The Teachers' Battle in Alberta Heats Up

Danielle Walker of Pensions & Investments reports that Alberta proposes AIMCo take on management of teachers' fund:
The Alberta government proposed in its recent budget that management of the C$18 billion ($13.8 billion) Alberta Teachers' Retirement Fund, Edmonton, be shifted to Alberta Investment Management Corp.

AIMCo is an institutional investment manager with more than C$108.2 billion of assets from more than 30 pension, endowment and government funds in Alberta.

The move is intended to "lower costs and achieve significant and necessary economies of scale" that would "protect returns to pensioners," the budget plan, published Oct. 24, said.

A spokeswoman for the Alberta Treasury Board and Finance said in an email Wednesday that the transfer is a proposed change until the appropriate legislation is introduced and passed in the Legislative Assembly.

As part of the budget proposal, the Alberta government also recommended that assets from the C$10.3 billion Workers' Compensation Board and the C$2.3 billion Alberta Health Services, both in Edmonton, also be transferred to AIMCo for management. A spokeswoman for health agency declined to comment on the matter; and a spokesman for the compensation board did not immediately respond.

AIMCo already manages a small portion of the Workers' Compensation Board's assets, the treasury spokeswoman said.

The Alberta fund in a statement on its website said that fund personnel were only informed of the proposed change when the budget proposal was released. "The ATRF Board and Management have a number of questions and are in the process of seeking information and answers to those questions," the statement said.

"What we do know is that our commitment to plan members and employees is our utmost priority. To this end, we'll continue to provide the superior investment management and service delivery our members have come to expect from ATRF, and we will endeavor to share any and all updates as soon as they become available. Note that the change should not immediately affect pension benefits or contributions," the statement says.

Over the weekend, Jason Schilling, president of the Alberta Teachers' Association, Edmonton, said in a statement published on the association's website that the decision without the input of teachers made the move "feel like a hijacking."

"Why didn't they talk to us? Individual teachers contribute half of the money that funds the plan and now will have no say over the management of those funds," Mr. Schilling said in the statement.
I've already covered the "hijacking" of Alberta Teachers' Retirement Fund here but things are heating up in Alberta and in my opinion, degenerating very quickly.

All you have to do is search the term "ATRF" on Twitter and read some of the nonsense and misinformation being spread there. Typical case in point:

Now, I have the utmost respect for teachers, my soon-to-be wife is a teacher and I think they're grossly underpaid for the work they do even if they get a great defined benefit pension at the end of their career (which they pay a lot over the years to receive benefits when eligible to retire).

As my fiancé keeps telling me: "Trust me, you spend a day with 19 five-year olds and your perspective on teaching will change." (I trust her, I can't even imagine what this is like on a day to day basis).

But when I read nonsense from Alberta teachers and the Alberta Teachers Association which represents them, I have no qualms whatsoever calling them out.

Case in point, ATRF's Board Chair, Sandra Johnston, just sent a follow-up letter to the President of Treasury Board and Minister of Finance, Travis Toews. According to the ATRF website: "The letter provides some information regarding net asset return comparisons between ATRF and AIMCo, and speaks to the benefits our members receive from ATRF as a pension manager.

Take the time to read this letter here, and if you are a teacher in Alberta, I am going to test your critical thinking skills because in my opinion, it's blatantly biased, patently false in some sections and compares apples to oranges!

For example, take this statement:
Historically ATRF's net investment returns after all costs have been superior to AIMCo's. Over the past 5 years, ATRF's fund returns have exceeded the returns of AIMCo's primary pension clients (PSPP and LAPP) by between 0.3% and 1.5% annually, depending on the plan. Notably, ATRF's returns have significantly exceeded those of AIMCo in all major private market categories (private equity, infrastructure and real estate), which is a clear indication that larger scale is not necessarily an advantage, and may in fact be a disadvantage.
Whoah! Really? Sure, in some cases bigger isn't better and smaller plans can play in the mid-market space which is too small for larger plans, but if you've been following my comments on CPPIB, Canada's $400 billion+ behemoth and in my opinion, the best pension fund in the country in terms of long-term performance, you'll quickly realize that more often than not, bigger is much better, especially when the governance is right.

Also, have a look at ATRF's investment performance from page 43 of its 2018 Annual Report:

An astute, critical thinker, would first notice that ATRF's fiscal year ends at the end of August, not at the end of calendar year like AIMCo's. Do you all remember what happened in Q4 of 2018? Stocks got slaughtered and came back strongly this year, giving ATRF an advantage when reporting its returns.

In fact, AIMCo put out a one page backgrounder which you can all read here addressing the difference in year-end performance and discussing the benefits of scale.

When adjusting performance to reflect different year-end reporting dates, it turns out AIMCo's Balanced Fund outperformed ATRF over one year (9.8% vs 9.6%) and more importantly over the last four years, it's pretty much the same (8.2% vs 8.1%) net of all fees.

And this despite the fact that ATRF's Private Markets (Private Equity, Real Estate and Infrastructure) outperformed those of AIMCo over the last four years.

But here too, you need to be careful as AIMCo has a lot of legacy investments it is dealing with in private markets and the mid-market space where the ATRFs of this world primarily invest in has been outperforming of late but not over the long run.

The most important thing in AIMCo's one page backgrounder, however, isn't its 4-year performance edging out that of ATRF, it's the fact that it addresses scale, diversity and governance head on:

When informing Alberta's teachers of the benefits of joining AIMCo, they should familiarize themselves with the mandate and roles of AIMCo as well as its diligence and governance.

Moreover, Alberta's teachers can have joint governance over their pension plan, just like AIMCo's three largest clients. This should address points 3, 4 and 5 of ATRF's letter to the Minister.

The main point I think is lost in all this is that AIMCo is a world-class organization investing across public and private markets all over the world.

Importantly, nothing will happen to Alberta teachers' pensions if assets are managed by AIMCo. If anything, they will be bolstered over the long run because AIMCo at $150 billion+ in assets will be an even stronger force to be reckoned with.

What about Ontario Teachers', OMERS, HOOPP, IMCO and OPTrust? All great organizations but in theory, Doug Ford's government can amalgamate them to to create one big Ontario pension fund just like BCI in British Columbia or the Caisse in Quebec. This will lower administrative costs significantly and improve performance over the long run. In fact, some people have privately told me it's going to eventually happen.

I say in theory because in practice, there will be great pushback as these are all extremely well run, successful and mature organizations and there is no comparable Ontario fund where assets can be moved to amalgamate them.

Again, as I expressed in my last comment on the hijacking of Alberta Teachers' Retirement Fund,  the Government of Alberta made a series of blunders, the biggest one not properly consulting the teachers before moving ahead with this proposal. That was a blatantly dumb and arrogant mistake.

Also, ATRF is a great organization with exceptional people. I feel their angst but as I said, there's no way some people will not be absorbed into AIMCo and they too will be better off over the long run (better compensation, bigger, more stable organization).

By the way, Wayne Kozun, the CIO of Forthlane Partners and former SVP at OTPP posted this on LinkedIn:
Why were the assets of these funds, like Alberta Teachers, not managed by AIMCo since 2008 when AIMCo was founded? What has changed since then? I haven't seen that mentioned in the media articles that I have read about this issue in the last week.
The answer is ATRF is an older organization, it had unfunded liabilities that were addressed in 1992 and at the time of AIMCo's creation in 2008, ATRF had single digit billions being managed mostly by external managers whereas AIMCo had big clients to absorb and service from the old Alberta Investment Management Division.

The key thing I want to reiterate is that even though this government proposal was rammed down the throat of Alberta's teachers, it does make a lot of sense over the long run for all stakeholders, including taxpayers, the government and teachers.

Yes, it's true AIMCo benefits the most from this proposal and ATRF loses everything. I'm cognizant of this fact and empathize with employees at ATRF but it doesn't change the logic and long-term benefits of moving ahead with the government's proposal.

I urge Alberta's teachers to get properly informed on what this proposal entails and really understand the benefits of having AIMCo manage their pension assets over the long run.

I really think everyone needs to cool down here, stop reading nonsense on Twitter or the Communist Broadcast Corporation (CBC), start getting informed by real experts who understand the pros and cons of this proposal.

Sometimes I feel this battle in Alberta is like watching the old rivalry between the Calgary Flames and Edmonton Oilers when Tim Hunter and big Dave Semenko used to go at it. Cool down folks, whether it's ATRF or AIMCo, you're in great hands!

Update: Wayne Kozun, CIO of Forthlane Partners, shared this with me after reading this comment:
In terms of amalgamation in Ontario - I have seen both single client funds and multi-client funds and I think that there is a tangible benefit in being a single client fund. This leads to clarity of purpose for the fund and it allows them to think about managing all risks in both the assets and the liabilities. This includes making adjustments like conditional inflation protection and managing the total return of the fund, not just the alpha. That is very hard to do at entities that are asset managers managing assets for multiple provincial plans. They tend to not be able to manage the total return of the fund, they manage to a benchmark (aka strategic asset allocation) and focus solely on earning alpha on their assets. And they spend a LOT of time and resources managing the client - asset manager relationship. This benefit has to be weighed against the increased cost of not having as many economies of scale.

Maybe you can get around this by not giving the individual plans much power (is this the way it is done in Quebec with the CDP?) but that may not be palatable to some stakeholders.
I thank Wayne for sharing his insights with my readers.

Lastly, I was dumbfounded Friday morning when I read Alberta Premier Jason Kenney says there’s a “compelling case” to be made for his province to exit the half-century-old Canada Pension Plan.

Needless to say, I think this is a completely bonehead move which isn't in the best interest of Alberta's residents or the country.

Below, BNN Bloomberg's Amanda Lang discusses the idea floated by Alberta Premier Jason Kenney for the province to withdraw from the Canadian Pension Plan amid a growing divide between the East and West.She's absolutely right, "the kids need to shut up and let mom and dad drive."

Update: Malcolm Hamilton, a retired actuary, sent me this after reading this post:
I don't want to wander into the middle of a political minefield but you are jumping to conclusions supported by opinions, not by fact or analysis.

You are no doubt aware that Quebec decided in the early 1960s that it would rather have its own pension plan (the QPP) than participate in the CPP. Quebec has never changed its mind about this. To the best of my knowledge, you have never criticized Quebec for staying out of the CPP. This being the case, why would you criticize Alberta for evaluating what Quebec has already done? Why not criticize Quebec's "bonehead move"?

Viewed objectively, Quebec made a mistake by opting out of the CPP. The problem isn't poor governance or lack of scale - the QPP is well run. The problem is demography. The QPP costs more than the CPP largely because Quebec's population grew more slowly than the population in the rest of Canada. Since neither the CPP nor the QPP is well funded, good investment performance cannot compensate for poor demography. By opting out of the CPP, Quebecers forced themselves to bear the burden of their own demography. Had Quebecers participated in the CPP, all Canadians would have borne this burden.

There is no mystery here. Pay-as-you-go pension systems force workers to pay for pensioners. In a national pension plan, the "older provinces" (Quebec, BC and the Maritimes) will be supported by the "younger" ones (everyone else). The subsidies are never measured or disclosed. Sometimes it is best not to know what's going on. Still, the subsidies are there and there is little doubt that Alberta (the youngest province) collectively subsidizes the other provinces. I see no harm in acknowledging this. The harder question is whether to do something about it.

There are many subsidies in a national pension plan. Men may subsidize women, who live longer. The poor may subsidize the rich, for the same reason. The healthy subsidize the less healthy. In the CPP and QPP, past generations had a better deal than future generations. Alberta may have subsidized other provinces in the past but that does not mean that Alberta will subsidize other provinces in the future. Its population and economy may change.

DB pension plans never flourish where everyone seeks a subsidy and no one is prepared to subsidize. There needs to be some solidarity and some commitment to sharing. Otherwise the plans die... and few things are uglier than the death of a poorly funded DB plan.
Bernard Dussault, Canada's former Chief Actuary, echoed similar points in his response to my post:
Quebecers are paying more (about 11% vs. 9.99% for the CPP) to the QPP because Quebec is older than Canada as a whole (i.e. the % of seniors is about 15% higher than in Canada as a whole).

If Alberta were to exit the CPP, they would be compelled by the CPP Act to set own their own ‘APP’, which would have to be “similar” to the CPP.

Because Alberta is younger than Canada, the APP contribution rate would be smaller than 9.9%, which Is likely the main reason Alberta wants its own “APP”.

If that were to happen, the CPP 9.9% contribution rate would therefore most likely have to be increased.
I thank both of them for graciously providing me these insights.