FTfm research revealing multimillion-dollar salaries at some of the world’s largest pension funds has prompted condemnation over the vast gulf in earnings between chief executives and scheme members.In a follow-up FT article, Pension pay dilemma becomes acute, Madison Marriage looked further into compensation at pensions noting the following:
Analysis of 14 schemes showed Jim Leech, former chief executive of the Ontario Teachers’ Pension Plan, was paid $7.4m in 2013 before he retired and which included long term incentive payments, while his eventual successor, Ron Mock, received $2.5m in his role as vice-president of fixed income and alternatives.
The $175bn Canada Pension Plan Investment Board paid its chief executive, Mark Wiseman, $3.1m.
The Canadian pension salaries outstrip the total earnings of many chief executives in the private fund sector, including Man Group’s Emmanuel Roman, who was paid $3.4m for 2013, and Jupiter’s Edward Bonham Carter, who received $3m.
Chris Roberts, director of social and economic policy at the Canadian Labour Congress, described the figures as “alarming”. “These are plans in which trustees have a fiduciary obligation to the plan members. They should be in a similar [financial] relationship to plan members,” he said.
Mr Roberts added that he was particularly concerned with respect to public sector funds. “I am not convinced that these salary levels are warranted when public sector budgets are being squeezed and public sector workers are being told to tighten their belts,” he said.
Elsewhere, the highest-paid executive at the Australian Super fund received $1.04m, the chief executive of Denmark’s ATP, Carsten Stendevad, received $903,000; and Dick Sluimers, the chief executive of APG, which manages the assets of a number of Dutch pension schemes, was paid $795,000.
Deborah Hargreaves, founding director of the High Pay Centre, a think-tank, said: “These figures highlight why we cannot rely on pension funds to hold companies to account on pay. These pension chief executives are benefiting from the high-pay culture themselves and often see nothing wrong with multimillion-dollar awards for top bosses. Scheme members often have a different outlook, but do not have a chance to have their say.”
Geraldine Egan, national pension official at the University and College Union for academics and researchers, said members of the Universities Superannuation Scheme feel particularly aggrieved. The highest-paid executive at the USS received a 50 per cent pay increase last year, to £900,000.
Ms Egan said: “[USS members] are aware that [pension executives] get high bonuses because they meet their benchmarks, and yet the funds are doing poorly and members’ benefits are being cut.
“It is problematic and our members find it very difficult. There is a mismatch between the financial world and members who work in the academic world.”
At the lower end of the scale, Anne Stausboll, chief executive of Calpers, earned $414,416; Sweden’s AP3 paid chief executive Kerstin Hessius $472,097; and the UK’s Pension Protection Fund paid its chief executive, Alan Rubenstein, $359,525.
Ontario’s Mr Mock defended high pay at his pension fund, which has generated a 10.2 per cent average rate of return since 1990, in an interview with FTfm last year.
He said: “[To get] upper-quartile performance, you need upper-quartile people. Our assets are intellectual capital and we need to make sure that we are attracting the best we can get our hands on.”
Ontario generated 10.9 per cent returns in 2013, underperforming all but one of the pension funds in the FTfm sample.
Ms Hargreaves dismissed the notion that multimillion-dollar salaries are necessary for pension funds to recruit the best executives.
“That argument is always put forward as a justification for top awards, but I would argue that these talents are not as rare as some people at the top of the corporate ladder like to make out,” she said.
There is also concern that handing out big salaries reduces a pension fund’s credibility when fighting excessive pay at the companies they invest in. CPPIB and Ontario voted against pay proposals at companies including Coca-Cola, the beverage company, and Barrick Gold, the Canadian miner, last year.It's about time the media and non-profit organizations start scrutinizing executive pay at public pension funds. I've been covering the good, the bad and downright ugly on executive compensation at Canada's large public pension funds since the inception of this blog back in June 2008.
Bill Tufts, founder of Fair Pensions for All, a Canadian organisation that campaigns on public sector pension and compensation issues, says: “It is kind of ironic for these pension plans to call out against obscene compensation in corporations and criticise their chief executives, but at the same time pay their managers at [a similar] level.”
Other parties believe increased pay in the pension sector is necessary. The Rotman International Centre for Pension Management published a report in January concluding that pension fund governance and returns are being held back by “uncompetitive compensation structures” for senior management and investment talent.
“It will require a concerted, ongoing joint effort by pension-plan stakeholders, pension organisation boards and legislators to change the current situation,” the report found.
Keith Ambachtsheer, director of the ICPM, believes high salaries could be money well spent. He estimates that a $20bn pension fund could save a large chunk of the $800m a year typically spent on fees to external managers by hiring expensive but talented in-house investment personnel.
“Research has shown [pension funds that do this] end up winning by a lot,” he says.
The consensus is that pay for top executives and investment staff at pension schemes beyond Canada will begin creeping towards those in the private sector as well.
Scott Cornfoot, director of consultant relationships at Australia’s Queensland Investment Corporation, says: “I have heard very senior pension fund managers in Australia demand the same amount of money as a fund manager gets. Attitudes are changing.”
Mr Rajan adds: “Pay relativity [between the pension market and asset management industry] is grossly uneven. Adjustments will take time.
“It will start with investment professionals before spreading to senior business executives. An increasing number of pension boards now recognise that they are competing in an international market place.”
In fact, my very first post was on the ABCP of pension governance where I wrote:
If compensation is tied to performance and benchmarks, doesn't the public have a right to know whether or not the benchmarks used to evaluate this performance accurately reflect the risks taken by the investment manager(s)?I followed up that first blog comment with my second comment on alternative investments and bogus benchmarks where I used the returns and benchmarks of real estate investments at a few of Canada's large public pension funds to demonstrate how some were gaming their benchmarks to claim "significant outperformance and value-added" in order to justify their multimillion compensation packages even as their funds lost billions during the crisis.
The dirtiest secret in the pension fund world is that benchmarks used to reference the performance of private investments and hedge fund activities in public pension funds are grossly underestimating the risks taken by the managers to achieve their returns. Moreover, most of the "alpha" from these investment activities is just "beta" of the underlying asset class. Why are pension executives being compensated for what is essentially beta?!?!?
There is a disconnect between public market benchmarks and private market benchmarks. Most pension funds use well known public market benchmarks like the S&P 500 to evaluate the performance of their internal and external managers. Public market benchmarks are well known and for the most part, they accurately reflect the risks that investment managers are taking (the worst example of public benchmark abuse was the ABCP fallout at the Caisse which the media keeps covering up).
But there are no standard private market benchmarks; these investments are illiquid and valued on a quarterly basis with lags. This leads to some serious issues. In particular, if the underlying benchmark does not reflect the risk of private market investments, a pension fund can wipe out its entire risk budget if real estate or private equity gets hit hard in any given year, which is not hard to fathom in the current environment.
In April 2009, I went to Parliament Hill where I was invited to speak at the Standing Committee on Finance on matters relating to pensions (after that hearing, I was even confronted by Claude Lamoureux, the former CEO at Ontario Teachers largely credited for starting this trend to pay top dollars to senior pension fund managers, which then spread elsewhere). There, I discussed abuses on benchmarks and how pension fund managers routinely game private market benchmarks to create "value-added" in their overall results to justify some seriously hefty payouts for their senior executives.
This brings me to the list above (click on image at the top). Where is Gordon Fyfe, the man who you can all indirectly credit for this blog? He should be right up there at the top of this list. He left PSP for bcIMC this past summer right on time to evade getting grilled on why PSP skirted foreign taxes, embarrassing the federal government.
In fact, over the ten years at the helm of PSP Investments, a federal Crown corporation that is in charge of managing the pensions of people on the federal government's payroll, Gordon Fyfe and his senior executives literally made off like bandits, especially in the last few years. This is why I poked fun at them when I covered PSP's FY 2014 results but was dead serious when I wrote this:
And why are benchmarks important? Because they determine compensation. Last year, there was an uproar over the hefty payouts for PSP's senior executives. And this year isn't much different (click on image below from page 65 of the 2014 Annual report):But enough ranting about PSP's tricky balancing act, I've covered that topic ad nauseum and think the Auditor General of Canada really dropped the ball in its 2011 Special Examination which was nothing more than a sham, basically rubber stamping the findings of PSP's financial auditor, Deloitte.
As you can see, PSP's senior executives all saw a reduction in total compensation (new rules were put in place to curb excessive comp) but they still made off like bandits, collecting millions in total compensation. Once again, Mr. Fyfe made the most, $4.2 million in FY 2014 and a whopping total of close to $13 million over the last three fiscal years.
This type of excessive compensation for public pension fund managers beating their bogus private market benchmarks over a four-year rolling return period really makes my blood boil. Where is the Treasury Board and Auditor General of Canada when it comes to curbing such blatant abuses? (As explained here, the Auditor General of Canada rubber stamps financial audits but has failed to do an in-depth performance audit of PSP).
And don't think that PSP's employees are all getting paid big bucks. The lion's share of the short-term incentive plan (STIP) and long-term incentive plan (LTIP) was paid out to five senior executives but other employees did participate.
Nothing is more contentious than CEO pay at public sector organizations. The Vancouver Sun just published an article listing the top salaries of public sector executives where it states:
Topping this year’s salary ranking is former bcIMC CEO Doug Pearce, with total remuneration of $1.5 million in 2013, the most recent year for which data is available. That’s a 24-per-cent jump from his pay the year before of $1.2 million.Wait till the socialist press in British Columbia see Fyfe's remuneration, that will really rattle them!
It could be the last No. 1 ranking for Pearce, who has topped The Sun’s salary ranking several times: he retired in the summer of 2014 and was replaced by Gordon Fyfe.
It's worth noting however, even in Canada, compensation of senior public pension fund managers varies considerably. On one end of the spectrum, you have Jim Leech, Gordon Fyfe and on the other end you have Michael Sabia and Doug Pearce, Fyfe's predecessor at bcIMC.
Leo de Bever's total comp is somewhere in the middle, averaging $3.5 million a year during the last three years he was at the helm of AIMCo. The same goes for OMERS's CEO, Michael Latimer (Ron Mock also currently lies in the middle but his compensation will rise significantly to reflect his new role).
Mark Wiseman and André Bourbonnais, PSP's new CEO, also fall in the middle of the compensation spectrum but they also enjoyed hefty payouts in FY 2014 of roughly $3.5 million (notice however, Wiseman and Bourbonnais pretty much made the same amount, which shows you their compensation system is much flatter than the one at PSP).
Still, teachers, police officers, firemen, civil servants, soldiers, nurses, all making extremely modest incomes and suffering from budget cuts and austerity, will look at these hefty payouts and rightfully wonder why are senior public pension fund managers managing their retirement being compensated like some of Canada's top private sector CEOs and making more than their counterparts working at mutual funds and banks?
And therein lies the sticking point. The senior executives at Ontario Teachers, CPPIB, PSP, bcIMC, AIMCo, OMERS, Caisse are all managing assets of public sector workers that have no choice on who manages their assets. These public sector employees are all captive clients of these large pensions. I'm not sure about the nurses and healthcare workers at HOOPP but that is a private pension plan (never understood why it is private and not public but the compensation of HOOPP's senior executives is in line with that at other large Canadian pension funds, albeit not as high even if along with Teachers, it's arguably the best pension plan in Canada).
Of course, all this negative press on payouts at public pension funds can also be a huge distraction and potentially disastrous. Importantly, Canada's large public pension funds are among the best in the world precisely because unlike the United States and elsewhere, they got the governance and compensation right, operating at arms-length from the government and paying people properly to deliver outstanding results in public and private markets.
And let's be clear on something, the brutal truth on defined-contribution plans is they simply can't compete with Canada's large defined-benefit pensions and will never be able to match their results because they're not investing across public and private markets, they don't have the scale to significantly lower costs and don't enjoy a very long investment horizon. Also, Canada's large pensions invest directly in public and private assets and many of them also invest and co-invest with the very best private equity, real estate funds and hedge funds.
In other words, it's not easy comparing public pension fund payouts to their private sector counterparts because the skills required to manage private investments are different than those required to manage public investments.
Also, it's not easy comparing payouts among Canada's large DB plans. Why? One senior portfolio manager shared this with me:
"First and foremost, various funds use more leverage than others. This is the most differentiating factor in explaining performance across DB plans. In Canada, F/X policy will also impact performance of past 3 years. It's very hard to compare returns because of vastly different invest policies; case in point is PSP's huge equity weighting (need to include all real estate, private equity and infrastructure) that has a huge beta."I'll share something else with you. I remember having a conversation with Mark Wiseman when I last visited CPPIB and he told me flat out that he knows he's being compensated extremely well. He also told me even though he will never be able to attract top talent away from private equity funds, CPPIB's large pool of capital (due to captive clients), long investment horizon and competitive compensation is why he's able to attract top talent from places like Goldman Sachs.
In fact, Bourbonnais's successor at CPPIB, Mark Jenkins, is a Goldman alumni but let's be clear, most people are still dying to work at Goldman where compensation is significantly higher than at any other place.
But we need to be very careful when discussing compensation at Canada's large pensions. The shift toward private assets which everyone is doing -- mostly because they want to shift away from volatile public markets and unlock hidden value in private investments using their long investment horizon, and partly because they can game their private market benchmarks more easily -- requires a different skill set and you have to pay up for that skill set in order to deliver outstanding long-term results.
Also, as I noted above, Canadian pensions invest a significant portion of their assets internally. This last point was underscored in an email Jim Keohane, CEO of HOOPP, sent me regarding the FT article above where he notes (added emphasis is mine):
You have to be careful with this type of simple comparison of Canadian pension plans with their US, European and Australian counterparts. It is a bit like comparing apples to oranges because the Canadian pension funds operate very different business models. The large Canadian funds use in house management teams to manage the vast majority of their assets, whereas most of these foreign funds mentioned outsource all or a significant portion of their assets to third party money managers. They are paying significantly larger amounts to these third party managers to run their money as compared to the amounts that Canadian pension funds pay their internal staff. As a result, their total implementation costs are significantly higher than Canadian funds. The right metric to compare is total implementation costs, and on this metric, Canadian funds are among the most efficient in the world.I agree with all the points Jim Keohane raises in regard to the pitfalls of making international comparisons.
We have very low implementation costs, with investment costs of approximately 20bps and total operating costs including the admin side between 30 and 35bps. We hire top investment managers to run our money and need to pay market competitive compensation to attract and retain them. I would agree that our long term nature and captive capital make us an attractive place to work so we don’t have to be the highest payer to attract talent, but we need to be in the ballpark. Running our money internally is significantly cheaper than the outsourcing alternative. It also allows you to pursue strategies that would be very difficult to pursue via an outsourcing solution, and it enables much more effective risk management.
One of the main reasons why Canadian pension plans have been successful is the independent governance structures that have been put in place. This enables funds like HOOPP to be run like a business in the best interest of the plan members. It is in the members best interest to implement the plan at the lowest possible cost. The cheapest way for us to run the fund is using an in-house staff paying them competitive compensation rather than outsource which would be much more costly. To put this in perspective, a few years ago we had 15% of our fund outsourced to third party money managers, and that 15% cost more to run than the other 85%!
Many of the international funds used for comparison in the article have poor governance structures fraught with political interference which makes it politically unpalatable to write large cheques to in-house managers, so instead they write much larger cheques to outside managers because it gets masked as paying for a service. This is not in plan members best interests.
But does this mean we shouldn't scrutinize compensation at Canada's large public pensions? Absolutely not. A few weeks ago when I discussed whether pensions are systemically important with Jim, I said we don't need to regulate them with some omnipotent regulator but we definitely need to continuously improve pension governance:
... I brought up the point that in the past, Canadian public pensions have made unwise investment decisions, and some of them could have exacerbated the financial crisis. The ABCP crisis had a somewhat happy ending but only because the Bank of Canada got involved and forced players to negotiate a deal, averting a systemic crisis. And we still don't know everything that led to this crisis because the media in Quebec and elsewhere are covering it up.This is where I stand. I think it's up to Canada's large public (and private) pension funds to really make a serious effort in explaining their benchmarks, the risks they take, the value-added and how it determines their compensation in the clearest, most transparent terms but I also think we need independent overview of their investment and operational activities above and beyond what their financial auditors and public auditors currently provide us.
I also told him we need to introduce uniform comprehensive performance, operational and risk audits at all of Canada's major pensions and these audits need to be conducted by independent and qualified third parties that are properly staffed to conduct them. I blasted the Auditor General of Canada for its flimsy audit of PSP Investments, but the truth is we need better, more comprehensive audits across the board and the findings should be made public.
Another thing I mentioned was maybe we don't need any central securities regulator. All we need is for the Bank of Canada to have a lot more transparency on all investment activities at all of Canada's public and private pensions. The Bank of Canada already has information on public investments but it needs more input, especially on less liquid public and private investments.
Importantly, there's a huge gap that needs to be filled to significantly improve the governance at Canada's large pensions, even if they are widely recognized as having world-class governance.
Below, Jonathan Macey, Yale Law School professor, and Bob Damon, Korn Ferry discuss whether U.S. CEOs are overpaid (April 2014). I've already discussed CEO pay spinning out of control and think now more than ever, we need a real conversation on this topic.