Thursday, July 20, 2017

HOOPP Warns of the Next Crisis?

At the end of June, The Healthcare of Ontario Pension Plan (HOOPP) put out an article, Senior Poverty: The Next Crisis?:
HOOPP is launching a series of articles to deepen the conversation around retirement security and to bring awareness around the benefits of defined benefit (DB) pension plans.

In the first article, we discuss how an increasing number of Canadians are heading into their senior years financially ill-equipped to adequately support themselves when their working lives end. A stark illustration of this has been set out in a slew of new statistics and studies that show poverty among seniors is on the rise once again after nearly two decades of decline.

Two key shifts have contributed to the rise of senior poverty in Canada:
  • Canadians are living longer than ever before
  • The number of seniors is growing at a faster rate than any other segment of the population, with those over 85 leading the way
In our first paper, we provide highlights from a growing body of statistics and research on senior poverty in Canada and explain why workplace savings plans must play a role in generating a healthy and stable income in retirement.
You should all take the time to read this report here. It is excellent and I applaud HOOPP for having the foresight for launching a series of articles to deepen the conversation around retirement security and to bring awareness around the benefits of defined benefit (DB) pension plans.

When it comes to communication, I give HOOPP an A++ and they deserve it. Not only are they the best pension plan in the world along with Ontario Teachers' and a handful of others, but they are taking the looming retirement crisis very seriously and by writing these articles, they are enhancing the policy discussion around retirement and rising senior poverty.

This report focuses on Canada, which arguably has the best defined-benefit plans in the world. The situation in other countries including the United States is far worse, all part of the $400 trillion pension time bomb.

I'm very conservative in my economic views but I fundamentally believe that a well-functioning democracy has three main pillars:
  1. Universal healthcare which provides access to great healthcare for every citizen, rich or poor
  2. Great public education for everyone, especially the poor who need it
  3. A solid retirement system that ensures hard-working people can retire in dignity and security no matter what happens in the bloody stock market
I've said this plenty of times on my blog, good pension policy is good economic policy over the long run.

Again, take the time to read HOOPP's short report here, it is superb. A few things that I will bring to your attention. First, CPP is not a pension plan (click on image):


Here, I agree, CPP is not the solution to Canada's retirement crisis, at least not yet. However, if it were up to me, I would significantly enhance CPP far more than what the federal and provincial governments did to make sure every Canadian can retire in dignity and security.

The truth is Canadians are poor savers, many are buying houses they can't afford and will regret it big time down the road, and they are financially illiterate. Even smart Canadians who save their money don't really know what to do with their money, and others are taking out huge mortgages to buy a nice house because "house prices never go down" (yeah, right).

There is a nice man is Vancouver, a retired securities lawyer who is quite astute and reads my blog religiously. Unlike others, he has significant savings and understands options strategies and markets.

He asked me for advice and what I trade. I showed him how to go on stockcharts.com to make daily and weekly charts of various stocks and how I get ideas of which stocks are worth looking at using information from what top funds are buying and selling and what are the top gainers in the market.

But I told him, I start out with my macro views to guide my trading and they haven't changed in a long time. I still fear global deflation lies straight ahead (the global retirement crisis and rising senior poverty will only exacerbate it).

And I didn't sugarcoat it. I told him I track and trade many biotech stocks, take huge risks and have endured 80%++ drawdown in my personal account, made it all back and more. I told him flat out, trading stocks is a full-time job and it's extremely stressful but if you want, follow my ideas on Stocktwits and roll the dice if you like any of them:

https://stocktwits.com/PensionPulse

In fact, here is my latest Stocktwits post on biotechs (click on image):


But I also told him if I was retired and had substantial savings, half my money would be in US long bonds (TLT) and the other half in dividend paying stocks like Bell (BCE.TO), Enbridge (ENB.TO) and Bank of Nova Scotia (BNS.TO), which is the only Canadian bank that actively manages its mortgage risk.

In other words, if you already have a nice retirement nest egg, it's not about capital expansion, it's about capital preservation and being able to sleep well at night.

And let me share another Stocktwits post that I posted on Friday afternoon on US long bonds (TLT) which is my highest conviction trade going into year-end (click on image):


Now, this individual is savvy about options and he wanted to know more about my friends at OpenMind Capital, so I put him in touch with them as they can explain their options strategies far better than I can.

Most retired Canadians are not in his position and don't have his knowledge of markets and options. We cannot expect people to manage their own money in these brutal markets where even macro gods are struggling.

These markets are brutal, I know, I trade them and often see big quantitative sharks raping clueless retail investors. I don't like using the word "rape" but that is what it is. I would love to take you into the real stock trading world where ruthless market makers and quants take out all the stops so they can load up on shares and make off like bandits.

It's brutal, trust me, and unless you've traded, you just don't know how brutal it really is.

And this leads me to my other point, we can't expect Joe and Jane Smith to trade these markets or even to retire by picking "safe" ETFs and dividend stocks. We need to provide them with a defined-benefit pension, something they can count on for the rest of their lives.

I firmly believe in large, well-governed public defined-benefit plans that pool investment and longevity risks, lower costs by managing the bulk of assets internally and invest all over the world across public and private markets and invest with the top hedge funds and private equity funds all over the world.

Period. This is my gold standard but as I also stated in my comment on the pension prescription, large public pensions need to adopt a shared-risk model:
The biggest problem with pensions these days are stakeholders with inflexible views. Unions that don't want to share the risk of their plan, governments that shirk their responsibility in topping out these public pensions and making the required contributions, pension funds with poor governance and unrealistic investment targets, and powerful private equity and hedge funds that refuse to cut their fees in order to contribute to solving this crisis.

From a social and moral view, I truly believe that a case can be made to a group of elite private equity and hedge fund managers that they need to cut their fees in half and be part of the pension solution. In return, public pensions can perhaps allocate more assets to them over a longer period, provided alignment of interests and performance are maintained.

I don't know, I've been thinking long and hard of a pension prescription which will go a long way into solving a looming crisis that is only going to get worse. There are no easy solutions but in my mind, we absolutely need to bolster defined-benefit plans and avoid defined-contribution plans, and make sure we get the governance and risk-sharing right. And to do this, everyone needs to be committed to the best interests of the plan, including unions, governments and alternative investment managers.
Interestingly, in its report, HOOPP recommends five best practices from the DB space that policymakers can look to for making progress in pension coverage right now (click on image):


Take the time to read the entire report here, it is brief and to the point and these recommendations can be used everywhere, not just in Canada.

Below, HOOPP's President & CEO Jim Keohane discusses Healthcare of Ontario Pension Plan’s overall pension plan performance and explains how the Plan’s funded status, which stands at 122%, acts as a cushion for the Fund.

If only all Canadians had access to this plan, there would be no looming retirement crisis.

Update: After reading my comment, the retired securities lawyer from Vancouver sent me two comments (added emphasis is mine):
  1. While I fully accept everything they, and you, say on the issue, there is a part of me that bristles at a moral problem that goes untouched. Specifically, a portion, probably relatively small, of the population had the means to ensure adequate pension assets, or at least ensure a better outcome than they have achieved, but failed to do so due to spending habits that would have kept Depression-era babies up at night. One need only look at the awesome increase in Canadian debt levels over the last 30 years to see that baby boomers brought forward spending at the expense of retirement savings. I believe strongly in protecting those who really had no chance to protect themselves, and most no doubt fall into this category. For the rest, fixing and preventing the problem in the future begins with acknowledging the role of reckless spending patterns, a lesson it appears the millennial generation might have learned from their profligate parents.
  2. Regarding defined benefit plans and the recent bankruptcy of Sears Canada, I have always been puzzled that legislation does not rank pensioners claims in first place, even ahead of CRA. We have reams of idiotic securities laws that are designed to protect the investing public because the investing public is judged to lack the sophistication to protect itself. Yet employees, many of whom aren’t even as sophisticated as the lowly investing public, are left to fend for themselves. Essentially, the pension promises made to them are substantively “securities” even if not technically. The holders of the pension promise have no way to protect themselves, unlike the holder of a bond. It’s a moral outrage that we let banks step in front of pensioners. Indeed, even CRA is in a better position to protect itself than pensioners and should therefore rank behind. Plus, there’s the economic point you and HOOP have made: a pensioner made whole is probably much more likely to generate economic activity than a bank made whole. Unless I’m missing a compelling counter-point, public policy considerations cry out for pension claims to rank in first place.
I thank him for sharing this and his comments only reinforce my view that corporations shouldn't be in the pension business, something I discussed in my comment on how GE botched its pension math:
I envision a future where all corporations get out of the pension business to focus only on their core business and retirement will be handled by the federal and state (provincial) governments using large, well-governed public pension plans. There will be resistance to such change but it's the only way forward and it makes good pension and economic sense to do this.

One thing is for sure, the status quo isn't working and is leaving too many Americans exposed to pension poverty. It's not just GE's botched pension math that worries me, it's that of the entire country where too many public and private pensions are chronically underfunded.
Think about it, why are corporations in the pension business at all? Many US corporations are grossly underfunded and the situation isn't that much better in Canada (with a few exceptions).

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