Friday, May 29, 2015

The Bigger Short?

Lawrence Delevingne of CNBC reports, This is the new 'big short':
Billionaire investor Paul Singer says he has spotted the next big thing to bet against: bonds.

"Today, six and a half years after the collapse of Lehman, there is a Bigger Short cooking. That Bigger Short is long-term claims on paper money, i.e., bonds," Singer wrote in a letter to investors of his hedge fund firm Elliott Management obtained by

"Bigger Short" is a play on "The Big Short," the book by Michael Lewis describing how a tiny group of investors made huge sums of money for their contrarian bets against mortgage-backed securities before the collapse of the housing market in 2007 and 2008.

"Central bankers have chosen, and doubled down on, a palliative (super-easy money and QE), which is unprecedented and extreme, and whose ultimate effects are unknowable," Singer wrote of governments stimulating markets, in part through the purchase of bonds.

Singer has long been a critic of mainstream economic policy, particularly taking on high debt to spur financial recovery.

"Asset prices are skyrocketing because of massive public-sector purchases. The tinkering and experimentation that characterizes each round of novel central bank policy leads to more and more complicated unwanted consequences and convolutions," Singer wrote. "Central bankers are, in our view, getting 'pretzeled' by all this flailing, yet they deliver it with aplomb and serene self-confidence. Are they really taming volatility with their bond-buying, or just jamming it into a coiled spring?"

That makes for risk that many don't see, according to Singer.

"Bondholders ... continue to think," he wrote, "that it is perfectly safe to own 30-year German bonds at a yield of 0.6 percent per year, or a 20-year Japanese bond (issued by the most thoroughly long-term-insolvent of the major countries) at a little over 1 percent per year, or an American 30-year bond at scarcely above 2 percent per year."

The opportunity, then, is to short bonds.

"Today, the Bigger Short is in a much larger marketplace," Singer wrote of bonds compared to subprime mortgages, "so it can be undertaken in whatever size one can stomach, and the cost of effectuating it during the waiting period is really low."

"However," Singer added, "the power of the herd on the current upward bond price stampede is beyond anyone's control, so one can lose money waiting for the trade to work out."

A spokesman for Elliott declined to comment.

The firm managers more than $26 billion and invests across a range of asset classes, including bonds, stocks and commodities. Its main fund, Elliott International Limited, fell 0.5 percent over the first quarter, according to the letter.

The fund has produced annualized returns of 12.3 percent since inception in December 1994, easily beating stocks and bonds over the same period.
Add Paul Singer to a growing list of skeptics, including Bill Gross, who think the end is near and that the scary bond market is about to get a whole lot scarier.

The short-selling, cataclysmic, dimwit gold bugs over at Zero Edge pounced on Singer's "Bigger Short" thesis to once again make the case that the world is ending and people should all go out and buy "gold, silver and bullets."

Is Singer right? Are bonds the "Bigger Short"? Let me first go over this passage which Zero Hedge posted (added emphasis is mine):
Our view is that central bankers have chosen, and doubled down on, a palliative (super-easy money and QE), which is unprecedented and extreme, and whose ultimate effects are unknowable. To be sure, the collapse in interest rates all along the curve, and a bull market in equities, “trophy real estate” and other assets, has had some effect on job creation.

However, the effect is indirect, and in our opinion the benefits of complete reliance on monetary extremism are overwhelmed by the negatives and the risks. To begin with, such policies are inefficient in actually creating jobs and growth, and they worsen inequality: Investors prosper and the middle class struggles. The goal of leaders of developed nations and their central bankers should be more or less the same: enhanced growth and financial stability. 

But somehow the principal policy goal of both has become to generate more inflation. Both extreme deflation (credit collapse) and extreme inflation (which forces citizens to forego normal economic activities and become traders and speculators in a desperate attempt to keep up with the erosion of savings and value) are threats to societal stability, and we don’t actually think there is much to choose from between those extremes. But central bankers are completely focused on erasing any chance of deflation, and the tool to do so – currency debasement – is certainly near to hand. Therefore, the likelihood of deflation is highly remote. By contrast, the central bankers’ universal belief that inflation is easy to deal with if it accidentally overheats is arrogant and not supported by the historical record.

Furthermore, we fail to comprehend how owners of claims on money (that is, bondholders) can continue to ignore the fact that the goal of generating more inflation is aimed precisely at reducing the value of their capital. Central bankers obviously do not understand that the modern financial system is almost impossible to “manage,” and is fundamentally unsound as currently structured and leveraged. Given that reality, why should bondholders believe that central banks are capable of creating just enough inflation, and not a farthing more, in their current quest to rebubble-ize the world? We also question why bondholders believe that if inflation bursts its dictated boundaries despite central bank scolding, that policymakers can indeed, as a former Fed chairman and now immodest citizen blogger and incoming hedge fund advisor (Ben Bernanke) has said, cure it in “10 minutes.” We call to your attention the hand-wringing and agonizing now underway about raising U.S. policy rates by 25, 50 or 75 basis points over the next few months. Imagine the caterwauling in global financial markets if inflation surprises everyone on the upside and the right policy rate should be 2%, 4% or higher. Given the fragility of the financial system and its still-extreme leverage, even a few points of inflation and a few hundred basis points of increase in medium- and long-term interest rates could cause a renewed financial crisis.

Inflation is more or less a generalized diminution in the value of money. A bond is an instrument by which a promise to return, in the distant future, a fixed-in-currency amount of invested money is supplemented by periodic interest payments in the meantime. That’s it, and that’s all you get. Such interest payments are meant to compensate the investor for the use of his or her money, taxes (if any) and expected inflation. At currently prevailing interest rates in the developed world, if there is ANY inflation in the next 10 to 30 years, investors who buy or hold bonds at today’s prices and rates will have made a bad deal. And if inflation emerges from the stone-cold dead and walks, trots or (heaven forbid) gallops into the future, they will have made a very, very bad deal.

Equity values depend to an important degree on confidence that policymakers will continue to allow private enterprise, profits and private ownership of assets. But bonds, in our view, represent a greater leap of confidence. It is so much easier to purloin value from bondholders, and so tempting to rulers; in fact, the current leaders and policymakers have said in so many words that there is not enough debasement (that is, inflation) underway at present. You don’t need a weatherman to know which way the wind blows (according to Bob Dylan), but bondholders nevertheless continue to think, up to basically this moment, that it is perfectly safe to own 30-year German bonds at a yield of 0.6% per year, or a 20-year Japanese bond (issued by the most thoroughly long-term-insolvent of the major countries) at a little over 1% per year, or an American 30-year bond at scarcely above 2% per year.

Asset prices are skyrocketing because of massive public-sector purchases. The tinkering and experimentation that characterizes each round of novel central bank policy leads to more and more complicated unwanted consequences and convolutions. Central bankers are, in our view, getting “pretzeled” by all this flailing, yet they deliver it with aplomb and serene self-confidence. Are they really taming volatility with their bond-buying, or just jamming it into a coiled spring?
Don't you love it when overpaid and over-glorified hedge fund gurus who made their vast fortune charging public pensions excessive fees come out to talk up their book and publicly criticize central banks for fueling inequality? Meanwhile QE has been a boon for elite hedge funds and private equity funds.

I'm not sure if Singer is playing the global reflation theme but I did peer into his fund's top holdings and added it to my list of top funds I track every quarter. You can view the top equity holdings of Singer's fund, Elliott Associates, as of the end of March by clicking here and on the image below:

Keep in mind, however, that Elliott Associates is more of a global distressed debt fund that invests in a lot of assets, not just equities. Singer is most famous for his ongoing tango with Argentina. Still, his fund is long 53 stocks which represent roughly $7 billion of his $26 billion fund.

Among his top holdings, you will see Hess Corporation (HES), Juniper Networks (JNPR) and EMC Corporation (EMC), which tells me he's positioned the equity portfolio for global reflation but again, I don't know if he's long or short bonds. He publicly states that bonds are the "bigger short" but unless you're privy to his entire book, you don't know how he's positioned.

But for the sake of argument, let's say he is short bonds, joining the ranks of many other bond market skeptics, is he right? Are they right? I don't think so and have publicly stated that I don't buy the global reflation story and fear that investors ignoring the very real threat of global deflation are going to get clobbered in the decade(s) ahead. This is especially true for delusional U.S. pension funds holding on to unrealistic investment projections. Deflation will decimate them.

"But Leo, Singer says the likelihood of deflation is remote and its inflation we should worry about." I couldn't care less what Singer says and neither does the bond market. I'm telling you there is no question whatsoever in my mind that  the titanic battle over deflation will not sink bonds. Moreover, if the Fed makes a monumental mistake and starts raising rates too soon, it will all but ensure deflation because this time is different.

Having said this, there is one area of the U.S. bond market that increasingly concerns me. It's not junk bonds, it's pension obligation bonds. Suzanne Bishopric sent me an article written by the New York Times' Mary Williams Walsh, Borrowing to Replenish Depleted Pensions:
Facing a shortfall of more than $50 billion in his state’s pensions, and with no simple solution at hand, Gov. Tom Wolf of Pennsylvania is proposing to issue $3 billion in bonds, despite the role that such bonds have already played in the fiscal woes of other places.

And he is not alone. Several states and municipalities are considering similar action as they struggle with ballooning pension costs.

Interest in so-called pension obligation bonds is expected to intensify in the wake of a recent Illinois Supreme Court decision that rejected the state’s attempt to overhaul its severely depleted pension system. The court ruled unanimously that Illinois could not legally cut its public workers’ retirement benefits to lower costs, forcing lawmakers to scramble for the billions of dollars it will take to keep the system intact.

While the Illinois ruling is not binding on other states, analysts think it may influence lawmakers elsewhere to look to alternatives to cutting public pensions. The Illinois justices offered a list of all the times since 1917 that state lawmakers had ignored expert warnings and diverted pension money to other projects. They said, in effect, that the lawmakers had to restore the money.

Pennsylvania and other states and cities fear similar restrictions.

“My reaction was, ‘Yeah, that’s going to play here,’ “ said John D. McGinnis, a lawmaker in Pennsylvania, which has also been diverting money from its pension system, setting the stage for a crisis as more and more public workers retire. The state has no explicit constitutional mandate to protect public pensions, as Illinois does, but that is irrelevant, said Mr. McGinnis, a Republican and former finance professor at Pennsylvania State University.

“The judiciary in Pennsylvania has been solidly of the belief that there are ‘implicit contracts,’ and you can’t deviate from them,” he said. If lawmakers in Harrisburg were to unilaterally cut pensions now, he said, they could be taken to court and be dealt a stinging rebuke, like their counterparts in Illinois.

Against that backdrop, pension obligation bonds may appear tempting, even though such deals have contributed to financial crises in Detroit, Puerto Rico, Illinois and other places.

The deals are generally pitched to state and local officials as an arbitrage play: The government will issue the bonds; the pension system will invest the proceeds; and the investments will earn more, on average, than the interest rate on the bonds. The projected spread between the two rates makes it look as if the government has refinanced its pension shortfall at a lower interest rate, saving vast sums of money.

But that’s just on paper. In reality, the investment-return assumption is just that — an assumption, and a deceptive one at that because it does not take risk into account.

Fiscal analysts say it is possible, in theory, to shape a pension obligation bond deal responsibly, but that is not what they usually see.

Instead, the deals are typically used to make troubled pension systems seem a little less troubled for a few years, allowing elected officials to celebrate a pension reform without having to make the system sustainable over the long term.

The flood of cash from the bonds may also tempt officials into taking a break from their pension-funding schedule — the very action that has caused so much pension distress to begin with. Skipping annual pension contributions produces an off-balance-sheet debt that can start growing exponentially.

“These deals are being done as a budget gimmick,” said Matt Fabian, a managing director at Municipal Market Advisors, who keeps a database of municipal bond defaults and other mishaps. “They should not be done at all.”

But that has not stopped officials from pursuing them. Kansas recently authorized a $1 billion pension obligation bond and is seeking an underwriter. Alaska has been mulling the idea, although the governor, Bill Walker, opposes it. Hamden, Conn., recently borrowed $125 million for pensions, and the Atlanta school district wants to borrow up to $400 million to revive a dwindling pension plan for bus drivers and cafeteria workers.

In California, Orange County recently borrowed $340 million for pensions; South Lake Tahoe borrowed $12 million; and Riverside and Pasadena each took out new pension obligation bonds to refinance their old ones.

Municipalities are borrowing for their pension funds even in Michigan, where local governments are said to carry the stigma of Detroit, which dealt steep losses to its bondholders in bankruptcy. How a state handles the distress of one city is seen by credit analysts as the implicit policy for all municipalities in that state.

After declaring bankruptcy in 2013, Detroit sought to have $1.4 billion of pension obligation bonds voided outright, saying they had been sold illegally in 2005 and were not enforceable. Ultimately, Detroit settled the debt for about 13 cents on the dollar, the lowest recovery rate of any of its bonds.

Michigan now takes extra precautions with pension obligation bonds, requiring local governments to be rated at least Double-A and to close their pension plans to new employees before borrowing. That has not thwarted Ottawa County, Saginaw County and Bloomfield Hills.

And outside Michigan, San Bernardino, Calif., has told its bankruptcy judge that it wants to settle its pension obligation bonds for just a penny on the dollar.

Investors evidently see the risk as acceptable, but it is still there. The governments typically invest the proceeds aggressively in their efforts to capture the widest spread. But success is more elusive than it looks in the presentations to officials.

The Center for Retirement Research at Boston College tracked a sample of 270 pension obligation bonds issued since 1992 and found that governments were borrowing in the wake of market run-ups, investing when asset prices were high, and reaping losses in subsequent corrections.

The center also found that the greater a government’s fiscal problems, the likelier it was to attempt the arbitrage play.

“Those least able to absorb the risk were most likely to do so,” said Jean-Pierre Aubry, the center’s assistant director of state and local research.

There are signs that at least some state and local officials are taking such findings to heart. In Kentucky, a plan to borrow $3.3 billion for the state-run teachers’ pension fund fizzled in March. In Colorado, a plan to borrow up to $10 billion was derailed by three Republican senators just before the legislative session adjourned.

But in Pennsylvania, Governor Wolf, a Democrat elected last year, sees the risk as acceptable. Five years ago, the state enacted what it called a pension reform that set up a new, cheaper pension plan for the public workers hired from 2011 onward; everyone in the existing plan continued to accrue the richer benefits. In the heat of the election campaign, Mr. Wolf called for giving the plan more time to work.

Indeed, a reform affecting only future employees will take decades to achieve appreciable savings because it will take decades for the current public workers to complete their careers, retire and be replaced by new workers with the cheaper benefits.

Pension obligation bonds look appealing as a stopgap measure. They are, in fact, illegal in Pennsylvania, but proponents say that is not a problem because the statute can be amended.

The idea has bipartisan support. Last year, a Republican state representative, Glen Grell, called for borrowing $9 billion for pensions, saying it “would save $15 billion over 30 years.” His proposal mustered considerable support, but then Mr. Grell resigned to become executive director of the state pension plan for public-school employees.

Barry Shutt, a retired state worker, has been staging a one-man vigil against pension obligation bonds at the state capitol in Harrisburg. He had a sign that said: “Borrowing money is not a fix. It kicks the can down the road and steals from our children and grandchildren.”

Mr. Shutt is a retired accountant who began his career as a state auditor and later administered food programs. He said there was little doubt as to when and why the state pension system went off the rails: In 2001, lawmakers increased everybody’s pensions retroactively, causing a huge, wholly unfunded increase in the state’s obligations.

The lawmakers figured that booming stock-market returns would pay for the costly increase, a mistake made by officials in many other states and cities as well. Two stock crashes later, the mistake is apparent, but it is too late to reverse the increase — it is deemed it an “implicit contract” that cannot be breached.

Pension obligation bonds would only make the problem worse, Mr. Shutt said. “When you’re borrowing money for pensions,” he said, “you’re getting a new credit card to pay off the old one, and you still haven’t paid off the old one.”
Mr. Shutt is absolutely right, pension obligation bonds will not solve the deep structural problems affecting delusional U.S. pension funds, they will only make matters worse. Same goes for their big bet on alternatives, it simply won't pan out.

Keep an eye on the issuance of pension obligation bonds, it just might be the next bigger short nobody is looking at. But when it hits the fan, there will be huge losses and taxpayers will once again be called upon to clean up the mess.

Below, CNBC reports that hedge fund manager Paul Singer says he's spotted the next big thing to bet against: bonds. I wish Paul Singer, Bill Gross and everyone else in the world shorting bonds the best of luck and remind them that continued weakness in the eurozone, the China bubble, and U.S. dollar strength will only intensify global deflationary pressures.

Finally, I remind all of you who regularly read my blog comments to please donate and/ or subscribe using PayPal on the top right-hand side. Thank you and have a great weekend!

Thursday, May 28, 2015

Is The CPP Proposal Doomed to Fail?

Don Pittis of the CBC reports, CPP plan won't help savers or stop the pension crisis:
If as many suggest, the government's latest plan to expand the Canada Pension Plan is pure politics, perhaps the details don't matter.

But based on the little we know so far, you should not expect the new scheme to solve what many worry is a coming Canadian pension crisis.

At first glance, the plan is enticing, especially after CPP's recently announced truly fabulous return on its (our) investments.

The plan, famous for being fully funded and managed by competent professionals without political interference, made a stunning 19 per cent return this year.

The Conservatives aren't saying it, but that huge return — better than almost anyone is earning from their private sector investment accounts — may be one reason the government abruptly changed direction and announced what appears to be an ill-thought-out way to let Canadians top up the CPP.

Magnificent returns

The magnificent CPP return suddenly made plans by the NDP and Liberals to expand CPP look enormously smart.

In fact, it may have made some voters think that those two parties had better financial judgement about what is best for Canadians than the Conservatives, who have repeatedly and stubbornly pooh-poohed the idea.

While the Conservatives can now boast of a "me, too," proposal to extend CPP, the one key detail of a plan almost free of details raises a number of complications.

And that key detail is that under the Conservative plan, investing in the CPP would be voluntary.

The first question is whether voluntarily investing additional funds in CPP is something you should do. That 19 per cent is certainly hypnotizing. But as with any startling one-time investment return, a detailed look reveals some very special circumstances.

Kudos to the professionals at the CPP Investment Board for investing the money offshore to diversify the risk instead of putting all our eggs in one Canadian basket.

But the earnings as a result of a plunging Canadian dollar, which added some 10 per cent to valuations when those foreign assets were recalculated in loonies, are not something that can be repeated annually.
The tax advantage

Not being in Canadian market funds dominated by plunging oil and commodities was also a great advantage, but once again not easily repeated. CPP's real long-run return, even averaging in this bumper year, is a far less stunning 6.2 per cent.

Good returns are important. But when it comes to deciding where to invest your precious savings, perhaps the biggest consideration is taxes, especially for those rich enough to decide to make additional voluntary contributions. And CPP benefits are taxable.

Although I am no financial adviser, paying taxes once on your money and then putting it in a Tax Free Savings Account and never paying taxes again on the profits seems an obviously better deal in the long run.

If that is the case, then those topping up the CPP under the Conservative plan would only be those who had already set aside the full $10,000 annual limit on TFSAs.

The second complication of a voluntary program is one that already concerns some critics of other CPP expansion plans. That is the mixing of new contributions with the decades-old nest egg set aside by Canadians who have paid into the plan over their working lives.

Those who add new voluntary contributions cannot expect to benefit to the same degree as those who contributed under the old rules. Anything else smacks of government interference in a system that has managed to avoid politics.
The grasshopper problem

But the worst part of the plan is that it does not solve the one single problem that could lead to a new crisis of poverty among the elderly. And that is that too many Canadians just don't save enough voluntarily.

The existing CPP's claim to fame in the world of pensions is that it is "actuarially sound." That means that unlike what we have seen in places as diverse as Greece, Detroit and most recently Chicago, the CPPIB has enough money saved and invested to keep on paying out for 75 years based on current expectations.

But there is a big however.

And that is that the amount we contribute off our cheque every month isn't really enough to keep us comfortable during our long retirement. In fact, in many places the entire month's CPP cheque would barely cover monthly rent.

That's super for people who have paid-off houses and other sources of income.

But of course people like that are among the ants of Aesop's Fable. The ants have been saving for the long winter ahead. They will not be part of the pension crisis, except insofar as they have to pay taxes to prevent the old and destitute grasshoppers from starving.

The problem lies around the fabled grasshoppers who live for the present and never get around to saving. They already have many voluntary ways to save. They just can't bring themselves to volunteer.

And even if the latest voluntary plan makes it past the consultation phase, it will do nothing to change that.
This article misses important points. I actually sent it over to Bernard Dussault, Canada's former Chief Actuary, who sent me his thoughts on it:
The only viewpoint expressed in this article makes much sense but it is unfortunately presented in such in a convoluted way that it is not easy to detect.

That valid viewpoint is simply that any plan financed on a voluntary basis is not expected “to solve what many worry is a coming Canadian pension crisis”. That should be obvious. Laymen have easily understood the point made by pension experts over the past few years that if workers are not compelled to save, they will not.

Most of the article refers to the recent high investment return on the CPP investment. This is irrelevant. CPPIB returns have on average since the 1998 reform been quite as planned and projected. Most big pension plans have also been successful in that regard. It is presumptive to speculate that the conservative government suddenly proposed the concerned CPP voluntary contributions scheme in light of the recent high CPPIB investment return.
I went over the record 18.3% return CPPIB delivered in fiscal 2015. No doubt, it was a spectacular year and currency gains played a big factor in those returns, but the point Bernard makes above is much more important, namely, the CPPIB has delivered solid long-term results, well above the actuarial target it is required to deliver.

Pittis is right to mention that the Tories' proposal to expand the CPP on a voluntary basis is full of holes. I explained why in my last comment discussing this proposal:
This latest proposal is going nowhere and even if it's implemented, the "voluntary" nature of it means it will only benefit the richest Canadians much like increasing the tax-free savings account limit to $10,000 a year (the few who  need it the least will wisely sign on but the majority who really need it will opt out).
Given a choice, very few people like to save, which is why I prefer mandatory CPP enhancement. Small business groups like the CFIB are vehemently opposed to the ORPP and enhanced CPP but that's because they are hopelessly myopic and don't see the long-term benefits of such a policy.

Importantly, enhancing the CPP will provide many Canadian workers with a very decent retirement income, something they can actually count on. Far from being a tax, it's a form of savings and the money is being managed by professional pension fund managers who can pool resources to lower costs, invest directly in public and private markets, and invest in world class funds where they can't invest directly.

Another big advantage of the CPP is it pools investment risk and longevity risk so people don't have to worry about putting off retirement because their investments took a big hit (like in 2008) or outliving their savings.

And what about Pittis' comments on TFSAs? I think they're ridiculous. As I highlighted in my last comment, most Canadians aren't contributing enough to their TFSAs, they won't take advantage of the new limits, and even if they do, most people will not out perform the CPPIB over a 10, 20 or 30 year investment horizon, especially on a risk adjustment basis.

"Yeah but Leo, you've been kicking ass in your TFSAs trading biotechs and I'm sure that others are outperforming the CPPIB or any of our large Canadian pension funds."

Wrong again! I take huge risks in my personal portfolio and stomach huge swings that would make 99.99% of retail and institutional investors vomit and have sleepless nights. Moreover, while I can be lucky on any given year, I know I can get whacked hard at any time.

As far as individual investors, I know of a couple of superstars who trade on their own and even a few great investors, but there are no guarantees that they will be able to outperform in these markets, none whatsoever. I've allocated to the very best hedge fund managers in the world and all of them have had serious losses at one point in their career.

Most Canadians are ill-informed, get clobbered on fees investing in mediocre mutual funds that underperform markets, and they know astonishingly little about constructing a well diversified portfolio and how to do this paying the least fees possible.

And even if they did, they're limited to investing in public markets. CPPIB invests in both public and private markets and it co-invests and invests with the very best hedge funds, private equity funds and real estate funds in the world.

What else? The federal government is also looking at relaxing the 30 percent rule to allow federal pensions to invest more in infrastructure in Canada, which will provide CPPIB and other large Canadian public pensions the ability to invest in big Canadian infrastructure projects.

Mutual funds can't invest directly in private markets, which is why over a very long investment horizon, they severely underperform our large, well-governed public pensions.

I'm tired of reading terrible articles criticizing mandatory enhanced CPP or attacking the ORPP and Wynne's pension boondoggle. If the Conservatives enhanced the CPP when Jim Flaherty was alive, we would be well on our way to a much better retirement system, much like the Netherlands.

But Canadians are being lied and misled on what enhancing the CPP is all about and why in the long-run, this will bolster our economy and lower our debt. I will keep repeating this till my face turns blue, good pension policy makes for good economic policy. And Canada desperately needs both at this critical juncture.

I will end this comment with some feedback from one of my blog readers, Jean-Pierre Morency, a retired civil servant who lives in Lévis, Quebec:
I am one of your followers, through your blog, for quite a while. I personally agree with about 90% of your writing and for the last 10% its involve more emotional than rationale arguments. That, being said, I also think that the last Tories move related to CPP is a fake or a political scam or whatever you want to call it. The Tories ideology and more particularly Stephen Harper’s one, as far as I am concerned, is private institutional and financial bias or extreme right as you like. They don’t give a damn to ‘working’ people but create of fancy and wealthy world for the ‘controlling or governing’ 1% as we say.

Now, don’t get me bad, I am a retired federal civil servant and I have the ‘luck’ of having quite a good, or some will say ‘gold-plated’ defined-benefit (DB) pension scheme. However, I also think that instead of fighting this approach, which of course need some improvement, all ought to be put in place to expand it to everyone whatever the CFIB, the Fraser Institute and some other related institutions promote against it. The fundamental rationale being that all other proposal is definitely not a pension as such. I don’t have to elaborate on the subject since you are a ‘pro’ of it and I am still trying to understand it.

One of the reasons I have finally decided to get in touch with you is the fact that you seem to have a high esteem for my friend Bernard Dussault which I think, as yourself, has paid the price for a frank and honest position on the matter when he was Chief Actuary. I hope he, as yourself, will continue this professional work.

Thanks for taking the time to read me and sorry about my English since, like Bernard,  I am a ‘francophone’.
Merci beaucoup Jean-Pierre, your written English is much better than my written French and I appreciate your honesty and comments. And you're absolutely right, we shouldn't be fighting against existing defined-benefit plans, we should be improving them, introducing more transparency, accountability and shared risk. More importantly, we should strive to enhance the CPP for all Canadians so more people can retire in dignity and security.

As far as the Harper Conservatives, I will refrain from getting political. I think they bungled CPP enhancement when Jim Flahery was still alive and they now realize it but their proposal is ridiculous.

The CPP plan the Conservatives are now peddling is doomed to fail (if it's implemented) because it's a total farce. Instead of making it mandatory, they're making it voluntary and lying through their teeth using asinine political jingoism like "we won't tax Canadians any further."

Enhancing the CPP isn't "a payroll tax" or "jobs killer". It's a sound pension policy, one the country desperately needs to get back on solid footing. By making their proposal voluntary, the Conservatives will end up putting forth a policy that fuels more inequality (much like raising the TFSA limit) and it will do nothing to stem the coming pension and economic crises Canada will experience.

Finally, I get emotional (more like irritated) at times when writing this blog but only because I don't like the way policymakers are dealing with the pension crisis. Also, I've put up with so much garbage in my life from such powerful yet weak and pathetic individuals who thought they can bully and intimidate me. Boy were they wrong! They completely underestimated my tenacity and resilience, not to mention the success of this blog which has had over 4 million visits since June 2008.

On that note, I thank all of you who have financially contributed to this blog and ask many others to donate or subscribe using the PayPal options on the top right-hand side. You'll notice I was a bit late with my comment today. I was tired and woke up late. I was also busy trading, analyzing markets and went to the gym this morning to work out. I've got to take better care of the man in the mirror.

Below, a Canadian Press clip where Justin Trudeau, Tom Mulcair question Harper's sincerity on CPP expansion. I too question the timing and sincerity of this proposal and think it's wishy-washy at best and going nowhere.

Also, Brian Milner, Senior Business Writer, The Globe and Mail joins BNN to discuss why making voluntary contributions to the Canada Pension Plan makes great sense for investors. It certainly does but make sure it's mandatory, not voluntary. Listen to Milner's comments, he rightly notes that bankers will try to kill this proposal.

Wednesday, May 27, 2015

Tories Backtracking on Enhanced CPP?

The CBC reports, Joe Oliver to consult on 'voluntary' Canada Pension Plan boost:
Finance Minister Joe Oliver says his government is ready to start consulting Canadians on allowing larger, "voluntary," contributions to the Canada Pension Plan.

"We are open to giving Canadians the option to voluntarily contribute more to the Canada Pension Plan to supplement their current retirement savings," he told the House of Commons on Tuesday.

Oliver said the move would build on the Harper government's record of creating more options for retirement savings, including the pooled pension plans and tax-free savings account alternatives championed by the Conservatives. A statement released by his office said that "by providing voluntary, flexible savings tools, Canada's retirement system is, in fact, now among the best in the world."

No more details were provided in his brief answer to a planted question from a Conservative caucus colleague. It's unclear how the voluntary contributions would work, or what limits would apply.

But Oliver reiterated his government's position on hiking basic premiums, something federal government talking points have called a "mandatory, job-killing, economy-destabilizing, pension-tax hike on employees and employers."

"What we will not do is reach into the pockets of Canadians with a mandatory payroll tax, like the Liberals and the NDP would do," Oliver said in question period.

"A one-size fits all pension tax hike is not what Canadians want, nor what they need," Oliver's release said.
Policy reversal?

This is the second time in two years the government has seemingly done an about-face on the CPP issue.

In 2010, then-finance minister Jim Flaherty announced consultations had begun to expand CPP, calling the program "the envy of the world."

He said the expansion should be "modest and phased in," and that provinces were on board.

Then, in 2013, he abruptly backtracked and started referring to the CPP as a "payroll tax" that the country couldn't afford until there was more economic growth.

Employees and employers are each required to contribute up to almost $2,480 annually on income up to $53,600.

This year, the CPP pays out a maximum benefit of $12,780.

Past proposals have suggested doubling both the contribution cap and the maximum payout. Although Flaherty had made it clear he wasn't in favour of going that high, he never publicly outlined what numbers he had in mind.

Oliver now intends to spend the summer months ahead of a coming election consulting with "experts and stakeholders," on what voluntary contributions to the CPP might look like.

Finance critic NDP MP Nathan Cullen questioned what he called the Conservatives' "death-bed conversion" to CPP enhancement.

"It's incredibly vague. It's a non-announcement today. This is at the very last minute. If they were serious about this, we would have seen something a lot sooner," he said.

Ontario Liberal MPP Mitzie Hunter, the associate minister of finance, dismissed the announcement, saying the federal government "has made it clear they have no real interest in enhancing CPP."

"It's disappointing that the federal government is only concerned with their short-term election prospects instead of providing a secure retirement for millions of Canadians."

Canada's most populous province recently passed a bill approving the creation of a provincial pension plan that would start in 2017. Ontario's plan, which would be phased in over a two-year period, would be for those who don't have a workplace plan.
Bill Curry and Steven Chase of the Globe and Mail also report, Tories propose voluntary expansion of Canada Pension Plan:
The federal Conservative government is proposing a voluntary expansion of the Canada Pension Plan, adding a pre-election twist to the politically charged debate over how best to boost Canadian savings.

Finance Minister Joe Oliver made the announcement Tuesday in the House of Commons, promising that consultations will take place over the summer on the details.

The general premise is that Canadians who choose to pay higher CPP premiums would receive higher guaranteed payments in retirement.

The announcement marks a significant shift for the Conservatives, who have long resisted changes to the CPP on the grounds that higher premiums would represent job-killing payroll taxes.

It also amounts to a key campaign promise because this measure will not be in place before an expected Oct. 19 federal election.

“Our Conservative government believes all Canadians should have options when saving for their future. That is why we intend to consult on giving Canadians the voluntary option to contribute more to the Canada Pension Plan to supplement their retirement savings,” Mr. Oliver said.

Though the announcement represents a significant policy shift, the Finance Minister did not take questions from the media and few details were provided.

This expansion of the CPP on a voluntary, instead of compulsory, basis is an attempt by the Conservatives to offer voters another way to save for retirement without obliging them to do so.

The Tories have been at loggerheads with the opposition parties – and most provinces – over the issue for years.

Labour groups and the seniors advocacy group CARP have long argued that voluntary savings vehicles do not work and that a mandatory CPP expansion is needed to ensure that all Canadians are saving enough for retirement.

The Conservatives have sided with business groups, such as the Canadian Federation of Independent Business, that argue that increasing mandatory contributions to the CPP by employees and employers would be damaging to the economy.

The CFIB said Tuesday that it was “delighted” by Mr. Oliver’s proposal, provided that it would also be a voluntary decision as to whether or not employers make larger contributions for employees.

Susan Eng, the vice-president of CARP, also responded positively, although she stressed that mandatory increases are still likely to be needed.

Mr. Oliver said the voluntary plan would build on other government initiatives, including tax-free savings accounts and pooled registered pension plans.

He suggested that the Tories give Canadians more choice than the Liberals and the NDP.

However, Liberal finance critic Scott Brison noted it was his party that advocated both a mandatory and a voluntary expansion of the CPP in the 2011 election campaign.

NDP finance critic Nathan Cullen called the move a “deathbed conversion” by the Conservatives.

“You can tell when the government’s serious about something: They ram it through an omnibus bill. When they’re not serious about it, they launch a series of consultations over the summer on the eve of an election as if somehow they were going to be converted at the very last minute,” he said. “This is about polls. It’s about the Conservatives realizing they’re in trouble.”

At one point during the past several years of debate over CPP reform, the Conservatives spoke out against the idea they now propose.

In 2010, Jim Flaherty, then the finance minister, took the view that further voluntary savings vehicles were not enough.

The government later changed course. While Mr. Flaherty briefly advocated for expanded mandatory CPP contributions, Prime Minister Stephen Harper has long opposed the idea in his public comments.

The Ontario government has been among the most vocal advocates urging the federal government to support an expanded CPP. When Ottawa decided against the idea, Ontario proposed its own supplemental pension plan, which would begin in 2017 and would apply only to workers who do not have a company pension plan.

Ontario has suggested that if Ottawa changes its position and decides to support an expanded CPP, it would not go ahead with its own pension plan.

Ontario’s associate finance minister, Mitzie Hunter, described the federal proposal as “disappointing.”

“Two things are clear – people are not saving enough for retirement, and we don’t have a federal partner willing to tackle this problem,” she said in a statement.
Say it ain't so? Have the Harper Consevatives who continuously pander to the financial services industry finally seen the light on why now is the time to enhance the CPP? Do they finally realize the benefits of defined-benefit plans and how enhancing the CPP is not only a good pension policy but good economic policy for a country teetering on disaster?

The federal government is also looking at relaxing the 30 percent rule to allow federal pensions to invest more in infrastructure in Canada, which makes a lot of sense if they allow all our public pensions to do so and open infrastructure investments to global pensions and sovereign wealth funds.

Unfortunately, this latest about-face on enhanced CPP is nothing more than a farce. Harper's government doesn't have a clue of what they're doing on enhanced CPP and I can't say the Liberals or NDP are any better (a bit better but far from perfect).

As an ultra cynical Greek-Canadian who is tired of seeing politicians in Greece and Canada talk from both sides of their mouth, let me give it to you straight up. This latest proposal is going nowhere and even if it's implemented, the "voluntary" nature of it means it will only benefit the richest Canadians much like increasing the tax-free savings account limit to $10,000 a year (the few who  need it the least will wisely sign on but the majority who really need it will opt out).

By the way, a new survey shows a third of Canadians won’t take advantage of new TFSA limits:
A new survey suggests about a third of Canadians don’t have the money to take advantage of new rules under which Ottawa almost doubled the amount that can be contributed each year to tax-free savings accounts.

The poll done for CIBC found that roughly 34 per cent of respondents said they either didn’t have the money to take advantage of the new $10,000 limit or had other investment plans.

Breaking the figure down, 18 per cent of those surveyed said they would probably contribute less than the old limit of $5,500, while 12 per cent said they would not have enough savings this year to make a contribution. Four per cent said they would contribute to other saving plans.

The survey found just 10 per cent said they typically contribute the maximum and would now invest $10,000, while an additional 17 per cent said they would try to increase their contributions above $5,500.

Twenty per cent of those responding did not have a TFSA account and had no plans to open one.

The online survey was conducted between April 30 and May 4, less two weeks after the federal budget announcement.
Shocking eh? Not really. Most Canadians are in debt up to their eyeballs, paying off multiple credit cards and trying to make their mortgage payment every month on their insanely overvalued homes (when you see official denial from the finance minister and our central banker, you know they're worried about Canada's housing bubble but don't worry, according to some, Canada is the new Switzerland. Sigh!!).

I use my old Greek indicator to gauge economic activity. I talk to a few Greek taxi drivers and restauranteurs in Montreal to get the real scoop. They all tell me business is down across the board. Restauranteurs and cab drivers are praying the good weather holds up for the Grand Prix next weekend so they can make up for a devastating winter, but they tell me the economy is terrible and "people just aren't spending like they used to" which is why many retail stores are closing in Montreal. Hopefully, the lower loonie and some tourism will help but that is only temporary relief.

Anyways, back to the Tories and their latest proposal. Why am I so skeptical? Easy. Enhanced CPP shouldn't be voluntary, it should be mandatory for almost all Canadians (minus the poor and working poor). This is why behind the scenes, I've argued with some Liberals on their proposal because they too want to make enhanced CPP optional.

It doesn't work that way folks. Yes, higher CPP premiums means less money to spend on the economy and housing but it in the long-run, it also means more Canadians will be able to retire in dignity and security. And people who receive defined-benefit pensions are able to spend more in their golden years, allowing the government to collect more in sales and income taxes.

More importantly, RRSPs and TFSAs are savings vehicles, not defined-benefit pensions, and they place the retirement onus entirely on individuals to make the right investment decisions to be able to retire comfortably. When it comes to their retirement, most Canadians need a reality check because they're getting raped on fees investing in mediocre mutual funds which underperform the market over the long-run.

There is a much better option. Make enhanced CPP mandatory and have the money managed managed by the Canada Pension Plan Investment Board which just recorded a record 18.3% gain in fiscal 2015.

"But Leo, you just finished crucifying these guys for lacking a truly diverse workforce at all levels representing Canada's multiculturalism and you still want to enhance the CPP for all Canadians?!?"

Absolutely! I'm very hard on the CPPIB because I hold them to a much higher standard than any other large Canadian public pension because they represent all Canadians and even though I like their governance and operations, I think there can be significant improvements (see my discussion here).

In particular, I'm a stickler for diversity in the workplace and give a failing grade in this department to all of Canada's coveted top ten, not just CPPIB.  And don't kid yourselves, things are getting worse not better when it comes to diversity at Crown corporations, government organizations and private sector federally regulated businesses.

How do I know this? Because of my struggles to find full-time employment after I was wrongfully dismissed at PSP but also through my conversations with people with disabilities -- much more disabled than me -- who are frustrated with the lack of opportunities for them to find full-time work.

But aren't federally regulated employers suppose to hire people regardless of their age, sex, ethnic background, sexual orientation or disability? That all sounds great on paper but the brutal reality is the unemployment rate for minorities, especially people with disabilities is sky-high, and the hiring decisions at these places are often done in a covert manner to circumvent our laws.

When Michael Sabia, Mark Wiseman, Gordon Fyfe, Andre Bourbonnais or Ron Mock want someone in, there in. And when they want them out, they're out. It's that simple (this goes on everywhere but these are public pensions).

I remember a conversation I had with Mark Wiseman where he told me he contributes to the Multiple Sclerosis Society of Canada. I felt like saying "that's great but what are your doing as the leader of Canada's biggest Crown corporation to hire people with disabilities?"

The only big federally regulated Canadian bank that actually has a diversity blueprint is the Royal Bank but I can tell you from experience this is a bogus program that doesn't actively go out to search and hire minorities or people with disabilities and the jobs they offer are low level jobs that pay peanuts. But at least the Royal Bank has a diversity blueprint which is more than I can say for many other large private and public sector employers.

But my diversity qualms aside, I'm a huge believer in mandatory enhanced CPP for most Canadians and think the time has come that we do away with company pensions altogether and have pensions managed by our large well-governed public pensions that pool investment and longevity risks, lower costs by investing directly across public and private investments where they can and with top global funds where they can't.

Imagine for a second if we didn't have Air Canada, Bombardier, Bell pensions or AIMCo, OTPP, HOOPP, Caisse, OMERS, bcIMC, etc but several large, well-governed public pensions that operate at arms-length from the government and manage the pensions of all Canadians across the public and private sector. It wouldn't be one CPPIB juggernaut but several CPPIBs and there wouldn't be an issue of pension portability.

I'm telling you we have the people and resources to do this. All we lack is political will in Ottawa which is why Ontario is right to go it alone despite all the criticism Premier Wynne has faced. Some think the Conservative pension promise sets up showdown with Ontario but I don't think so.

The sad reality is that our politicians have ignored the pension crisis in this country for far too long and that will impact our debt and deficit in the future as social welfare costs climb. Enhancing the CPP on a voluntary basis isn't a good pension policy; it's a dead giveaway to rich Canadians with high disposable income just like increasing TFSA and RRSP limits are a dead giveaway to the rich and the financial services industry. These aren't the people that need help to retire in dignity and security.

If you have any questions or concerns on this comment and my views, feel free to reach me at You don't have to agree with me and I know I can be very blunt and "controversial" (euphemism for someone who highlights uncomfortable truths) but that is my style and I make no apologies whatsoever for it (ask Tom Mulcair, Gordon Fyfe, Mark Wiseman, etc.).

Bernard Dussault, Canada's former Chief Actuary, shared this with me:
I will give an interview to CPAC on this matter at 1:30 this afternoon where my main two comments will be that:
  • The federal government should first consult the provinces rather than the public because the CPP can be amended only with the approval of at least 7 provinces covering at least 2/3 of the Canadian population.
  • Because participation in the CPP is mandatory, no voluntary contributions can be made to it. Voluntary contributions could only be made to a new plan (i.e. other than CPP), which would still require provincial approval because pensions are under provincial jurisdiction control.
I thank Bernard for his timely and wise insights. He is someone who understands what's at stake when it comes to molding the right retirement policy.

Below, a raw CBC clip where Conservative MP and Minister of State, Kevin Sorenson, talks about CPP consultations. I also embedded a Canadian Press clip on the Tories looking at voluntary CPP add-on contributions. Listen closely to these guys and how they choose their words. They're not serious about enhancing the CPP and bolstering our retirement system and economy. If they were, they would have enhanced the CPP when the great Jim Flaherty was still alive.

Tuesday, May 26, 2015

CPPIB Gains a Record 18.3% in FY 2015

Benefits Canada reports, CPPIB posts record 18.3% return:
The Canada Pension Plan Investment Board (CPPIB) delivered a net investment return of 18.3% for fiscal 2015—the biggest one-year return since it was created.

The CPP fund ended the year with net assets of $264.6 billion, compared to $219.1 billion at the end of fiscal 2014. The $45.5 billion increase in assets for the year consisted of $40.6 billion in net investment income after all CPPIB costs and $4.9 billion in net CPP contributions.

Multiple factors contributed to fiscal 2015 growth, including all major public equity markets, bonds, private assets and real estate holdings.

Combined, all three of CPPIB’s investment departments delivered substantial investment income to the Fund. International markets, both emerging and developed markets, advanced significantly, boosting returns further as CPPIB continues to diversify the fund. The benefit of the fund’s diversification across currencies also played a role in its returns, as the Canadian dollar fell against certain currencies, including the U.S. dollar.

In the 10-year period up to and including fiscal 2015, CPPIB has contributed $129.5 billion in cumulative net investment income to the fund after all CPPIB costs, and more than $151.5 billion since inception in 1999, meaning that over 57% of the fund’s cumulative assets are the result of investment income.
The Canadian Press also reports, CPP Investment Board has record year, targets U.S. for near term growth:
The Canada Pension Plan Investment Board sees the United States as a key destination for investments in the near term, but expects to shift a bigger share of its assets to faster-growing emerging economies over time.

Emerging markets equities account for about 5.9 per cent of the assets managed by the CPP Investment Board, but chief executive Mark Wiseman said Thursday the fund is building its capabilities in markets like India, China and Latin America in a “slow and prudent progression.”

“We believe they will undoubtedly have ups and downs, but in the long run those economies will produce disproportionately higher growth than the developed economies of Europe and North America,” Wiseman said.

The CPP Fund reported Thursday a return of 18.3 per cent for its latest financial year, its best showing ever.

Compared with the end of fiscal 2014, the fund’s assets were up $45.5 billion from the end of fiscal 2014 — the biggest one-year gain since the fund received its first money for investments in March 1999.

In the medium term, Wiseman said there are “excellent prospects” in the United States, which is home to about $100.7 billion or 38 per cent of the fund’s assets — the largest of any country.

“We see more investment opportunities there than in other developed world markets,” Wiseman said.

As for Canada, which represented about 24.1 per cent of the fund’s assets as of March 31, Wiseman said the CPPIB continues to have a positive view despite the impact of the recent oil price shock.

He said lower energy prices, the decline in the loonie’s value against the U.S. dollar, and “solid growth” in the United States — Canada’s biggest market — should help the overall economy.

“So, by and large, we remain optimistic about Canada as well as the U.S,” Wiseman said.

The CPP Investment Board says there were multiple reasons for the strong investment performance last year, including growth at all major stock markets, bonds, private assets and real estate holdings.

Only $4.9 billion of last year’s increase came from employer and employee contributions while $40.6 billion came from investments. None of the fund’s assets were required to pay benefits to current retirees, with contributions expected to carry the load until the end of 2022.

The value of its investments also got a $7.8-billion boost in fiscal 2015 from a decline in the Canadian dollar against certain currencies, including the U.S. dollar and U.K. pound.

The fund’s 10-year inflation-adjusted rate of return was 6.2 per cent — well above the 4.0 per cent that Canada’s chief actuary estimates is necessary.
Finally, take the time to read CPPIB's press release, CPP Fund Totals $264.6 Billion at 2015 Fiscal Year-End:
The CPP Fund ended its fiscal year on March 31, 2015, with net assets of $264.6 billion, compared to $219.1 billion at the end of fiscal 2014. The $45.5 billion increase in assets for the year consisted of $40.6 billion in net investment income after all CPPIB costs and $4.9 billion in net CPP contributions. The portfolio delivered a gross investment return of 18.7% for fiscal 2015, or 18.3% on a net basis.

“The CPP Fund generated exceptional returns this year, achieving both the highest one-year return and annual investment income since our inception,” said Mark Wiseman, President & Chief Executive Officer, CPP Investment Board (CPPIB). “More importantly, our 10-year return, a measure that better indicates how we seek to serve contributors and beneficiaries, reached 8.0% on a net basis.”

In the 10-year period up to and including fiscal 2015, CPPIB has contributed $129.5 billion in cumulative net investment income to the Fund after all CPPIB costs, and over $151.5 billion since inception in 1999, meaning that over 57% of the Fund’s cumulative assets are the result of investment income.

“First, let me cite the hard work, dedication and capabilities of the CPPIB team across all of our offices, as well as close collaboration with our key partners worldwide,” added Mr. Wiseman. “Many factors helped lift the year’s results but the impact of decisions made over several years – and patience – is evident.”

Multiple factors contributed to fiscal 2015 growth, including all major public equity markets, bonds, private assets and real estate holdings. Combined, all three of CPPIB’s investment departments delivered substantial investment income to the Fund. International markets, both emerging and developed markets, advanced significantly, boosting returns further as CPPIB continues to diversify the Fund. The benefit of the Fund’s diversification across currencies also played a role in its returns, as the Canadian dollar fell against certain currencies, including the U.S. dollar.

“While any large increase helps foster public confidence in the sustainability of the Fund, results can and will fluctuate in any given year,” said Mr. Wiseman. “The Fund’s horizon, size and funding allow us to accept more risk and invest differently than almost all other investors, including having a high tolerance for potential future negative shocks. In the same way that we temper our enthusiasm for this year’s exceptional performance, we will also stay on course even through negative returns in any given short-term period. As a result of our unique position, we focus on long-term results of 10-plus years.”

The Canada Pension Plan’s multi-generational funding and liabilities give rise to an exceptionally long investment horizon. To meet long-term investment objectives, CPPIB is building a portfolio and investing in assets designed to generate and maximize long-term returns. Long-term investment returns are a more appropriate measure of CPPIB’s performance than returns in any given quarter or single fiscal year.

Long-Term Sustainability

In the most recent triennial review released in December 2013, the Chief Actuary of Canada reaffirmed that, as at December 31, 2012, the CPP remains sustainable at the current contribution rate of 9.9% throughout the 75-year period of his report. The Chief Actuary’s projections are based on the assumption that the Fund will attain a prospective 4.0% real rate of return, which takes into account the impact of inflation. CPPIB’s 10-year annualized nominal rate of return of 8.0%, or 6.2% on a real rate of return basis, was comfortably above the Chief Actuary’s assumption over this same period. These figures are reported net of all CPPIB costs to be consistent with the Chief Actuary’s approach.

The Chief Actuary’s report also indicates that CPP contributions are expected to exceed annual benefits paid until the end of 2022, after which a portion of the investment income from CPPIB will be needed to help pay pensions.

Performance Against Benchmarks

CPPIB measures its performance against a market-based benchmark, the Reference Portfolio, representing a passive portfolio of public market investments that can reasonably be expected to generate the long-term returns needed to help sustain the CPP at the current contribution rate.

In fiscal 2015, the CPP Fund’s gross return of 18.7% outperformed the Reference Portfolio delivering $3.6 billion in gross dollar value-added (DVA) above the Reference Portfolio’s return, after external management fees and transaction costs. Net of all CPPIB costs, the investment portfolio exceeded the benchmark’s return by 1.3%, producing $2.8 billion in net DVA.

“Dollar value-added is an important measure as it shows the difference between active investments made relative to their benchmarks in dollar terms. We will maintain a greater focus on total Fund – absolute as well as relative – returns, by continuing to develop and apply our capabilities more widely to portfolio management,” said Mr. Wiseman. “Our attention to both measures helps maximize returns, CPPIB’s objective, in the best interests of current and future beneficiaries, since the source of pension benefits is the total Fund. To reduce volatility, DVA is particularly valuable when it is generated as loss reduction in negative market conditions. Both total returns and DVA can vary widely from year-to-year depending on market conditions. Accordingly, both measures must be looked at over longer periods of at least one market cycle, such as five years or more.”

Given our long-term view and risk-return accountability framework, we track cumulative value-added returns since the April 1, 2006, inception of the Reference Portfolio. Cumulative value-added over the past nine years totals $5.8 billion, after all costs.

Total Costs

CPPIB total costs for fiscal 2015 consisted of $803 million or 33.9 basis points of operating expenses, $1,254 million of external management fees and $273 million of transaction costs. CPPIB reports on these distinct cost categories as each is materially different in purpose, substance and variability. We report the external management fees and transaction costs we incur by asset class and report the investment income our programs generate net of these fees. We then report on total Fund performance net of CPPIB’s overall operating expenses.

Fiscal 2015 CPPIB operating expenses reflect increased incentive compensation due to strong total Fund and DVA performance over the past four years, and the continued expansion of CPPIB’s operations and further development of our capabilities to support 17 distinct investment programs. International operations accounted for approximately 30% of operating expenses, including the impact of a weaker Canadian dollar relative to countries we have operations in.

Fiscal 2015 external management fees and transaction costs reflect the continued growth in the volume and sophistication of our investing activities. With external management fees also reflecting performance-based fees, the year-over-year increase was in part driven by higher performance fees for exceptional financial performance. The increase in transaction costs in fiscal 2015 was due to a large private market transaction.

Portfolio Performance by Asset Class

Portfolio performance by asset class is included in the table below. A more detailed breakdown of performance by investment department is included in the CPPIB Annual Report for fiscal 2015, which is available at

Asset Mix

We continued to diversify the portfolio by return-risk characteristics of various assets and geographies during fiscal 2015. Canadian assets represented 24.1% of the portfolio, and totalled $63.8 billion. International assets represented 75.9% of the portfolio, and totalled $201.0 billion.

Investment Highlights

During fiscal 2015, CPPIB completed 40 transactions of over $200 million each, in 15 countries around the world. Highlights for the year include:

Private Investments
  • Signed an agreement to invest approximately £1.6 billion to acquire a 33% stake in Associated British Ports (ABP) with Hermes Infrastructure, an existing U.K.-based partner. ABP is the U.K.'s leading ports group, owning and operating 21 ports with a diverse cargo base, long-term contracts with a broad mix of blue chip customers and experienced management.
  • Expanded our Australian infrastructure portfolio with a A$525 million commitment to build and operate a new tunnelled motorway in Sydney, called NorthConnex. This transaction was completed with Transurban Group and Queensland Investment Corporation, our existing partners in the Westlink M7 toll road. CPPIB will own a 25% stake in the nine-kilometre motorway that will connect Sydney’s northern suburbs with the orbital road network and will be the longest road tunnel project in Australia.
  • Completed our first investment in India's infrastructure sector with the country’s largest engineering and construction company. We committed US$332 million in the Larsen & Toubro Limited (L&T) subsidiary, L&T Infrastructure Development Projects Limited (L&T IDPL), which has a portfolio of 20 infrastructure assets, including India’s largest private toll road concession portfolio spanning over 2,000 kilometres.
  • Completed a US$596 million secondary private equity investment in two JW Childs funds. As the lead investor, CPPIB invested US$477 million in a secondary transaction related to the JW Childs Equity Partners III fund, which provided an attractive liquidity solution to existing limited partners. We also committed US$119 million to a new fund, JW Childs Equity Partners IV. JW Childs focuses primarily on mid-market investments in the consumer products, specialty retail and healthcare services sectors across North America.

Public Market Investments
  • Acquired 172,382,000 ordinary shares of Hong Kong Broadband Network Limited (HKBN) as the sole cornerstone investor in HKBN’s initial public offering. CPPIB invested HK$1,551 million for an approximate 17% ownership interest, becoming the largest shareholder. HKBN is Hong Kong’s second largest residential broadband service provider by number of subscriptions, reaching more than 2.1 million residential homes and 1,900 commercial buildings.
  • Received an additional Qualified Foreign Institutional Investor (QFII) quota of US$600 million to invest in China A-shares that are traded on the Shanghai and Shenzhen Stock Exchanges. Since 2011, when CPPIB obtained its QFII licence, a total allocation of US$1.2 billion has been granted to CPPIB, thereby making it among the top 10 largest QFII holders.
  • Invested US$250 million in the initial public offering of Markit Ltd., representing an approximate 6% ownership interest. Founded in 2003, Markit is a globally diversified provider of financial information services that enhance transparency, reduce risk and improve operational efficiency.

Real Estate Investments
  • Entered into a new real estate sector with the 100% acquisition of a U.K. student accommodation portfolio and management platform operating under the Liberty Living brand, at an enterprise value of £1.1 billion. Liberty Living is one of the U.K.’s largest student accommodation providers with more than 40 high-quality residences located in 17 of the largest university towns and cities across the U.K.
  • Committed RMB 1,250 million to jointly develop the Times Paradise Walk project, a major mixed-use development in Suzhou, the fifth most affluent city in China, with Longfor Properties Company Ltd. The mixed-use development comprises residential, office, retail and hotel space for a total gross floor area of 7.9 million square feet. It is designed to be a top-quality, one-stop commercial destination in Suzhou with completion scheduled in multiple phases between 2016 and 2019.
  • Significantly expanded CPPIB’s real estate portfolio in Brazil during the year. We committed approximately R$1.3 billion to Brazilian retail, logistics and residential assets this year, bringing our total equity commitment to date to R$5.5 billion. This included a R$507 million commitment for a 30% ownership stake in a new joint venture with Global Logistic Properties comprising a high-quality portfolio of logistics properties located primarily in São Paulo and Rio de Janeiro.
  • Invested approximately €236 million in Citycon Oyj to hold 15% of the shares and voting rights, expanding CPPIB’s retail platform in the Nordic region. Citycon is a leading owner and developer of grocery-anchored shopping centres in the region. The investment helped to support Citycon’s acquisition and development opportunities.

Investment highlights following the year end include:
  • Entered into a joint venture partnership with GIC to acquire the D-Cube Retail Mall in Seoul, South Korea from Daesung Industries for a total consideration of US$263 million. Following the transaction, GIC and CPPIB will each own a 50% stake in the mall. Completed in 2011, D-Cube is an income-generating, high-quality retail mall in a prime location.
  • Entered into an agreement to form a strategic joint venture with Unibail-Rodamco, the second largest retail REIT in the world and the largest in Europe, to grow CPPIB's German retail real estate platform. The joint venture will be formed through CPPIB's indirect acquisition of a 46.1% interest in Unibail-Rodamco's German retail platform, mfi management fur immobilien AG (mfi), for €394 million. In addition, CPPIB will invest a further €366 million in support of mfi's financing strategies.
  • Signed an agreement to acquire an approximate 12% stake, by investing £1.1 billion alongside Hutchison Whampoa, in the telecommunications entity that will be created by merging O2 U.K. and Three U.K.
  • Signed a definitive agreement to acquire Informatica Corporation for US$5.3 billion, or US$48.75 in cash per common share, alongside our partner, the Permira funds. Informatica is the world’s number one independent provider of enterprise data integration software. The transaction is expected to be completed in the second or third quarter of calendar 2015.
  • Invested US$335 million in the senior secured notes of Global Cash Access, Inc. (GCA) through our Principal Credit Investments group. GCA is the leading provider of cash access solutions and related gaming and lottery products to the gaming sector.

Asset Dispositions
  • Signed an agreement, together with BC European Capital IX (BCEC IX), a fund advised by BC Partners, management and other co-investors, to sell a 70% stake in Cequel Communications Holdings, LLC (together with its subsidiaries, Suddenlink) to Altice S.A. Upon closing of the proposed sale, it is expected that BCEC IX and CPPIB will each receive proceeds of approximately US$960 million and a vendor note of approximately US$200 million. CPPIB and BCEC IX will each retain a 12% stake in the company.
  • Announced that AWAS, a leading Dublin-based aircraft lessor, signed an agreement to sell a portfolio of 90 aircraft to Macquarie Group Limited for a total consideration of US$4 billion. CPPIB owns a 25% stake in AWAS alongside Terra Firma, which owns the remaining 75% stake.
  • Sold our 50% interest in 151 Yonge Street to GWL Realty Advisors. Proceeds from the sale to CPPIB were approximately $76 million. Located in downtown Toronto, 151 Yonge Street was acquired in 2005 as part of a larger Canadian office portfolio acquisition.
  • Sold our 39.4% interest in a Denver office properties joint venture to Ivanhoé Cambridge. Proceeds from the sale to CPPIB were approximately US$132 million.

Corporate Highlights
  • In May 2015, we continued to expand our global presence with the official opening of a CPPIB office in Luxembourg, representing our sixth international office. We have a significant and growing asset base in Europe today. Establishing an office in Luxembourg supports our global strategy of building out our internal capabilities to support our long-term investment goals. Through our Luxembourg office, we will conduct asset management activities such as investment monitoring, cash management, finance and operations, including transaction support, legal and regulatory compliance.‎ Looking ahead, we expect to complete our previously announced plans to open an office in Mumbai later in calendar 2015.
  • Welcomed the appointment of Dr. Heather Munroe-Blum as the new Chair of CPPIB’s Board of Directors. Dr. Munroe-Blum succeeded Robert Astley, CPPIB’s Chair since 2008, upon the expiry of his term on October 26, 2014.
  • Welcomed the appointment of Tahira Hassan to CPPIB’s Board of Directors in February 2015 for a three-year term. Ms. Hassan also serves as a non-executive Director on the Boards of Brambles Limited and Recall Holdings Limited and held various executive leadership roles with Nestlé for more than 26 years.
  • Announced senior executive appointments:
    • Mark Jenkins was promoted to Senior Managing Director & Global Head of Private Investments responsible for leading the direct private equity, infrastructure, principal credit investments, natural resources and portfolio value creation functions. Mr. Jenkins joined CPPIB in 2008 and most recently held the role of Managing Director, Head of Principal Investments.
    • Pierre Lavallée was appointed to the new role of Senior Managing Director & Global Head of Investment Partnerships. Mr. Lavallée, who joined CPPIB in 2012, leads this new investment department to focus on broadening relationships with CPPIB’s external managers in private and public market funds, secondaries and co-investments, expanding direct private equity investments in Asia and further building thematic investing capabilities.
    • Following the year end, Patrice Walch-Watson was appointed to Senior Managing Director & General Counsel and Corporate Secretary, and a member of the Senior Management Team, effective June 5, 2015. Ms. Walch-Watson joins CPPIB from Torys LLP where she was a Partner, with expertise in mergers and acquisitions, corporate finance, privatization and corporate governance.

You can download CPPIB's Annual Report for fiscal 2015 by clicking here. Take the time to read it, it's well written and provides in-depth information on their investments and a lot more. At the very least, read the President's message here.

Fiscal 2015 was an exceptional year for CPPIB. All public and private investments delivered strong gains. Most were double digit gains except for Canadian equities and bonds which each delivered a 9% gain. Also, the value of its investments got a $7.8-billion boost in fiscal 2015 from a decline in the Canadian dollar against certain currencies like the U.S. dollar and U.K. pound.

CPPIB's strong performance will silence its critics. The key passages from above:
  • In fiscal 2015, the CPP Fund’s gross return of 18.7% outperformed the Reference Portfolio delivering $3.6 billion in gross dollar value-added (DVA) above the Reference Portfolio’s return, after external management fees and transaction costs. Net of all CPPIB costs, the investment portfolio exceeded the benchmark’s return by 1.3%, producing $2.8 billion in net DVA.
  • Given our long-term view and risk-return accountability framework, we track cumulative value-added returns since the April 1, 2006, inception of the Reference Portfolio. Cumulative value-added over the past nine years totals $5.8 billion, after all costs. 
  • CPPIB total costs for fiscal 2015 consisted of $803 million or 33.9 basis points of operating expenses, $1,254 million of external management fees and $273 million of transaction costs. CPPIB reports on these distinct cost categories as each is materially different in purpose, substance and variability. We report the external management fees and transaction costs we incur by asset class and report the investment income our programs generate net of these fees. We then report on total Fund performance net of CPPIB’s overall operating expenses.
That really sums it all up. Yes, it's expensive to run an operation like CPPIB but the cumulative value-added over the past nine years totals $5.8 billion, after all costs. And they have done a good job of keeping those costs down, investing directly where they can.

And then people wonder why I'm such a stickler for enhancing the CPP for all Canadians. Because bar none, this is the most cost effective way to bolster the retirement security of all Canadians. The results speak for themselves and the fact is CPPIB invests across public and private markets, which adds important long-term diversification benefits.

By the way, you have to pay people for performance and the senior managers at CPPIB get paid very well (click on image):

But keep in mind this is an almost $300 billion fund operating in Toronto, which is is why they need to be competitive with compensation. Still, I wouldn't call Mark Wiseman's compensation outrageous relative to some of his peers. I think he gets paid very well for what he does and the huge responsibilities he has.

Mark is a good guy and sharp as hell. I'm not in total agreement with him on the outlook for Canada and I've been hard on him concerning diversifying the workplace at CPPIB at all levels, including senior managers (their board needs diversity too). Case in point, here is a picture with all of CPPIB's senior managers from the Annual Report (click on image):

Not exactly the epitome of diversification and Canadian multiculturalism, eh? Having said this, I trust Mark Wiseman and his senior managers are doing an outstanding job managing this juggernaut.

One thing I won't hide from you is that I've applied to jobs at CPPIB and even got an email from Mark nicely explaining "why I don't fit" in their organization and that they tried to find me " a suitable position." This is all rubbish to me because when David Denison was in charge of the place, I went as far as an interview for a job before the folks at PSP cut me off with one phone call (I know a lot more than people give me credit for which is why I find these excuses downright insulting).

Also, I know far too many talented folks who haven't been hired at CPPIB and all of them have received lame, if not laughable excuses. The same with other large Canadian pensions. Something is seriously wrong in the HR departments at CPPIB, the Caisse, PSP, Ontario Teachers and elsewhere if they're not hiring these talented individuals (and I include myself in that group). And I have no qualms stating this publicly.

Getting hired at these places is all about politics. I also noticed they don't like hiring people who are smarter than them or who can challenge them in any way, shape or form. Too bad, this is why the culture at these places reeks of politics, and why I just don't buy that "the best and brightest" are working at these places (again, I'm entitled to my opinion and the folks working at these places are entitled to theirs but I can give you my A-list of amazing individuals that were not hired for flimsy reasons at any of these coveted organizations).

I'm starting to get cynical in my old age. I'll end on a positive note, however. These results are only one year but the long-term results, the ones that count, are equally impressive. CPPIB is doing something right to manage the hundred of billions they're responsible for. And again, in spite of my criticism, I still maintain that we need to enhance the CPP for all Canadians. Period.

Take the time to read all the recent articles on CPPIB here. They have been very busy lately on all sorts of deals, some with partners and some with their peers like the Caisse.

Below, listen  to CPPIB employees talk about what makes the organization a special place to work. Take these comments with a grain of salt. And again, where are the visible minorities? People with disabilities? This is the biggest Crown corporation in Canada and we need to be on their case to diversify their workforce at all levels because it doesn't represent Canadian multiculturalism at its best.

If that last comment pisses off some people at CPPIB, tough luck, that is my opinion. Let them publish something in their Annual Report providing hard statistics to counter my claims. And when it comes to governance, CPPIB and all of Canada's top ten gloat on how they're the best but they can't even get diversity in the workplace right.