# Canadian pension funds are now hedge funds



## sags (May 15, 2010)

I am not impressed with this story, especially the "what else am I going to do" quote by Jim Keohane, CEO of the HOOPP pension plan ?

That sounds rather.................desperate ?

We need a law that allows people to remove their money from pension funds.

I am thinking we would be taking our money out. If we had to store it in a fireproof safe in the basement and have to cut spending to make it last............so be it.

http://business.financialpost.com/n...ploy-risky-formula-in-low-interest-rate-world


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## sags (May 15, 2010)

On second thought, I would rather take our money, buy BRK shares and let Warren Buffet worry about it.

For those interested here is a link to a blog from a very distinguished blogger who covers Warren Buffet and Berkshire Hathaway.


http://blogs.rhsmith.umd.edu/davidkass/


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## HaroldCrump (Jun 10, 2009)

Keohane is a classic public sector fatcat - running a taxpayer funded pension plan with guaranteed contributions, guaranteed staffing, and well known rates of contribution increases.
He & the unions shake down taxpayers and then bellow back - "*Nobody’s going to shake us out*" (quoted from above interview)


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## Rusty O'Toole (Feb 1, 2012)

Hedge funds as a whole have a rotten record and swaps, derivatives and options are a zero sum game. About the only thing that makes sense for big investors is to emulate Buffett and buy good stocks when you can find a company that is not over priced. Today Buffett is so big he buys whole companies but the same principles apply.

Usually when these institutions try to get fancy they get burned.


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## sags (May 15, 2010)

That's what I worry about..........and then one day there it was..............gone.


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## RBull (Jan 20, 2013)

Yes, this seems to be a dangerous path to go down. So far its working but when it doesn't it could be very damaging. 

With the obligations of some of these very generous public pensions so great, they are forced to take higher risk, or alternatively face under funding. This often means taxpayers pony up the shortfall. Ultimately it seems the taxpayer goes on the hook.


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## FI40 (Apr 6, 2015)

I used to work for one of the large pension funds, and I did not like the attitude in the front office - it's not appropriate for a pension fund, it's very aggressive and cutthroat. It's very much an investment bank atmosphere. I wouldn't go so far as to say a hedge fund atmosphere though. They are taking risks, but not huge directional leveraged bets.

Still, it's worrisome that these funds are so huge and employ active and aggressive investment strategies with a relatively high risk tolerance. Pension funds should be low-risk and have defined strategies in my view. I'd like to opt-out of the CPP, as others have mentioned above, but I'm not sure I would vote in someone that wanted to make that possible. People with no idea how to invest would take their money out, blow it, and then forever be a burden on the system in their old age.


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## HaroldCrump (Jun 10, 2009)

Public sector pension plans are not subject to the same rigorous accounting rules that private sector DBP plans are.
For instance, they are allowed to use "_notional interest rates_" to forecast their returns (i.e. higher than current 30 yr. bond yields), smooth out losses over multiple years ("_unamortized estimation adjustment_"), and many other tricks not available to pvt sector plans.

They are also allowed to use wildly optimistic investment rates of returns, sometimes in double digits.

That is how many public sector plans are magically "fully funded", while comparable pvt sector plans are struggling with 80% or below solvency funding rates.

As an example, the State of Connecticut pension fund recently came under fire for using 8% RoR, after inflation, while 30 yr. treasuries are paying 3.10%.
The state regulator asked them to lower the RoR forecast to 7% instead of 8% - that's hilarious.

In Canada, a new set of oversight regulatory rules for public sector pension plans was proposed by the previous govt. a year or so ago.
All the 3 big dogs - OTPP, HOOPP & OMERS - *rose up against it and vociferously protested*.
It was supposed to be drafted over the next couple of years (had the previous govt. returned to office).

The new govt. has agreed to quietly kill the proposed regulations (what a surprise)....

And thus the looting of taxpayers will continue unabated...


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## NorthernRaven (Aug 4, 2010)

I think this is conflating a bunch of stuff together. As Canadians, it is obviously instructive to observer pension funds in other jurisdictions and their woes, but it doesn't necessarily mean ours are in the exact same situation. 

For the Connecticut 8% return rate, I believe, although I could be wrong, that that is a "nominal" number, not a real, after-inflation target. That may still indeed be inappropriately high, but it is important to make the distinction.

Looking at HOOPP and OMERS (just as examples), they seem to have a "discount rate" of 6.5%, calculated (at least for OMERS) as 2.25% inflation and 4.25% real return. I think this is a standard range for Canadian public plans; certainly there seem to be no "obviously crazy" or "double-digit" rates. What risk may be needed to achieve these returns in future economic circumstances is up for debate, but that's a different matter.

Canadian private DB plans, I believe, have to use a discount rate based on Canadian govt bonds. However, private sector companies can also go bankrupt with no way to make up unfunded liabilities, so there is probably an incentive to be more conservative in their regulation. As people grumble, taxpayers will always be present for the public system! I believe US private DBs can use a 25-year _corporate_ bond rate (6.5%) instead of the government bond rate (3%?). Some of those Canadian private DB plans are no doubt arguing that they are indeed "fully funded" if looked at with less conservative discount rates that would presumably reflect their likely long-term returns.

Oversight of pension plans and assumptions is a good thing. The regulatory rules linked to seemed to be considering more with systemic-risk, "too big to fail" and market sorts of issues, though, not details of pension plan funding.


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## Nerd Investor (Nov 3, 2015)

NorthernRaven said:


> I think this is conflating a bunch of stuff together. As Canadians, it is obviously instructive to observer pension funds in other jurisdictions and their woes, but it doesn't necessarily mean ours are in the exact same situation.
> 
> For the Connecticut 8% return rate, I believe, although I could be wrong, that that is a "nominal" number, not a real, after-inflation target. That may still indeed be inappropriately high, but it is important to make the distinction.
> 
> ...


It's interesting, you could probably argue that it's actually in everyone's best interest for public pensions to invest more aggressively, at least within reason. I'm not talking about absurd bets and crazy leveraged strategies, but simply a more aggressive "profile" if you will where you are accepting greater volatility and short-term risk for higher long-term returns. In theory, the fact "there will always be taxpayers" provides somewhat of a safety net for short-term volatility. So the argument would say, let's take advantage of that safety net, invest a bit more aggressively for higher expected returns which should save the taxpayers money in the long-run by requiring less contributions to fund those defined benefits.

Or maybe I'm just crazy. :stupid:


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## HaroldCrump (Jun 10, 2009)

Nerd Investor said:


> It's interesting, you could probably argue that it's actually in everyone's best interest for public pensions to invest more aggressively, at least within reason. I'm not talking about absurd bets and crazy leveraged strategies, but simply a more aggressive "profile" if you will where you are accepting greater volatility and short-term risk for higher long-term returns. In theory, the fact "there will always be taxpayers" provides somewhat of a safety net for short-term volatility. So the argument would say, let's take advantage of that safety net, invest a bit more aggressively for higher expected returns which should save the taxpayers money in the long-run by requiring less contributions to fund those defined benefits.


It doesn't work that way.
A % point or two in investment return by taking higher risks & leverage does not change the fundamentals of pension plan solvency.
Those are based on more fundamental factors such as contribution rates, changes in expected longevity, demographic mix (i.e. ratio of workers to retirees), etc.
This reaching for yield is just a way to cover up unfavorable demographics.

As for your idea that higher returns will reduce taxpayer contributions in the long run, don't hold your breath for that...it doesn't work that way.
All it does is generate higher bonuses for the fat cats in the pension plan company (such as OTPP & HOOPP).

Anyway, it sounds all great when both equities and bond markets have been having a spectacular bull run for the last 8 years.

If/when the trend reverses, all of these high flying pension plans will be back to the taxpayer trough - cap in hand - asking for bailouts.
Taxpayers have bailed out both OTPP & OMERS several times, and will keep doing so every time a financial crisis hits...


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## HaroldCrump (Jun 10, 2009)

NorthernRaven said:


> but it doesn't necessarily mean ours are in the exact same situation


Public sector pension plans in Canada also enjoy several accounting "privileges" - may not be the same privileges as the US counterparts, but the net effect is the same.
Such as notional interest rates.
There was a C.H. Howe report last year highlighting some of those accounting differences for the federal public service plan and the RCMP plan.
The solvency deficit increases significantly when some of those rules were backed out.



> Looking at HOOPP and OMERS (just as examples), they seem to have a "discount rate" of 6.5%, calculated


So 0.50% below the State of Connecticut recommended rate.
That's not much accounting rigor.

This is the factor leading the yield chasing by pension plans - the subject of the original link posted by sags.
All of the major plans are essentially hedge funds now.

Both OTPP & HOOPP have trading floors right within their offices.
They trade commodities, futures, corporate paper, junk bonds - you name it.
All of them are big investors in real estate loan sharking, rental properties, and other "alternatives".
They have large lobbying budgets, which they use to lobby both domestic and foreign governments to privatize public services, so that they can take monopoly stakes in those businesses.

An increasingly smaller share of their assets are publicly traded, which makes it easier for them to "make stuff up" on the mark-to-market assets.



> The regulatory rules linked to seemed to be considering more with systemic-risk, "too big to fail" and market sorts of issues, though, not details of pension plan funding.


True. But TBTF regulations for public sector pension funds are needed.
They have become both TBTF & TBTBO.


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## Nerd Investor (Nov 3, 2015)

It's interesting you'd bring up OTPP as it is often regarded as such a well managed pension fund. It made me dig up an old article, 2 years old but still a great read and I think pretty pertinent to the thread here:
http://thewalrus.ca/pension-envy/


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## HaroldCrump (Jun 10, 2009)

^ yeah, the media does tend to drool all over OTPP.
Part of it is due to the public profile of its ex head honcho - Jim Leech - a Freudian last name, IMHO :biggrin:

Is OTPP well managed - yeah, sure.
No one is suggesting otherwise.

However, we have to keep in mind that when we compare OTPP/HOOPP with private sector DBP plans (i.e. defined benefit pensions for the serfs), it is not an apples-to-apples comparison.
OTPP etc. operate under very different dynamics and parameters than typical pvt sector plans.
Leaving aside lax accounting rules and regulatory leeway, the forecasting model is different as well.

OTPP is able to predict its contribution rates (both employer and employee) with 100% certainty, model future contribution increases with 100% certainty, and their employee/retiree ratios are well defined.
Unlike pvt sector companies that go through boom & bust economic times, contribution holidays, layoffs, 2-tier wage systems, etc.
OTPP parameters are 100% guaranteed because of the nature of union-to-govt. bargaining process.

OTPP also receives preferential treatment when it comes to participating in P2P deals with the govt, incl. asset divestiture (case in point : recent Hydro One IPO).

They also have a massive lobbying budget, for both domestic and international lobbying, which allows them to participate in lucrative public asset sales, such as the UK day care centres, UK Lottery & Gaming, and power projects.
No private sector pension plan will ever be allowed to run such lobbying & influence-buying activities.

Last but not the least, the taxpayers have been constantly bailing out OTPP.
Bailouts are both implicit & explicit.
Explicit bailouts are where the provincial govt. took money from general tax revenues and paid into the pension plan to compensate for losses and/or boost funding levels.

*For example during 2008/9*

^ In the instance, note who the Minister of Education was in charge of the bailout :rolleyes2:

Implicit bailouts are where taxpayer portion of the contributions are automatically increased to maintain or restore plan solvency.
This tends to happen every 3 - 5 years like clockwork regularity.

In the article you linked to, it says that taxpayer contribution is 12% - that is now old information.
Contribution rate has already increased to 13%.
Going back to pre 2008 years, contribution rate was 10%.
Therefore, in barely 10 years, taxpayers have been asked to pony up an additional 3% contribution into the pension plan.

This is a perpetual noose around the necks of taxpayers, with no hope of escape.

Leech himself is bit of a hypocrite.
He "managed" a pension plan, which is essentially a taxpayer funded & guaranteed bank account.

The book he co-authored - "_The Third Rail_" - is all about pension reforms.
Yet, none of those reforms have been made to his own OTPP - not one.
No, sir, those reforms are for the serfs.

He was one of the "consultants" to the ON govt. in evaluating the divestiture of Hydro One.
Gee, I wonder which pension plan got the biggest share of the pre IPO placement :rolleyes2:

But, as I said, the media tends to drool over OTPP.


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## Nerd Investor (Nov 3, 2015)

HaroldCrump said:


> ^ yeah, the media does tend to drool all over OTPP.
> Part of it is due to the public profile of its ex head honcho - Jim Leech - a Freudian last name, IMHO :biggrin:
> 
> Is OTPP well managed - yeah, sure.
> ...


Maybe I'm confused; you reference taxpayer contribution rates and how the article says it used to be 12%, now it's 13%. 
Those are the contribution rates the teachers put in from their salaries. Are you referring to matching contributions from the government?


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## HaroldCrump (Jun 10, 2009)

Nerd Investor said:


> Are you referring to matching contributions from the government?


Yes, of course.
What you call "government", I call taxpayer.

As a side note, OTPP happens to be among the few public sector pension plans wherein taxpayer and employee contributions are 50/50.
In many other cases, taxpayers put in more than employees, including HOOPP (taxpayers pony up 125% of employee).
The most egregious are the various hydro pensions were taxpayers are forced to put in 5x times employee contributions.

"_It’s at the high end of even the public sector plans in Ontario. They’re pushing the limits_"
said Mr. Leech, former chief executive officer of the Ontario Teachers' Pension Plan
"_It's not sustainable the way it is_."

- interview with G&M, Aug 2014.


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## houska (Feb 6, 2010)

Pension funds in general have the luxury of much more predictable liabilities (payouts) and somewhat more predictable inflow than individuals' retirement plans. And their professional management means they *should* be more immune to market panic locking in losses. All of which to say that, all other things being equal, I would expect pension funds to be more tolerant of volatility than the average individual's investment portfolio. However, they are also more aware of fundamental economic risks (inflation, deflation, .... - William Bernstein stuff) that the typical inflation. Which could, rightly or wrongly, push them to add macro overlays to hedge (original sense of the word, not speculatively bet) these exposures.

So am not disturbed that pension funds would have a fairly high investment risk appetite and use instruments we as individuals would not touch. Of course it can backfire, and too much attempt to "seek alpha" is dangerous (for instance the ABCP fiasco). But the biggest risk for most pension funds is not mark-to-market volatility, or opaque instruments and "hedging". It is long-term performance in line with funding needs.


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## HaroldCrump (Jun 10, 2009)

houska said:


> But the biggest risk for most pension funds is not mark-to-market volatility, or opaque instruments and "hedging". It is long-term performance in line with funding needs.


Both are two sides of same coin...pension funds are "reaching for yield" in order to keep up with ever increasing funding needs.

You are correct that their key factors are longevity, long term inflation, and similar macro-demographic factors.
However, contribution rates are not being adjusted (upwards) to account for those fundamental changes.
Retirement ages and lifetime benefits (such as early retirement penalties, post-retirement health benefits, etc.) are not being adjusted (scaled back) to bring benefits in line with contributions.

Net results is that pension fund management is being expected to generate higher & higher returns.
Hence, all the leverage and hedge-fund like behavior.


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## sags (May 15, 2010)

Pension costs have to be considered in the overall compensation package though.

Many HOOPP member wages were average and their pensions reflect that.

Had they not had a pension plan, they may have received higher wages.

In a hospital setting, HOOPP doesn't represent the higher paid nurses and doctors. It may represent some technicians, janitors, kitchen staff............etc.

Hydro pensions must have been in a league of their own.

It would be more relevant to discuss public service employee costs as a whole package in my view.


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## sags (May 15, 2010)

A seldom discussed "danger" to pension plans, is what both my wife and I experienced at the end of our working career.

At GM and at the hospitals, the employers used the pension plan to reduce their active employee head counts.

To encourage the retirements, (to entice downsizing by attrition) they offered bridge and transition payments, which came from the pension funds.

This practice should not be allowed in my opinion, if the taxpayer is expected to make up future shortfalls.

From what I understand HOOPP discontinued the practice when they faced underfunding and had to raise contributions.

At GM, the practice continues with the offer of commuted values at 100%, and bridge benefits..........despite the pension being underfunded.


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