Wednesday, August 24, 2016

Beware Of The Big Bad Caisse?

This comment is bilingual, so please bear with me as I will explain it below. At the end of June, Patricia Cloutier and Valerie Gaudreau of Le Soleil reported, Tous les régimes de retraite de Québec passent à la Caisse de dépôt:
Dans l'espoir de faire des économies et d'améliorer leurs rendements, tous les régimes de retraite de la Ville de Québec seront dorénavant gérés par la Caisse de dépôt et placement du Québec (CDPQ).

Cet actif, qui s'élève à environ 2 milliards $, était auparavant géré par un comité composé de fonctionnaires de la Ville et de représentants syndicaux. La Caisse de dépôt, qui gère déjà le bas de laine des employés des Villes de Laval, Sherbrooke, Terrebonne et Magog, a ainsi ouvert la porte mardi à son plus gros déposant dans le secteur municipal. «On est très heureux de les accueillir. C'est une belle marque de confiance et de reconnaissance pour nous», soutient Maxime Chagnon, porte-parole de la CDPQ.

Dans la région de Québec, la CDPQ gère aussi les fonds des employés de l'Université Laval et d'une partie des employés de la commission scolaire de la Capitale.

En mêlée de presse, le maire de Québec, Régis Labeaume, a dit s'être entretenu avec le président et chef de la direction de la Caisse, Michael Sabia. «J'ai parlé à M. Sabia cette semaine, je lui ai dit qu'on lui envoyait 2 milliards $. J'ai dit qu'on voulait du bon rendement, il nous a promis tous les efforts. Je pense qu'on fait un bon coup. Ils sont très bien équipés», a-t-il commenté.

«On était dû pour changer et viser de plus gros rendements», a poursuivi M. Labeaume selon qui les syndicats ont aussi tout intérêt à percevoir de bons rendements depuis que la loi 15 oblige le partage à parts égales des déficits entre employés et employeurs. «Ils ont beaucoup plus d'intérêt maintenant pour le rendement car ils doivent payer 50 %», a-t-il dit.

Propos «indécents»

Jean Gagnon, président du Syndicat des cols blancs de la Ville de Québec, juge ces propos du maire «indécents». «Il faut être drôlement culotté pour s'approprier une démarche dont il était 100 % absent», soutient le syndicaliste. Selon lui, ce sont les syndicats qui ont tiré la sonnette d'alarme en ce qui a trait aux coûts élevés du régime. Un travail d'équipe de plusieurs mois s'est ensuite enclenché en collaboration avec la direction générale de la Ville.

Selon M. Gagnon, les employés municipaux sont eux-mêmes des contribuables et se sont intéressés depuis très longtemps au rendement des régimes de retraite. «Sauf qu'avant, je me faisais dire de me mêler de mes affaires!» lance-t-il, irrité.

La première solution envisagée par la Ville et les syndicats a été de créer un gros bureau de gestion des fonds à l'interne, avec une vingtaine d'employés, raconte M. Gagnon. Mais la structure aurait été lourde, et l'expertise, à développer. «Quand on a vu la proposition que la Caisse nous a faite, on ne pouvait avoir mieux», dit-il.

«La Caisse a eu un mauvais épisode en 2008, mais on sait qu'ils ont appris de leurs erreurs et ne referont pas ce genre de connerie-là», commente M. Gagnon, en parlant des pertes colossales enregistrées par la CDPQ il y a huit ans.

Alors qu'à l'heure actuelle, les frais de gestion des régimes de retraite des cadres, employés manuels, fonctionnaires, professionnels, pompiers et policiers sont de 0,29 %, ils pourraient maintenant descendre à 0,17 %, explique M. Gagnon.

Le représentant syndical évalue qu'entre les mains de la CDPQ, les rendements de ces régimes devraient augmenter, au minimum, de 1 %. Ce qui représente une économie de 22 millions $, tant pour les citoyens de Québec que pour les employés. «C'est une solution gagnant, gagnant», plaide-t-il.

Au 31 décembre 2015, les six régimes de retraite de la Ville de Québec comptaient plus de 9500 participants actifs, retraités et bénéficiaires.

Le chef de l'opposition à l'hôtel de ville, Paul Shoiry a aussi salué la décision mardi. «La Caisse de dépôt connaît des bons rendements depuis quelques années. Leur expertise est connue et je pense que financièrement, ça peut être une bonne chose. C'est probablement une très bonne décision», a dit l'élu de Démocratie Québec.
The article above was written at the end of June and basically discusses why the city of Quebec transferred $2 billion to the Caisse to manage its pension assets which were previously managed by a city pension plan. The Caisse didn't solicit this business, it was approached to do this.

The main reason behind this move? Performance. The passage of Bill 15 in Quebec's National Assembly forces public sector employees to share the risk of the pension plan, which means if a deficit occurs, they and the plan's sponsor need to contribute more to shore it up (not sure if it's Bill 15 but that is what the article states).

It is estimated that the plan's performance will increase 1% which represents a savings of $22 million. In addition to this, there will be significant administrative savings, passing from 29 basis points to 17 basis points. The union representing Quebec City's public sector employees pushed hard for this.

Now, the person who brought this to my attention shared this with me: "This is a terrible idea because it is setting a dangerous precedent as other cities and municipalities will follow and it will mean the end of many small equity and fixed income shops in Quebec that rely on these city and municipal pensions for mandates."

He told me that Quebec's financial community is dying and "nobody cares". He said "Finance Montréal is doing a good job attracting back office jobs to Montreal and helping firms like Morgan Stanley and Societé Générale open up middle office jobs which helps many students in finance, but it's not enough. There are no front office jobs being created here and that's terrible."

He said this will concentrate "more power in the hands of the Caisse and will jeopardize the emerging manager program which was set up to reinvigorate Montreal and Quebec's financial community."

He also told me that PSP's CEO André Bourbonnais who sits on the board of Finance Montréal "went ballistic" when he found out that the Caisse will now be managing Quebec City's pension assets because "he knows what it means for Quebec's financial community." [Note: This is all hearsay and the people that have met André  Bourbonnais tell me he's a well-mannered person with a steady temperament.]

I listened patiently to his qualms and then asked him: "Why are you bothering me with this? I'm just a pension blogger trying to make a buck trading some biotech shares and here you are ranting and raving about the big bad Caisse taking over Quebec's city and municipal pensions."

Alright, so you all want to know my thoughts? I'll share them with you and be very blunt so you are all crystal clear on them. I think it's about time all of Quebec's defined-benefit pensions be managed by the Caisse.

Why? Because over the long run, nothing beats a large well governed defined-benefit plan which can invest directly across public and private markets all over the world and choose the top funds in public and private markets where it can't invest directly. Canada's Top Ten pensions have the size and expertise to do this efficiently which is why it's very hard to top their long-term performance.

And I'm not saying this to suck up to the Caisse or its senior managers. I couldn't care less of what they think of me. I'm thinking of what is in the best interests of plan members and sponsors as well as Quebec taxpayers. And from my expert vantage point, there is no question whatsoever that they're doing the right thing for their contributors, beneficiaries and the province's taxpayers.

Will other unions in Quebec follow the decision of Quebec City's public sector union and transfer their pension assets to the Caisse? I certainly hope so especially if it's in their members' best interests. I just finished a comment on the disaster at the Dallas Police and Fire Pension where I recommended almagamating all city and local pensions at the state level and improve their governance.

Will there be collateral damage because of decisions to transfer pension assets to the Caisse? Yes, no doubt about it. The person who shared this with be is right to lament that it will impact many Quebec based funds as well as consultants, actuarial shops and lawyers and accountants dealing with setting up new funds and managing their business. It will also impact brokers as they will receive less commissions.

Such is life, it is tough. When my buddy's father closed up his children manufacturing shop in the nineties after Eaton's closed stores and eventually went bankrupt, it meant he and others had to lay off many employees. He later admitted to me that he had too much concentration risk relying on Eaton's.

The same goes for Quebec funds and consultants relying solely on Quebec's small to mid size city and municipal pensions for all their business. If that is their business model, they're going to close shop too.

The problem in Quebec is everyone knows each other and it's a little fraternity. I call it "la petite mentalité québécoise" (the small Quebec mentality). It's not just me. A French Canadian friend of mine once told me: "There are two type of Quebecers, those who think like Ginette Reno and those who think Celine Dion."

I have no problem with Ginette Reno or Celine Dion, god bless both of these singers. But I understand what my friend was saying, either you're going to think big time and act accordingly or close yourself off to what is familiar in your own surroundings. And if you're going to do that, then you won't enjoy big time success.

There are Quebec based private funds that think like Ginette Reno and others that think like Celine Dion. The latter are enjoying huge success while the former enjoy success but on a much smaller scale and their business model leaves them much more exposed to client concentration risk.

Again, such is life and it isn't always fair. I know all about that on a personal and professional level, but I'm not going to shed a tear for Quebec based funds that close shop because of the right decision of Quebec City or other cities to transfer pension assets to the Caisse which will do a much better job, delivering better risk-ajusted results at a fraction of the cost.

The person who shared this with me didn't like my response. He lamented "the Caisse's results especially in fixed income weren't as strong as those of Ontario Teachers'," to which I replied "And, who cares? The Caisse's 2015 overall results were excellent even if Fixed Income underperformed its Ontario Teachers' peers" (not to mention you need to be extremely careful when intepreting results from Canada's highly leveraged pensions).

And in its recent semiannual update, the Caisse said over five years, the weighted average annual return on clients' funds reached 9.2%, generating net investment results of $86.8 billion for this period. With respect to its benchmark portfolio, the Caisse produced $9.4 billion of value added. For the first six months of the year, the average return stood at 2.0%, generating $1.6 billion of value added. Net assets totalled $254.9 billion.

Now, I don't know if André Bourbonnais who sits on the board of Finance Montréal "went ballistic" when he found out that the Caisse will be managing Quebec City's pension assets. This might be all hearsay which is completely false.

But I will tell you what I think, there is no doubt in my mind that Quebec and Montreal's finance cummunty is shrinking (this is happening everywhere) and there needs to be a lot more done to attract front office jobs to our beautiful city. And I think that both André Bourbonnais and Michael Sabia need to use their power to do a lot more to help this city's financial community flourish once again.

How should they do this? That's a tough question. Most Quebec hedge funds, just like most hedge funds, absolutely stink. Most have closed shop in the last few years (the only hedge fund I would invest in is my friend's currency hedge fund and even he is battling for returns with one arm tied behind his back). The same goes for private equity funds, which are much fewer.

Maybe the focus should be more on opening up another long only shop like Hexavest or opening up a big global macro shop. Or maybe this city needs to make a huge pitch to the United Nations to bring its pension operations here. I argued for this in a recent post of mine.

I don't know the answers but all I can tell you is the financial landscape is being irrevocably altered and it will impact pensions, hedge funds, private equity funds, mutual funds, banks, insurance companies, and many third party vendors and service providers.

Life is tough, you need to live through, accept and adapt to change, some of us a lot more than others. On that note, make sure you read my earlier comment on whether it's time to plunge into stocks. I certainly don't get paid enough for sticking my neck out and sharing my insights with all of you.

Below, take the time to listen to a panel session from the recent International Pension Conference of Montréal (IPCM) featuring Leo de Bever, AIMCo's former CEO.

I already went over the conference here but noticed this session was made public after my post. You can watch all the sessions here.

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