Pension Pulse

Before getting into my latest topic, I want to thank those of you who took the time to write me after reading my last comment on the ugly truth . Rest assured this blog is not my open diary but sometimes I like delving deep into personal matters because I believe certain frustrations, anxieties and worries are common and if by expressing my thoughts, I can help someone else, so much the better. I have nothing to ashamed of and if some people choose to use my openness against me, then shame on them. The real ugly truth is that far too many people in finance and business are money whores and would screw over anyone for money. That's all I'll say about the ugly truth. Now, onto the latest topic, direct investments into hedge funds. Christine Williamson of Pensions & Investments reports, Move to direct hedge fund investments boosting business for consultants : The pace of searches and hires is up sharply this year for specialist and general consultants advising instituti...

Following my last comment on Japan's pensions betting on hedge funds , Jonathan Jacob of Forethought Risk sent me an Institutional Investor article by Imogen Rose Smith, Public Pension Plans Bet Their Future On Hedge Funds : It didn’t sound like much, even at the time. In April 2002 the California Public Employees’ Retirement System invested a total of $50 million with five hedge fund firms. For the then-$235.7 billion CalPERS, the largest state pension plan in the U.S., writing $50 million in checks was hardly a noticeable occurrence. But as the first step in an initial $1 billion allocation, the investment was a monumental moment for the hedge fund industry. It marked one of the first significant commitments by a public pension fund to a program of investing with hedge fund managers, a group that the pension community and its advisers had previously shunned as too risky and secretive. And in ways that are only now starting to become completely clear, it would dramati...

Chikafumi Hodo and Nishant Kumar of Reuters report, Japan pensions bet on hedge funds to boost returns : Japan's corporate pension funds, hobbled by a sluggish domestic stock market, are raising their allocations to hedge funds as they scramble to boost returns for the country's ageing population. The move is part of a broader trend in Asia where institutions are looking to raise exposure to hedge funds in search for absolute positive returns and as confidence in the asset class improves, lifting prospects for the $2 trillion (1.2 trillion pound) global hedge fund industry. Nearly all of Japan's corporate pension funds, which collectively manage more than $900 billion, have lowered their guaranteed yield in the last decade from about 5.5 percent to below 3.5 percent on average, industry observers said. "Considering that they have had a very hard time raising decent returns by directly investing in equities over the past years, pension funds are now very ...

Mebane Faber of Cambria Investment Management sent me an excellent paper he authored, What if 8% is Really 0%? Pension Funds Investing with Fingers-Crossed and Eyes Closed : It is well known that pension funds in the United States are underfunded even if they achieve their projected 8% rate of return. The scope of pension underfunding increases to an astonishing level when more probable future rates are employed. A reduction in the future rate of return from 8% to the more reasonable risk-free rate of approximately 4% causes the liabilities to explode by trillions of dollars. As bond yields declined over the past twenty years, pension funds moved toward more aggressive equity-based portfolios in an attempt to reach for this 8% return. By investing in a portfolio with uncertain outcomes, pension funds could experience increasingly volatile and even negative returns. Paradoxically, in an effort to chase the universal 8% rate, pension funds may be laying the groundwork f...

Spent the last couple of days at a pension conference here in Montreal, Sommet Avantages & Retraite. There were numerous excellent presentations covering all sorts of pension issues. Here are some brief bullet notes: Bernard Morency, Executive Vice-President, Depositors and Strategic Initiatives at the Caisse de dépôt et placement du Québec, kick-started the conference with an excellent presentation on the future of pension plans. Mr. Morency made a forceful argument that if defined-benefit plans are going to survive, then all stakeholders will need to make concessions. During the question period, I asked him if he sees a role for the private sector and he said "yes because if we leave pensions all up to the government, chances are they will understate the true cost." I assisted most of the investment workshops. Ron Chesire of Triasima spoke on integrating lessons on behavioral finance in risk management. Bernard Augustin of Addenda Capital focused on liability-driven ...

Richard Barley of the WSJ reports, Beware Contagion From Greeks Baring Rifts : Euro-zone politicians may be fiddling while Athens burns. Tuesday's meeting of finance ministers brought no progress on how to address Greece's funding problems and avoid setting off a financial crisis. But conditions in European markets are deteriorating. The main risk from Greece has always been contagion, and that process is already under way. Most directly, prices of Portuguese and Irish bonds have fallen sharply, with 10-year yields rising above 11% and the cost of insuring their debt at record levels. The gap between Spanish and German 10-year bond yields is at its widest since January. The market is effectively giving no credit for any reforms or budget policies set out in the past six months. The next link in the chain, the banking system, has been affected. In Spain, progress by banks on regaining market access has gone into reverse: Average borrowing from the European Central ...

Gordon Hamilton of the Vancouver Sun reports, TimberWest unitholders approve $1 billion sale to pension funds : Unitholders of TimberWest Forest, the largest landowner in B.C., approved the sale of the company Tuesday to two public pension funds, a move that president Paul McElligott said should result in better decision-making on the company’s Vancouver Island lands. “We look forward to a new future as a private company,” McElligott said after unitholders voted 98 per cent in favour of the $1 billion deal. In an interview, he said TimberWest’s structure as a publicly-traded company worked well until the U.S. housing downturn led to a collapse in lumber demand. TimberWest had thrived on selling logs into modern sawmilling sector that has developed in the U.S. Pacific Northwest. “The U.S. economic downturn had a very punishing effect on this sector, and I think private ownership is more patient capital; it’s a longer-term view. You are not under the same kind of pressures to...

CBC reports on Air Canada's great pension divide : One of the key issues that had Air Canada management and union negotiators talking right up to the Monday midnight strike deadline was pensions. The Canadian Auto Workers union — which represents the airline's 3,800 sales and service agents — says the pension changes proposed by Air Canada would make new hires "second-class workers." What is Air Canada proposing? The airline wants the CAW to agree to a number of changes to the pension program that its customer service employees pay into. The union says Air Canada's demands for pension concessions are not negotiable. There appear to be two major stumbling blocks: The airline's demand for pension cuts that could see new retirees having their pensions being chopped by an average of 40 per cent , according to the CAW. (The airline says the cuts aren't that big.) The airline's demand that all new hires into the bargaining unit be routed into...

Robert Sibley of Postmedia News reports in the Ottawa Citizen, Panel refuses disabled workers' case : The Supreme Court failed to serve the "national interest" and thereby jeopardized the disability insurance plans of hundreds of thousands of Canadian workers by refusing to hear a case involving a group of disabled former Nortel employees, says a financial expert. "It was in the national interest to hear the case so that 1.1 million Canadians could be assured their disability insurance plans were protected," said financial analyst Diane Urquhart. "The Supreme Court of Canada has de facto allowed a court precedent to stand that compromises every health and welfare trust in Canada for disabled insured policyholders." On Thursday, a three-judge panel of the Supreme Court refused the group's request for leave to appeal a lower court's previous decision rejecting the former workers' attempt to challenge a court-approved se...