, executive director of the Massachusetts Public Reserves Investment Management Board, which runs the state pension fund. Assets are now down to $37.8 billion.

Historically one of the top public pension funds in the country, Massachusetts is now likely to rank among the worst performers for the past year among all major funds tracked by Wilshire Associates. It is also the first time since 2002 the fund performed worse than average.

The fund's performance could spell trouble for its chairman, state Treasurer Timothy P. Cahill, as he contemplates a run for governor. Cahill dropped out of the Democratic Party earlier this month and is expected to run as an Independent in next year's election. He has increasingly criticized Governor Deval Patrick's fiscal management of the state.

But as pension board chairman, Cahill has taken an active role in the management of the fund. In 2004 Cahill pushed to invest in so-called absolute return hedge funds, which strive to make money regardless of the overall market's performance. Such investments, he argued, would limit losses during periods when the US stock market posts steep declines.

That has worked--to a degree. The state fund has considerably less of its money invested in US stocks than five years ago, and the hedge fund component of its portfolio declined much less last year than did its stock holdings. But the Massachusetts fund still had a large exposure to stocks of foreign companies--25 percent--greater than what most other public pension funds maintain. Foreign stocks performed just as poorly as US stocks last year, down 31 percent.

Meanwhile Massachusetts has lower levels of bond holdings than other public funds. That investment made money--up 4.3 percent--in the fiscal year.

"Given those weightings," Travaglini said, the state fund "will outperform during bull markets and underperform during difficult equity markets."

Travaglini said the board will re-evaluate its investment strategy at its next meeting on Aug. 5.

Some of the poor performance was attributed to failings of fund managers hired by the state agency. Four fund managers were fired within the last year including one--Austin Capital Management--that lost $12 million to convicted swindler Bernard L. Madoff. And in April, the pension fund replaced its long-time alternative funds consultant, Cliffwater of Marina del Rey, Calif., with Ennis Knupp & Associates of Chicago.

Travaglini said the fund would have lost only 20 percent if it had simply invested its money in index funds -- rather than hand-picking stocks and other investments.

So how are hedge funds doing nowadays? Bloomberg reports that hedge funds had a record rally last quarter:

Hedge funds had net inflows of $6.2 billion and returned an average 0.2 percent in June, rounding off a record three-month rally, Eurekahedge Pte said.

The advance by the Eurekahedge Hedge Fund Index, tracking more than 2,000 funds, follows 3.2 percent and 5 percent gains in April and May, respectively, and brings its 2009 advance to 9.5 percent, according to a report by the Singapore-based research firm.

Hedge fund managers are making a comeback after suffering their worst year on record in 2008, outperforming global benchmarks including the MSCI World Index, which rose 4.8 percent in the first six months. Hedge-fund assets rose for the second consecutive month in June, the first back-to-back increase in a year, bringing total assets under management to $1.33 trillion, the report said.

Gross inflows to the industry totaled $19.2 billion last month, compared with $13 billion in redemptions that were mainly from so-called funds of hedge funds, as investors sought to lower fees and optimize returns by investing directly, the report said.

Assets of funds invested in Latin America rose 1.8 percent in June from May to $44.7 billion, the biggest percentage increase among five geographical categories, on the view that markets in this region will recover along with the economies as demand for commodities increases, the report showed.

Manager allocations to Japan followed with a 1.5 percent increase to $13 billion, while those for Asia ex-Japan and North America each recorded 0.5 percent increases to $93.3 billion and $877.4 billion, respectively. Assets of funds investing in Europe were little changed at $304.4 billion, Eurekahedge said.

Event-Driven Funds

By strategy, managers of so-called event-driven funds that invest in companies such as those involved in mergers and acquisitions had the largest increase in capital, gaining 1.5 percent with inflows of $2.2 billion, as investors bet that an increase in deals will offer lucrative opportunities, Eurekahedge said. An index tracking the strategy has gained 19.1 percent in the first half of 2009, making it the best performer, the report said.

In May, hedge-fund assets increased by a net $38 billion, the report showed.

Eurekahedge’s global index slid 12 percent last year, the most since Eurekahedge began tracking data in 2000. The firm released a preliminary report last week on June performances.

Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether asset prices will rise or fall.

Finally, David Prosser of the Independent writes: At last, some good news for hedge funds:

There is good news in sight for the beleaguered hedge fund industry courtesy of our friends in the US.

Grimly aware that a European Commission crackdown on regulation of hedge funds and private equity spells disaster for the EU's predominantly London-based industry, Treasury ministers have been desperately lobbying their counterparts in Brussels for months, but their pleas have fallen on deaf ears.

Now, however, the Americans have woken up to the fact that many of their hedge funds would find it impossible to do business in the EU under proposals for regulatory reform. In recent weeks, US Treasury officials have thus been touring the EU, letting their displeasure be known.

It appears that the Americans' involvement is already paying dividends. Sweden, which holds the EU presidency, was quietly letting it be known yesterday that it will ensure some sort of compromise is brokered. The Alternative Investment Management Association, which represents the sector's interests, now thinks disaster may be averted.

That's good news for London. Hedge funds and private equity investors have been popular whipping boys in this country for too long. Before the credit crunch, the fashion was to accuse the latter of asset-stripping and profiteering. Once the crisis began, the focus moved to greedy hedge funds and dishonest short selling, though not a scrap of evidence of wrongdoing has ever been produced.

By all means dislike them if you must, but London's 450 or so hedge funds manage about £250bn and employ, directly and indirectly, 40,000 people. We simply can't afford to allow the business to go up in smoke thanks to a knee-jerk reaction from European regulators.

The real good news for hedge funds is that the markets keep grinding higher. Most hedge funds charge alpha fees for leveraged beta. Sure, they package it nicely, slap on some "risk management" and peddle it through a network of slick salespeople, but at the end of the day, it's "diguised beta".

They also got the politicians in their back pockets so I do not expect any major regulatory reforms. And while they collect 2 & 20 for their "alpha", the rest of society watches the stock market and their portfolios go up and down like a yo-yo.

The irony in all this is that people's pension contributions are feeding all this volatility. Great news for hedge funds but I am not so sure what it means for the rest of society.

Monday, July 27, 2009

Pension Poverty?

The Times reports that British pensioners are among the poorest in the EU:

Britain's pensioners have the fourth highest level of poverty in Europe, according to figures published today by the European Commission.

The over 65’s in Britain are, on average, worse off than their counterparts in Romania, Poland and France.

The research, which compared relative poverty in the 27 member states, showed nearly one in three UK over-65s were at risk of poverty - the same proportion as in Lithuania (30 per cent).

Only pensioners in Cyprus (51 per cent), Latvia (33 per cent), and Estonia (33 per cent) came out worse. The EU average was 19 per cent.

The figures came ahead of the work and pension committee's review of government efforts to tackle pensioner poverty, which is due to be published on Thursday.

Michelle Mitchell, charity director for Age Concern and Help the Aged, said the report demonstrated that many older people were being left behind.

"In a country where the richest have incomes five times higher than the poorest, older people are disproportionately bearing the burden of this inequality," she said.

Steve Webb, the Liberal Democrat Shadow Work and Pensions Secretary, blamed the Labour Party for failing to address poverty in old age. He said: “The basic state pension is simply too little to live on for the millions of pensioners who have no other income. Labour’s complex and undignified system of means-tested benefits has meant that many pensioners do not even claim the extra help that they are entitled to.

“We need a more generous, universal pension based on citizenship that would give pensioners a sense of dignity and a stable income in retirement.”

The EU study found pensioners in the Czech Republic were least likely to be living in poverty, with 5per cent below the threshold of an income of 60per cent of the national median.

Similarly, in Canada, the Calgary Herald reports that Alberta seniors' need for welfare soaring:
The number of seniors needing provincial welfare to get by has swollen by 36 per cent in a year, likely part of a troubling trend as the country's population ages.

Federal payment programs such as Canada Pension Plan, Old Age Security and Guaranteed Income Supplement make most seniors ineligible for welfare.

But a steadily growing group has been turning to the province for help in the past year.

Last month, 406 seniors were drawing financial aid from Alberta Works, 108 more than in June 2008, according to Alberta Employment numbers.

The figures are troubling, said Alberta Liberal Leader David Swann.

"It's only going to get worse, so we need to be putting in place a plan and resources . . . and the staffing to reach out to those who may be at risk."

Calgarian Ralph DeWeerd said he can't help but feel time is working against him.

A construction worker by trade, the 58-year-old was laid off last August when the economy tanked. Unable to pay the rent on his basement suite, he was forced to seek shelter at the drop-in centre. A bad hip due to a motorcycle accident in 1981 limits his mobility, and he finds it difficult to compete with the "young guys" for work.

Without some form of government aid, he worries about how he'll get by.

"My age is against me," said DeWeerd, who has already had two hip replacements.

"I'm in a no-win situation." Other aging Albertans face similar dilemmas.

Seniors who qualify for welfare generally don't get pension payments and don't have adequate savings to pay for retirement.

The savings issue has landed on the provincial and federal political agenda, in part due to the erosion of many people's RRSPs as financial markets collapsed last year.

Alberta MP Ted Menzies, the federal finance minister's point man on pensions, is chairing a provincial-federal task force examining how to get Canadians to save more for the golden years. The group, which met for the first time last week in Calgary, includes finance ministers from Alberta, Ontario, British Columbia, Manitoba and Nova Scotia.

Menzies said they plan to reconvene in October to hear from experts before submitting a report for the country's finance ministers to consider at their next meeting in December.

"We may find we have a good system," Menzies said after last week's meeting. "But if we don't, then I'm sure there will be recommendations coming out of this on how we can make sure that retirees have enough to retire on."

Statistics suggest the task force will find Canada's savings system needs reform. Most Canadians don't have company pensions to supplement their retirement savings. In Alberta, only one in three workers are offered employer-sponsored pension plans.

The rate of saving is also poor. According to a 2006 Statistics Canada review of wealth, debt and savings, nearly one-third of working Canadians had no retirement savings, while many of the rest weren't socking away enough money.

At the same time, the country's population is quickly greying. By 2031, about a quarter of Canadians will be older than 65, compared with 13 per cent in 2005, the federal statistics agency forecasts.

Sally Stuike, a spokeswoman with Alberta Employment and Immigration, said the province doesn't believe the 36 per cent increase among seniors who need provincial welfare is tied to the economic downturn that took hold last fall.

"It's been a slow and gradual increase over the last 12 months," she said, adding the growth likely reflects a societal shift.

Although not completely at fault, the economy's downward swoop makes the situation even more difficult, Swann added.

"It adds to the extra burdens that seniors have, especially those that either don't have the income to save or didn't save in the way they needed to for this time in their lives," he said.

"This is precisely where the government needs to step in."

Bill Moore-Kilgannon of Public Interest Alberta is advocating that the province adopt a poverty reduction strategy to address the plight of seniors and others who don't have enough income to pay for basic needs.

"Seniors are going to be a growing problem with respect to poverty," Moore-Kilgannon said. "The savings rates are nowhere where they need to be for the vast majority of people who are retiring."

Pension poverty has arrived. The global pension crisis will leave millions of people poor and destitute. So the next time you see some hedge fund and private equity managers raking billions, or some pension fund managers collecting millions in bonus, I want you to remember the poor and marginalized of our society. They are in dire straights and it seems like nobody is paying attention to their plight.


I received this comment for an avid reader:

Where has Menzies been in the past 3 years? Hasn't he read any of the Expert Commission reports on pensions?

Alberta MP Ted Menzies, the federal finance minister's point man on pensions, is chairing a provincial-federal task force examining how to get Canadians to save more for the golden years. The group, which met for the first time last week in Calgary, includes finance ministers from Alberta, Ontario, British Columbia, Manitoba and Nova Scotia.

Menzies said they plan to reconvene in October to hear from experts before submitting a report for the country's finance ministers to consider at their next meeting in December.

"We may find we have a good system," Menzies said after last week's meeting. "But if we don't, then I'm sure there will be recommendations coming out of this on how we can make sure that retirees have enough to retire on."

A system where 75% of the private sector workers who pay for civil servant gold plated pensions through their taxes don't have an employer pension plan doesn't sound like such a great system.

I guess he wouldn't know...

Thursday, July 23, 2009

PSP Investments Loses 23% in FY 2009

The Globe & Mail reports that federal pension plan books 22.7% loss:
The pension plan for federal government workers lost 22.7 per cent in the latest fiscal year, but paid partial bonuses to its top executives for meeting their individual objectives for the year.

The Public Sector Pension Investment Board reported Thursday it was buffeted by the financial crisis that began last year, seeing its assets fall by $5.1-billion to $33.8-billion as of March 31, 2009, down from $38.9-billion a year earlier.

The pension manager said its equity portfolio lost more than 30 per cent of its value last year, while its real estate holdings were down almost 17 per cent. PSP Investments said its bond holdings offset the losses, however, with government bonds earning a 19.4-per-cent return for the year.

“We experienced exceptionally difficult financial and economic times in Canada and around the world over the last year,” chief executive officer Gordon Fyfe said in a statement.

PSP Investments is a Crown corporation that invests pension money for the public service as well as the Royal Canadian Mounted Police, the Canadian Forces, and the Reserve Force.

The fund's annual report, released Thursday, said Mr. Fyfe's compensation totalled $1.42-million in fiscal 2009, up 11 per cent from $1.28-million last year. His pay included a $485,000 base salary, an annual bonus of $189,122, a deferred incentive plan payment of $611,100, benefits and other compensation worth $35,876, and accrued pension benefits worth $98,500.

Fund chairman Paul Cantor said that due to underperformance in 2009, executives did not receive short-term or long-term bonuses allocated for fund performance. But he said the board of directors decided to pay the portion of short-term bonuses based on achieving individual objectives.

Mr. Cantor added PSP Investments introduced a new long-term incentive plan in fiscal 2009, which is based on four-year investment performance. It is similar in structure to the four-year design at many other large pension managers.

“The deferred incentive payments in 2009 reflect the strong fund performance achieved over the four-year period from 2004 until 2007,” Mr. Cantor said in a statement in the fund's annual report.
The new incentive program means the poor performance in 2009 will continue to affect bonus levels until 2012. As well, PSP Investments said base salaries for managers were not increased for fiscal 2010.

You can read the entire FY 2009 annual report by clicking here. The results are horrible, much like other large plans, but for PSP, they are even worse because they severely underperformed their benchmark portfolio (-22.7% vs. -17.6%).

Are Pension Freezes Effective?

Nearly a third of the pension plans offered by Fortune 1,000 firms are now frozen, according to a report from Watson Wyatt.

Though the rate at which companies are freezing plans has dropped since the peak year in 2006, the 190 plans now locked down represent a 12% increase from a year ago.

Companies in industries that have been hardest hit by the economic downturn have higher freeze rates. Among them are financial services and auto industry employers, according to Watson Wyatt.

"We think it's a short-sighted move that definitely hurts employees," says Nancy Hwa, spokeswoman for the Pension Rights Center. "But it's not surprising, given the way the economy is going."

Pension freezes are a relatively new corporate development."If a company is literally fighting for its survival, it's more likely to pull out all stops," says Alan Glickstein,
senior retirement consultant at Watson Wyatt. "And that might include freezing a
plan because they can pick up some savings."

The percentage of pension plan freezes has steadily risen since 2004, when only 7.1% of Fortune 1,000 firms had taken that step. But the largest percentage increase occurred in 2006 and not during the current recession.

"The biggest surprise is that we haven't seen a huge surge," Glickstein says.The rate of freezes might be slowing as companies realize that the freeze does not provide much of a reduction in retirement costs, the report says.

Although there are different types of pension freezes, companies generally close the plan to new hires. And they bar existing employees from earning any more benefits.
But by freezing the plan, employers do not cut or slash the benefits that already have been earned. And after freezing a pension, companies often increase their 401(k) matching contributions or take other steps to partially offset that pension reductions, Glickstein says.

Companies also have found that pension freezes have had an insignificant or negative impact on stock prices, according to a separate Watson Wyatt report.

It's unclear if companies that have frozen plans will eventually unfreeze them. So far, that has been rare.

As I have mentioned before, companies that maintain their pension plans will attract and maintain good employees and likely enhance productivity. Unfortunately, the shortsighted attempt to cut costs will prove ineffective when they freeze pension plans.

Wednesday, July 22, 2009

California's $100 Billion Whooping

As if California didn't have enough to deal with its budget crisis, now the FT reports that the two largest pension funds in the US have recorded steep losses following the turmoil in stock markets, with the value of their combined portfolios shrinking by almost $100bn:

The California Public Employees’ Retirement System (Calpers) and the California State Teachers’ Retirement System (Calstrs) were hit by the real estate slowdown and the slump in global equities. Calpers said the fall in the value of its assets was the most severe in its history.

“This result is not a surprise; it is about what we expected, given the collapse of markets across the globe,” said Joe Dear, investment chief at Calpers.

The value of Calpers assets fell 23.4 per cent for the year to June 30, raising concerns that state employees and local governments might have to increase their ontributions to cover the shortfall.

But Calpers presented a bullish view. “The system has more than enough cash through contributions and income from investments to meet our present liabilities, so we are in a good position to ride out the current downturn and come out stronger,” said Mr Dear.

The market value of Calpers assets was $180.9bn (£110bn) on June 30, down from $237.1bn on the same date the previous year. The value of the portfolio had fallen to $160bn in March of this year but rebounded by $20bn by the end of June thanks to a partial recovery in equity markets.

Both organisations shifted a portion of their portfolios out of equities and into fixed income and real estate during the year to take advantage of lower prices.

Calpers also said it was “realigning relationships with hedge funds and private equity partners”. This would lead to “reduced fees, better alignment of interests, and more mutually beneficial long-term relationships”.

The value of Calpers real estate and private equity investments fell by 35.8 per cent and 31.4 per cent respectively in the year to June 30.

Calstrs was hit by the same macro-economic factors, with the value of its assets falling from $162.2bn to $118.8bn in the 12 months to June 30.

The organisation wrote down the value of its property holdings rather than spread the writedown over several years, which saw the value of its real estate portfolio shrink by 43 per cent.

“We’re now in a position to turn round our real estate returns,” said Christopher Ailman, Calstrs chief investment officer, adding the organisation planned to acquire “high-quality assets from distressed sellers at attractive deep discounts”.

The steep annual decline could exacerbate Calstrs long-term funding gap of $22.5bn. “Our members’ benefits are secure, yet the current economic picture clearly illustrates investments alone cannot meet pension obligations in the long term,” said Jack Ehnes, Calstrs chief executive.

He added: “We are not in a crisis to resolve the contribution gap, but the sooner a solution is found, the lower the cost.”

The only way California is going to solve the funding gap is by increasing contribution rates, cutting benefits, increasing the retirement age and by increasing taxes. It's a bitter pill to swallow but given the magnitude of these losses, they don't really have a choice.

I also heard another large Canadian pension fund, PSP Investments, deposited their FY2009 report to the Treasury Board. Parliament will discussing it today for approval. It will be interesting to see their losses in public and private markets.

Tuesday, July 21, 2009

Who Spiked the Pension?

The WSJ reports that three days before Pete Nowicki announced he was retiring, fire department trustees agreed to increase his salary in a practice called “pension spiking.” The resulting bump in his annual pension has angered colleagues and residents in this Northern California area. (See related article.)

Andrew Ross of the San Francisco Chronicle asks, Who Spiked the Pension?:

Big five-column photo of Moraga-Orinda fire Chief Pete Nowicki in Monday's Wall Street Journal - though it might not be the kind of celebrity he welcomes. The 51-year-old retiree is fast becoming the poster child for "pension spiking," that is, making an already generous pension even larger via a pay raise granted just before retirement. Nowicki's boost, as Contra Costa Times columnist Dan Borenstein has reported, came in the form of cashed-in vacation time and other compensation. The raise increased his annual pension from $185,000 to $241,000. Local outrage and vows to reform the system followed the revelation's wake.

As Nowicki rightly pointed out, "I did not negotiate these rules." Public sector pension plans allow for such extravagance. Neither is he alone. The retired chief of the San Ramon Valley Fire Protection District, as Borenstein also noted, turned his $221,000 annual salary into a yearly pension starting at $284,000. Meanwhile, as the Moraga-Orinda Fire District Board of Directors looks for a new fire chief, Nowicki's working as a temporary fill-in. At $14,700 a month. (Plus pension.)

This is just another example of pensions apartheid. If you think that is bad, you should check out the accrued pension benefits of overpaid senior public pension fund managers that are delivering mediocre performances. You'd need an army to put out that fire.

Speaking about putting out fires, check out the Financial Ninja's post (HT Displaced EMA): Dark Pools, Goldman Front Running. If true, "Goldman's collar" is about to get a lot tighter.

Monday, July 20, 2009

PBGC Takes Over Nortel's Pension Plan

Nortel Networks pensioners are calling for action by governments at all levels after a U.S. government agency seized control of the U.S. Nortel pension plan:

They say they're worried that the U.S. Pension Benefit Guaranty Corp. will try to get Canadian assets of the insolvent company to cover a $514-million deficit in the U.S. pension plan.

With the Nortel Networks pension plan in more trouble than previously believed, the U.S. government stepped in Friday to take control of the U.S. pension plan and guarantee the pensions of 23,000 employees and retirees in that country.

Canadian Nortel pensioners fear the U.S. agency, a quasi-government agency backed by the U.S. government, will act quickly to try to protect U.S. interests. It sits on the official creditors committee in the Nortel bankruptcy action and has lots of experience taking over pension plans after a string of airline, steel and other industrial bankruptcies.

For Nortel U.S. employees and pensioners, the takeover is good news because it guarantees that pensions of as much as $54,000 US annually will be paid from the Pension Benefit Guaranty Corp. fund.

But for more than 20,000 Canadian Nortel pensioners, employees and people with rights to future pensions, the future is much bleaker. The U.S. action means their hopes that their pension plan will survive the Nortel bankruptcy are effectively dead. Only Ontario guarantees pensions of up to $12,000 annually and only for work that was performed in the province.

The estimated 40% of Nortel employees who worked in Montreal, Calgary and other provinces have no guarantees.

This is shaping up to be a very interesting case. Forget trade wars, pension wars might be the next big international dispute.

Sunday, July 19, 2009

Paradise Found?

I spent the weekend with friends and family enjoying the spectacular beaches and sunsets of southern Crete. We stayed at the Pegasus Resort, just outside Agia Paraskevi. It's a family-run hotel with everything you need. If you go there, tell Kyriakos and Marina that Leonidas from Montreal suggested the place. I was blown away by their genuine hospitality and Marina's food is to die for (you have to order the carrot salad, the tabbouleh, the stuffed vine leaves, more commonly known as dolmades, and their delicious lamb chops). Don't forget to bring shampoo and body wash as this is an excellent no frills hotel literally in the middle of nowhere.

Southern Crete is surreal. This particular place isn't easy to get to from Iraklio; it is much easier to go through Rethymno and then follow the signs for the village of Spili and then Agia Paraskevi. Once you get there, you will understand why I call this place Paradise. There are hardly any tourists (except for the true die-hard tourists who truly love Greece's raw beauty), it is still underdeveloped and the view and the beaches are breathtaking. I have been to incredible places in Greece, but southern Crete is unbelievable. Once you swim at Triopetra and enjoy the sunset there, you will feel totally detached from the electronic world. Bring an umbrella, a hat, lots of sun screen, sandals so you can walk on the hot sand and a good book. It gets so hot in southern Crete that the locals say the sun can melt rocks (it is brutal when the winds die down).

There is no television, no internet, but your cell phone will work if you need to be reached. Once there, you will be so overwhelmed by the beauty of the place that all you need is to surrender yourself to this gift of nature.

Let the rich and famous go to Elounda, Crete. I found my new Paradise and hopefully it will remain underdeveloped for a very long time so I can enjoy it for a few more years.

Finally, I came across another commercial on Greek television that made me laugh so hard, I had to post it here. For us guys, paradise comes in all shapes and sizes. We enjoy the simple things in life. A nice beach, a great book, good food, good company and cold beer.

Friday, July 17, 2009

Pledging Commercial Real Estate as Pension Contributions?

From CalPERS' lawsuit against credit agencies, we go to another more interesting lawsuit. The WSJ reports that Delphi retirees are suing over a plan to end pensions:

A group of retirees of Delphi Corp. (DPHIQ) filed suit Thursday, saying it needs an independent administrator to help stop the bankrupt auto supplier from terminating its pension plan for salaried employees and transferring the obligation to the Pension Benefit Guaranty Corp.

In a federal lawsuit filed in Michigan, the Delphi Salaried Retiree Association asked the court to replace its current trustees, who are Delphi executives, and appoint a new plan administrator "loyal only to us."

The suit also seeks an immediate injunction prohibiting the current plan administrator from negotiating a termination with the PBGC until this suit is concluded.

"We have serious concerns about whether Delphi executives can protect our pension rights while at the same time serving Delphi's shareholders and creditors," the retiree group said.

The group said it was not notified before Delphi announced its PBGC plan June 1.

Separately, the association filed an objection in the Delphi bankruptcy case to a provision stating the pension plan, by agreement, shall be terminated and transferred to the PBGC.

On Monday, General Motors Co. moved closer to buying its former parts unit Delphi when a bankruptcy judge said GM could move forward with a plan that will allow the auto maker to team up with a private-equity firm to buy Delphi and take it out of bankruptcy.

The deal, approved by Judge Robert Gerber of the U.S. Bankruptcy Court in Manhattan, is designed to ensure GM a steady supply of parts and allow Delphi to exit bankruptcy after nearly four years in Chapter 11.

But another New York bankruptcy judge, who is overseeing Delphi's bankruptcy case, also needs to sign off on the agreement. That hearing is scheduled for next week.

Meanwhile, Delphi's lenders said Thursday that they will bid for the auto-parts supplier this week and try to defeat the sale to GM and the private-equity firm.

One condition of the GM agreement is Delphi will not be on the hook for unfunded pensions for its hourly workers, an amount that totals about $3.2 billion. GM, Delphi and the government's pension watchdog are negotiating an agreement by which GM would assume some or all of those pension costs, court document show.

Delphi, which was spun off from GM in 1999 and filed for bankruptcy in 2005, has seen its value plunge amid falling auto sales and has struggled for more than a year to pull together the financing it needs to exit bankruptcy.

Delphi officials were not immediately available for comment.

It is worth watching developments out of this Delphi lawsuit very carefully. I have to agree with the Delphi Salaried Retiree Association that they need to find a new plan administrator "loyal to them", but they are going to have a tough battle proving this in court.

In another interesting development, CoStar Group reports about a deal where commercial real estate was pledged in lieu of cash for pension contributions:

YRC Worldwide Inc., the financially troubled Overland Park, KS, trucking company, completed a pension contribution deferral agreement with the Teamsters Union to defer the payment of $94 million of contributions due last month.

In exchange, YRC has pledged real property so that the union has first priority security interest in the property. The real estate is located throughout the United States and Mexico.

YRC Inc., USF Holland Inc., USF Reddaway Inc. and New Penn Motor Express, Inc., made the deal with the Central States, Southeast and Southwest Areas Pension Fund with Wilmington Trust Co., as agent. The Central States Pension Fund is the largest of the Company's International Brotherhood of Teamsters ("IBT") multiemployer defined benefit pension funds, representing approximately 58% of the company's pension funding obligations.

The initial agreement covered $83 million in pension contributions. Since the initial agreement, seven additional union funds have joined as participants in the same agreement for a deferral of an additional $11 million.

If YRC were to default on cash contributions, the union funds would have the right to foreclosure on the pledged properties.

Unions better be careful accepting pledges of commercial real estate in lieu of cash as pension contributions. Forbes recently interviewed the world's best real estate investor, Tom Barrack of Colony Capital, who said he expects a refinancing crunch over the next few years to cause misery:

I quote the following from Mr. Barrack (but read the entire article):
"It's bad and it's getting worse at the moment. The $700 billion commercial mortgage-backed securities (CMBS) market still has no new money for buyers or refinancing. About a third of that is due at the end of 2010 and 2011 and the majority between 2010 and 2012. So you have $750 billion in refinancing needed over the next 24 months and you don't have one lender."
On that cheerful note, I am off to the southern part of Rethymno, Crete to enjoy a weekend of tranquility and reading my books. I am seriously wondering whether or not to return to Montreal where I hear the weather has been miserable this summer.

Thursday, July 16, 2009

Is CalPERS Passing the Buck?

The Independent reports that CalPERS is now suing rating agencies over $1 billion losses:

Calpers, the California state employees' pension fund and one of the most powerful fund managers in the US, is suing the three main credit rating agencies, saying they were negligent when they gave gold-plated ratings to mortgage derivatives that have since turned toxic.

The lawsuit adds to the growing pressure on the agencies – Standard & Poor's, Moody's and Fitch – over their role in inflating the credit bubble that turned spectacularly to bust.

Calpers claims that it lost around $1bn on securities that the agencies had said were as safe as government bonds.

The computer models used by the rating agencies to judge the creditworthiness of mortgage derivatives were "seriously flawed in conception and incompetently applied", the Calpers lawsuit alleges.

The pension fund invested $1.3bn in bonds issued by three structured investment vehicles (SIVs), specially-created investment companies whose assets included mortgage derivatives and other repackaged loans. All the bonds were given the gold-plated AAA credit rating, yet all three SIVs collapsed amid the market turmoil of 2007 and 2008.

The agencies "gave the SIVs purchased by Calpers their highest credit ratings, and by doing so made negligent misrepresentation," the fund's lawsuit says. "The credit ratings on the three SIVs ultimately proved to be wildly inaccurate and unreasonably high."

The SIVs in question include the finance industry's oldest and largest such vehicle, Sigma Finance, which was set up by London-based hedge fund Gordian Knot. The founders of Gordian Knot, Stephen Partridge-Hicks and Nick Sossidis, had been pioneers of structured finance while at Citibank in the UK in the Eighties.

The other two named in the lawsuit are Stanfield Victoria Funding, run by a New York hedge fund, and Cheyne Finance, run by London-based Cheyne Capital

Calpers is not alleging wrongdoing by the SIVs themselves, rather that the rating agencies were riddled with conflicts of interest because of their close involvement in the way the SIVs were structured. SIV managers designed their vehicles precisely so that the top tranche of bonds issued would get a AAA rating.

"SIVs were opaque, and the rating agencies were the only entities other than those running the SIV with knowledge of what assets a SIV actually purchased," Calpers said. "The rating agencies were indispensable players in the structuring and issuance of SIV debt, which they subsequently rated for huge fees paid by the issuers – 'rating their own work', according to a recent Securities and Exchange Commission report."

Calpers, which manages $178bn of investments on behalf of 1.6 million public employees and their families, is the latest in a long line of investors to have launched lawsuits against the three main agencies. Standard & Poor's said yesterday that the suit was without merit and it would defend it vigorously.

The credit rating agencies – in common with many market participants – fatally misunderstood the effect of a housing market downturn on the many of trillions of dollars of derivatives whose value derived from the underlying mortgages. Many of these were "sub-prime" loans to borrowers with poor or incomplete credit histories, which began defaulting in unexpectedly high numbers in 2007.

Policymakers are examining ways to reduce conflicts of interest in the credit rating industry, and to help investors to be less reliant on ratings when they choose which bonds to buy.

While the lawsuits may have merit, I personally think the large pension funds are wasting their time, enriching corporate lawyers. It's easy to blame the credit rating agencies - they were incompetent and riddled with conflicts of interests - but ultimately the pension funds failed in their fiduciary responsibility to question all investments as well as the ratings that the credit agencies slapped on this structured garbage.

My advice to pension funds is to take your losses, trust none of the credit rating agencies, and focus on the future. The Sceptical Market Observer wrote an interesting comment on alternative energy shooting up to the sky.

Readers of my blog know that I am a huge proponent of solar energy and I am deeply invested in the sector. There are other, less volatile ways to play solars. I was impressed with the good news that came out of Intel (INTC) yesterday and I like Applied Materials (AMAT) because they are a big player in the solar sector. Another way to play semis is just to buy the ML Semiconductor Holders ETF (SMH). Inventories are so low that any pick-up in demand will translate into better earnings.

Let me end by stating again that I would be buying any dips in the market. I think we will see a lot more positive earnings surprises ahead and the big funds are accumulating shares in order not to underperform the overall market.

Wednesday, July 15, 2009

The Elephant in the Room?

The Associated Press reports that the funding shortfall faced by the UK's defined benefit pension schemes broke back through the £200 billion barrier during June:

The deficit of the 7,400 defined benefit schemes, including final salary pensions, widened to £200.1 billion during the month, after dipping below the £200 billion mark for one month in May.

The current shortfall represents a dramatic turnaround from the collective £13 billion surplus the schemes had in June last year, according to pensions safety net the Pension Protection Fund.

Pension schemes have faced a double whammy of falling asset values and rising liabilities during the past year. The cost of their liabilities to members has soared by 21% during the past 12 months due to lower gilt yields. At the same time, falling equity markets have slashed the value of the schemes' assets by 5.5%.

A total of 6,461 pension schemes now face a funding shortfall, representing 88% of all defined benefit schemes. The ongoing funding problems faced by many pension schemes is expected to lead to an increasing trend among companies to close their final salary pensions to existing staff, meaning they can no longer build up further benefits in them.

The majority of companies have already closed these schemes to new members,
and a recent report carried out by PricewaterhouseCoopers showed that 16% of
companies have also frozen their schemes to existing ones.

A further 42% of employers said they planned to close their final salary schemes to future accruals in the near future, while 32% said they were considering doing so.

Professional Pensions reveals the exact figures of the widening U.K. pension crisis:

The aggregate funding position - total assets minus total liabilities - of defined benefit schemes has worsened during the last month, the Pension Protection Fund says.

The lifeboat fund said its PPF7800 index showed the aggregate deficit of UK schemes has grown to £200.1bn at the end of June from £179.3bn at the end of May.

The PPF7800 index showed a surplus of £13bn at the end of June last year.

The PPF estimated the total deficit of schemes in deficit in June 2009 has worsened to £215.8bn from £196.8bn at the end of May.

In June 2008, the aggregate deficit of all schemes in deficit stood at £60.3bn. The total surpluses of schemes in surplus also worsened. It fell to £15.7bn from £17.5bn at the end of May 2009. In June 2008, the total surplus of all schemes in surplus stood at £73.3bn.

Alex Brummer writes this comment in the Daily Mail about a ballooning pensions crisis:

The rush out of defined-benefit pension schemes in recent months has become all too common. Britain's richest company BP has closed its scheme, regarded as one of the most generous, to new members. And Barclays, seeking to conserve cash in a hostile climate for banking, has taken all but a handful of top executives out of its final salary scheme.

Elsewhere at BT and British Airways the pension-fund deficit has become the elephant in the room. BT may yet face delicate negotiations with the Pensions Regulator on its future obligations later this year as it completes its triennial actuarial valuation.

Just how bad life has become for defined-benefit schemes, which have more members than any others in the UK, isevident from the Pension Regulator's annual report. It notes a sharp deterioration in the health of defined-benefit schemes.

At the end of March 2007, after a strong run for financial markets and efforts by companies to fill gaps, the surplus in defined benefit schemes reached £74.2billion. As the credit crunch drove down markets, the surplus was turned into a modest £5.1billion deficit by the end of March 2008, which ballooned to a £242billion shortfall by this March. It has now narrowed to £200billion. Clearly, the end of the bull market and the sharp decline in equity prices played its part in this.

Other factors have been increased mortality and the higher costs of running pension funds, with healthy retirement schemes now required to bail out of those of failed companies. Except in a few brave companies, final-salary pensions look as dead as a dodo for new employees. What's worse, in the case of some quoted corporations, they could threaten dividend payouts and returns to investors as companies struggle to come to terms with their liabilities.

Given the deterioration in defined-benefit schemes, it is understandable that employers' group the CBI is among those campaigning for the government sector to face up to its pension obligations. Most recent estimates suggest a shortfall of £750billion in publicsector schemes. However, that may well be an underestimate.

But with private sector employers struggling under the weight of deficits, this is a problem that is not going to go away. It may have the surprising side-effect of rendering many quoted companies bid proof. But it is a defence that they would rather not have.

So are pension deficits the elephant in the room? As I have stated before, pension deficits will be the major global public policy issue of the next decade. That's why monetary authorities are desperately trying to reflate the global economy and avoid debt deflation at all costs.

The global pensions crisis will hit many hard working people in both the private and public sector. The latter are not immune to cuts in benefits and increased contribution rates. The only people laughing all the way to the bank are overpaid pension fund managers delivering mediocre results and ex-CEOs like Rick Wagoner.

CNN reports that the former General Motors CEO will receive $8.5 million over the next five years -- a reduction of about $12 million in his retirement package. I got a beter idea. Why doesn't Mr. Wagoner do the honorable thing and give his pension benefits to GM's underfunded pension fund?

Then again, honor is a rare commodity these days when everyone is looking to cut corners and profit on the backs of an ever restless working class wondering how they will safely retire without losing their dignity.

Tuesday, July 14, 2009

Chooching Pensions Funds?

The NYT reports that President Obama's chief auto adviser, Steven Rattner, has stepped down:

Steven Rattner is quitting his post as President Obama’s chief adviser on the troubled automobile industry at a time when an investigation into his former Wall Street firm’s role in a scandal involving public pension funds has intensified.

Mr. Rattner, who has won plaudits for directing the rapid restructuring of General Motors and Chrysler, has been under a cloud since shortly after arriving in Washington in late February after it was disclosed that his firm, the Quadrangle Group, made payments to middlemen that helped it win state pension business.

It is unclear whether Mr. Rattner’s departure is directly connected to the inquiry, or whether he felt that it was time to leave because Chrysler and G.M. effectively had emerged from bankruptcy. A person who has worked with him in Washington said he understood that Mr. Rattner had decided to leave because his role on the task force had come to its natural end. Mr. Rattner could not be reached for comment. A spokesman for Quadrangle declined to comment.

An investigation by New York Attorney General Andrew M. Cuomo has picked up in recent weeks, according to people briefed on the matter who did not want to be identified for fear of jeopardizing the inquiry. Quadrangle faces potential civil charges and is said to be eager to resolve the matter, according to these people, who said that Mr. Rattner has separate counsel from Quadrangle, and that discussions have accelerated among the various parties recently.

Several other firms, including the Carlyle Group, a private equity firm, have paid fines and agreed to change their practices as a result of payments they made to get pension business.

A fine against Quadrangle could make it difficult for Mr. Rattner to remain in a position of authority in Washington, given his role in the matter. Mr. Rattner, according to people close to the investigation, arranged for his investment firm to pay $1.1 million to an agent who helped Quadrangle obtain New York pension business. The agent who received most of that money has been indicted and accused of selling access to the pension fund, but neither Mr. Rattner nor Quadrangle is expected to face criminal charges, according to people close to the matter. The Securities and
Exchange Commission is also investigating pension fund abuses.

The investigations in Quadrangle have raised questions about the political ambitions of Mr. Rattner. A major Democratic Party contributor, he backed Senator Hillary Rodham Clinton’s presidential campaign, and some speculated that he would have been interested in a position in a Clinton administration, possibly as Treasury Secretary. His wife, Maureen White, was Mrs. Clinton’s finance co-chairwoman. For years, Mr. Rattner has cultivated a reputation as a major player in New York’s financial, political and charity circles. After working as a reporter for The New York Times, he became an investment banker, doing deals in the media and communications businesses for the likes of Lehman Brothers, Morgan Stanley and Lazard before co-founding Quadrangle in 2000.

Mr. Cuomo has been conducting a broad investigation of pension fund “pay-to-play” practices — allegations that investment firms had to pay politically connected middlemen to get pension funds to manage. Fees for managing pension funds can be very lucrative. While occupying a legal gray area, payments to intermediaries can be illegal if they amount to bribes or kickbacks made under the guise of being legitimate payments. In cases described in court filings, people who received payments for acting as intermediaries did no actual work, instead appearing simply to be collecting

The attorney general’s stated goal is to change industry practices to prevent futures abuses, and win fines for past violations. Carlyle, which is among the biggest and most politically connected private equity firms and paid a $20 million fine, has agreed to stop using intermediaries, known as placement agents, to win investment business from public pension funds. It also agreed to halt campaign contributions to public officials who oversee pension funds. Riverstone Holdings, another firm caught up in the case, paid a $30 million settlement last month.

In a statement announcing Mr. Rattner’s departure, the Obama administration made no mention of the pension scandal inquiry, but said Ron Bloom will take over the leadership of the task force.

In the past, the president has said he has full confidence in Mr. Rattner. Treasury Secretary Timothy F. Geithner praised his work turning around G.M. and Chrysler. The two carmakers completed their restructuring plans well ahead of schedule, taking little more than a month each.

“We are extremely grateful to Steve for his efforts in helping to strengthen G.M. and Chrysler, recapitalize GMAC, and support the American auto industry,” Mr. Geithner said. “I hope that he takes another opportunity to bring his unique skills to government service in the future.”

Investigators have been particularly focused on investment executives who arranged for payments to be made to further the production of “Chooch,” a low-budget movie produced by the brother of David J. Loglisci, who was the chief investment officer of the New York State pension fund under Alan G. Hevesi, the former state comptroller. Investigators believe a number of executives, including Mr. Rattner, gave assistance to “Chooch” to win pension fund business.

Hey, at least Mr. Rattner wasn't appointed a pensions czar! I know of many rats (no pun intended) in the pension industry who I suspect took kickbacks and used fraudulent accounting to "juice up" their returns. There is an old Greek saying, "he who has honey on his fingers, can't help licking them."

Monday, July 13, 2009

Another Comment on Bonuses and Benchmarks

A former colleaugue of mine, Keith Porter, posted an excellent entry on Luc Vallée's blog on bonuses and benchmarks:

I would like to pick up some of the themes Leo Kolivakis has been pursuing on Pension Pulse about bonuses in the industry.

Let me start with a disclaimer. I am one of the people whose bonus was cancelled by the Caisse earlier this year.

But I want to start before that, and address Leo’s point about benchmarks.

Firstly, it is axiomatic that if you are going to “pay-for-performance” you must know what you are paying for, and that you must pay a reasonable amount.

As Luc Vallée has pointed out in the past, if Warren Buffet had charged 2&20 to run Berkshire Hathaway, the shares would be worth only a small fraction of what they are today. Instead, Mr. Buffet has made himself fabulously wealthy, and many others along side him, by being “reasonable” in his compensation.

I do not think anyone can say that an industry standard of 2&20 is reasonable; for a start, it looks remarkably like a cartel rather than free-market competition. Secondly, what exactly are you paying for?

A couple of years ago, I was talking to a colleague who dealt with Hedge Funds, and he told me a story of one of his external managers whom he had just sacked for bad performance. The ex-manager had been polite, as he could not deny how poor his performance had been, and, ever the sales man, promised that things would recover and that he would keep capacity open for my colleague to return. Yet, when my colleague suggested that the ex-manager cut his fees to reflect the poor performance, the ex-manager became positively abusive; curse my colleague for his unprofessional behaviour, he would no longer keep capacity open for him, and basically “Don’t darken my door-step again!”

The supposed “High-Water Mark” has proven to be a myth. It is an open secret/ joke that most funds that have to make up the lost ground either close down, only to reopen under another guise, or, more brazenly, get the clients to forgo the requirement “to keep the manager motivated”.

In the public markets where I get to play, things are not so easy to game as there are independent providers of indices, and the pricing is on a daily and transparent basis.

Having said that, there are attempts to play with the system, and I think it sheds an alternative light on some of Leo's complaints. Leo assumes that self-enrichment is the sole driving factor, but I believe ego is also a major factor; we fund managers are not exactly a self-effacing bunch.

A couple of years ago, someone in the C-suite decided that they would modify my group’s index. The idea was passed around all our external managers, and the response was universal condemnation; apparently it was a well know statistical artifact.

This message did not deter our hero. He insisted that my team would carry out his plan and prove the Nay-Sayers wrong. I, my boss, and my boss’s boss, all traipsed up to the C-Suite to make our views known. We tried everything to no avail. It was clear that he was not interested in anyone else’s opinion.

My bosses pointed out that he was artificially transferring performance from my team to his, transferring bonuses in the same direction, and thus putting my whole team at risk – we were considered a strategic asset at that time. Irrelevant.

And then came the zinger. At his level, he had to be seen to be publishing research that advanced industry understanding. All the other great leaders of pension funds had done the same (I even think Leo’s “friend”, Mr. Lamoureux's name got included in the list), and his credibility rested upon it!

His ego overcame all reason, my team fell apart, which in turn cost the clients tens of millions of dollars more than the theoretical gain from his little project.

Oh, and his name is now mud.

Now, to a thornier question, was the Caisse right to void all bonuses this year? No.

I agree the results were appalling, and I am personally embarrassed to be associated with them, but some people did deserve their bonuses.

Hidden within the debacle were many managers who produced excellent results – I was not one (with 150% turnover in staff, I defy anyone to get good results). Why should they be punished? If they met their targets, they deserve the rewards; frankly, if they managed to achieve their targets in last year’s market, they deserve an even bigger bonus!

One of the classic complaints against fund managers is that we are too short-term in our thinking, and yet cancelling a 5 year bonus because of 1 (very) bad year only reinforces that tendency. Don’t get me wrong, I am not trying to underplay those bad results. They would have reduced this year’s calculation dramatically, and would have fed through the bonus system for years. Now, the whole system will have to be reset to exclude them, probably at a higher level than previously – see my complaint about “High Water Marks" above. Would you trust an employer that arbitrarily reneges on paying you?

If the Caisse has any hope of even partially making up the losses, they are going to need the very people whose bonuses they have just negated. Leo has mentioned more than once the problems the Caisse has had in attracting and retaining qualified staff, whilst my friends still there tell me that there has been an unusual pick up in dentists appointments, smart suits taken out of the wardrobe, and hair being kept unusually well groomed….

The money spent on new risk managers and systems is long overdue, but is very much shutting the door after the horse has bolted. The Caisse has abandoned its strategic advantage in International Equities just as other Canadian funds start to play catch up. When the Caisse decides to get back into this area, probably after they shoot themselves in the foot a couple more times, what credibility will they have when they try and attract in the necessary talent?

When you are about to retire on a government funded, index linked, final salary pension, it is easy to make simplistic populist decisions, but the Caisse and Quebec do not need the simplistic, they need good. Sadly, they are becoming as rare as hen’s teeth.
I will try to keep my comments brief. First, every single public pension plan should publicly disclose their employee turnover rates for each fiscal year. PERIOD. One of the key gauges of an excellent organization is that they are able to attract and retain great employees.

When I was "let go" from the pension funds I worked with, I saw a lot of talented individuals also get sacked on flimsy grounds. If you fight them, the pension bullies try to intimidate you and tell you stuff like "you'll never work in this industry again" and in most cases they buy your silence. In my case, they managed to piss me off so much that I decided to start blogging about all the nonsense going around at public pension funds.

Again, the pension bullies tried everything in their power to intimidate me. I ignored their lawyers' letters which they sent me early in the morning by bailiff, their threats and other sneaky and despicable tactics they used to try to shut me up.

When I started informing labor unions and parliamentarians in Canada about all these pension shenanigans, they wisely backed off. One thing about pension bullies: they are cowards who hide behind their high priced lawyers (which are paid for by pension contributions!!!). If you know you are right, stick to your guns and expose them for who they are.

As for hedge funds and their exhorbitant fees, this is not a simple issue. On the one hand, I believe in paying for true alpha. The problem is that most hedge funds offer disguised beta and most pension funds have ill-trained staff to recognize this.

The worst abuses happen in Long/Short equity strategies where fund managers are typically long small cap stocks and short large cap stocks. Big deal, you can easily replicate 95% of all L/S equity hedge fund strategies using a few futures contracts for a lot less and with zero operational risk (full transparency and full control). The same can be said about most other hedge fund strategies. The trick is to have someone competent informing you about replicating these strategies (not just a some math geek with a PhD but someone who has actually traded futures and knows these contracts inside out).

The problem with Long only funds is that they also charge fees and the bulk of these funds under-perform the markets over one, two, three or five years. Why pay some portfolio managers fees for beta?!?!? Why buy mutual funds when they under-perform low cost exchange traded funds (ETFs)?!? It's also ridiculous to pay someone huge bonuses because they beat the market but still lost billions in a bad year.

My biggest disagreement with the comment above is that public pension funds should dole out hefty bonuses when they experience huge losses. Maybe they should pay out bonuses to individual analysts and portfolio managers who performed well in a terrible year, but no bonuses whatsoever should be going out to senior managers. The Canadian "pension mafia" has already gotten away with murder. Lots of good people are still looking for work while some pension fat cats arrogantly justify their outrageous compensation packages.

Sunday, July 12, 2009

Mayhem in Maranello?

They got some great commercials on Greek television. Above is one of my fasvorites featuring the super Audi R8. Make sure you also see the video Yves Smith posted on Naked Capitalism, "The Fed Under Fire" as well as the Financial Ninja's video, A Complete Fleecing of the Sheeple. Two must watch videos.

Friday, July 10, 2009

Jersey's Jitters: An Omen For Public Plans?

From Big Blue's pension blues, we go to public sector pension blues. Bloomberg reports that New Jersey's pension asset value dropped 19% last fiscal year:

New Jersey’s pension assets fell 19 percent during the fiscal year that ended June 30, the board overseeing the funds said.

The decline in asset value, to $63 billion on June 30 from $78.2 billion a year earlier, adds stress to a retirement account that was underfunded by about $34 billion at the start of the fiscal year. The fund covers about $6 billion in benefit payments each year.

“Tough year,” William Clark, director of the Division of Investment, told members of the State Investment Council today. Clark said the losses are not as severe as those suffered by other public pension funds. “At the end of the day, our numbers will come out at the top of the range for public funds,” he said.

Actuaries who calculate the health of the fund each year assume the state’s investments will earn 8.25 percent annually. Taxpayers eventually are required to make up any difference between actual earnings and that assumed rate. In the fiscal year that ended June 30, the investments posted a negative return of 14 percent, Clark said.

Last year was the second in a row that the fund’s assets declined in value. The fund’s losses came even after gains since February, when the value reached a low of $56.4

The investment losses are compounded by a decline in pension contributions by the state and local governments.

Governor Jon Corzine, grappling with a growing budget deficit, cut pension payments to $263 million last fiscal year and plans to contribute about $150 million this year.
Actuaries said the state needed to contribute $4.7 billion over those two years to keep pace with the funds’ rising expenses.

In addition, the state this year allowed local governments to postpone up to $584 million in payments they were scheduled to make into the fund in April.

As you can see, the health of public plans isn't any better than that of private plans. The only difference is that taxpayers are on the hook for public plans.

Moreover, New Jersey isn't the only one with that ridiculous 8.25% required actuarial return. Governor Corzine, an ex-Goldman Sachs alumni, knows that in a deflationary world such rosy projections are pure pipe dreams.

Are Jersey's jitters an omen for public plans? You bet they are. Governments around the world are grappling with seriously underfunded public and private pension plans and there are no real solutions to deal with global pension tension.

As I write, there is a mini heat wave going on in Greece, but I am more concerned with the rising temperature of the pension pandemic. Oh well, back to swimming, tanning, eating amazing Cretan food, and reading Henry Miller's novels. Not sure if I am coming back to Montreal.

Thursday, July 9, 2009

Big Blue's Pension Blues Spreading?

The Independent reports that IBM is ready to close its UK final salary pension scheme:
IBM has become the latest company planning to turn its back on final salary pension payouts. The computer systems group is consultung staff about proposals to close its UK scheme, which would affect 5,000 employees.

Brendon Riley, the general manager of IBM in the UK and Ireland, said in a memo to staff that the "rising costs and liabilities" had forced it to consider moving existing members of the IBM scheme – about a quarter of the workforce – to a defined contribution scheme.

Staff will be consulted for 60 days from 5 August and a decision will be made following the feedback. Mr Riley said he understood the situation would be "sensitive and difficult for many". He added: "The rapidly rising costs and liabilities associated with the provision of defined benefit pensions is placing pressure on our long-term ability to invest for future growth and operate in an intensely competitive global market."

IBM confirmed the move, saying it was "taking action to maintain competitiveness in the marketplace and introduce greater predictability to long-term pension provision costs". IBM's final salary pension scheme was closed to new members several years ago.

Tesco, Shell, Diageo and Cadbury are the only FTSE 100 companies that still have final salary pension schemes open to new employees. Five years ago, about 40 per cent of businesses offered such an incentive, but company pension schemes have fallen out of favour as interest rates and the equity markets have slumped and life expectancy has risen.

This summer, three blue-chip companies have closed their final salary schemes, which base their payouts on a worker's earnings at retirement and their length of service.

The Morrisons supermarket chain closed its scheme for existing members last month, and Barclays Bank also said it was closing its scheme. Earlier that week,
BP announced that it was closing its scheme to new recruits from April.
IBM is the latest large firm contemplating to cut its penion scheme. I suspect many more will follow in the era of pensions apartheid. The pension crisis is exposing one of the biggest flaws of the private sector, namely, how to secure a stable retirement income for all those hard-working folks who are now discovering their pensions are in jeopardy.
On that note, I am heading out to the big blue seas of Crete to swim and read my Henry Miller books.

Tuesday, July 7, 2009

Pensions Thriller?

Off vacationing in Crete so I will keep it short and sweet. Noticed stocks got hammered again on Tuesday. I would be buying those dips, especially on solars (LDK and YGE).

A few pension articles for you. The Toronto Star reports that pension panic subsiding. The Financial Post reports that improved Canadian equity markets sends solvency ratio up.

The CBC reports that Canada Pension Plan loses assets but not hope. We are in the early stages of the pension crisis so I wouldn't lose hope yet but it will get much uglier if the status quo is the only solution policymakers can come up with.

Finally, broadcasts of Michael Jackson hits and skyrocketing sales of the late pop icon's discs after his death have given a boost to Dutch pension fund ABP, which in 2008 bought the rights to several of his songs.

Good move for ABP but the pensions thriller will continue long after the King of Pop's death.

Wednesday, July 1, 2009

Did You Say Dance?

I hope every Canadian enjoyed their time off July 1st for Canada Day. I am off to the Land of Zorba tomorrow (the island of Crete) for the baptism of my three nephews.

I am looking forward to being with my family but I dread the hustle and bustle of airports. My MS always acts up this time of year with the heat and humidity but I am going to take it one step at a time and try to enjoy my time off.

I have been blogging for a little over a year. I managed to meet many interesting people, email others and of course, piss off some pension bullies, not that I really care about them.

People ask me why I blog and what I get out of it. For me, it's cathartic and it allows me to structure my thoughts on a daily basis. I love learning about new things and trying to put all the macro pieces together.

Of course, it helps to have a strong network and to read what other commentators are saying. I continuously read what intelligent people have to say about the markets. Today I read the July comment from Niels Jensen of Absolute Return Partners, Make Sure You get This One Right.

Like Mr. Jensen, I also fear that a bout of deflation will force monetary authorities to take aggressive actions. I look forward to reading John Mauldin's latest comment on Thoughts from the Frontline on this subject.

But markets will have to take a back seat to Henry Miller for now. You see when I travel to Greece, I dust off my copy of the Colossus of Maroussi and let his genius prose take me far away from the mundane world of finance. Henry Miller's writings help me put things into perspective.

In Miller's own words:
Marvelous things happen to one in Greece - marvelous good things which can happen to one nowhere else on earth. Somehow, almost as if He were nodding, Greece still remains under the protection of the Creator. Men may go about their puny, ineffectual bedevilment, even in Greece, but God's magic is still at work, no matter what race of man may do or try to do, Greece is still a sacred precinct - and my belief is that it will remain so until the end of time.
I love that passage and for me, Greece holds a mystical quality that is hard to describe until you are there and are overwhelmed by the raw beauty and history of the land.

My other favorite book is Nikos Kazantzakis' Zorba The Greek. Anthony Quinn was superb in the movie and who can forget this scene when Alexis Zorbas teaches his boss to dance.

I won't be dancing but I hope to swim and lose my senses in the beautiful oceans of Crete. I reserve the right to blog, but I will ask you to keep reading Yves Smith's Naked Capitalism, Luc Vallée's The Sceptical Market Observer, Jack Dean's Pension Tsunami, Bill Tufts' Fair Pensions for All, The Financial Ninja and a host of other blogs on my blog roll.

Also, keep an eye on PSP Investments. I am still waiting for them to post their FY 2009 results. Last year they quietly posted their FY 2008 results some time in July so keep checking this link from time to time.

I leave you with some breathtaking scenery on YouTube from Hania, Crete. Enjoy your holidays and I wish you all a safe and happy summer.