'The two most important reasons as to why Canada's large pensions are fully funded are right there, world-class governance which separates governments from pensions allowing public pensions to manage more internally and adopting a shared risk model typically in the form of conditional inflation protection.
Pensions are all about managing assets and liabilities. You can have a "dream team" of investment managers managing assets but if your liabilities soar because rates are dropping and you're overpromising, your pension deficits will soar too.''Luckily, the US can look at the Canadian model and adopt two important components which I discussed in my comment on Pennsylvania's pension furry:
<blockquote>It looks like all hell is breaking loose in Pennsylvania and I will be the first to admit that I was aware something was cooking here as I was approached months ago by a lady consulting the state treasurer telling me they're looking closely at fees being paid out to alternative investment managers at SERS and PSERS.
I put her in touch with a bunch of people I knew in Canada and never heard back from her. I also carefully explained the Canadian pension model to her so she understands that the success is built on two principles:
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World-class governance: Allows Canada's pensions to hire top talent across public and private markets and pay them properly. This is why over 70% of the assets are typically managed internally, lowering fees and costs, adding meaningful alpha over benchmark index returns over the long run.</li>
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A shared-risk model: This means when pensions run into trouble and there is a deficit, the risk of the plan is shared which in turn means higher contributions, lower benefits or both. Pension plans in Canada with a shared-risk model have adopted
conditional inflation protection to partially or fully remove cost-of-living-adjustments for a period until the plan's funded status is fully restored again.
I also explained to her that Canada's large pensions also pay big fees to private equity and real estate funds but they are doing more co-investments to lower overall fees (see my recent comment on
PSP upping the dosage of private equity).
But to develop a solid, long-term co-investment program where pensions can invest alongside a GP on larger transactions where they pay no fees, they first have to invest in the traditional funds where they pay big fees and they need to hire qualified people to evaluate co-investment opportunities as they arise.
Still, if done properly, a good co-investment program allows pensions to scale into private equity and maintain target allocations without paying a bundle on fees.
I mention this because I guarantee you very few US public pensions have developed their co-investment program to rival that of Canada's large public pensions which is why they're paying insane fees to their private equity managers per dollars invested in their PE portfolio.</blockquote>
The two most important reasons as to why Canada's large pensions are fully funded are right there, world-class governance which separates governments from pensions allowing public pensions to manage more internally and adopting a shared risk model typically in the form of conditional inflation protection.
Pensions are all about managing assets and liabilities. You can have a "dream team" of investment managers managing assets but if your liabilities soar because rates are dropping and you're overpromising, your pension deficits will soar too.
US public pensions need to 1) get real on their return assumptions, 2) adopt world-class governance to attract top talent to their pensions and manage more internally and last but not least 3) adopt a shared risk model and replace guaranteed inflation protection with conditional inflation protection.
Let public sector unions scream and shout, it doesn't matter, confront them head-on and ask them to present a better solution to sustain their public pensions as more and more people retire with generous benefits.
By the way, politicians should take an ax to these generous benefits once and for all. This is just ridiculous, pensions aren't there to fully replace your average lifetime earnings or in some cases, make them even better in retirement.
On the one hand, public sector unions castigate America's CEOs for their lavish retirement packages and on the other, they defend gross abuses at their own public pensions allowing people to retire with eye-popping $100,000+++ pensions. Totally unacceptable.'
- Leo Kolivakis,
Behind the US Public Pension Crisis? July 24, 2018
ContextJUST - Corporate social responsibility - How do you pay and treat your workers? How do you treat your customers?'..the mainstream failure to recognize the dynamic elements of an economy..''Most organizations are still feudal at their core..' - Gary Hamel‘The dimension of feeling..’ – ‘The Myth of Efficiency’