Tuesday, November 30, 2010

Pension Accounting Change to Hit Profits?

Bob Tita of the Dow Jones Newswire reports in the WSJ, Pension Accounting Change Could Make Company Profits Less Predictable:

Efforts to make pension accounting more transparent could cause corporate profits to become more volatile if gains and losses from pension assets are mingled with results from companies' business operations.

The agency for international accounting standards is expected to take up a proposal next year that would require companies with defined-benefit pensions to report annual changes in the value of their pension assets as part in their income statements. Under current procedures, returns on pension investments and gains and losses in pension-plan assets are accounted for in small increments over several years to keep them from skewing companies' earnings.

The change would provide a more immediate snapshot of companies' pension-plan performance. But U.S. companies, aside from Honeywell International Inc. (HON), have so far been reluctant to voluntarily change their pension accounting. Observers warn that investors could be subjected to bouncier stock prices if earnings become significantly less reliable with the addition of unpredictable gains and losses from pensions.

"If we've learned nothing else over the last three years, it's that the market isn't always rational," said Alan Glickstein, senior consultant for Towers Watson, an employee benefits consultancy. "It's not necessarily a good thing if [the accounting change] just increases earnings volatility."

If the International Accounting Standards Board--the nongovernmental agency for accounting rules used by companies outside the U.S.--adopts the change for pension accounting, observers predict the Financial Accounting Standards Board will follow suit for the sake of consistency and amend the Generally Accepted Accounting Principles used by U.S. companies.

"To the degree that a company wants to make sure that their financials are reflective of their operations, it would make sense to go through a change like this. It would add transparency to the numbers," said Daniel Holland, an analyst for research firm Morningstar Inc.

More than 340 companies in the Standard & Poor's 500 Index have defined-benefit pensions that guarantee employees pension incomes when they retire. To meet these obligations, the companies have set aside a combined $1.22 trillion that is invested in stocks, bonds and other types of investments.

Smoothing out annual gains and losses from defined-benefit pensions has come under increasing scrutiny as regulators dismantle other accounting practices used for decades to wall off pension costs and liabilities from companies' balance sheets and their profit statements.

"The pension volatility has always been there. It's just not measured today. The accounting doesn't require that it be highlighted," said David Larsen, managing director for corporate finance consulting at Duff & Phelps Corp., a financial services and investment banking advisory firm.

Honeywell is the largest U.S. company to begin using market-to-market accounting for its pension. The move is intended to put the brakes on escalating costs for Honeywell's pension. Falling interest rates on bonds used to determine companies' future pension obligations have driven up annual pension costs for all companies with defined-benefit plans. But Honeywell's expenses have been exacerbated by a decision it made in the late 1990s to use a six-year schedule for amortizing pension gains and losses on pension assets and a three-year schedule for smoothing out returns from pension investments. Most companies amortize gains and losses over 10 years or 12 years and account for investment returns over five years.

Honeywell's shorter time frame helped the company lower its pension expenses when asset values soared. But when pension-fund performance tanked in 2008, Honeywell's pension headwinds were magnified in its earnings.

Without the option of switching back to a longer amortization schedule, Honeywell will stop deferring gains and losses. The aerospace and building-systems manufacturer will recognize $5.5 billion in prior asset losses in its 2010 income statement. Going forward, Honeywell will report gains and losses in their entirety during the year they occur.

The change will increase the company's pension costs for this year to $1.61 billion, compared with $791 million under the six-year schedule. But its pension expenses are expected to plunge to $200 million in 2011.

"It takes all that old stuff and puts it behind them," said Howard Silverblatt, an analyst with Standard & Poor's investment services unit.

Once the slate is wiped clean, Honeywell aims to limit its pension expenses to about $200 million a year. Moreover, the company will attempt hold down pension-related volatility in its earnings by making pension asset values and returns more predictable than in the past.

"I can see investors having this fear that every fourth quarter there's going to be this wild swing," Chairman and Chief Executive David Cote said during a Nov. 16 conference call with analysts. "More likely than not, that is not going to happen."

In the coming years, Honeywell plans to shift more of its pension funds from equities to fixed-income investments. That will lower annual returns to 6.5% from 9%, but will lessen Honeywell's exposure to sudden swings in stock values and returns that would contribute to earnings volatility.

If mark-to-market pension accounting becomes the standard, other companies will likely change their investment mix as well, creating a profound shift in the allocation of pension funds the next decade.

"I would expect it to take a while, but pension assets would shift to less volatile securities," Morningstar's Holland said.

Is there a "profound" shift in asset allocation going on? I'm not convinced. If corporate plans adopt mark-to-market pension accounting rules, they will reduce pension costs and likely shift assets into less volatile securities, winding up their existing defined-benefit plans while scrapping them for new employees (moving them into defined-contribution plans).

But I've already discussed that while private pension plans are reducing risk, most public plans are increasing risk, continuing to invest the bulk of their assets in equities and alternatives. Public plans are much larger and shifts in their asset mix carry a lot more weight. In other words, we can speculate all we want, but it remains to be seen whether a "profound" shift in asset mix will take place over the next decade, even among corporate plans.

Of course, if Charles Nenner is right (see Yahoo Tech Ticker interview below), and a Japan-style slump hits the US economy, then corporate plans adopting Honeywell's approach might come out ahead. I don't agree with Mr. Nenner (correlation does not imply causation!!!), but if he's right, bonds will continue to outperform over the next decade.

Monday, November 29, 2010

Universities Sinking in Pension Abyss?

James Bradshaw of the Globe & Mail reports, Universities facing service cuts to climb out of ‘pension abyss’:
Canadian university pension plans have fallen into a collective $2.6-billion hole, and may have no choice but to cut services to begin climbing back out of it.

Most faculty and staff have defined benefit pensions, which promise a set retirement income based on service and salary. But those funds suddenly cratered when markets crashed in 2008, most losing 15 to 30 per cent of their value.

Now, provincial laws will force schools to find money to plug those holes – sometimes tens of millions of dollars a year – an untimely headache for institutions already warning of cuts to come due to static government grants, limits on tuition hikes and shaky endowment returns.

A Globe and Mail survey of more than 20 Canadian universities shows a combined pension plan solvency deficit of at least $2.59-billion, and since some schools last crunched their numbers before 2008, that figure could still grow.

Pension investments rebounded somewhat in 2009, but the long-term horizon is hardly any brighter. With a large proportion of long-serving faculty members across Canada nearing retirement, keeping plans fully funded costs more. Meanwhile, longer average lifespans have combined with rising wages and low interest rates to impose structural strains.

“I think [defined benefit] plans are suddenly going to cost more than they historically did,” said Virendra Gupta, executive director of the Universities Academic Pension Plan (UAPP), which manages pensions for all Alberta universities.

Two years ago, Dalhousie University’s $726-million pension plan lost 16 per cent of its value, leaving a $129-million solvency deficit – the amount that needs to be added so that if the university suddenly folded, it could honour the plan.

To comply with Nova Scotia law, Dalhousie would need to pump $12-million into its plan on top of regular contributions in 2011. That prompted university and faculty leaders to jointly ask for an exemption from solvency rules earlier this year. The province said no, instead granting a payment-free 2011 and ten years to make up the deficit, instead of the usual five years.

That still means some cuts are likely unavoidable, said Dalhousie assistant vice-president Katherine Sheehan.

“The only place that [money] could come from is our operating budget,” she said.

The University of Toronto’s pension fund was the hardest hit, losing 29 per cent in 2008. As a result, the school expects to owe an extra $50-million a year on top of $100-million it already contributes from a $1.5-billion operating budget. Since an arbitrator recently ruled against a proposed premium hike for faculty and librarians, cuts to services are the likely solution again.

This fall, Ontario temporarily eased pension requirements on universities to give them time to regroup, but U of T argues solvency tests make no sense for universities.

“We’re not going to go out of business unless the government decides to put [us] out of business,” said Cathy Riggall, U of T’s vice-president of business affairs. “We can’t just raise our prices to raise our revenue: The government controls our tuition levels, the government controls our grant funding, so they hold all the cards.”

If exempted, U of T would only have to meet a potentially lower “going concern” threshold, which assumes the fund’s continued survival when estimating how much money it needs. But its faculty association argues an exemption won’t solve the problem.

“All that does is kick the can down the road,” said George Luste, president of the University of Toronto Faculty Association.

Saskatchewan is in the midst of a three-year moratorium on solvency payments, while Manitoba and Quebec universities already enjoy permanent exemptions. So does Alberta’s UAPP, which the employers and employees run jointly, making employees “part of the problem, part of the solution,” Mr. Gupta said. But because UAPP lost 20 per cent in 2008, its employees now fork over nearly 2.4 per cent more of their salaries than they did two years ago.

Diane Urqhart sent me this article and she also forwarded me a list of Canadian universities with non-bank asset-backed commercial paper (ABCP) exposure (click on image to enlarge):

And this isn't just a Canadian problem. I was skimming through Pension Tsunami today and right at the top was Ed Mendel's Calpensions blog entry, UC pensions: from free lunch to years of pain:
UC Regents may vote on a costly retirement reform plan next month that officials say will not only lower benefits, but could squeeze faculty recruitment, research and medical centers for two or more decades.

An institution known for its prized collection of intellects did something two decades ago that in hindsight now seems unwise. It stopped making employer-employee contributions to the pension system, getting by on strong investment earnings.

A staff report to the Regents in September said that if normal contributions had continued since 1990, the University of California retirement system “would be approximately 120 percent funded today.”

But as of last July the system was 73 percent funded using the market value of assets and 87 percent funded on an actuarial basis, which spreads gains and losses over five years and won’t fully reflect the 2008 stock market crash losses until 2013.

“The idea of having a defined benefit and not paying into it is insanity,” Richard Blum told his fellow Regents at a meeting this month. He said he began urging that contributions be restarted several years ago.

A Regents faculty advisor, Dan Simmons, said the current problem is the result of failing to resume contributions seven or eight years ago. He said a faculty task force and others urged a restart “I think even before Regent Blum began pushing that issue here.”

Action by the Regents restarted contributions last April with 2 percent of pay from employees (if bargained with unions) and 4 percent from the university, expected to grow respectively to 5 and 10 percent by 2012.

Read the entire entry here. It's clear that this university's pension plan was heading towards disaster, as were others. The pension squeeze on these plans will have severe repercussions on higher education, especially here in Canada where tuition fees remain relatively cheap (of course, they've been creeping up and relative to the US everything looks insanely cheap!).

So what are Canadian universities going to do? Start exclusive MBA programs that charge outrageously expensive fees? Good luck. It won't make a difference. There will be pain at Canadian universities, impacting staff and students. Ultimately, society will bear the brunt of these cuts.

Sunday, November 28, 2010

Preparing for a Pension Riot?

Connie Woodcock of the Toronto Sun reports, Preparing for a pension riot:

My family knows me too well. They knew I wasn’t going to react well to my birthday this year — I’d been worrying about it for months.

So last weekend, they threw me a big, fat, happy-last-day-of-being-59 party with lots of food and wine and presents and jokes and even a speech.

And really, it helped — a little.

But turning 60 is a traumatic event in your life any way you slice it. And, no, 60 is not the new 40. No matter how much you keep up with pop culture, no matter how many times a week you go to the gym, you’re not a kid any more. You may even have to abandon the term “middle-aged” soon.

In my 40s, it never occurred to me 60 would be such a boulder in my path. Sixty-five, I thought, would be terrible — the day society officially kicks you to the curb. But then my best friend hit the big birthday and it turns out 65 isn’t that bad. They start sending you cheques every month, they pay for your drugs and you get the seniors’ discount.

What’s not to like?

Sixty, on the other hand, is the day it occurs to you that you’re old enough to be someone’s grandmother.

Mostly, it makes you stop and assess your life and where you’re headed.

So imagine my dismay when I discovered that by the time I get to age 65 there may not be a monthly cheque waiting for me.

I may have to wait until age 67 — or even 70.

The federal government is being asked to consider raising the retirement age two years to relieve pressure on the Canada Pension Plan.

A report called “Is 70 the New 65?” released last week from the Mowat Centre, a University of Toronto think tank, suggests raising the official retirement age by two years would more equitably distribute pension costs among younger and older Canadians.

It shouldn’t come as any surprise to baby boomers. If you’ve been paying attention, you’ll have noticed that many Western countries — the U.S., the U.K., Germany and Australia — have already hiked the pension age. In France, they’ve had riots over it in the streets this fall.

But I wonder what this will do to people at the low end of the wage scale who have clung to their jobs for years with their retirement plans geared to age 65.

You’ll still be able to take your Canada pension at 62, but it would be much reduced, beyond what it already is if you take it early. And also last week, new stats show more Canadian seniors living in poverty.

Remember “Freedom 55”? In Canada, that’s only true for politicians and civil servants. There are lots of perfectly employable people in their 50s who haven’t held a full-time job since their 40s thanks to recessionary cutbacks. They can’t even get job interviews.

Some of them have resigned themselves to the situation and are now driving school buses or bartending or clerking at Tim Hortons. They’re not going to react well to continuing even longer.

In fact, Canadians have heard for years the CPP won’t be there for them by the time they get to age 65. That, too, turns out to be a myth since the CPP’s chief actuary has said it’s sustainable at current contribution levels.

Critics have been quick to point out because Canada raised contributions years ago, we aren’t in the same situation as other countries. But we’re living longer and the baby boomer bulge will start hitting 65 next year.

The idea isn’t really on the government’s radar yet and no government would want to be the one to actually do it. But I’m certain there’s about to be a national debate.

Selfishly, I just hope it drags on so long that I’ll sneak under the wire.

I already discussed whether 70 is the new 65. As governments clamor to reign in entitlement spending, they're cutting everywhere and increasing the retirement age. Does Canada really need to raise the retirement age? According to Bernard Dussault, former Chief Actuary of Canada, there is no imminent need to do so:

Current CPP contributors pay too much (9.9% rather than 5.5%) to the CPP because their predecessors:

  • did not pay enough into it (3.6% for 20 year, increased to 6% by 1996, etc.) and
  • got full accrual of benefit rights after 10 rather than 47 years.
Why would/should we consider penalizing further the current contributors by increasing the pensionable age? The 9.9% remains somewhat sufficient to afford the payment of pensions commencing at age 65.
In the end, I think there will be pressure to raise the retirement age. Is this fair? Not if you're sixty and working on the assembly line or at some job paying you low wages and wearing you down every day as you try to get by.

There are no easy solutions to the pension conundrum. Many Canadians over sixty and others around the world are just beginning to come to grips with the grim reality that awaits them. Their retirement dreams are slipping further away and along with them, their standard of living. That's why along with jobs, pensions will remain the hot political issue of the next decade.

Thursday, November 25, 2010

The Pension Conundrum?

Stefania Moretti of QMI Agency reports in the Toronto Star, The pension conundrum:

Recent calls to boost the Canada and Quebec Pension Plans will further burden business owners and push wages down as much as 2.5%, according to a new report.

The Canadian Federation of Independent Business said it has studied recent proposals from the Canadian Labour Congress and others to up CPP and QPP benefits and premiums.

The CLC proposal, it found, will force pay down as much as 2.5% in the long term.

With Canadians more indebted than ever, retirement funding has become a hot-button issue, with many claiming the CPP and QPP aren’t enough to sustain quality of life, especially for private sector workers. The average retired Canadian man gets $6,800 a year from the CPP, while the average woman gets just $4,700.

Canada’s finance ministers have received a flurry of proposals on how to revamp the system ahead of their meeting on retirement income in December.

“One way or another everybody has to save more or we’ll be facing a crisis,” said Jeff Atkinson, a spokesperson for the CLC.

The CLC has proposed gradually doubling the benefits plan with premium increases of 0.47% in each of the next seven years, which works out to an additional $3.57 per week for a worker earning $47,200.

But employers, who already have the burden of funding employment insurance, would have to match the new premiums and that will drive wages and even job growth down, the CFIB said.

And the spending power that comes along with increased savings won’t be fully realized for 40 years, it said.

"The other important lesson of this exercise is to shed light on the fact that the bulk of the negative economic impacts would be the result of increases to employer-paid premium costs," said CFIB chief economist Ted Mallet.

Catherine Swift, president of the CFIB, said the real problem is the gap between private and public sector pensions.

"Taxpayers struggle to save for their own retirement, in part because they are paying dearly for the pensions of civil servants,” she said.

The CFIB says that if premiums must be raised, then they should be raised on the employee side only.

"As employers pay 60% of Employment Insurance premiums compared to 40% for employees, perhaps employees should pick up more of the cost of CPP, leaving employers' premiums at the current level,” she said.

CLC President Ken Georgetti said unionized employers and the public sector have done their part to ensure better retirement income and now it’s time for the private sector to step up to the plate.

“If you follow Swift’s argument to its illogical conclusion, she would argue that everybody should be as poor as the poorest private sector worker. That’s not the goal,” he said.

Employers who already offer a pension through an Registered Retirement Savings Plan could transfer some payments to the CPP since it is tax deductable and offers a better return for workers, he added.

I have to agree with Ken Georgetti on this one. The goal isn't to impoverish everyone, but to increase retirement security among as many workers as possible in both the public and private sector.

And here is an additional thought. Maybe the gap between private and public sector pensions exists because the latter are better managed. Yes, public sector pensions are more generous, but I happen to believe that for the most part, they're better managed plans.

Finally, Susan Eng, VP Advocacy at CARP, sent me Joe Friesen's Globe and Mail article, Number of seniors living in poverty soars nearly 25%

The number of seniors living in poverty spiked at the beginning of the financial meltdown, reversing a decades-long trend and threatening one of Canada’s most important social policy successes.

The number of seniors living below the low-income cutoff, Statistics Canada’s basic measure of poverty, jumped nearly 25 per cent between 2007 and 2008, to 250,000 from 204,000, according to figures released on Wednesday by Campaign 2000. It’s the largest increase among any group, and as the first cohort of baby boomers turns 65 next year, could place increased pressure on families supporting elderly parents.

Economists say women make up as much as 80 per cent of the increase in seniors poverty. Armine Yalnizyan, economist at the Canadian Centre for Policy Alternatives, said more women than men were living close to the poverty threshold before the financial crisis took hold in 2008, and, because their retirement savings tend to be smaller, were more likely to slip below the low-income cutoff. Men over 65 are also twice as likely as women over 65 to have a job. By January, 2009, there were 23,000 fewer women over 65 working than there were seven months earlier, while the number for men changed very little, Ms. Yalnizyan said.

“My guess is that the majority of women [who are still] working over 65 are not carrying on with their career, but trying to have a little more comfort in their lives. They were probably never too far above the poverty line, whatever line you pick. When those jobs are gone, more of them are struggling to make ends meet,” Ms. Yalnizyan said.

The rise in poverty among seniors poses particular problems for their adult children, who will be expected to bridge financial gaps for their parents while supporting their own families. This so-called “sandwich generation” is often caught with the twin pressures of having children in higher education and parents requiring additional care for failing health, according to Laurel Rothman, co-ordinator of the Campaign 2000 report card on child and family poverty.

She said the trend is particularly hard on new Canadians who have sponsored their parents to join them in Canada. Many of those parents have been able to work for only a few years in Canada before retirement, and so receive very little in Canadian pensions.

“In Montreal, Toronto and Vancouver, ethno-racial newcomers are particularly a concern,” Ms. Rothman said. “We see it all the time at Family Service Toronto, people who come here that are sponsored [by their family members]. It may be someone who puts in five or 10 years of work [in Canada], but they don’t get full Canada Pension Plan. ... And their cost of living has gone up.”

The jump in poverty among seniors is unusual because Canada’s success in tackling this issue has been cited as perhaps its single most successful policy intervention. According to figures cited in a 2009 Conference Board report, Canada’s rate of seniors poverty was as high as 36.9 per cent in 1971. The government, in an effort to tackle the problem, had a few years earlier introduced the Guaranteed Income Supplement and the Canada Pension Plan. By 2007, the rate of poverty among seniors had plummeted to 4.9 per cent, before rising to 5.8 per cent in 2008.

The Canadian data are at odds with what’s happened in the United States, where the poverty rate of 9.7 per cent among seniors did not change between 2007 and 2008, despite the financial collapse. Ms. Yalnizyan said that could be explained by the time lag between the beginning of the economic upheaval in the United States and its eventual impact on Canada.

The Campaign 2000 report also says 9.1 per cent of Canadian children were living in poverty in 2008, down slightly from the year before, but nowhere near the goal of eliminating child poverty set by Parliament in 1989.

Susan Eng sent me her response to this article, which she sent to the Globe and Mail:

The 25% increase in poverty among Canadians 65-plus is no surprise. That despite being warned, governments have not acted to prevent it is the real story.

The dramatic decline in seniors’ poverty rates over the last 20 years is largely attributed to the CPP, OAS and GIS. But the CPP has “matured” – retirees have just started receiving their full entitlements after 40 years in the workforce – so no more improvements from this source. OAS and GIS have not kept pace with the true increase in cost of living – the indexing formula excludes food and energy costs.

The differential impact on women is also not news. In and out of the work force with child rearing and caring for their parents or spouses, the women now over 65 had lower career earnings and more likely, no workplace pension.

Instead of helping, government rules actually exacerbate the problem. Applying late for OAS, GIS or CPP, limits you to11 months in retroactive payments – of your own money. Eighteen percent of women over 65 who live alone live in poverty. It didn’t help that the OAS spouse allowance for those aged 60-64 was not available to them.

Where’s the money to increase OAS and GIS to come from? The $2 billion saved when the Afghan mission ends, one or two jet fighters and their maintenance contracts, fundamental restructuring of health care delivery– take your pick. But the ignoring the issue won’t make it go away. Thanks for the story.

Canada's finance ministers can no longer ignore this problem. There is no pension conundrum, only pension poverty which will get worse over the next decade. In fact, I had a conversation with a colleague of mine today and we chatted about how quantitative easing (QE) may be the only option, but it will exacerbate the divide between the financial economy and the real economy. It's great for banks, hedge funds, and private equity funds, but it remains to be seen whether the wealth will trickle down to the working class. In the meantime, pension poverty is getting worse and policymakers need to implement policies that will protect society's poor, elderly and most vulnerable from the vagaries of Casino Capitalism.

Wednesday, November 24, 2010

There Go Irish and Hungarian Pensions?

Stephen Collins, Harry McGee and Mary Minihan of the Irish Times report, Welfare and pensions hardest hit in €15bn package of cuts and taxes:

A sharp increase in taxation, deep cuts in social welfare payments, a reduction in the minimum wage and a modest property tax are among the elements in the Government’s four-year National Recovery Plan.

Tax relief on pensions will be reduced dramatically and recipients of public sector pensions will face cuts for the first time.

The 140-page plan published yesterday outlines a package of measures designed to reduce public spending by €10 billion and raise an extra €5 billion in taxes by 2014.

The plan will be front-loaded with a €6 billion adjustment coming in the 2011 budget, to be published on December 7th. That will involve extra tax of about €2 billion in a full year and cuts in social welfare of €760 million.

The Government’s prospects of getting the budget through the Dáil eased last night when it emerged that Independent TDs Jackie Healy-Rae and Michael Lowry are likely to support it.

With the backing of the two Independents the Government would have a potential 82 supporters while the Opposition will have a potential maximum of 80 if Pearse Doherty is elected as Sinn Féin TD for Donegal South West tomorrow.

EU economic and monetary affairs commissioner Olli Rehn welcomed the plan – which maintains corporation tax at 12.5 per cent – saying it represented “an important contribution to the stabilisation of Irish public finances”.

He added that a €6 billion adjustment in the 2011 budget would be “appropriate”.

Taoiseach Brian Cowen has said the plan would provide the basis for surmounting the deepest economic crisis since the foundation of the State. “We are a smart, resilient and proud people, and we are going to come through this challenge because we love our country and we want to make sure our children have a good future,” he told a press conference to launch the plan.

“Lessons will have to be learned . . . It’s a challenge that can be surmounted. I am confident that talent and will and courage of our own people will make this a reality for us as a people,” Mr Cowen said.

As part of the plan the minimum wage is to be reduced by €1 to €7.65 an hour in next month’s budget. Social welfare cuts of almost €3 billion will take place over four years as part of a package of measures to encourage people to get involved in “employment enhancement” schemes.

Income tax changes to rates and credits combined with the reduction in relief on pensions and other measures will lead to a significant rise in the tax take from those already in the tax net. It will also bring more people into the tax net for the first time with a drop in the entry point from €18,300 to €15,300.

The plan states that the after-tax income of a single person earning €55,000 will fall by €1,860 a year, or about €36 a week, a drop of 4.8 per cent. The after-tax income of a married single-income family earning €55,000 will fall by €2,310 a year, or €44 a week; a fall of 5.4 per cent.

As a result of changes to pension reliefs, the after-tax income of a person earning €55,000 who contributes to a private sector pension will fall by a further 2.5 per cent by 2011.

The Croke Park deal which protects the pay of public service workers remains unaltered in the plan but new entrants to the service will start on 10 per cent less than existing salaries and their pension entitlements will be considerably less generous. Existing public service pensioners will be face cuts for the first time, with an average reduction of 4 per cent.

There will be a reduction of 24,750 in the numbers employed in the public service over the period by 2014 compared to 2008, with half of this having already been achieved, while work practices will be reformed to allow for flexibility and more efficient services.

A property tax of €200 a year and water charges of about the same amount will be phased in by 2014.

No change in the State pension is proposed but the plan reiterates a decision to increase the qualifying age to 66 in 2014. The capital budget will be cut by €1.8 billion for next year.

When asked last night about the reasons for the massive adjustment, Mr Cowen referred to the collapse in the construction industry. “People were expecting a soft landing and it didn’t happen. The analysis was wrong and the advice was wrong. I take responsibility for that and I have never ducked that.”

Opposition parties were critical of the plan, with Fine Gael leader Enda Kenny saying it lacked details of budgets for the next four years. He said the European Commission had confirmed to him that any incoming government would not be bound by its proposals.

Labour Party spokeswoman on finance Joan Burton called on the Government to clarify the status of the plan, saying it was not clear if the document represented the Coalition’s opening position as it went into talks with the IMF.

This is the the ugly face of austerity. Cut everywhere, even public pensions and minimum wage. No wonder the Irish are pissed off and protesting. It's going to be a very rough four years ahead.

Meanwhile, over in Hungary, Bloomberg reports that the government is is trying to force 3 million people now in private pension schemes back into the state system to help it meet strict budget targets.

Special incentives would be offered to those switching into the state pension plan by Jan. 31, Economy Minister Gyorgy Matolcsy said Wednesday. Those people remaining in private schemes will become ineligible for public pensions -- a move that would effectively cost them 70 percent of their retirement payouts.

At stake is about 2.7 trillion forints (euro9.8 billion, $13.5 billion) accumulated in individual pension accounts and managed by private pension funds.

The government plan, while not nationalizing private pension funds outright as Argentina did in 2008, is expected to make it very difficult for the 18 funds offering pension services in Hungary to keep operating.

Matolcsy said severe cuts will also be made in how much private funds can charge for fees and operating expenses.

Hungarians will automatically be transferred into the state system unless they opt out.

At present, 10 percent of most employees' wages go into a private pension fund, while employers pay another 24 percent into state coffers. Under the government's new plan, those who stay in the private scheme can count only on their own 10 percent payments when they retire.

Matolcsy told reporters the new plan was an "important turning point in terms of economic policy."

Hungary was hard hit by the global financial crisis and is still facing daunting economic challenges. In 2008, it was forced to rely on a bailout of euro20 billion ($27 billion) from the International Monetary Fund and other institutions to avoid bankruptcy.

Government officials this summer have made contradictory statements about the state of the country's finances, increasing uncertainty in the financial markets about Hungary's credibility and hurting the stability of the forint.

Ever get the feeling that the world economy is hanging on by the skin of its teeth? Sure, it's only Ireland and Hungary, but it could easily shift to Portugal and worse still, Spain. All this tells me the Fed, the ECB and central bankers around the world are going to be busy printing money, counterbalancing some of the fiscal austerity taking place right now. Welcome to the future.

Tuesday, November 23, 2010

Nice Guys, Naughty Information?

Nathaniel Popper of the LA Times reports, Major investment firms subpoenaed in insider trading probe:
A number of high-profile investment firms — including two that manage mutual funds owned by millions of Americans — have received subpoenas in a federal probe of alleged insider trading on Wall Street.

Janus Capital Group Inc., a Denver-based mutual fund family, reported in a regulatory filing Tuesday that it had "received an inquiry regarding the recently disclosed insider trading investigation on Wall Street calling for general information."

Boston-based Wellington Management, which invests money for a number of pension funds and mutual funds, also received a government request for information, Bloomberg News reported.

One of the biggest names in the hedge fund world, SAC Capital Advisors, wrote in a letter to clients Tuesday that it had received a government request for information, according to a person who saw the letter.

Another big hedge fund operator, Chicago-based Citadel Asset Management, and at least two smaller hedge fund firms also were reported to have been subpoenaed.

Shares of Janus slumped 2.8% on the news. SAC Capital and Wellington are privately held.

News of the subpoenas came a day after FBI agents raided the offices of three hedge fund firms as part of the insider trading probe. Although a raid requires a search warrant approved by a judge, a subpoena can be issued without judicial approval.

Wellington has $598 billion in assets under management. Janus manages $161 billion. SAC Capital and Citadel manage many fewer billions than Wellington or Janus, but charge much higher fees relative to the size of the portfolios they handle.

The government's interest in SAC Capital caused a buzz on Wall Street because of the firm's successful track record and an air of mystery surrounding its secretive founder, billionaire art collector Steven A. Cohen, who has been called the "hedge fund king" by the Wall Street Journal.

Two of the firms raided Monday were started by alumni of SAC Capital.
Yahoo's Tech Ticker said that according to initial reports, the investigation could ensnare Wall Street's biggest names: Goldman Sachs, SAC Capital, Wellington, Jennison, MFS Global, Maverick, Citadel, and others. (Here's a who's who of who might get nailed.)

For Rolling Stone contributor Matt Taibi, author of Griftopia, there's nothing shocking at all about revelations of possible widespread insider trading on Wall Street (see video below):

"Everybody is trading on the inside somehow or another; so this isn't particularly surprising," Taibbi says. "A lot of sources I talked to suggested this is endemic to the entire culture."

The current investigations center around alleged insider trading prior to merger announcements such as MedImmune's takeover by AstraZeneca in 2007 and Merck's buyout of Schering-Plough in 2009, The WSJ reports.

While gaming takeovers is a "classic" form of insider trading, Taibbi says it's also evident in high-frequency trading, where exchanges provide a millisecond sneak peak at buy and sell orders, or the practice of clients front-running big orders by institutions.

"The real issue here is that it's everywhere," he says. "And the fear is there's no end to it."

Taibbi, who became widely known in financial circles in 2009 when he dubbed Goldman Sachs "a vampire squid on the face of humanity," says he is not cynical by nature. "But this Wall Street stuff is overwhelming," he says. "The more you look into it, the less you see the way out. The government seems so completely helpless to do anything positive in this situation."

Finally, Holman Jenkins Jr. of the WSJ reports, Nice Guys, Naughty Information?:

Beating a dead horse in argument is frowned upon, but sometimes it takes a good thrashing to reveal the absurdity beneath the surface reasonability. So it has been with the evolution of insider trading law.

Once it was deemed that the person acting on the information was naughty because, however valuable and accurate the information, acting on it involved a betrayal. An executive who traded on inside information betrayed his shareholders. A lawyer who traded on advance word of his client's deal betrayed his client.

You could buy or not buy this theory, based on whether you think the benefit of having the information in the stock price outweighs using criminal law to improve the climate of trust between principals and agents. But it was not insane. Insane is what has happened to insider trading law over the past generation, and by all portents may reach its culmination in today's widely leaked FBI crackdown on hedge funds and research firms.

Insane is treating the information as the offender. Insane is seeking serially to expand the circle of people who can be criminalized for trading on it, as if it were desirable to keep accurate information out of stock prices.

The latest investigation has led to raids on hedge funds and people who run research shops being visited by the FBI and threatened with jail. That much we know. The papers delight in hinting between lines that the climatic target is hedge fund impresario Stephen A. Cohen, whose vast wealth and semi- colorful history you can read about on Wikipedia.

The probe may yet reveal something we can properly hold our noses over. Bribes were distributed to betray corporate confidences. Agents were induced to sell out those whom they were duty-bound not to sell out.

It may also turn out—many years hence, after careers and lives have been ruined—to be an instance of the dead-horsers at the FBI and SEC running amok.

We can already cite one considerable irony. The effort over many years to police "insider" information has made such information more valuable. From "your bunny has a good nose" (a line that got an investment banker charged with insider trading in the 1980s) to today's crackdown on what leaky investigators describe as an insider information "trading network," the government has injected fertility drugs into a sub-industry of specialists devoted to winkling out whatever corporate information is not yet in the share price.

Lately books have been written debunking the efficient markets hypothesis, claiming it does not account for all known human phenomena. But a hypothesis does not have to be comprehensive to be valuable. And the securities markets, whatever their vagaries, manifestly do finally deliver prices that accurately reflect what an investor can expect back on the money he puts in. Romantic as it may seem, some of us even believe the stock research industry is worth putting up with if it contributes to creating accurate, up-to-date stock prices. Society is served, after all, when investors and management get the best possible feedback on what products and services and business models are most demanded by the public.

The SEC has a different view. The logic of insider trading law, taken to its dead-horse extreme, is to keep good information out of stock prices. In the SEC's ideal world, any information originating inside a company will be reflected in stock prices only after the company has publicly announced it to the world's investors simultaneously.

As a colleague said of Stalin, there is no way to get the SEC's ideal world without mangling the real world beyond repair. A company cannot do business without revealing itself to its customers, its suppliers, the guy who drives by and sees a parking lot more full (or empty) than the day before. Yet under "misappropriation theory" anyone can be prosecuted for trading on information that the government decides they should have known they shouldn't have known.

More ridiculous is the claimed motive: because it's "fair" to small investors.

Huh? In a world where hedge funds spend millions so their computers can be a nanosecond closer to the stock exchange, the average small investor is supposed to secure his retirement by betting on his ability to beat the world to some market- moving bit of information? Let us suggest an ironic and contradictory theory: What really improves the small investor's confidence in the market's fairness is when he buys a stock, is blindsided by some corporate announcement, and yet notices the stock barely moves anyway thanks to the sharpies who made sure the information was already in the price.

The SEC touts on every possible occasion its political bona fides with blather about its devotion to small investors. But if the agency really had our interests at heart, it would preach daily the unwisdom of most us ever buying an individual stock. We should be free-riding on the efforts of the people the FBI is trying to criminalize. Let the pros do the work of keeping stock prices "right" (a problematic concept, we understand). Let the rest of us sit back on our index funds while this marvelous, greedy, roiling system keeps Corporate America's nose to the wheel.

Mr. Jenkins' argument has merits but he uses twisted logic. The stock market is rigged and it's ridiculous to hear the SEC is devoted to maintaining a level playing field between small investors and large banks and their large hedge fund clients. Joe and Jane Retail can never compete with the Goldmans, Citadels and SAC Capitals of this world. Not in their wildest dreams. To even suggest you can create a level playing field is a farce!

Keep in mind, however, this nonsense has been going on for years. Matt Taibbi is dead right, it's endemic and pervasive across the entire financial industry. Pension funds who invest in these mutual funds and hedge funds are probably very nervous, weighing the reputation risk of being linked to these funds, especially if criminal charges are laid. When the ship goes down, everyone is looking to cover themselves. Also, the prospect of major hedge funds and mutual funds getting redemption notices makes traders on Wall Street very nervous.

This is the type of stuff that makes me nervous too because you don't know how it's going to play out. It might turn out to be nothing and blow over, or it might snowball and wreak havoc in financial markets. Citadel and SAC Capital are two of the biggest and best multi-strategy hedge funds. I don't want to blow this up until I hear all the facts, but now might be a good time for pension funds to cut risk across the board and assess the implications of these investigations. I keep asking myself why is this happening now? What else is lurking out there? Is this the beginning of a series of investigations? If so, we're in for a long, tough slug ahead.

Monday, November 22, 2010

Slashing UK Public Pensions?

The FT reports, Value of public pensions falls by quarter:
Reforms to public-sector pensions have already cut their value to the typical employee by 25 per cent, according to a study by the Pensions Policy Institute.

Further changes being considered by Lord Hutton, the former Labour cabinet minister, in his review of public-sector pensions could reduce the cost to the taxpayer by a third during the next 40 years.

That would come at the price, however, of making the schemes appreciably less generous, the institute said in a study funded by the Nuffield Foundation, which is to be published on Tuesday.

Under the most radical potential reform, the average earner would get just over 40 per cent of their pay in retirement, against a current replacement rate of 64 per cent.

“Changes that Labour and the coalition government have announced will already reduce the cost of public-sector pensions from 1.2 per cent of GDP [gross domestic product] today to 1 per cent by 2050, even if the government undertakes no further reform,” said Niki Cleal, the institute’s director.

A large part of the saving comes from the decision to increase the pensions in future using the consumer price index rather than the retail price index.

“That has a really quite radical effect, which I am not sure most people have fully understood,” said Ms Cleal. While the 0.2 per cent reduction in GDP might not sound much, in today’s money it is £3bn.

The changes already make public-sector pensions more affordable. That will lead some people to argue that there is no need to do more,” she said.

“But as Lord Hutton has said, there are arguments for making the present system fairer, both between the public and the private sectors – where public-sector pensions still remain more generous – and between staff within public-sector schemes.

“Under the current final salary arrangements, high fliers do much better than lower earners.”

The PPI has modelled a range of potential reforms. These include a switch to career average pensions, which Lord Hutton has said he favours, and other options he is considering such as providing a career average pension up to a specified salary cap, and then a form of unfunded direct contribution on top.

The PPI said the results depend on the assumptions used, but give a good guide to the potential impact of further reform.

And things are not much better at private pension plans. Insurance ERM reports, Pension deficits reduced but not the risk outlook:

While October was positive for FTSE 100 UK pension schemes, with the overall deficit reducing by £11.0bn to £43.5bn, it did little to improve the risk picture, according to the first issue of PF Risk Report.

The new publication from PensionsFirst, which provides advanced risk management and advisory services to the defined-benefit pensions industry, said that at the end of October, the one-month 95% value-at-risk figure on an IAS19 basis was £25.4bn.

This means that in November there was a 1-in-20 chance that the IAS19 deficit could increase by £25.4bn or more - and the expectation that in one of the next twenty months it will. "The corresponding VAR figure at September month-end was £26.6bn, so the improved deficit position changed little from a risk perspective," commented the report.

The PF Risk Report breaks down pension risk into its key components. On an uncorrelated basis, interest-rate risk is the largest risk factor, contributing £17.8bn to the VAR, closely followed by equity risk, which contributes £15.7bn. The report also focuses on inflation, FX, credit and property risk exposures, while ignoring longevity, which is a genuine long-term risk exposure but has negligible volatility in the short term.

The report illustrates the impact of the key factors that could cause variation in deficits. For example, a 20% decrease in equities would increase the aggregate deficit by £34.2bn and a 1% increase in long-term inflation would increase the deficit by £60.8bn. The two events combined would increase the deficit by almost £100bn.

"The simple fact is that many UK companies (not just those in the FTSE 100) have significant unhedged exposure to financial market volatility through their pensions schemes", the report stated.

The report puts into context the expectation that the monthly accounting deficits of the FTSE 100's UK pension schemes will move by £25.4bn at least once in a two-year period by underlining the fact that in August 2010 the accounting deficits increased by £20.8bn, driven primarily by a 60bp fall in interest rates. "And it is important to note that while...such large monthly movements can be reasonably anticipated, there is also the potential for much more extreme outcomes," the PF Risk Report concluded.

It's not just UK companies that have significant unhedged exposure to financial market volatility through their pensions schemes. The problem is widespread and as the report concludes, there is also potential for much more extreme outcomes.

Finally, take the time to listen to this CBC interview with three experts discussing CPP reforms. Pensions are a big issue everywhere right now, including here in Canada. The discussion highlights important issues and is well worth listening to.

Sunday, November 21, 2010

The Liberation Controversy?

It's been exactly one year since I wrote about an exciting but controversial treatment for Multiple Sclerosis (MS), called the Liberation treatment. A lot has happened in a year, and I think it's important to share some of my thoughts with you. Please feel free to relay the information back to anyone you know who has MS.

Let me begin with the tragedy that happened a month ago. CBC reports, Lack of follow-up deplored after MS death:

Some Canadians who've left the country for a controversial multiple sclerosis treatment remain frustrated by what they consider a lack of medical support after an Ontario man died following the procedure.

CBC News reported Thursday that Mahir Mostic, 35, of St. Catharines died on Oct. 19, one day after doctors in Costa Rica tried to dissolve a blood-clot complication following the vein-opening procedure.

He first went to the Central American country in June to have a mesh stent inserted to prop open a vein in his neck in hopes it would relieve symptoms of his fast-moving form of MS.

But after Mostic returned to Canada, his MS became worse and a blood clot formed around the stent.

Dr. Marcial Fallas of Clinica Biblica in San Jose, who cared for Mostic both times, thinks the powerful medication used to dissolve the clot triggered internal bleeding.

Fallas said he has performed the procedure 300 times, but Mostic's was the only time he used a stent. On Friday, Fallas said he wouldn't try a stent again unless it is proven to work specifically in neck veins.

Stents are approved for use in arteries, not veins.

When Mostic was in Costa Rica, Edmonton resident Betty Taylor was in Bulgaria getting a stent to open up her left jugular vein.

Taylor said she felt better after the procedure but that the effects didn't last and she's having trouble walking again.

Taylor said she was unable to get a referral to a Canadian specialist for the procedure and went abroad aware of the risks she faced.

"I was told that no, I would not get a referral because the doctor would be thrown in jail," Taylor said.

Like Mostic, Taylor's stent is now blocked. Over the weekend, she's going to the U.S. to have the vein opened again.

In offering her condolences to Mostic's friends and family, Health Minister Leona Aglukkaq noted seven Canadian trials are underway to determine whether blocked veins are linked to MS.

"How can a doctor know what they're looking for, or how to treat without that information or the scientific evidence that is required to move forward?" Aglukkaq asked reporters in Ottawa.

Mostic's death points to the need for clinical trials in Canada and a registry of people who've had the treatment, said Liberal MP Kirsty Duncan.

Last month, Saskatchewan Premier Brad Wall announced $5 million in funding for clinical trials in the province that aim to answer whether the procedure is safe and if it works.

While Wall did not endorse the surgery, nor did he dismiss the hopes of MS patients seeking it.

"We deserve to lead in finding them some answers either way on it," Wall said.

The death of any patient is a tragedy. Speaking with my friends and family who are trained physicians, stents are risky business, even in arteries, let alone veins which are much more fragile. The actual testing that goes on with medical devices is nowhere near as exhaustive as drug trials. Also, it is important to remember that Dr. Zamboni's theory and his own procedures never involved stents, only balloon angioplasty to open up blocked veins.

Another thing you should keep in mind is that while the death of a patient is tragic, deaths happen even in normal drug trials. The real tragedy in this case is that Mr. Mostic didn't receive follow-up care here in Canada. Having to travel to Costa Rica, Poland or India for follow-up care is ridiculous and expensive.

Moreover, you will get all sorts of accounts on this treatment. Some have reported priceless relief from MS symptoms:
There's hope for the 75,000 Canadians suffering from multiple sclerosis. Outside of Canada, that is. I know it because I've experienced it. Or, rather, my wife, Tracy, has. She walked out of a medical clinic in Albany, New York, three weeks ago following a 40-minute procedure with a brighter outlook on the world and her future.

Her eyesight was sharper. The main symptoms of her MS -- the fatigue and vertigo which have forced her to sleep two hours every afternoon for the past nine years -- have all but disappeared. Yes, it cost us thousands of dollars to go cross-border shopping for health, but gaining back two hours every day? Priceless.

If you know anyone with MS, and Canada has one of the highest rates of the disease in the world, you've probably heard similar stories to ours.

People who are travelling the globe in search of the procedure that's unavailable here, often cobbling together money from friends, family and neighbours for the trek. To Poland. Mexico. Costa Rica. Bulgaria. Italy. Kuwait. Jordan. India. California. Or like us, to Albany.

Most have reported improvements. Some modest. Some remarkable. Patients formerly confined to wheelchairs are taking steps again. MS sufferers who couldn't previously walk long distances are now jogging. Warmth and sensitivity have returned to hands and feet. Energy levels have spiked.

Other patients have reported horror stories, even regretting their decision to undergo this treatment:
One month after receiving the “liberation therapy” he had hoped would loosen the debilitating grip of multiple sclerosis on his life, Jamie McGowan was still racked with pain and felt like a ticking time bomb.

He feared one of four stents inserted into veins in his neck at a hospital in India could come loose and launch into his heart, or that an accidental blow might drive one of them into his brain.

“If anyone ever said ‘we'll need to do this again' . . . I would never do it, never,” says McGowan, who as a fan of body piercing could not be counted among the squeamish. “I would never go through that pain again.”

So what's the answer? Should MS patients be spending thousands of dollars to undergo the liberation therapy? I wish I could tell you yes or no, but from what I've heard from people who have undergone this procedure, doctors told them about 1/3 of the patients report marked improvements, 1/3 marginal improvements and 1/3 no improvements whatsoever (and this regardless of age, gender or disease progression).

This may not sound promising but if you're part of that 1/3 who experienced marked or even marginal improvements, then the procedure is indeed worth the cost. This underscores the need to develop and conduct proper clinical trials in Canada and the United States. We need to understand more about this procedure and the link between CCSVI and MS.

Some people are frustrated with the slow process of getting clinical trials underway. Ashton Embry sent me a CTV link providing details on Mostic's death and the need for clinical trials (click here to watch all the videos and pay attention to what Dr. Zamboni says). Ashton also wanted me to relay the following to my readers:

It is clear that the MS Society wants to delay a pivotal CCSVI treatment trial for as long as possible as demonstrated by the Multiple Sclerosis Society/ Canadian Institutes for Health Research Report on CCSVI Treatment Research (http://www.direct-ms.org/magazines/Beaudet%20Executive%20Summary.pdf).

In contrast, Direct-MS sees the need for a CCSVI treatment trial as soon as possible. Such a trial will be necessary before the medical profession/government bodies accept that CCSVI treatment is of value for MS. The sooner the trial is completed, the sooner CCSVI treatment will be widely available in Canada and the USA.

Direct-MS is spearheading an effort to raise enough money to fund a proper clinical trial to test the effectiveness of CCSVI. Such a trial will likely cost ~ 5 million dollars. Because of the critical importance of such CCSVI clinical research, all non-directed donations to Direct-MS over the next 24 months will go to this project.

Importantly, Direct-MS is a volunteer, “flow through” charity and every dollar donated will go to research. We take nothing off the top and this approach contrasts sharply with that of the MS Society which uses the majority of all money collected for internal uses (salaries, fund raising, administration, travel) rather than research.

If you wish to donate to Direct-MS, this can be done either through our website (http://www.direct-ms.org/donate.html) or by sending a cheque to Direct-MS, 5119 Brockington Rd NW, Calgary, AB, Canada, T2L 1R7.

Direct-MS is a registered charity and a receipt for tax purposes will be issued promptly for both Canada and the USA. Please tell your friends and relatives, if they want to help persons with MS, to consider donating to Direct-MS. If we are going to reach our goal of funding a proper CCSVI treatment trial, we are going to have strong support from as many people as possible.

I do not share Ashton's cynicism on the neurological community, but I do share his passion for more answers regarding MS and the need for proper trials regarding the liberation therapy. Ashton's insights on diet and MS have been a valuable source of information for many MS patients and I am thankful to have met him and his wonderful family.

I invite everyone to carefully assess the decision to undergo this procedure. Even if you see marked improvements, you should be aware that there is a risk of restenosis of the veins, and performing angioplasty several times on blocked veins can lead to permanent damage. Of course, if you have no other option, and are frustrated with neurologists and the delays with clinical trials, then you might want to consider undergoing this procedure elsewhere. Again, it's not a cure, but we definitely need more research and proper clinical trials to understand why some patients see benefits and others don't.

In the meantime, people should go over the one-year timeline provided on CTV's website. I would also urge patients, especially newly diagnosed patients, not to lose hope. Don't do what I did, spending months at the McGill University medical school library researching MS after I got diagnosed, trying to find out everything I could about this bedevilling disease with no simple answers.

As with any illness, your mindset is critical. You're going to have great days and you're going to have bad days. Just accept it. Stay positive, take care of your body and your mind, and focus on your life. Focus on what you can do today, not what you might not be able to do tomorrow. Remember the natural course of the disease is that many patients live a relatively normal life.

As for me, I'm still taking high dose vitamin D (drop form, 20,000 IUs a day) and feel very good (talk to your doctor before doing anything). I'm not perfect, but I'm thankful for being able to work and be a productive citizen (if I can only spend less time blogging!). I'm considering the liberation treatment, but I would prefer doing it under the supervision of Canadian or US doctors. That's my preference and it's based entirely on receiving proper follow-up care.

But I will also tell you that I remain hopeful. There are a lot of clinical trials going on in MS, and I wouldn't be shocked to see more breakthroughs in the future. Just this weekend, I read about research from the University of Colorado at Boulder suggesting that an existing anti-inflammatory drug can be used to heal multiples sclerosis lesions. There will be more exciting research on MS, but we need to remain patient and we need to explore all possible treatments, no matter how controversial they are.

***More information***

I forgot to mention an interesting interview with Dr. Maureen McShane who spent 10 months suffering from Lyme disease. Click here to listen to her discussion on chronic Lyme and how it mimics many illnesses, including MS.

Also, a buddy of mine, a cardiologist at Stanford shared these thoughts with me:

Indeed I am very skeptical of this manner of treating MS (i.e. CCSVI), but I am extremely hopeful that new pharmacotherapies will be available soon to arrest and improve MS symptoms. The new genetics studies involving complex diseases like MS combine with other studies involving measurement of everything" (i.e. all genes, or all proteins) in people with and without disease are resulting in incredible and fast paced discoveries.

These studies are pointing to several new genes that will inform biology of common complex diseases and allow for the more efficient and successful identification of compounds that can interfere with the pathological process. The biological tools to translate these basic discoveries to effective pharmacotherapies are much better than they were even five years ago! Technology is really driving much of this discovery. Think of the progress in the personal computer over the last 2 decades...the exact same thing is happening in the biological sciences in identifying the various contributors to complex diseases.

Even if the disease is complex, it doesn't mean you can't develop/identify a drug or compound that will have profound positive effect on the risk of disease or its progression.

Two examples:

1) The "statins" are a class of cholesterol lowering drugs that came to market in the mid 1970s. We quickly learned that this drug can reduce the risk of heart attacks dramatically. In fact it cuts that risk by 30-40% for ANYONE who takes it even for 4-5 years and likely for people who take it lifelong it can cut the risk by more than 80% (we don't have these studies but genetic studies suggest this). Recent comprehensive genetic studies looking at all our genes at the same time picked up mutations in the gene that statins target. The nice thing is these studies have also reliably picked up another about 50-60 brand new cholesterol targets (here I will not be humble and be proud of my accomplishments by pointing you to this paper in order to make my point.....http://www.nature.com/nature/journal/v466/n7307/full/nature09270.html) . In this paper, you can also get a sense of how quickly one can use these data to perform basic science experiments that shed light on how the gene effects disease. This work was all done in less than 2 years.

2) Another example relevant to psychiatry is the development of haloperidol back in the 1950s (and related drugs subsequently) which basically did an unbelievable job in controlling schizophrenia symptoms and led to a massive shift from institutionalization of all people with schizophrenia to allowing a majority to live and work with the rest of us.

In MS, I just took a quick look at the NHGRI catalogue and there is at least 5-7 new targets from recent genetic studies and this number will only dramatically increase over time as more investigators share their genetic data and as many more people are genetically fingerprinted.

For reversing disease consequences, there is great promise in stem cell therapy. I am involved in this type of science as well here at Stanford and have gained a much better perspective in the potential.

Indeed I think there is much much hope not only for MS but also many other serious common but complex diseases given the above. The wonder drug or therapy for MS has not yet made its appearance but I wouldn't be surprised if it is just around the corner.

Friday, November 19, 2010

Update on Nortel Benefits Fight

Diane Urquhart sent me an update on the Nortel benefits fight:

Please watch this November 18th interview by Evan Solomon of Jackie Bodie, a Nortel long term disabled employee with Parkinson's Disease, and Senator Art Eggleton, sponsor of Bill S-216:

Watch interview by clicking here.

Jackie Bodie says:

"Take a position. Do the right thing. Pass Bill C-216. It is the right thing to do. By doing nothing, by leaving us hanging, in my opinion, they are effectively giving their blessing to the court judge and lawyers we are dealing with to bury us alive. I do not know why. I do not understand what I and 400 other sick people did wrong to be treated like this."

Below are the videos of the Senate Banking Trade and Commerce Committee Hearings on Bill S-216, which were held on November 17 and 18, 2010. This is a bill to amend the Federal bankruptcy laws to provide for the preferred status of long term disability wage loss replacement income and medical benefit claims above the unsecured creditors at bankrupt employers. These claims arise when employers promise to pay long term disability benefits and then self-insure them without setting aside any or enough money in a trust account to fund these benefits in the event the employer were to become bankrupt.

Without Bill S-216 or another Federal Government alternative, there are 375 Nortel long term disability employees losing their disability income and medical reimbursement in six weeks time.

The anticipated cash settlement approved by Justice Morawetz at the Ontario Superior Court of Justice from the Nortel Health and Welfare Trust can fund only about 30% of their previous disability income, which means their incomes fall to 15% to 21% of the income they had before they got sick. The average CPP disability income is only $9,700 per year, with the maximum at $13,510 per year if there has been enough years service and income up until the start of the disability.

The Health and Welfare Trust distribution decision of J. Morawetz is being appealed by the dissenting Nortel Long Term Disabled Employees. Bill S-216 takes these very sick and injured Canadians out of the court process, by eliminating the need for this appeal. Bill S-216 with its transitional provision will permit the Nortel disabled to continue their disability income and medical reimbursement until their age 65, death or recovery from their disability.


Senate Banking Trade and Commerce Meeting No. 29

Room 9, Victoria Building, 140 Wellington Street, Ottawa

Thursday, Nov. 18, 2010 10:30 AM - 12:30 PM EST 120 minutes


Senate Banking Trade and Commerce Meeting No. 28

Room 9, Victoria Building, 140 Wellington Street, Ottawa

Wednesday, Nov. 17, 2010 4:15 PM - 6:15 PM EST 120 minutes

Take it from someone who knows firsthand that your life can turn around very quickly if you're diagnosed with a chronic or life-threatening disease. I understand Jackie Bodie's and Peter Burns' frustration. These people are desperate and sick and they shouldn't be fighting in bankruptcy court. They deserve to be treated fairly and honorably, and the Canadian government better get its act together and pass Bill C-216 as soon as possible. This is a shameful chapter in the long Nortel saga. Let's hope justice finally prevails for Nortel's disabled.

Thursday, November 18, 2010

NYC Pensions Adjusting to the New Normal?

Bloomberg reports, New York City May Cut Assumed Rate of Return on Pension Assets, Liu Says:

New York City may reduce the assumed return on its $100.5 billion of pension investments from the current 8 percent rate, Comptroller John Liu said today.

The move would increase the amount of money the city must contribute to its five public retirement plans even as it faces a $2.4 billion budget deficit next year, Liu said after a speech at the Union League Club in Manhattan. The city’s pension costs are expected to rise more than 15 percent next year, to $8.3 billion, budget director Mark Page said today. That’s about 20 percent of municipal tax revenue, he said.

“The city has maintained an 8 percent assumed rate for a long time,” Liu said. “It’s fair to say that the assumption will be lowered at some point.”

Public-pension funds from New York state to Illinois are cutting their expected returns amid market losses and in the face of a sluggish economy. New York state’s $132.8 billion retirement fund lowered its target to 7.5 percent from 8 percent, while the Illinois State Employees’ Retirement System cut its rate to 7.75 percent from 8.5 percent, Tim Blair, the system’s executive secretary, said in a telephone interview.

In the 10 years from July 1999 to June 2009, New York’s pensions returned 2.09 percent, according to the city’s comprehensive annual financial report for the fiscal year ended June 30, 2009.

Trustees’ Approval

Liu didn’t say when the change might occur or what the new assumed rate might be. The decrease must be approved by the trustees of the five funds for civil employees, police officers, firefighters, teachers and school administrators as well as the state Legislature. The plans cover 334,000 city employees and 237,000 retirees and beneficiaries.

Liu’s prediction of a more conservative investment outlook follows remarks by Mayor Michael Bloomberg last month calling the pensions’ assumed rate of return unrealistically high.

New York City is seeking more power to set pension benefits for workers as retirement costs grow.

Mayor Bloomberg is absolutely right, the assumed rate of return is unrealistically high. Many US pension plans still grasp onto this ridiculous 8% assumed rate of return, which is why they've reached their breaking point. With 10-year bond yields hovering around 2.9%, an 8% assumed rate of return is a pipe dream. Sooner or later, trustees will have to adjust their expectations accordingly.

Even 7.5% is not realistic. I don't care if pensions shove all their assets into alternatives (hedge funds, private equity, real estate, infrastructure, etc.), they'll still come up short. Tyler Durden at Zero Hedge discussed GMO's 7-year asset class return forecast (click on chart above):

Jeremy Grantham, who has been rather vocal in his condemnation of the Fed recently, and has been rather lukewarm in his endorsement of equities as an asset class, has released an updated (as of Oct 31) estimate for 7 Year returns by asset class. And it has bad news for pension funds which have a rather high bogey of about 8% per year.

If Grantham is correct the 'new normal' (which is really the normal normal but with the cheap credit spigot taken away due to a new deleveraging regime) also means that pension fund actuarial models have to be scrapped as they will likely not be able to attain the kinds of returns needed to keep them solvent based on capital appreciation expectations.

Where Grantham sees the best return potential is in international and emerging equities, presumably on the assumption that decoupling will take place. On the other hand, many are increasingly seeing the possibility of a China topping as a major risk factor. While Grantham is bearish on small cap US equities and sees just a modest outperformance of large caps, what he hates the most are all bonds, where in four out of five categories he see a negative 7 year return. Perhaps it is time for a Rosie-Grantham round table.

I'm inclined to side with Grantham on bonds, but I'm also acutely aware that JGBs outperformed the S&P 500 over the last ten years and was the number one performing asset class during Japan's lost decades. All that quantitative easing by the BoJ and the so-called Japanese bond bubble still hasn't popped. Lots of smart hedge fund managers shorting JGBs got their heads handed to them in the last 15 years. Could the same thing happen in the US over the next decade? Who knows? All I know is that more pension plans will have to adjust to the new normal or they risk seeing their pension deficits spiral out of control.


Bernard Dussault, former Chief Actuary of Canada, had this to say on this topic: ''Reducing the assumed gross return from 8% to 7.5% is in the good direction. Still too high, should not exceed 7%, or more precisely the real rate of return (gross minus inflation, presuming that benefits are indexed) should not exceed 7%.''

Wednesday, November 17, 2010

Is 70 the New 65?

The Canadian Business Journal reports, Raise retirement to 67, think tank says:
A policy think tank believes increasing retirement eligibility by two years may fix an impending demographic crunch.

The Mowat Centre for Policy Innovation, a think tank affiliated with the University of Toronto, published a report today calling for a raise in eligibility ages for the Canadian Pension Plan and Quebec Pension Plan from 65 to 67, and the earliest ages from 60 to 62.

“By 2050, an age increase would reduce CPP expenditures by about $15 billion per year and increase contribution revenues by about $5 billion per year,” the report said. “Increasing the eligibility ages is a fair solution for financing the costs of population aging, because doing so divides these costs across younger and older generations.”

The report, Is 70 the New 65? Raising the Eligibility Age in the Canada Pension Plan, was written by Martin Hering and Thomas R. Klassen, compared Canada's situation to similar legislation enacted in Australia, the United States and throughout Europe.

You can download the full report by clicking here. Table 1 above shows that even though the retirement age increase would be implemented gradually over a relatively long period of time, its impact on the CPP’s finances would be significant after 2025:

Specifically, policy makers could reduce the CPP’s minimum contribution rate (the rate required to sustain the CPP), from the current 9.82 to 9.06 per cent, without affecting benefit levels and while maintaining the required size of assets.8 Alternatively, benefits could be increased over time while maintaining current premium levels.

A reduction of the minimum contribution rate from 9.82 to 9.06 per cent would create a significant buffer between the minimum and the legislated contribution rate. This would make it more likely that plausible demographic and economic developments— such as a higher than expected increase in life expectancy, a slower than expected growth of wages, or lower than expected investment returns—would have a much smaller impact on the sustainability of pension finances and would reduce the need for significant policy shifts, including increased premiums or reduced benefits.

The table also shows that a gradual increase in retirement ages increases contributions and decreases expenditures each year, so that by 2050 the CPP has $982 billion more in assets than otherwise would be the case. An important measure of the CPP’s financial health is the assets in years of expenditure: by 2050, the CPP would have assets of 11 years of expenditure, and thus twice the legal minimum of 5.5 years. Put differently, the plan’s funding would grow from about 25 per cent to about 50 per cent of liabilities.

The consequence is that an increase in eligibility age creates a cushion for the CPP, allowing the existing contribution rate of 9.9 per cent to remain unchanged if demographic and economic conditions were more unfavourable than expected. In our projections, we assumed that employees would delay their retirement by 2 years and used the same assumptions regarding retirement rates that the Chief Actuary used in the 2006 actuarial report on the CPP (see Appendix B). Specifically, we expected that about 40 per cent of workers retire at the earliest retirement age, about 30 per cent at the normal retirement age, about 20 per cent between the earliest and normal retirement ages, and less than 5 per cent after the normal retirement age.

The assumption that a very high proportion of workers— about 40 per cent—chooses to receive an actuarially reduced CPP benefit at the earliest possible age primarily reflects the role of private retirementincome sources, especially occupational pensions, in the retirement decisions of individuals (Wannell 2007b, 2007a). The assumption that Canadians would change their behaviour significantly and delay their retirement by 2 years allows us to estimate the potential size of the effect of a retirement age increase. If individuals did not delay their retirement by as much as we assumed, the impact of an age increase on the minimum contribution rate and on the level of funding would be smaller than that shown in our estimates.

Even though an increase of eligibility ages would certainly lead to savings because individuals would have to postpone their receipt of CPP benefits at least until age 62 and would receive reduced benefits if they retired before age 67, it would not force them to wait until age 67. For example, workers who plan to retire at age 65 could still do so if they accept a permanent actuarial reduction of their pension by 14.4 per cent. In this case, the retirement age increase from 65 to 67 would reduce expenditures but would not increase contribution revenues.

The study is interesting but increasing the retirement age to 67 will not be easy. Also, I worry that if we do increase it to 67, then in a few years, who is to say policymakers won't try to increase it again to 70? Nevertheless, with people living longer and healthier lives, increasing the retirement age may be an option worth exploring.


Bernard Dussault, former Chief Actuary of Canada had this to share with me on this topic:
Current CPP contributors pay too much (9.9% rather than 5.5%) to the CPP because their predecessors:

  • did not pay enough into it (3.6% for 20 year, increased to 6% by 1996, etc.) and
  • got full accrual of benefit rights after 10 rather than 47 years.

Why would/should we consider penalizing further the current contributors by increasing the pensionable age? The 9.9% remains somewhat sufficient to afford the payment of pensions commencing at age 65.


There is no new issue with the CPP. It had big ones that were addressed through the 1998 reform. Its partly funded status is due to the insufficient contributions made from 1966 to 1996 and to granting full accrued benefits after only 10 years of contributions to the original (1866) cohorts of contributors, which gave rise to a huge deficit, too huge to ever be amortized. Therefore , our children, grand children, grand-grand children and so on will have to pay 9.9% (half paid by employer) rather than 5.5%. Pure case on intergenerational inequity.

The CPP is not a target benefit plan and not meant to be one. The decreased in future benefits in 1998 (the then current pensioners were not affected) was one good mean to correct errors (re: insufficient contributions) of the past. Real target plans do not allow known insufficient contributions. In 1966, it was clearly reported that the CPP 3.6% contribution rate was insufficient. It was a political decision to go ahead with the 3.6% and leave the problems to future generations.