Tuesday, January 20, 2015

Canada's Overstaffed Public Pensions?

Barry Critchley of the National Post reports, Brian Gibson’s take on Canada’s overstaffed public pension plans:
Given his role as a senior investments adviser to the chief investment officer of the US$91 billion University of California pension fund, there’s no real surprise that Canadian Brian Gibson has strong views of the structure of a model pension fund.

Gibson, the former senior vice president of public equities at both Ontario Teachers Pension Plan Board and AIMCo, has advanced a number of suggestions as to how the UC fund should operate. Those suggestions have been made to Jagdeep Singh Bachher, the fund’s relatively new chief investment officer.

In essence the suggestions focus on filling knowledge or skill set gaps in the organization with a series of hires, culling some staff and giving more assets to a smaller group of external managers.

In this way returns should improve and costs (to the extent that the fund can negotiate lower fees with the managers with more assets) should be reduced.

And Gibson, who spent about 14 years at Teachers and about five years at AIMCo. has fairly strong views on the large Canadian public sector pension funds. He feels that some of them have too many staff and argues that better results could be generated by a smaller, higher quality group of employees. In other words more could be done with less.

“The Canadian firms are way too top heavy with staff and [that] causes median results,” he said Monday.

Gibson did make an exception, noting that under Michael Sabia, Caisse de dépôt et placement du Québec is “not overstaffed. They are reasonably well organized now since Michael Sabia reorganized things,” added Gibson.
You might not know him but Brian Gibson is very well known in the Canadian pension industry. He delivered strong results in public equities at Ontario Teachers and even at AIMCo and is well respected, highly regarded and considered to be a hard working intelligent portfolio manager.

But Gibson also has a reputation of not being the best manager of people, which is one reason he left AIMCo. From that respect, it doesn't surprise me that he thinks Canada's public pensions are way overstaffed. Typically people that don't like managing people or aren't good at it, are not big fans of large staffs.

Having said this, I haven't met Brian Gibson nor do I completely disagree with him. I have worked at two of the largest public pension funds in Canada, large crown corporations and federal government organizations and have seen enough "dead weight" to make my blood boil.

When I was working at the Business Development Bank of Canada, replacing their senior economist who went on mat leave, someone exasperated with the lack of work from another group shared a French Québécois expression which I love: "Ils brassent de l'eau avec leur doigt, tabernac!" which literally means "they're stirring water with their finger, god damn it!".

Unfortunately, the person who mentioned this to me had an exaggerated sense of importance of his own group and didn't realize that they too were pretty much dead weight and replaceable, which is why I found his comments amusing.

In fact, every group has an exaggerated sense of how instrumental they are to the success of their organization. It's quite comedic and often just downright sad to listen to their comments and how they perceive their importance to the overall well-being of their organization.

To be fair to employees, however, often times they're dead weight or demotivated because their team leader lacks leadership skills or the organization lacks focus. In other words, the problem of a "lazy" or "demotivated" employee often has nothing to do with them but it has to do with other factors that explain their behavior.

Now, let me get back to Gibson's comments. His focus is mainly on the investment staff at Canada's large public pension funds. He thinks they can do more with less and then fill the gap by hiring a few external managers, using their size to negotiate down the fees. And in many cases, he's absolutely right.

But one can easily make the case for hiring more, not less people, and paying them properly to invest the assets internally, doing away with external manager fees as much as possible. This is the model that Canada's large public pensions have adopted across public and private assets and it has contributed to their success which others try to emulate.

We should also note the benefits of Canada's top ten extend way beyond their investment performance, they also contribute directly into the economy, hire a lot of smart people, and play an important socioeconomic role in the cities they're based in.

I also take exception to Gibson's assertion that “the Canadian firms are way too top heavy with staff and [that] causes median results.” Ok, I invite Gibson to show me the proof by posting his fidngs on a blog so they can be openly discussed and duly scrutinized. Don't just talk to some journalist at the National Post who doesn't have a clue about how large pension funds really work and the added value they deliver over public market benchmarks.

Worse still, he cites the Caisse as an example of a large fund that is "not overstaffed" and delivering above average returns. Really? Is he consulting the Caisse? I can list you a lot of top senior analysts and portfolio managers that were let go or left that organization in disgust even after Michael Sabia took over and cleaned up the shop. There's still way too much dead weight at the Caisse and a few huge frigging egos who think they're god's gift to the investment management industry (they're not, they're just blowhards who are sitting in a cushy chair; once they lose that seat, they're dead).

And I certainly don't agree with the Caisse's hiring binge on so-called "industry experts" to provide "top research" in various industries and long-term results. I would hire people with market knowledge and trading experience any day of the week over some industry expert with a "PhD in mining engineering" or some other obscure field who couldn't manage money if their life depended on it.

Now, I don't want to be overly critical of the Caisse because they're hyper sensitive of things I write on my blog. There are a lot of good people there working across public and private markets, but don't tell me the Caisse is better than CPPIB, Ontario Teachers' or HOOPP. In some things (like real estate), they most certainly are top in the industry but not in public markets (the jury is still out on life after benchmarks and whether their shift to industry experts and a global value portfolio will provide meaningful long-term results over public market benchmarks).

Are there arguments and valid concerns on the size of the staff at Canada's large pension funds? Yes, every one of them has HR issues across all their groups, which includes HR, back office, front office, risk management, finance and IT. Last I heard, IT makes up almost 50% of the staff at PSP Investments (now over 800 employees), which is insane if true (albeit, as funds grow they need more and more IT support).

One pension expert who wishes to remain anonymous shared these insights with me:
IT might cause you to look at the facts as they show up in annual reports. Be careful, however, unlisted assets are not always reported consistently in terms of costs. Some take costs out of returns.

In many pension funds internal costs per dollar of AUM are about 1/3 or 1/4 of external costs. That suggests to me Brian Gibson does not have things quite right.

As to whether Michael Sabia is doing better than most, I doubt that. He has all the challenges of the other funds and probably a few extra ones.
So true! My biggest beef at these large pension funds is not the size of their staff but that the groups still work in silos and they don't have enough people like me or Brian Romanchuk who can connect the dots and see the bigger picture. That is where you'll get the biggest bang for your buck, not by indiscriminately firing a bunch of people because some brainless consultant told you to do so, but by finding the right people with the right attitude and brains who truly understand how all the moving parts at your organization work together and where the real risks lie ahead.

On that note, I would urge the Caisse, PSP and others to take a much closer look at the people they hire and respect diversity in the workplace and even publish diversity stats publicly every year and set lofty goals there just like Intel just did. When it comes to staffing, there's a lot more work ahead at all of Canada's large pension funds but I'm sorry to say Brian Gibson doesn't have the pulse on the real issues that matter.

Below, Brian Krzanich, Intel CEO, discusses how his company plans to address diversity issues in the workplace. I think all of Canada's CEOs at large public pension funds, large Crown corps and other public and private organizations should listen carefully to his comments.

Take it from a guy who has been shunned and let go from jobs because of Multiple Sclerosis, when it comes to diversity in the workplace, Canada and especially Quebec's large public and private organizations still have a lot more work ahead of them.

It's actually quite worrisome and not reported because the media prefers focusing on other trivial staffing issues, completely ignoring the plight of all minorities, especially persons with disabilities, in securing full-time employment with benefits.

No comments:

Post a Comment