CPP bankruptcy?

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
brucecohen
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Post by brucecohen »

beluga wrote:And in 2009, our active management empire didn't protect us any better than plain old index.
But beat the index in the two years before that and generated enough extra return to cover all organizational expenses. Remains to be seen if that continues.
Why don't we put out RFP every three years to manage the funds? Have the eligible firms fight over the work, make competitive bids, and critique / police the incumbent.
Well, for one thing imagine the risks a manager would take if his contract was up for grabs every three years.

For another, CPP and other big pension funds are ideally equipped to buy, as long-term holds, real estate and infrastructure that generates inflation-linked cash flows well aligned with the plans' inflation-linked liabilities. Even assuming there's a wide array of for-hire managers with the capacity to do RE and infrastructure investing -- and there isn't -- how could they do it effectively if their due diligence costs are amortized over just three years? Also, while a new manager can reasonably restructure a public equities portfolio he doesn't like, it's very difficult for him to sell a waterworks or electrical grid.

Where's your evidence that outsourced managers would do better? The web-available archive of RBC Dexia news releases goes back three years. According to them, CPPIB beat the universe of Canadian pension managers in two of the past three 12-month periods ending March 31:

FY07 -- Universe: 10.8 CPPIB: 12.9
FY08 -- Universe: (2.7) CPPIB: (0.3)
FY09 -- Universe (16.3) CPPIB: (18.6)

Where's your evidence that bonuses for outsourced managers would be any less? (Teachers' says the biggest reason they decided to pioneer in-house pension investment mgmt in 1990 was that outsourcing fees were too high. Bob Bertram, who retired last year, believed he could do the same job or better at much less cost. So far, after 18 years, he's been right.)

The bottom line:

-- One either does or does not accept the value of having a DB plan that covers the entire workforce, including self-employed. I do. You don't.

-- One is or is not satisfied that this plan has a conventional, and ideally reasonable, approach to meeting its long-term obligations. I do. You don't.

-- One accepts or does not accept that every industry has norms for evaluating and compensating key people. We both probably accept that.

-- One accepts or does not accept that CPPIB follows the pension industry norm. I do. You don't.

-- One accepts or does not accept that unlisted holdings such as real estate, infrastructure and private equity are valid holdings for well-capitalized pension funds with long time horizons, especially those whose obligations are inflation-linked. I do. You don't.

-- One accepts that active investing is worth the added cost over indexing. You don't. I don't for public markets, but like the idea of a pension plan directly owning illiquid cash-generating assets that are not available to the indexed investor.

Only time will tell who's right. In the meantime I look forward to starting my CPP pension at the end of this year and continuing to receive that pension, fully or substantially inflation-indexed, for the rest of my life.
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beluga
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Post by beluga »

I agree that outsourcing may not be the right answer but I also wouldn't rule it out. I think it's not unreasonable to suggest a large fund like CPP could attract a manager that consistently beats the universe. The constraints and issues that arises with a limited term might be a deal breaker.

Let me speak for my position on those points.
brucecohen wrote:The bottom line:

-- One either does or does not accept the value of having a DB plan that covers the entire workforce, including self-employed. I do. You don't.
I do. I have no problems with such a plan. In fact, I even support expanding it to ensure the scope and amounts are such that all seniors have a dignified retirement.

I am not convinced the current plan is that well managed. If we're compensating the CEO of CPPIB at a similar level to a fantastic CEO at the largest company in Canada, I expect some pretty damn good performance.
brucecohen wrote: -- One is or is not satisfied that this plan has a conventional, and ideally reasonable, approach to meeting its long-term obligations. I do. You don't.
Correct. Not satisfied. I think we need more transparency. I suggest some ideas like slow and steady over the long term and costs matter are being marginalized. They are replaced with load up on risky assets cause pensions are around long enough to hit some home runs and absorb the losses. Not unlike the thinking that got the LSIF fiasco started. The only people who benefitted from that were the managers.
brucecohen wrote: -- One accepts or does not accept that every industry has norms for evaluating and compensating key people. We both probably accept that.
Sure.
brucecohen wrote: -- One accepts or does not accept that CPPIB follows the pension industry norm. I do. You don't.
I do. I'm not forced to pay into those other pensions which IMHO are good candidates for some critical examination.
brucecohen wrote: -- One accepts or does not accept that unlisted holdings such as real estate, infrastructure and private equity are valid holdings for well-capitalized pension funds with long time horizons, especially those whose obligations are inflation-linked. I do. You don't.
I do. For example, owning the 407 and receiving cash year after year is fine. Saying, we can't put a value on the holding and the benchmark is secret, not fine. I complain there isn't enough transparency for independent commentary to be produced by outside experts.
brucecohen wrote: -- One accepts that active investing is worth the added cost over indexing. You don't. I don't for public markets, but like the idea of a pension plan directly owning illiquid cash-generating assets that are not available to the indexed investor.
Depends on the cost and the risks taken. Complaining about the current manager is not the same as complaining about active investing.
brucecohen wrote:Only time will tell who's right. In the meantime I look forward to starting my CPP pension at the end of this year and continuing to receive that pension, fully or substantially inflation-indexed, for the rest of my life.
Congratulations!
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Post by brucecohen »

George$ wrote: I don't think I agree with your analogy. I don't think temporary and short term market fluctuations (or one stock fluctuations) are the same as long term pension plan assumptions. The former reflect the day to day whims of individuals - while I would like to think that long term actuarial assumptions are justified by more than that. Periodic market fuctuations are often mostly noise - when the buy and sell on the basis of the 'greater fool' notion stops working.
I agree; short-term market fluctuations are noise. But supposedly highly skilled institutional investors account for the lion's share of trading in blue chip issues so the share price on any given pretty much represents an informed opinion of value, delusional or not.

The point I was trying to make is that, at any point, an investor's valuation might seem delusional. Partly because few investors are anywhere near as good as they think they are. And partly because the investor and observer have different viewpoints; one might be thinking strategically while the other is thinking tactically. I vividly recall in the mid-80s how all the smart guys at Midland, Walwyn, Richardson's, Wood Gundy etc laughed uproariously at how much the stupid big banks were paying to buy up investment dealers. Now almost all those guys work for the big banks which virtually own the brokerage industry and use it as a cash cow.
I try and follow Buffett's advice and ignore the market fluctuations - and focus more on the sustainable earnings, good management, protective moat etc aspects.
So does the typical pension fund manager. Or they claim to. Value is the most common style and there are independent measurement services that fund directors can, and do, hire to report on how well, or poorly, they're hewing to the professed style.
There is also the leverage of a compounded 75-year actuarial assumption. A 4% real gain in 75 years becomes x18.9 gain, whereas a 2% in 75 years becomes x4.4 - a huge difference from x18.9
The 4.2% assumption seems high to me too. I have the luxury of using 2%. Again we get back to what's the reasonably acceptable approach to a long-term question with 100% uncertainty? It's to fall back on conventional norms and practices unless there's a truly compelling reason to do otherwise. The Chief Actuary's CPP valuation is peer reviewed by three independent actuaries who are selected by Britain's actuarial office to reduce the risk of Ottawa influencing the outcome, or being seen to be influencing the outcome. Actuarial projections are obviously not bang on, especially as you go out on the time horizon. Actuaries are basically professional odds makers. But they have developed a system based on statistical probability and the CPP valuation seems to be well within the conventional bounds of that system.

As I understand it, the CPP stewards (federal and prov finance ministers), the Chief Actuary and CPPIB are focused on contribution rate stability. The new asset-liability modeling system that CPPIB developed with support from the Chief Actuary can stress test the contribution rate by varying any or all of the assumptions that underlie the CA's projection as much as desired. This produces a potential contribution shortfall. The model can then test the ability of varied investment portfolios to generate the cash needed to top up that shortfall. One of the boffins who oversees CPPIB portfolio design told me they assume that neither the Chief Actuary's long-term assumptions about CPP in/out flows or their own long-term assumptions about investment performance will pan out as predicted. Based on that assumption, they've sought to identify the Reference Portfolio mix that will perform "least worst."

I have no idea of whether CPPIB's approach is right or wrong. I do know that they are much more disciplined and systematic than the investment mgmt firm where I worked a decade ago, I know they've committed enormous resources to measuring and projecting risk, I know they have a singular mandate and I know that they have a crystal clear view of what their job is: to establish and maintain a cushion large enough to keep the contribution rate at 9.9%.

BTW, if you want sustainable earnings, protective moat etc, what's better than a water or electrical distribution system? And if good mgmt isn't in place at the time of purchase, the new owners can certainly change that.
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Post by beluga »

http://www.cppib.ca/Investments/Our_Inv ... fault.html
The Carlyle Group is a Washington based, global private equity firm. We have committed US$60 million to Carlyle Venture Partners II, LP to be drawn down over five years. The fund, with commitments of US$600 million, will focus on companies providing infrastructure for enterprises and communications networks.
Riverstone is a leading private equity investor in the energy and power sector with offices in New York and London. We have committed US$200 million to Riverstone/Carlyle Global Energy and Power Fund IV. This fund will focus on large buyouts in the energy and power sector opportunities primarily in North America.
http://www.nytimes.com/2009/07/14/busin ... l?_r=1&hpw
Carlyle, which is among the biggest and most politically connected private equity firms and paid a $20 million fine, has agreed to stop using intermediaries, known as placement agents, to win investment business from public pension funds. It also agreed to halt campaign contributions to public officials who oversee pension funds. Riverstone Holdings, another firm caught up in the case, paid a $30 million settlement last month.
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Post by newguy »

In the g+m.
http://www.theglobeandmail.com/report-o ... le1229050/
As was stated upthread, the 1.4 million bonus paid is lower this year and till 2012, poor guy.

I wonder how much they're up so far this year.

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Post by George$ »

For Bruce Cohen -
I just came across the following 2008 book title about our CPP
Fixing the Future: How Canada's Usually Fractious Governments Worked Together to Rescue the Canada Pension Plan - by Bruce Little
Are you familiar with it? What is your opinion on it? Worth reading? etc

Added later:
A short article on same topic by Bruce Little
The big Fix - How Canada came together to save the CPP.
By Bruce Little - and a bit of text ...
In all the recent gloomy news about pension funds shortfalls, there has been precious little mention of the pension fund that affects most Canadians—and for good reason. The Canada Pension Plan’s investment fund has taken a hit, just like every other fund in the world, but even so, the CPP will be ready to make good on all its promised pensions and other benefits for decades to come.
“The search for truth is more precious than its possession.” Albert Einstein
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Post by brucecohen »

George$ wrote:For Bruce Cohen -
I just came across the following 2008 book title about our CPP
Fixing the Future: How Canada's Usually Fractious Governments Worked Together to Rescue the Canada Pension Plan - by Bruce Little
Are you familiar with it? What is your opinion on it? Worth reading? etc
I've got the book but have not yet started it. Now retired, Bruce Little was the Globe and Mail economics reporter for many years, and a very good one at that.
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Post by brucecohen »

OSFI has just posted a talk by the Chief Actuary of Canada called "The post-turmoil financial sustainability of the Canada Pension Plan"

It's here. I haven't looked at it yet, but his talks are normally easy to read and quite informative.
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Re: CPP bankruptcy?

Post by Shakespeare »

Andrew Coyne: CPP board can’t escape blame for fund’s bloated state | National Post
In pursuit of higher returns, the fund has plunged into an increasingly esoteric, and risky, range of private investments, from shopping malls to drug patents to toll roads. Offices have been opened not only in London and New York, but Hong Kong, Luxembourg, Sao Paolo and Mumbai.

The results of this experiment are clear, at least to anyone who wades through the board’s opaque, ever-lengthening annual reports. The number of employees, from just five at the fund’s inception in 1999, has grown to roughly 1,200. Where total compensation for the CPPIB’s founding president, John McNaughton, was limited to just over $300,000, Wiseman pulled in 12 times as much last year. Indeed, the fund’s top five executives received an average of more than $3.4 million apiece.

Overall, operating costs have risen from $3 million in 2000 to $54 million in 2006 to $803 million in 2015. The growth in external management fees has been even more explosive: from $36 million in 2006 to $1.25 billion in 2015. Throw in commissions and transactions, and total costs added up to more than $2.3 billion in 2015. It would not be surprising to find they exceeded $3 billion in the year just ended, or roughly one per cent of the fund’s assets. By comparison, the management expense ratio on a large, passively-managed exchange-traded fund (ETF) can be less than 0.1 per cent.

And the results? From fiscal 2000 through 2006, the fund earned an average return net of expenses of 7.5 per cent. Since 2007 its average net return has been 7.2 per cent.
Sic transit gloria mundi. Tuesday is usually worse. - Robert A. Heinlein, Starman Jones
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Re: CPP bankruptcy?

Post by Bylo Selhi »

Sedulously eschew obfuscatory hyperverbosity and prolixity.
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