OPTrust's CEO on Why Healthy Pensions Matter
Every day, 1,000 people retire in Canada. As that number continues to grow, ensuring that Canadians can retire with security and stable incomes has never been more important. And that is the chief concern of Canada’s defined benefit pension plans. We are in the retirement security business, and we are best at providing it.
Those who can’t benefit from these pensions must trust the lion’s share of their retirement income to financial advisors. In recent weeks, there have been a number of opinion pieces published by financial advisors, all with a very specific perspective: they want to manage your money. Their business is related to ours – and yet, the differences are stark. Financial advisors must make profits for themselves and their employers while helping individuals maximize their savings.
Defined benefit pension plans are focused solely on earning enough money to pay pensions. There are no other factors. According to a 2018 study by the Healthcare of Ontario Pension Plan, pension plan members can expect to generate retirement income at a cost of roughly one quarter of the typical individual method. Why? The advantages include internal investment management with no fees, economies of scale, and risk sharing for all.
With shared risk, plan members don’t have to navigate volatile markets on their own. They’re not concerned about whether markets are up or down when they want to retire, and the pension payments are guaranteed for life. As with managing a pandemic or any other challenge in life, we work better when we work together.
Financial advisors may tell you that with their advice, you will benefit from superior investment returns. This conveniently ignores the fact that your pension plan doesn’t charge fees for holding your money in trust, and it obscures the role of the plan – to pay you a reliable lifetime income once you retire.
If you are lucky enough to be a member of a pension plan, and you are tempted by an investment advisor to leave it because they can give you better returns, you will be taking a big gamble. You will be betting the advisor can produce returns big enough for both you and them. You will be betting that the market doesn’t crash after you take your money out of the pension plan. And you will be betting that you don’t outlive your savings.
I understand the financial advisor’s perspective. Our kind of pension plan is the competition, and it can’t be fun competing with those whose sole mandate is to provide retirement security, free from the interference of profit margins and private interests.
It certainly seems that at a quarter of the cost, our business provides people with a superior retirement experience. The defined benefit pension is the most cost-effective way to generate retirement savings, because the individuals involved are the only interested parties, and they are all in it together. That’s why investment advisors call their constituents “clients,” while we call ours “members.”
Earlier today, I had a chance to speak with Peter Lindley on this and other topics.
First, let me thank him, Claire Prashaw and rest of the communications team which were on that call (it was actually a Teams video meeting but I had issues with Teams this morning so I dialed in).
Peter began talking to me about how the health crisis has impacted Ontario's non-profit sector.
He had a discussion with Cathy Taylor, Executive Director of the Ontario Nonprofit Network (ONN), a before we spoke and she told him that 20-25% of Ontario's non-profits might shutter their operations because they haven't been able to generate the fundraising revenues.
There are ongoing discussions with the Ontario Government but thus far, there has been no commitment from the government to help this sector (governments tend to focus on for profit businesses).
Apart from directly impacting social services, if a quarter of all of Ontario's non-profit organizations close their doors, it will impact employment and disproportionately impact women with modest incomes which tend to work at these non-profits.
Peter was right to point this out and lest we all forget, pension poverty disproportionately hits more women than men (for a lot of reasons).
Anyway, I asked him if this has put a dent on OPTrust Select garnering new members and he said "not at all, in fact, we surpassed 1000 members from 42 organizations, four more organizations will join and demand is strong."
We then got into an interesting conversation on investing in a zero-bound world.
Peter told me, no doubt, as rates decline to zero and central banks commit to keeping them low for longer, it will impact pensions in three critical ways:
- It will make pensions look less sustainable
- It will impact future returns as they will be lower
- It will place more pressure on pensions for scenario analysis
On that last point, he told me what keeps him up at night is a second wave of COVID-19 impacting economic activity and financial markets and rates declining further.
In terms of abandoning the LDI approach, he said they will proceed very slowly in terms of rejigging their asset mix as long bond yields approach zero but offered some insights:
- Shortening up duration and focusing on spread products
- Investing in more real return bonds (RRBs)
- Looking for more selective deals in private markets
On private markets, he said 40% of their assets are in privates and there are two issues:
- The ability to influence businesses directly, make them more profitable over the long run and harvest the results. You can't do this investing in public markets.
- managing your liquidity risk very tightly.
On liquidity risk, he told me they ran a stress test and under a 2008 GFC scenario, still had $3 billion of excess liquidity at the end of March, which is excellent for a $22 billion pension plan (keep in mind, they can also borrow if things get really bad).
Now, in terms of the article above he posted on LinkedIn, I was surprised to hear no major newspaper (Globe or National Post) would publish it, so they decided to post it on a social media site.
Well, I can't say I'm too surprised, the financial industry pays for most of the ads at these major newspapers and anything that goes against them or is perceived to go against them will be blocked by their editors (sad state of affairs when these major newspapers refuse to publish different opinions).
Peter told me there four critical points that people need to understand:
- There are major tax implications to taking money out of your pension to invest with an advisor, especially if you're at your maximum tax bracket when doing this. "That means, on day 1, you'll be left with 2/3 of your savings to invest."
- The major risk of taking money out of a pension is you're underestimating longevity risk -- ie. the risk of outliving your savings. A well managed and well governed pension pools longevity and investment risk so you never outlive your savings and you won't retire in poverty if markets crash.
- As you get older, investment advisors typically tell you to reduce risk, but if you're in a well managed pension, you leave it up to professionals to opportunistically take risks across private and public markets as they arise.
- And last but not least, investment advisors charge hefty fees whereas well managed pensions pool assets to reduce fees drastically. Over time, fees eat away up to a third of your gains, something IAs don't like to share with you as they drive around in their Porsche or Range Rover (there are many good IAs but a bunch of overpaid bozos).
Lastly, I did ask him about OPTrust's performance this year and he said it turned positive but was very cautious as the year isn't over and he brought up some good points:
- The second wave of COVID is happening right now and it can have a big impact on markets regardless of who is elected in November.
- Private markets (Real Estate, Private Equity and Infrastructure) are typically appraised during the last quarter of the year and some sectors will be hit while others will be fine.
- Most importantly, Canadian long bond yield went from 1.75% at the end of 2019 to 1% now, so liabilities "will be disproportionately impacted" as the duration of liabilities is a lot bigger than the duration of assets.
Keep in mind, unlike large pension funds (CPP Investments, BCI, CDPQ, PSP Investments), OPTrust, OTPP, OMERS and HOOPP are large pension plans which manage assets and liabilities and they measure success through their funded status, not their annual rate of return over a benchmark.
Also, on Sunday, Lisa Abramowicz of Bloomberg shared this FT article tweeting: Commercial properties hit by the economic effects of Covid are being written down by 27% on average: Wells Fargo data. “The numbers themselves are atrocious. A 30% markdown in appraisals pretty much across the board is horrific.”
Commercial properties hit by the economic effects of Covid are being written down by 27% on average: Wells Fargo data. “The numbers themselves are atrocious. A 30% markdown in appraisals pretty much across the board is horrific.” https://t.co/t8zBlQCGpm— Lisa Abramowicz (@lisaabramowicz1) September 27, 2020
You can bet there will be some significant witedowns in some real estate assets at all major pensions.
Alright, I think I covered the main gist of my conversation with Peter Lindley.
Once again, I thank him for taking the time to speak with me earlier today.
Before I forget, Peter told me he was feeling a "little off" because of social distancing and not being able to see people at the office. "There are some days where it gets to you."
Take it from me, working from home has its benefits and drawbacks, chief among them is you don't interact with colleagues on a regular basis (albeit, sometimes that's a blessing).
The most important thing is to stay disciplined and focused but also to take care of yourself:
- Take your vitamin D every day, a minimum of 1,000 IUs a day, and I would recommend three to five times that amount every day during the winter months. Not surprisingly, the 'sunshine vitamin" may be COVID shield and curb severity and even Dr. Fauci recommends you take it, especially if you're deficient (I've been taking it for 20 years and now take 20,000 IUs in one shot, once a week).
- Start your morning off right. Forget the gym, try to go for a short brisk walk first thing in the morning, suck in some oxygen, then come home and make yourself a delicious smoothie. My go-to morning smoothie consists of frozen wild blueberries, a handful of almonds, walnuts, pumpkin seeds, one Brazilian nut, one large table spoon of Greek yogurt, an apple (cut it in four slices) and I add half unsweetened coconut milk and cold water and mix it all together. This smoothie isn't just delicious, it packs lots of fiber and nutrients and will keep you full well into early afternoon (it also packs a lot of calories so take it easy on the nuts). I have it three times a week, and twice a week, like making scrambled eggs (only use omega-3 eggs), brown toast and cherry tomatoes with sea salt and drizzle extra virgin Greek olive oil on them. If you feel really full in the morning because you ate a heavy dinner the previous night, have a coffee and skip breakfast altogether and wait to eat a healthy lunch (intermittent fasting is actually healthy).
- Contact people you like to talk to. Sure, check in on your parents, family and friends to make sure they are ok, but also talk to your colleagues and don't just talk about work or markets. Talk about politics, health, their kids, whatever, connect with them, let them know you're there if they need someone to talk to (too many people take themselves way too seriously).
- Focus on those less fortunate. There are a lot of people in very dire situations during this pandemic and it's good to remind yourself that organizations need help in helping these people cope with all sorts of issues, like providing them food and clothing and addressing extreme poverty, homelessness, drug addiction or all the above (don't be self-absorbed, it's bad for your mental psyche).
- Get quality sleep. You can be eating right (the Pesco-Mediterranean diet is the best), exercising right (learn about HIT), but if you're not getting quality sleep, you're doing major damage to your mind and body. You should be sleeping a minimum eight hours a night (seven is fine but not enough). Invest in a great mattress (try them out, don't be cheap) and pillow (the regular flat pillows are what I prefer since I'm a side sleeper). I detest memory foam mattresses and pillows, sleep at the same time and always in a very cool room. Also, if you're not waking up refreshed, go see a sleep doctor, you're probably suffering from sleep apnea and don't know it (affects more men than women but it is more common that you think). You might also be suffering from magnesium deficiency, very common among those with poor diets. Also, check your thyroid, make sure everything is fine (hypo and hyperthyroidism can impact your sleep).
The only reason I'm sharing all this is too many people are feeling down and very anxious these days.
It's perfectly normal, we are living in a pandemic, lots of stressors to deal with but if you feel you're unable to cope, don't hesitate to talk to your doctor and get some professional help (intelligent people seek help when needed, dummies are too stubborn or proud to seek help and it catches up with them).
Alright, enough with my health pep talk, you get it, take good care of yourself so you can take care of your loved ones and colleagues, even if it's done through distancing.
And that goes for all of you, from junior analysts to CEOs.
Below, a video which highlights how OPTrust Select complements existing social security programs and private savings. It also provides a brief background on OPTrust and the key benefits of the Defined Benefit pension model. Great clip, shows you why OPTrust Select and DB plans are the way to go.
And for decades, researchers have studied what diet is best for good health. New findings show a twist on the traditional Mediterranean diet may be ideal for cardiovascular health.
CBS Miami reports a review of research in the Journal of the American College of Cardiology shows a Pesco-Mediterranean diet, which is rich in plants, nuts, whole grains, extra virgin olive oil, and emphasizes seafood as the main protein, may be the way to go.
Lastly, the pandemic has been particularly hard for Canadians with disabilities. More than a third (36%) have reported job losses or reduced working hours since March. Disability advocate and journalist Kevin McShan is one of them, and he appeared on CTV's Your Morning discussing what he wants the federal government to do to spur economic opportunities for people with disabilities.
Great interview, I told Peter and the communications team about Kevin and hope they and others reach out to him, he's an unbelievable advocate for people with disabilities.
Kevin recently interviewed Meggie Stewart, Siobhan Costelloe and Jackie Moore on how Ready, Willing and Able develops inclusive and effective labor markets. Watch it below, it's an excellent discussion.
Ready, Willing and Able (RWA) is a national partnership of the Canadian Association for Community Living (CACL), the Canadian Autism Spectrum Disorders Alliance (CASDA) and their member organizations. Funded by the Government of Canada and active in 20 communities across the country, RWA is designed to increase the labour force participation of people with an intellectual disability or Autism Spectrum Disorder (ASD).
Kevin also recently interviewed Amy Ballantyne, a holistic health coach & lifestyle mentor on why women need to take better care of themselves and he also just interviewed Andrea Wilson Woods, a writer on a mission to end cancer and has dedicated her life to the mission on ending liver cancer specifically.
Ms. Wilson Woods is a patient advocate who founded the nonprofit Blue Faery: The Adrienne Wilson Liver Cancer Association. She is the CEO and co-founder of Cancer University, a for-profit, social-benefit, digital health company.
Both these interviews are well worth watching and you can subscribe to Kevin's YouTube channel here.