Caisse Closed?

It didn't take Michael Sabia long to shake up the ranks at the Caisse, Canada's largest fund manager. Konrad Yakabuski of the Globe and Mail reports that Mr. Sabia is targeting risk controls:

The new head of the powerful Caisse de dépôt et placement du Québec has set the tone for his mandate by putting the emphasis squarely on risk management and a shift in the $120-billion pension fund manager's culture.

In an executive and organizational shake-up unveiled Thursday, Michael Sabia tapped Susan Kudzman to become the investment giant's chief risk officer and doubled the ranks of the risk management division. With the move, Mr. Sabia aims to “change the culture” of Canada's biggest institutional investor, which was rocked by massive losses last year.

“Risk management is not only a question for the risk management team,” Mr. Sabia, the former BCE Inc. chief executive officer named Caisse CEO in March, said on a conference call with journalists. “It's a challenge to change the culture” of the whole organization.

Much of the task will fall to Ms. Kudzman, who will see her division add 24 new positions and become responsible for implementing a series of measures – 60 in all – identified by the board of directors to enhance the Caisse's risk management practices.

Ms. Kudzman, an actuary by training, joined the Caisse in 2005.

She has been at the centre of criticisms that Caisse risk management practices were inadequate in recent years. She was previously executive vice-president, depositors and risks, but now cedes responsibility for relations with the 25 pension and insurance funds managed by the Caisse to focus exclusively on the revamped risk management efforts.

Mr. Sabia defended her promotion, insisting her “profound understanding of the challenges of our current situation and our milieu” would enable her to implement changes faster than an outsider could.

Of the 60 measures to improve risk management, 13 are deemed a priority, Mr. Sabia said, and 10 of them will be implemented before year-end. They include better preparation for unforeseen circumstances, such as last fall's market meltdown; a new approval process for investing in untested financial products, such as derivatives; and improving the methodologies used to evaluate risk.

Mr. Sabia's moves, which also include the departure of three top managers, aim to address criticisms that lax oversight of portfolio managers by senior executives was partly responsible for the fund's disastrous performance in 2008.

The Caisse lost 25 per cent of its value last year – almost $40-billion. Its performance was the worst among large Canadian pension funds, casting doubt on many of the investment strategies pursued under former CEOs Henri-Paul Rousseau and Richard Guay.

Under Mr. Rousseau, who left the Caisse in mid-2008 for a senior job at Power Corp. of Canada, the Caisse invested heavily in non-bank asset-backed commercial paper (ABCP) and has since written off about 40 per cent of its $12.6-billion investment in the now toxic paper. Mr. Guay, who served as chief investment officer under Mr. Rousseau, briefly succeeded him as CEO.

Mr. Sabia revealed Thursday that Mr. Guay, who remained a senior adviser at the Caisse after stepping down as CEO in January, is expected to leave the fund manager in the near future. “Richard is not currently a member of upper management,” Mr. Sabia told reporters. “He is preparing a transition to a new stage of his career.” The Caisse is also recruiting a new chief investment officer, Mr. Sabia said, hinting that the post would be filled by someone from outside the Caisse.

“The Caisse must adapt to the current reality of the financial markets, which is very different from that of recent years, and whose impacts include a decrease of activity in some areas, more volatile markets and more stringent risk management,” Mr. Sabia said in a statement.

The Caisse was caught off guard when markets tanked in October, as massive margin calls on futures contracts left it scrambling to raise cash. It was forced to sell equities in a down market and unwind its positions in currency and stock index futures. Overreliance on statistical risk management models left the Caisse unprepared to face unprecedented market volatility.

At least three top managers are leaving in the shake-up, including Michael Malo, head of hedge funds; chief strategist Christian Pestre; and François Grenier, the head of equity markets. Other top managers will take on added responsibilities, such as the head of private equity Normand Provost, who also becomes chief operating officer. The Caisse's hedge fund activities are also rolled into the private equity division, under Mr. Provost.

Jean-Luc Gravel was named executive vice-president of equity markets, replacing Mr. Grenier. He had been head of Canadian equities, overseeing the Caisse's only stock portfolio that beat its reference index in 2008. Its U.S. equity portfolio underperformed the market by almost seven percentage points last year.

Over all, the Caisse is cutting 31 of its 813 positions, once the 24 new risk management positions are taken into account.

The changes are the first major moves taken by Mr. Sabia, since he was appointed to run the Caisse last by Liberal Premier Jean Charest. His nomination was controversial in Quebec, given the anglophone Mr. Sabia's shallow roots in the province and mixed record running the telecom giant.

Some of my thoughts on these changes. I was not surprised to see Christian Pestre, Michel Malo and Francois Grenier let go, but if you ask me, the first executive vice-president that should have been asked to leave should have been Robert Desnoyers, Executive Vice-President of Human Resources and Organizational Development.

How can you possibly change the culture of an organization when you keep the same individual in charge of Human Resources and Organizational Development? That brings me to my second point. How can you say you are placing the priority on risk management when you are keeping Ms. Kudzman on as the Chief Risk Officer?

When a pension fund goes through a $40 billion train wreck, someone in charge of risk dropped the ball. It really was a Caisse of risk management theater. And it wasn't just Ms. Kudzman's fault. Her right hand man in risk management, Ernest Bastien, was in charge of the policy portfolio risk. It was his changes that allowed the Caisse to increase their exposure to non-bank asset-backed commercial paper (ABCP). Why is he still a senior risk officer at the Caisse?

Let's go through Ms. Kudzman's background:

Susan Kudzman joined the Caisse in 2005 as Senior Vice-President, Risk Management and Return. Previously, from 2000 to 2005, Ms. Kudzman was Chief Human Resources Officer and Chief Corporate Officer at BCE Emergis. She also worked for more than 15 years as an actuarial consultant for the firms of Towers Perrin and Mercer. Susan Kudzman holds a bachelor’s degree in Actuarial Science from Université Laval. She is a Fellow of the Canadian Institute of Actuaries and of the Society of Actuaries (United States).

I never met Ms. Kudzman, and hold nothing against her, but I do not see anything in her background to suggest that she should hold such a senior position in risk management at the Caisse. Given her background, maybe she would be better placed as Executive Vice-President of Human Resources and Organizational Development. I am pretty sure she can do a much better job than Mr. Desnoyers.

And there are other things that concern me. I read this CBC article which states the following:

As part of the reorganization, 55 positions will be abolished and 24 new ones will be created, mainly in risk management. The Caisse had 813 employees as of Dec. 31.

In the wake of the global financial crisis, many investment operations have been affected by a drop in activity, notably hedge funds, Sabia said. Therefore the Caisse has decided to combine all investment operations involving liquid markets into two departments: equity markets, and fixed income and currencies.

As a result, the position of executive vice-president, hedge funds, has been eliminated, and staff has been reduced. The Caisse is also eliminating the position of executive vice-president and chief strategist.

Normand Provost has been named chief operating officer, in addition to his job as executive vice-president, private equity.

Some good people fell victim to this "reorganization". People like Andrée Dion who for many years did an outstanding job reporting performance and Benoit Beauchemin who thoroughly researched what the Caisse's peers were doing in terms of asset allocation and other activities. These are good, solid employees that any organization should have on their team. I am truly shocked to see them go and to see other snakes survive at the Caisse.

And why is Normand Provost, the Executive Vice-President of Private Equity, named the Chief Operating Officer? This opens the door to serious conflicts of interests, namely, someone in charge of investments should not also be in charge of operations.

As far as shutting down internal and external hedge funds, I think this is a mistake too. In the sphere of alternative investments, I am more confident with certain hedge funds going forward than I am with private markets where I see the curtains closing for the next few years.

Importantly, if you really want to focus on risk management, you should develop your internal and external capabilities in liquid absolute return strategies. In the age of delation, this is where the future lies, not private markets.

Finally, a recent poll shows that Quebecers want the government to get more involved with the investment decisions of the Caisse de dépôt et placement du Québec. Pensions and pension funds are the topic of heated political discussions in Quebec and in Ottawa these days.

As I watch these big funds repeat the same mistakes over and over again, I am starting to think that the stewards have to step in and conduct thorough performance, operational and fraud audits by independent experts on all activities as soon as possible.

As for the basket Caisse, I hope it's not Caisse Sera Sera, but I have seen this movie before and it doesn't end well. As I told a friend of mine today, the "easy" part is to cut people. It's much harder building an organization around dedicated people who share your vision and values and want to see the organization thrive.

This is Mr. Sabia's most difficult challenge and it lies straight ahead. But if he is not careful, surrounding himself with knowledgeable, dedicated people who he can trust, his coup d'état might be short-lived and the Caisse's days could be numbered.

***Announcement***

Before I forget, Amy Long of Two Sheps That Pass contacted me and wanted to pass along this message:

I wanted to let you know about a unique event happening during the upcoming Berkshire Hathaway shareholder’s meeting weekend, on Saturday, May 2^nd, that I thought might be of interest to you and your readers.

Warren Buffett’s son, Peter, will be returning to his hometown for an evening of ‘Concert and Conversation’ at The Rose theater. All proceeds from ticket sales are going toward the Omaha-based foundation, Kent Bellows Studio and Center for the Visual Arts.

Peter’s ‘Concert and Conversation’ serves as an entertaining and informative look into the life of a man with a truly unique upbringing. His open discussion about the lessons he's learned as the son of one of the most noteworthy investors of our time and its effect on creating the man he's become, acts as a true testament that life is never a straight road. The evening will include live performances of selections from Peter’s album releases including his latest, Imaginary Kingdom, punctuated with videos from his film/television work and philanthropic activities.

EVENT DETAILS:

An Evening of Concert and Conversation with Peter Buffett

WHEN: Saturday, May 2^nd at 7:30 pm

WHERE: The Rose, 2001 Farnam Street, Omaha, NE

TICKETS: $42, with $25 of the cost being tax deductible

http://rosetheater.org/season-events.asp

www.peterbuffett.com

www.myspace.com/peterbuffett

http://www.kentbellows.org/

Demystifying Pension Fund Benchmarks

Following up on my last comment on CPPIB getting grilled in Ottawa, I received a few questions on benchmarks. I will elaborate on benchmarks in this post.

But first, CPPIB contacted me to tell me that they posted Ms. Warmbold's opening remarks to the Standing Committee on Finance. I am still waiting for PSPIB to post Mr. Valentini's remarks on their website, but given that the last press release dates back to October 2007, I doubt they'll post his remarks on their website.

Anyways, back to Ms. Warmbold's opening remarks (added notes are mine):

Good morning, Mr. Chairman and Members of the Committee.

My name is Benita Warmbold, and I am Senior Vice President and Chief Operations Officer of the CPP Investment Board. With me today is Mr. Don Raymond, Senior Vice President and head of Public Market Investments.

When the federal and provincial ministers of finance successfully reformed the Canada Pension Plan in the mid-1990s, they endowed the CPP – and the CPP Investment Board – with a number of advantages. Three of those advantages have proven invaluable in the recent economic environment.

The first is the clarity of our investment mandate enshrined in legislation to maximize returns without undue risk of loss.

[Note: It is not that clear to me what is meant by "undue risk of loss". Specifically, how much active risk is CPPIB taking to generate 100 basis? Is it 400 basis points of active risk? 500 basis points?]

The second is a governance model that balances independence with accountability. The CPPIB operates at arm’s length from government and is overseen by an independent board of directors which approves investment policies and makes critical operational decisions. To balance that independence, the CPPIB is accountable to the federal and provincial finance ministers who act as stewards of the CPP. And we have a high degree of transparency so Canadians can see how their pension fund is managed.

[Note: CPPIB does have a high degree of transparency EXCEPT for stating what its benchmarks are in both public and private markets. This will be discussed below. As far as accountability, the stewards have not performed a comprehensive performance, operational and fraud audit of the CPP Fund. This will surely come in the next Special Examination.]

The third is stability, through the legislation that protects the CPP assets and governs the CPP Investment Board, which requires the cooperation of the federal and provincial finance ministers to change.

All of these advantages reinforce our ability to earn investment returns to help sustain future benefits for the 17 million Canadians who participate in the CPP.

To fulfill this objective, the investment strategy of the CPP Fund is designed to generate returns over decades and generations and as a result we have a long investment horizon.

That long-term focus is central to my remarks today.

[Note: Focus on the long-run but we should then have ten or twenty year rolling returns on your bonuses along with clawbacks and high-water marks in case you blow up in the short-run.]

The combination of our long-term focus and the funding structure of the CPP -- in which contributions are expected to exceed benefits through 2019 -- has proven extremely valuable in helping the CPP withstand a prolonged market downturn.

The assets of the CPP Fund have grown steadily as the portfolio has been diversified over the past 10 years. As at December 31, 2008, the CPP Fund had assets of $108.9 billion. That’s an increase of $71 billion as a result of investment returns and contributions from employees and employers.

The fund today is a broadly diversified portfolio of public equities, private equities, real estate, inflation-linked bonds, infrastructure and fixed income instruments.

[Note: Ms. Warmbold forgot to mention that CPPIB also invests in hedge funds.]

Just under half of the fund – about 49% -- was invested in Canada and the balance was invested globally as of December 31.

As recent results have shown, the CPP Fund is not isolated from the storms buffeting financial markets and the global economies. Sharp declines in global equity markets have negatively impacted our recent results. For the first three quarters of the fiscal year, the fund declined $13.8 billionreflecting a return of negative 13.7 percent.

While we recognize that Canadians may be concerned about these short-term results, our long investment horizon creates advantages and opportunities.

First, the portfolio we manage today is not being used to pay benefits today. In fact, it will be another 11 years before money from the fund will be required to help pay pensions.

Secondly, as a result of new cash flows for the next 11 years, we have the opportunity to invest in quality assets at attractive prices, when many other investors cannot.

And thirdly, our portfolio reflects our long term mission and is designed to generate returns over 4 year periods, rather than focusing on a single year.

Appropriately, our policy on management compensation reflects our long term investment strategy, our portfolio design and our long-term outlook.

The key principles are that compensation rewards performance over the long term as measured in 4 year periods; that pay for performance is based on two factors -- how the fund performs overall and whether we generate returns above a market-based benchmark.

[Note: There is a great deal of uncertainty regarding the long-run. Towers Perrin has today warned that the pensions industry will not recover from its exposure to the financial crisis for more than twenty years. Will you be around in twenty years if your long-term bets go sour? I doubt it, but you have no problem collecting millions in short-term and long-term bonuses based on four year rolling returns. Something does not add up there. Then there are reporters like Andrew Willis of the Globe and Mail who do not bother to analyze benchmarks in detail but just blindly shill on your behalf, stating that politics threaten CPP Investment Board's integrity. ]

Overall, the program balances pay-for-performance with the ability to attract and retain the best investment professionals to manage the fund.

[Note: It's a secular bear market in the financial industry. You can attract a lot of talent to CPPIB, paying them a fraction of what you are paying those senior VPs!]

In summary, the CPPIB is very confident that we have the investment strategy to generate the long term returns required to help sustain the CPP.

Given recent conditions, we know Canadians are placing an even higher value on a strong public pension system. We take very seriously our responsibility to help sustain one of Canada’s most important social programs for decades and generations to come.

Thank you.

As I stated in my last post, CPPIB does not disclose its benchmarks (read their latest investment policy; there is nothing on benchmarks), preferring to give returns of the broad asset classes and of the overall fund.

But without proper disclosure of all the benchmarks governing each and every investment activity, including hedge funds, private equity, real estate, and infrastructure, we simply do not know whether the managers are taking appropriate risks relative to their performance benchmarks.

So what is a benchmark? I take the following definition from PIMCO:

In most cases, investors choose a market “index,” or combination of indices, as their portfolio benchmark. An index tracks the performance of a broad asset class, such as the investment-grade bond market, or a narrower slice of the market, such as investment-grade corporate bonds. Because indices track returns on a buy-and-hold basis and make no attempt to determine which securities are the most attractive, they represent a “passive” investment approach and can provide a good benchmark against which to compare the performance of a portfolio that is actively managed. Using an index, it is possible to see how much value an active manager adds and from where, or through what investments, that value comes.

When talking about the stock market the typical benchmarks for large cap U.S. stock is the S&P 500. If your mutual fund is underperforming the S&P 500 (most of them do), then you are paying fees to someone who is not capable of returning "market" returns.

There are very few major disagreements when it comes to plain old stock and bond benchmarks. You might argue that the S&P 600 is a better index of small cap stocks than the Russell 2000, but they are both reflective of the performance of small cap stocks. Most institutions use the same indexes to track the performance of public markets.

Where things get tricky is in private markets and hedge funds, what we call alternative investments. There is no consensus on what constitutes the appropriate benchmark for private equity, real estate, infrastructure and hedge funds. It amazes me that global pension funds never got together to figure out what will be the pension industry's benchmarks for private market assets and hedge funds.

Instead, each fund uses their own benchmarks. For example, in real estate, some funds use a spread (typically 500 basis points) over CPI while others gauge their performance using a benchmark like IPD Market Indices which better reflect actual property transactions in commercial real estate by region. Other funds will use a stock market real estate index like the Dow Jones REIT Index.

Being an economist, I like using benchmarks that reflect the opportunity cost of an invesment. If a pension fund is investing in large U.S. buyout funds in their private equity portfolio, then the benchmark governing these asset class should be some spread above the S&P 500 like S&P + 500 basis points and lag it by on quarter for valuation purposes. The spread is there to reflect the illiquidity of these investments and the embedded leverage of private equity deals where general partners borrow to finance their purchases of private companies.

If you are investing in private real estate or infrastructure investments, then try to benchmark these assets relative to some market index of real estate or infrastructure stocks that captures the "beta" of these investments and add a spread for illiquidity and lag it by on quarter for valuation purposes.

Unfortunately, it's not always possible to find the appropriate benchmarks that fits all pension funds in each of this alternative asset classes, but that is why you need a comprehensive performance audit to make sure they are not gaming their benchmarks to easily beat them.

Take hedge funds for example. Some strategies are liquid, others are illiquid, some use leverage, others use no leverage, and so on. Using an absolute return benchmark of T-bills + 500 basis points might seem appropriate, but what if your pension fund manager is investing in highly leveraged illiquid strategies? Up until last year, they would have trounced that benchmark, reaping huge bonuses, but then the music stopped and credit markets seized, effectively killing these strategies.

As I discussed before, it's all about the benchmarks stupid! Unless the benchmarks reflect the risks, beta and leverage of the underlying investments, then you simply do not know if the value added your pension fund manager is claiming to add is really that or just a free lunch.

Let me end by looking at specific examples from pension funds. First, let's look at PSP Investments' Policy Portfolio from their latest investment policy:

(Click to enlarge:)

You will notice that all the public markets indexes are properly disclosed but when it comes to private markets like private equity, real estate and infrastructure, PSP states that "for competitive reasons these benchmarks are not disclosed."

What are these "competitive reasons"? Who is PSP Investments competing against? For crying out loud, it's a public pension fund and a Crown corporation, not some secretive hedge fund! It is absolutely scandalous that they and CPPIB are refusing to disclose their private market benchmarks but see it fit to say that they added "significant value" in private markets when it comes time to collect their huge bonuses.

What's a clear indication that a benchmark does not reflect the risks of the underlying investments? Again, take a look at the 2007 real estate returns from the large funds:

(Click to enlarge:)

You'll notice that while OMERS, CPPIB and PSPIB "significantly outperformed" their real estate benchmarks, the Caisse underperformed it. This is because the Caisse policy benchmark for real estate is a lot tougher to beat because it accurately reflects the underlying beta, liquidity and leverage of their real estate investments.

The Caisse's Policy Portfolio is clearly presented on page 32 of its 2008 Annual Report:

(Click to enlarge:)

The Caisse is not perfect. The benchmark governing non-bank asset backed commercial paper clearly did not reflect the risks of these investments and it ended up costing the Caisse billions.

[Note: Those of you who read French, should read Francis Vailles' article in La Presse concerning the risks portfolio managers were encouraged to take in ABCP to reap huge bonuses.]

The message behind this short synopsis of pension fund benchmarks is that no fund is perfect. Some are more transparent in most areas but fail to disclose their benchmarks in public and private markets (CPPIB), some are much better with their real estate benchmarks but screwed up on their money market benchmark (Caisse), some are excellent with their public market benchmarks but their private market benchmarks are totally inadequate (PSPIB).

And the travesty in all this is that we have reporters like Andrew Willis telling us to leave these public pension fund managers alone and keep compensating them with millions of dollars because they are the experts and they are governing in the best interests of their beneficiaries.

If only that were true, I could then stop writing my blog and go to sleep early every night.

CPPIB Gets Grilled in Ottawa

The third meeting of the Standing Committee on Finance focusing on pensions took place on Tuesday morning, placing more senior pension executives on the hot seat.

Before I continue, let's recap what happened at the two first meetings. I went to Ottawa last week to expose the bogus benchmarks pension fund managers were using in private markets and hedge funds to justify their outrageous bonuses.

Two days later, PSP Investments' (PSPIB) CFO, John Valentini, was on the hot seat, getting grilled for refusing to answer some basic questions on performance and bonuses.

You'd think that after watching that grilling the folks at the Canada Pension Plan Investment Board (CPPIB) would be wise enough to come to Ottawa better prepared to answer some very tough questions.

Apparently not. The two representatives of the CPPIB that appeared this morning were Don Raymond, Senior Vice-President, Public Market Investments and Benita Warmbold, Senior Vice-President and Chief Operations Officer.

You can read more about them and other senior executives at CPPIB by clicking here. Notice that prior to joining CPPIB, Mr. Raymond worked at Goldman Sachs for seven years and Ms. Warmbold worked eleven years as a Managing Director and CFO of Northwater Capital Management Inc., a well known fund of hedge funds in Canada. This is important information to keep in mind as I review today's hearing.

You can view the entire meeting in English by clicking here (note French only version and floor version in both languages are also available and the transcripts will be available on this site).

There were other witnesses speaking today including:

• Jean-Claude Ménard, Chief Actuary of Canada from the Office of the Chief Actuary which is independent but situated within the Office of the Superintendent of Financial Institutions of Canada.
• Keith Ambachtsheer, President of KPA Advisory Services and founding director of the Rotman International Center for Pension Management (ICPM). Mr. Ambachtsheer has written books, including The Pension Revolution, and more recently an article for the C.D. Howe Institute, The Canada Supplementary Pension Plan (CSPP).
• Shirley-Ann George, Senior Vice-President, Policy at the Canadian Chamber of Commerce.
• Serge Pharand, Vice-President and Corporate Comptroller, Canadian National Railway
• Renaud Gagné and Germain Auclair, Communications, Energy and Paperworkers Union of Canada.
  

I enjoyed listening to all speeches. Mr. Ménard immediately made his speech available on the OCA's website. He is a consummate professional who has profound respect for Parliamentary institutions which why he and his team take transparency and accountability seriously.

I have said it before and I will say it again: The Office of the Chief Actuary of Canada is THE model for transparency and accountability. If only other government departments and Canadian Crown corporations were run like the OCA, we'd have a lot less waste and a lot more accountability.

For his part, Mr. Ambachtsheer raised several excellent points on the The Canada Supplementary Pension Plan (CSPP). Where I disagree with Mr. Ambachtsheer is on how he blindly defends the governance of the large Canadian pension funds, including their outrageous bonuses based on bogus benchmarks in alternative investments.

[Note: Mr. Ambachtsheer should come clean and say who pays for his services at KPA Advisors: the pension funds or the beneficiaries who those pension funds invest on behalf of? If the pension funds are his clients, it's hardly surprising he defends their governance model, ignoring some of the weaknesses in their compensation structure.]

Mr. Gagné and Mr. Auclair rightly noted that while the auto sector and banks are getting bailouts, the forestry industry has been getting decimated and is being ignored by the federal government.

Let me add something here. I read an article today about a Newfoundland man and his wife facing financial ruin because of troubled newsprint giant AbitibiBowater's decision to suspend his pension:

"Devastated, really," said Wilson Pike, 61, a former seasonal woodsworker for AbitibiBowater in Grand Falls-Windsor who opted to leave his job three years ago for a type of early retirement program.

AbitibiBowater, which has applied for bankruptcy protection in Canada and the U.S., said Friday it cannot maintain such programs.

"I figured I was set until I was 65. But now I don't know where to turn, really," said Pike, who had worked for Abitibi for 41 years.

Wilson and his wife Beverly lead a modest life on a budget of $1,200 per month.

Because the Abitibi payments have stopped, the two are using Canada Pension Plan payments to cover this month's rent, and have about $200 left to pay for groceries and cover their other bills.

"I know that seems a little to some, but it's our survival," said Beverly Pike, who is legally blind and has no income of her own.

"My husband has enough on his shoulders to worry about, taking care of me. We didn't need this extra stress."

Beverly's medical bills last year reached $9,000. Abitibi had allowed them to buy into the company medical plan for about $100 per month.

"Canada Pension is not going to cover it. So what we're going to have to decide to do is either we have medical insurance, or if we eat," she said.

"It's just as simple as that, 'cause there's not enough money to go around."

The Pikes said they are hoping that a court challenge planned by the Communications, Energy and Paperworkers Union will force AbitibiBowater to restart its payments.

If that doesn't work, Pike said he will have to re-enter the job market to make ends meet.

Keep Mr. and Mrs Pike in mind as you listen Mr. Raymond and Ms. Warmbold defend the outrageous bonuses that were handed out to the senior executives at the CPP Fund.

The table below was taken from page 54 of CPPIB's 2008 Annual Report

(click to enlarge:)

In case you can't read it clearly, let me go over the top four compensation packages doled out in fiscal year 2008 which ended March 31st, 2008 (same fiscal year as PSPIB):

1) David Denison, President and CEO: total compensation 2008: $4,163,966 (his base salary is $475,000)

2) Mark Wiseman, Senior VP, Private Markets: total compensation 2008: $3,107,840 (his base salary is $325,000)

3) Don Raymond, Senior VP, Public Markets: total compensation 2008: $2,626,073 (his base salary is $325,000)

4) Graeme Eadie, Senior VP, Real Estate Investments: total compensation 2008: $2,515,431 (his base salary is $300,000)

During question period, Ms. Warmbold evaded a direct question asking her to disclose the performance for fiscal year 2009 which just ended on March 31st. (I guess they are not finished valuing those private market investments!).

Mr. Mulcair noted that Mr. Raymond has a higher base salary than the Prime Minister of Canada and the Chief Justice of the Supreme Court of Canada.

I would argue that the Prime Minister of Canada and the Chief Justice of the Supreme Court of Canada are grossly underpaid, especially when you compare their responsibilities to those of the senior executives at CPPIB.

But that's not the point. The point is that Canadian public pension fund managers are paid too much for what they claim to be delivering. And what are they doing to justify these outrageous bonuses? They are increasingly shifting assets into private market investments and hedge funds where it's easier to game performance benchmarks so they can continue to scam the system and claim "significant value added".

[Note: Read Steven Chase's article in the Globe and Mail, Curb CPP managers' bonuses, opposition urges.]

When pressed to diclose the performance benchmarks for private markets, Mr. Raymond remarked that they do account for leverage (news to me), but he did not disclose what these benchmarks are composed of so we cannot verify his claims.

My question to both CPPIB and PSPIB is if the Caisse discloses all their benchmarks, including those of private markets (private equity, real estate, and infrastructure) then why do they refuse to disclose them?

PSPIB cites "competitive reasons" (what the hell does that mean?) and CPPIB does not properly disclose their private market benchmarks in their annual report or investment policy.

I will repeat it once again: unless you disclose all the benchmarks governing public market and private market investments, you simply do not know whether the reference portfolio used to compensate pension managers accurately reflects the liquidity risk, leverage and beta of the underlying investments.

I can show you 100 ways of how to scam pension plans by using bogus benchmarks in private markets and hedge fund investments. I can also show you how some accountant can write up or write down assets by one single magical stroke of a pen.

What's a clear indication that a benchmark does not reflect the risks of the underlying investments? Well, take a look at the 2007 real estate returns from the large funds:

(Click to enlarge:)

Whenever a fund is handily beating a benchmark in "private markets" or "hedge funds", year in and year out, you can bet your taxpayer dollars there are shenanigans going on. I have never in my life seen such incredible outperformance in the public markets (does your mutual fund outperform the Dow or S&P 500 every single year by 10%, 20% or 30%?!?!?)

Bottom line: Unless we augment financial audits by comprehensive performance, operational and fraud audits, our large public pension funds are vulnerable to further abuses. It is a scandal.

And let's call a spade a spade: the compensation packages at these large Canadian public pension funds is a scandal. All upside, no downside. If they screw up, most of these guys walk away with a golden parachute.

Again, while Mr. Raymond and Ms. Warmbold defend their compensation based on a "four year rolling return", there are people like Mr. and Mrs. Pike struggling to get by on next to nothing.

My eyes rolled behind my head when I heard Mr. Raymond claiming the reason they avoided non-bank asset-backed commercial paper (ABCP) at CPPIB is that their compensation allowed them to attract bright people to analyze these investments.

Give me a break! Do you really think the folks over at CPPIB are that much brighter than the pension managers at the Caisse? I can assure you they're not, and in many areas, they are a much weaker.

Mr. Raymond said the "focus on short-term results" is not in the best interests of beneficiaries. Agreed, but when you are losing billions and claiming value added in private markets without properly disclosing the benchmarks of those private markets, you are scamming the system.

I had lunch today with a former colleague of mine who was a senior public market pension manager. He knows all about the nonsense surrounding the benchmarks in private markets. He never had a free lunch trying to beat public market benchmarks.

He also had a great idea. "They should scrap the four year rolling returns, keep long-term incentives in escrow and use clawbacks if the fund or a particular portfolio suffer a hit. They should all get decent salaries, but not these outrageous salaries, bonuses and generous retirement benefits."

Let me end this comment by asking CPPIB to post their remarks on their website. I find it inexcusable that those remarks are not already posted there for public scrutiny. You claim to be transparent but all I see is "selective transparency" as long as it suits you and your compensation.

And one final thought on compensation. Nobel-prize winning economist, Paul Krugman wrote a excellent op-ed column in the New York Times called Money for Nothing.

I quote the following:

Still, you might argue that we have a free-market economy, and it’s up to the private sector to decide how much its employees are worth. But this brings me to my second point: Wall Street is no longer, in any real sense, part of the private sector. It’s a ward of the state, every bit as dependent on government aid as recipients of Temporary Assistance for Needy Families, a k a “welfare.”

I’m not just talking about the $600 billion or so already committed under the TARP. There are also the huge credit lines extended by the Federal Reserve; large-scale lending by Federal Home Loan Banks; the taxpayer-financed payoffs of A.I.G. contracts; the vast expansion of F.D.I.C. guarantees; and, more broadly, the implicit backing provided to every financial firm considered too big, or too strategic, to fail.

One can argue that it’s necessary to rescue Wall Street to protect the economy as a whole — and in fact I agree. But given all that taxpayer money on the line, financial firms should be acting like public utilities, not returning to the practices and paychecks of 2007.

Furthermore, paying vast sums to wheeler-dealers isn’t just outrageous; it’s dangerous. Why, after all, did bankers take such huge risks? Because success — or even the temporary appearance of success — offered such gigantic rewards: even executives who blew up their companies could and did walk away with hundreds of millions. Now we’re seeing similar rewards offered to people who can play their risky games with federal backing.

So what’s going on here? Why are paychecks heading for the stratosphere again? Claims that firms have to pay these salaries to retain their best people aren’t plausible: with employment in the financial sector plunging, where are those people going to go?

No, the real reason financial firms are paying big again is simply because they can. They’re making money again (although not as much as they claim), and why not? After all, they can borrow cheaply, thanks to all those federal guarantees, and lend at much higher rates. So it’s eat, drink and be merry, for tomorrow you may be regulated.

Or maybe not. There’s a palpable sense in the financial press that the storm has passed: stocks are up, the economy’s nose-dive may be leveling off, and the Obama administration will probably let the bankers off with nothing more than a few stern speeches. Rightly or wrongly, the bankers seem to believe that a return to business as usual is just around the corner.

We can only hope that our leaders prove them wrong, and carry through with real reform. In 2008, overpaid bankers taking big risks with other people’s money brought the world economy to its knees. The last thing we need is to give them a chance to do it all over again.

I sincerely hope that the leaders who sat in on these hearings at the Standing Committee on Finance heed my advice and further investigate the activities at these large public pension funds.

It is time to have special hearings focusing exclusively on public pension funds. Bring in the CEOs and chairs of the boards of PSPIB and CPPIB and ask them some very tough questions on how they added value in public and private markets. It's public monies they are managing so they should be held accountable for their decisions.

Pensions' Death Spiral?

The New York Times reports that the plight of carmakers could upset all pensions:

Decisions that the government will make soon on the future of General Motors and Chrysler could accelerate the decline of traditional pension plans, which have sheltered generations of workers from an impoverished old age.

Pension experts predict that a government takeover of the two giant plans would spur other auto companies and all types of manufacturers to abandon such benefits for competitive reasons.

For hundreds of thousands of retired auto workers, a federal pension takeover would mean sharply reduced benefits. For the federal agency that insures pensions, it would mean a logistical nightmare in the short term — and most likely a slow demise eventually as fewer and fewer small plans remain in the system and pay premiums.

So far, the prospect of a grueling grind through bankruptcy court has been a major deterrent to companies that might want to rid themselves of pension obligations. But retirement and labor specialists are watching closely to see whether the administration’s auto task force will give either of the auto companies an easier way to shed their huge pension funds, blazing a simplified trail for others to follow.

With or without a bankruptcy filing, the government is quietly making the preparations that would be needed to take over Chrysler’s pension plan, with its 255,000 participants, according to government officials.

Even if Chrysler manages to strike a deal to sell many of its assets to Fiat, perhaps in conjunction with a bankruptcy filing, experts doubt Fiat will agree to take on its pension plan without extraordinary assistance. One possibility being considered is a cash infusion of $1 billion from Daimler, which previously owned Chrysler and had agreed to backstop a pension failure for several years.

The future of General Motors’ pension plan is also unclear. G.M. has until June 1 to come up with an acceptable business plan. If it declares bankruptcy, it still may try to keep its pension plan afloat. G.M.’s plan for hourly workers, which covers 485,000 people, was in reasonably good shape until last fall’s market turmoil, and would not require cash contributions until 2013.

If one or both of these plans collapse, the federal agency that insures pension benefits, the Pension Benefit Guaranty Corporation, will lose a big source of the premium revenue it collects from companies with pension funds. But more important, the demise of the bellwether auto plans might set a template for other companies seeking to cut costs and stay competitive.

“If one of these companies solves its pension problem by shunting it off to the federal government, then for competitive reasons the others have to do the same thing,” said Zvi Bodie, a professor of finance at the Boston University School of Management and longtime observer of the government’s pension insurance system. “That is the death spiral.”

Though the automakers’ plans each have a gap between what they have on hand and what they owe their retirees over the years, if they failed, most of that shortfall would be made up by workers in the form of smaller benefits — not by the companies or the government.

The government estimated that Chrysler’s plan was $9.3 billion short as of last November — but said it would be responsible for only about $2 billion of that. Most of the shortfall would be sliced from workers’ benefits. At G.M., the estimated shortfall was $20 billion as of last November, but the government would assume $4 billion of obligations and G.M.’s workers would lose the rest.

When Daimler sold a majority stake in Chrysler in 2007 to a private equity firm, Cerberus, it promised to pay $1 billion into the government’s pension insurance program if the pension plan failed within five years. The Treasury could try to persuade Daimler to put some of that money into the plan to avoid a failure.

For years, traditional pensions — those that shield workers from market risk — have been in a slow decline, with troubled sectors like aviation and steel shedding their plans in bankruptcy court as new types of individually managed benefits like 401(k) plans have taken hold.

But big sectors, particularly manufacturing and financial services, have clung to the old plans. The Pension Rights Center, a consumer group in Washington, estimates that 18 million Americans are still building up such benefits every year, and millions more retirees are receiving guaranteed payments from their former employers.

“Those that are fortunate enough to have those plans are sleeping soundly,” said Karen Ferguson, director of the center.

The loss of the auto pensions would be devastating partly because Detroit sustains many other businesses and partly because of their history. It was the United Automobile Workers union, more than any other force, that pushed Congress to enact laws forcing companies to put money behind their pension promises and creating the federal guarantor. The failure of a major auto workers plan would be a blow to the whole system.

Not only would Ford have reason to opt out of the expense of maintaining a pension plan, but so would Toyota and Honda, which also have pension plans at their American plants, said Teresa Ghilarducci, a professor of economics at the New School for Social Research and former member of the P.B.G.C.’s advisory board.

Professor Ghilarducci said she believed the Obama White House had selected people for its auto task force who understood these stakes, and would strive to find some middle ground.

The pension insurance agency, currently operating with an $11 billion deficit, has long viewed the automakers’ plans with anxiety, though its officials declined to discuss the situation. G.M.’s plan alone is bigger than the guarantor. The agency has roughly $67 billion in assets to cover the benefits of nearly 4,000 failed pension plans; G.M. has $84 billion in trust just to cover promises to its own workers.

In a failure of that size, the agency’s immediate challenge would be logistical, not financial. Its insurance covers a simple benefit, not the much richer pensions negotiated over the years by the U.A.W. It would have to process applications from thousands and thousands of workers, most of whom would get the bad news that they were going to get less than promised.

The government’s maximum benefit is $54,000, but coverage falls off rapidly for workers who are younger when their plan fails. For a 62-year-old the maximum is $42,660, and for a 55-year-old, it is only $24,300.

Calculating which workers would bear how much of the losses would be fiendishly complex. The government’s rules favor older participants and contain tripwires and arbitrary cutoffs that can leave similar workers with sharply different benefits.

None of this can be sorted out in advance, because the calculations also depend on the amount of money in a pension fund on the day it terminates — something the pension benefits corporation does not yet know.

Some pension specialists, aware of these difficulties, are hoping the Obama administration’s auto task force will spare at least the G.M. pension fund. Not only would that let laid off workers keep receiving full benefits, but it could also break the death spiral among other plans.

For traditional pension plans, “maybe this is their last stand,” said Jeffrey B. Cohen, a partner with the law firm Ivins, Phillips & Barker in Washington who was chief counsel for the Pension Benefit Guaranty Corporation from 2005 to 2007. If the automakers’ plans fail, he added, “the biggest domino will have fallen for the P.B.G.C.”

This article has been revised to reflect the following correction:

Correction: April 25, 2009
An article on Friday about the implications of possible pension plan failures at General Motors and Chrysler misstated the maximum benefit guarantee under the federal government’s pension insurance program. The maximum is $54,000, for a person who is 65 or older when a company pension plan fails — not $42,660, which is the maximum for a person who is 62.

Late Monday night, Reuters reports that Daimler reaches deal to offload Chrysler:

Daimler AG on Monday reached an agreement with Chrysler, the U.S. automaker's owner Cerberus Capital Management, and the U.S. Pension Benefit Guaranty Corp to exit its 19.9 percent stake in the company.

Daimler had sold an 80.1 percent stake in the U.S. automaker to private equity firm Cerberus in 2007, ending a stormy decade long relationship with the struggling U.S. carmaker that is operating under U.S. government aid.

In Canada, auto workers made a historic concession to pay into their own pensions:

Newly hired Canadian workers will contribute $1 for every hour worked or about $1,700 a year, a change that comes after the subject of pensions for members of the Canadian Auto Workers, and who pays for them, became a hot-button topic among Canadians and a toxic issue for politicians during the debate about whether taxpayers' money should be used to keep Chrysler and General Motors of Canada Ltd. from collapsing.

Angry constituents complained to politicians in Ottawa and Toronto after GM said in a restructuring plan submitted to the federal and Ontario governments in February that it was being crippled by pension payments.

"We heard what people said, but I don't go by that," CAW president Ken Lewenza said in an interview yesterday after ratification meetings with workers from Chrysler's Brampton, Ont., and Windsor, Ont., assembly plants. "It's really how do we send a message to the companies that we recognize the [pension] challenges going forward?"

He noted that newly hired members of the United Auto Workers at Detroit Three plants in the United States will have no pensions, so the CAW needed to act to maintain Canada's competitive position.

The direct costs of pensions for existing employees will still be carried by the companies and the union argues that in previous rounds of bargaining, workers could have won higher wage increases or improvements in benefits but agreed instead to pension payments by the companies.

All three companies are retrenching in Canada, so they're not likely to be hiring new employees for some time. But the principle of auto workers paying directly for their own pensions is now established.

The pension move is just one of several major concessions the CAW made in the first agreement to take away hard-won benefits since the union agreed in the early 1980s to cut wages by about $1.15 an hour to help keep Chrysler from plunging into bankruptcy.

"Sacrifices have to be made because we have a cannon at our head," Mr. Lewenza told Brampton plant workers and retirees.

Other changes - which will apply to all three companies in Canada - include a freeze on wages and cost-of-living pension increases until 2012; an end to company coverage of semi-private hospital rooms; increases in health-care co-payments; and an increase in the amount of time it takes newly hired workers to reach full wages.

The concessions will cut Chrysler's labour costs by about $240-million annually.

That meets the demand set by Ottawa and Ontario that the company cut its labour costs to $57 an hour from $76 to match those of Toyota Motor Manufacturing Canada.

Chrysler has received $750-million of a planned $1-billion loan from the two governments and its parent company is in negotiations with Italian auto maker Fiat SpA on a strategic alliance. The Canadian and U.S. governments require the company to have a Fiat deal in place by Thursday.

And it's not just car companies. Royal Dutch Shell PLC said Monday that the ratio of assets to liabilities in its pension fund is now only 80% following the slump in global equities, and it has increased contributions to fill the gap:

Shell's contribution to the fund has risen from 5% to 23.6% and the employee contribution has risen from 2% to 8% of salaries, the company said in an update posted on its Web site Saturday. The increased payments should bring the pension's funding ratio to 105% within three years and 127% by 2023, the company said.

The pension fund is also reducing its exposure to investments in equities, which it considers to be higher risk. The fund will now comprise 30% shares, 50% fixed interest and 20% alternatives, compared with the previous 55-30-15 mix, the statement said. Exposure to emerging market shares has been cut by five percentage points to 20% of shares.

Public plans are not faring better. John Bury writes that on an actuarial basis the New Jersey state pension plan is a funding disaster. In the U.K., public sector pensions are in disarray:

As many across the UK take time out to consider their own pension arrangements it has been revealed that the UK taxpayer will be taking on a significantly increased burden in the medium to longer term. Figures buried in the back of this week's budget showed a £2.3 billion shortfall in public sector pension payments which was covered by the Treasury using taxpayer's money. This was for the year 2007/08 with the figure set to rise to a staggering £4.1 billion this year.

All in all, the cost of maintaining gold plated pension schemes, alternatively known as defined benefit schemes, will rise to a staggering £4.6 billion a year in 2010/11 and is set to increase year-on-year for the foreseeable future. All in all the UK taxpayer will have pumped in an extra £14.1 billion between 2006 and 2011 in order to maintain defined benefit pension payments for those working in the public sector.

As more and more non-public sector workers in the UK struggled to maintain their pension fund contributions it appears that the fat cats of the public sector are licking their lips. How ironic that we saw Gordon Brown introduced new pension regulations which will see billions of pounds a year taken from taxpayers pension schemes while public sector arrangements maintain their status quo.

In Ireland, government plans to deal with insolvent pension funds have received a muted response from interest groups. In Canada, the wolves are at the pension door:

Dalton McGuinty says Ontario doesn't have the resources to put more money into its pension safety net (Save Our Pensions, Auto Workers Urge McGuinty - April 24).

Yet, we have all the resources necessary for public service (and MPP) pension plans: They are funded from tax revenue. But apparently the Ontario Pension Guarantee Fund cannot fulfill even the meagre guarantee that was made for private defined-benefit pension plans - support to the $1,000 per month level.

The fact that members of defined-benefit plans have been restricted in their allowable contributions to RRSPs throughout their working lives makes it all the more invidious.

It seems a double standard, whereby public sector pensions are 100 per cent protected, while private-sector pensioners can be thrown to the wolves.

These same wolves are the so-called experts that have wreaked havoc on our global financial system. [Note: You should read the Barricade's latest comment on the tyranny of experts.]

In New York, Comptroller William Thomson released a list last Friday of “placement agents” — middlemen who collect fees from private firms investing pension funds. Attorney General Andrew Cuomo is looking into whether these agents took fees as illegal kickbacks:

On the list were firms either owned by or employing three former city pension fund managers. A New York Post report questioned Thompson’s role as their former boss. Jeff Simmons, a Thompson spokesman, said yesterday, “Any suggestion of improper actions is simply untrue.” The former workers, two of whom also made contributions to Thompson’s mayoral campaign, followed city rules by waiting more than a year before taking business with the pension funds, he said.

Last week Thompson called for a ban on placement agents, but that requires approval by the boards of each of five city pension funds, all “chaired by City Hall representatives,” Simmons said.

The New York Post reported on Friday that the investigation into the New York State pension fund has spread to Israel.

With few exceptions, all around the world, pension plans are in poor health. As fears of globally spreading swine flu cases spurred the World Health Organization to raise its pandemic alert to an unprecedented level, maybe it's time we also sound the alarm on the pension pandemic which is leaving global pensions in a death spiral.

Is the Recession Affecting Your Health?

Today is my birthday. I am now 38 years old. No big deal, it is just another Sunday for me. I woke up, had a cup of java and watched ABC's This Week with George Stephanopoulos.

There was an interesting interview with Iran's President, Mahmoud Ahmadinejad. The roundtable discussed President Obama's first 100 days and George Will stated he is convinced that the $9 trillion of public borrowing will lead to "stagflation" four years from now and this will be reflected in the polls, hurting Obama.

Poor George Will. Love listening to him but he is always wrong when it comes to economic prognostication. Four years from now, we will be in the midst of the longest debt deflation episode in post-war history (you can quote me on that!).

But today is my birthday and I wanted to discuss health issues. First, I read an interesting article in the Telegraph stating that adult stem cells 'able to reverse symptoms' of Multiple Sclerosis (MS):

Some have been left free from seizures and better able to walk after the treatment.

Researchers said that the results suggest that the "very simple" injection of their own cells can stimulate the regrowth of tissue damaged by the progression of the disease.

The preliminary findings add to the growing evidence that stem cells could be used to treat the crippling neurological disease, which affects about 85,000 people in Britain.

Last year experts suggested that stem cell therapy could be a "cure" for MS within the next 15 years.

Patients' symptoms were still improving up to a year after the treatment, the new study shows.

One, a 50-year-old man, who had suffered more than 600 painful seizures in the three years before treatment has not had a single one since the infusion of his own cells.

Another patient's ability to walk, run and even cycle are still improving 10 months after the therapy.

MS is caused by the destruction of myelin, a fatty protective sheath surrounding the body's central nervous system.

Sufferers typical experience fatigue, difficulty walking or speaking and pain and there is currently no known cure.

Dr Boris Minev, from the University of California, said: "All three patients in our study showed dramatic improvement in their condition.

"While obviously no conclusions in terms of therapeutic efficacy can be drawn from these reports, this first clinical use of fat stem cells for treatment of MS supports further investigations into this very simple and easily-implementable treatment methodology".

He added: "None of the presently available MS treatments selectively inhibit the immune attack against the nervous system, nor do they stimulate regeneration of previously damaged tissue. We've shown that [the] cells may fill this gap."

Earlier this year another study in 21 patients injected with their own bone marrow stem cells, found that 81 per cent saw significant improvements to their disability.

A spokesman for the MS Society said: "The preliminary research presented in this literary review is intriguing and we would be interested to see if what is shown in these case studies can be repeated in properly controlled clinical trials."

The three case studies are described the Journal of Translational Medicine.

Meanwhile scientists are claiming a major breakthrough in generating safer stem cells from adult cells.

Scientists usually use a virus to make the switch but this makes the resulting stem cells incredibly dangerous for use in humans as they can cause cancer.

Now a team at the Scripps Research Centre in California, which published its findings in Cell Stem Cell journal, claim they can use harmless proteins to carry out the same task.

This discovery has the potential to spark the development of many new types of therapies for humans, for diseases that range from Type 1 diabetes to Parkinson’s disease, they claim.

MS is a disease that I am intimately aware of. I was diagnosed with it twelve years ago. Luckily, my disease course progressed slowly, but it progressed. I now limp and there are days where walking 500 meters is a challenge.

But I remain hopeful, and for all the frustration the disease has caused me, it has also taught me how to appreciate the simple things in life, to remain positive and to fight and persevere in face of what often seems as insurmountable obstacles.

Earlier this week, we learned of the tragic death of David Kellerman, Freddie Mac's CFO, of an apparent suicide. What you might not know is that there is a rise in male suicides in this recession:

As the recession continues, it often seems that male workers are bearing the brunt of the downturn. Yesterday's announcement of David B. Kellerman's suicide highlights part of the impact that the economy is having on men, but hints at a societal shift whose effects may linger long after the unemployment crisis ends.

While the Freddie Mac CFO's death has garnered more attention than most, it is indicative of a much larger trend. This year, hardly a month has gone by without the newspapers reporting on a horrific murder/suicide involving an unemployed male. In locales as far apart as Washington state and Maryland, California and Massachusetts, the stories have been remarkably similar: a father is unable to support his family and, in a fit of depression, kills himself and members of his family. In some cases, the man is reported to have had previous psychological problems; in others, not. Most of the men are poor, but many are wealthy. Sometimes, as in the case of Kellermann, they occupy a prominent place in their society.

The rise in male suicide is among the most eye-catching news stories of the recession, but the trend only represents the tip of a very large iceberg. According to the Financial Times, 80 percent of the 5.1 million jobs lost in the recession were previously held by men. Consequently, while the female jobless rate is currently 7 percent, the unemployment rate among men has risen to 8.8 percent.

As in anything that divides the genders, the FT's survey has become somewhat controversial. The paper itself pointed out that a large part of the reason for the disproportionate split is the fact that the industries hardest hit by the recession -- construction and manufacturing -- are dominated by men. More traditionally female jobs in education and health care have emerged relatively unscathed.

Some have used the current downfall of male workers as an impetus to question what they see as "male dominance" in the workplace, as if men had this coming to them. The reasoning here is that, it's only because women were underpaid relative to their male counterparts that they're now more cost-effective and have been able to keep their jobs. Some have even gone so far as to aver that the "hidden sector" of the female unemployed who worked off the grid has skewed reporting, suggesting that the recession is not only robbing women of their jobs, but also of their voices.

However, for those whose analysis is based more on mercy and less on gender warfare, it's clear that the recession has been devastating for the male of the species. While the past 30 years has done a great deal to modify traditional gender roles, many men still feel a strong responsibility to be the primary breadwinners in their families. The inability to do so has has wide-ranging effects that are only beginning to be noticed. On the whimsical side, it has resulted in the "recession beard" trend, in which the recently unemployed assert their masculinity by indulging their ability to grow whiskers. On the darker side, as DF's Jonathan Berr noted yesterday, it has resulted in a spike among calls to therapists and suicide hot lines.

For some men, however, talking to a therapist is yet another sign of weakness, which means that many victims of the recession -- and the economic troubles that underlie it -- have been loath to seek help. Unfortunately, this masculine stereotype is particularly well-entrenched in Wall Street and in low-income communities, two areas that have been especially hard hit. Another "macho" group, military recruiters, has also been struck by a rash of suicides in recent years. Beset by work pressures and encouraged to repress their emotions, it is hardly surprising that so many men have been lashing out in inexplicable ways.

While economic estimates about the next few years vary wildly, it seems likely that the recession will bring about a broad-based reconsideration of vulnerability. As the tragic story of David Kellerman demonstrates, the people who seem strongest sometimes need the most help.

My father and brother are psychiatrists and what you should all know is that mental illness often goes unreported or isn't taken seriously. Importantly, despite the economic downturn, in any given one year period, depression strikes 10% of the population.

This is why you should learn to recognize the signs of depression and if you or a loved one suffer from it, get help as soon as possible. Employers should also start discussing mental illness more openly and offer services to their employees who might be very stressed out.

No matter where we are in the economic cycle, my advice is to always make your mental and physical health a priorirty. I invite you to read Ashton Embry's site on the best bet treatment for MS (lots of excellent nutritional information there) and to always scope out the latest health news. And sometimes what seems healthy isn't really very healthy for you. For example, I was surprised to hear about how fruit juice doubles the risk of obesity.

I think like anything else in life, you should approach things in a sensible manner. You should exercise (even moderately), eat very well, sleep at least seven hours, and try to maintain a positive outlook on life.

But if you need help, do not be embarrassed to seek it out. The old myth that "men do not need psychologists" is just that - a myth that might end up costing you your life.

Recession or no recession, never take your mental or physical health for granted. Always remember that life is short and while you can replace money and things, you can't replace your health as easily.

The Pension Killer?

Writing in the Financial Post, Stephen Donald, a consulting actuary with Buck Consultants, reports on the pension killer:

When I started my career in 1973, the economy promptly went into a recession. The S&P 500 fell 48% and took four years to get back to break-even. At the end of 1973 near the market peak, Warren Buffet said he could not find any stock bargains and returned investors their money. Companies had large deficits in their pension plans and had to start making large contributions, and that was before solvency funding! 2009 is déjà vu with the average solvency-funded ratio below 70% and many large well-known companies on the brink of chapter 11 bankruptcy. How did pension plans get into this mess?

Back in the ’70s, actuaries assumed conservative discount rates at least 1% less than expected, and this represented a margin in the order of 20%. At the same time, the market woes of the mid-’70s resulted in large company contributions going into their pension plans. Then we had a string of remarkable investment returns, and in the early ’80s pension plans returned to surpluses — and large ones at that. Some plans were wound up for business reasons and, to the shock of those companies, trust laws were interpreted by the courts such that the surplus belonged to the members.

PSP's CFO in the Hot Seat

Today was the second meeting of the Standing Committee on Finance focusing on pensions and it placed someone in the hot seat.

You can click here to view the entire meeting in English (note French only and floor videos are available by clicking here and then clicking on the speaker to scroll down).

Present today were the following witnesses:

• Phil Benson, a lobbyist of Teamsters Canada
• Barbara Miazga, Secretary Treasurer of the Board of Directors of Pensions Investment Association of Canada (PIAC)
• John Valentini, Executive Vice President, Chief Operating Officer and Chief Financial Officer, Public Sector Pension Plan Investment Board (PSP Investments)
• Pierre Malo, First Vice President, Asset Allocation Strategies and Research, Public Sector Pension Plan Investment Board (PSP Investments)
• Marie Smith, United Senior Citizens of Ontario
  
• Diane Urquhart, Independent Analyst

While I invite you to listen carefully to all the speakers, I am going to focus my attention solely on Mr. Valentini's remarks and his response to some tough questions.

[Note: As you watch the video you can fast forward by dragging the handle at the bottom above the pause bottom. Transcripts are not available yet but will be soon.]

Mr. Valentini began talking about PSP stating "we are one of the youngest and fastest growing investment managers in Canada". He noted that PSP is an investment manager, not a pension plan manager and that the liabilities are the responsibility of the Government of Canada.

Mr. Valentini stated that according to RBC Dexia, PSP Investments delivered "top-quartile" returns in the last four fiscal years. He stated that since 2004, diversification has added "significant value" to PSP Investments' performance since then.

"In fact, a review of long-term results that we have perfomed ourselves on the major funds in Canada last year indicated that private investment returns in real estate, private equity and infrastructure all outperformed total overall fund of each of those funds thus outperforming public markets."

He went on to recite the mantra: "PSP Investments is in a unique situation. We have the liquidity and flexibility to take a long-term view".

"As patient buyers we are well positioned to benefit from the drop in asset prices which means our that our stakeholders will ultimately benefit from today's distressed prices. That is good for our stakeholders and good for Canadian taxpayers."

Stop right there. Why worry about PSP Investments? With net cash flows of $4 billion a year over the next twenty years, why do they bother with "risk management"? They make it sound as if they do not have to worry about risk, and keep doubling down, buying assets on the cheap, collecting huge bonuses as they trounce bogus benchmarks in private markets.

But what about their study that indicated that private investment returns in real estate, private equity and infrastructure all outperformed total overall fund of each of those funds thus outperforming public markets? Well, notice how Mr. Valentini was careful not to discuss why all those other funds, including OMERS, are betting big in private markets.

Here is the answer: Pension fund managers realized long ago that they do not stand a chance in hell to consistently beat the S&P 500 or the S&P/TSX, so they decided to shift assets into private markets like real estate, private equity, and infrastructure, gaming the benchmarks of these assets, allowing them to easily beat them.

Claude Lamoureux and his senior team at Ontario Teachers were the first ones to realize this and when everyone saw how they got compensated millions of dollars, beating bogus benchmarks, the pension herd quickly scrambled to follow suit, claiming they are adding value through the "diversification process".

But now that it's the end of the great pension con job and curtains for private markets, how will these pension fund managers game their benchmarks? How will they continue to collect huge bonuses?

No problem! They will claim that "over a four year period, they added significant value". Of course, this makes perfect sense to them because they do not question these bogus benchmarks in private markets, but to anyone with minimum common sense something does not add up here.

Again, look at the table below comparing 2007 results in Real Estate (click to enlarge):




You'll notice the Caisse under-performed its Real Estate benchmark while the other funds trounced their benchmark. As I stated at the hearings on Tuesday, the Caisse has the toughest Real Estate benchmark of all the major funds in Canada - a benchmark that takes into account leverage, liquidity risk and beta. (But the Caisse obviously screwed up royally investing in ABCP).

Huh? What? Mr. Valentini just said they got the "more rigorous and the best" Policy Portfolio in Canada. He cited some study from RBC Dexia and their own internal study (both are not public on PSP's website) that their Policy Portfolio delivers the highest risk-adjusted returns. How could this be if they killed the Real Estate benchmark?

Importantly, how could PSP's Policy Portfolio be the "best and most rigorous" if they do not even disclose benchmarks in private markets citing "competitive reasons"?

Speaking of results, let's get back to the hearings. Mr. Valentini got grilled on disclosing PSP Investments' results for the latest fiscal year which just ended on March 31st.

This is where things got interesting. In a flagrant display of arrogance, bordering on contempt, Mr. Valentini proceeded to evade answering simple questions on their investments, their performance and on bonuses.

[Note: Read Steven Chase's article in the Globe & Mail, Federal fund managers won't rule out bonuses.]

On ABCP, Mr. Valentini said they underestimated "liquidity risk" and totally neglected to mention that both the Caisse and PSP Investments invested in ABCP without proper due diligence and that the benchmarks governing these investments did not accurately reflect liquidity risk.

[Note: La Presse published an article today stating that the Caisse borrowed heavily to invest in ABCP. We do not know if PSP also borrowed to invest in ABCP.]

On bonuses, Mr. Valentini got grilled by Thomas Mulcair and avoided answering questions. At one point, Mr. Mulcair pressed on and said "you are bordering on contempt". Mr. Valentini said that their results are being audited and that bonuses are based on "industry standards" and approved by their Board of Directors.

That begs the question why is the Board of Directors allowing bonuses when PSP is losing billions and as Diane Urquhart pointed out here, selling CDS but calling it CDOs.

Mr. Mulcair had a message for PSP's Board of Directors: "Anyone in this country running something called an investment board that lost billions of dollars last year who thinks or even thinks of paying themselves a bonus needs their heads read. We would find it properly scandalous if in the light of what happened last year, that in addition to your considerable salaries, you decide to vote yourself bonuses."

Mr. McKay echoed these concerns stating it would be inappropriate to pay out bonuses when Canadians are experiencing serious haircuts in their own investment accounts.

[Note to PSP's Board: Listen carefully to Mr. Mulcair's message because you have a fiduciary responsibility to oversee activities in the best interests of beneficiaries and the plan sponsor. Also note that Caisse did not pay out any bonuses in 2008.]

While the committee members focused on ABCP, performance and bonuses, no questions were asked on on their credit portfolio and losses related to selling CDS. Who approved of this activity? Did the Board approve it? Why weren't measures taken to mitigate risks? What is the value of this portfolio now? Who is accountable for this credit portfolio?

In order to answer these questions, the Standing Committee on Finance should bring in PSP's Chairman of the Board, Paul Cantor, and its President and CEO, Gordon Fyfe.

While they have them both there, they can ask them several other questions:

• Are there solid whistleblower policies at PSP Investments?
• What was the turnover rate at PSP Investments in each of the last four fiscal years?
  
• What are the benchmarks for Real Estate, Private Equity and Infrastructure? Do they reflect the risks, leverage and beta of the underlying investments?
• What was the benchmark governing Money Markets where ABCP was bought? Does it reflect the liquidity risks of these investments?
• Why did André Collin the former First Vice President, Real Estate Investments leave PSP? How much bonus and compensation did he receive while there? Where is he now and what relationship does PSP have with his current employer?

Also, why does Mr. Fyfe have a golden parachute which states the following [From page 37 of PSP's 2008 Annual Report, footnote 1]:

If Mr. Fyfe’s employment is terminated for any reason other than for good and sufficient cause, he is entitled to a payment equal to two times his base salary, plus two times the average annual amount earned under the investment Plan and the Deferred Incentive Plan for the three-year period prior to the termination. Mr. Fyfe is subject to post employment non-solicitation of employees and confidentiality obligations.

I think today's hearing was very interesting because it proves my point that we need more in-depth hearings focusing solely on activities at the large public pension funds. Next up are the hearings in Quebec focusing on the Caisse whose moves have been assailed.

Finally, when people tell you there was nowhere to hide in 2008, please bring up the example of HOOPP and South Korea's National Pension Service and how they avoided much of the rout in stocks, private assets and hedge funds by allocating a good portion of their asset mix to good old government bonds.

When it comes to hot seats, bonds won't burn you as badly.