Pension Gap Creating Tension?

Via Pension Pulse.

Before discussing my latest topic, I want to bring something to your attention. Frederic Bettan, Managing Partner & CEO of Swing Capital contacted me to include their fund in my post on Quebec's Absolute Return Fund.
Along with his partner, Michel Nahmany, they claim to run one of the
largest F/X programs in Quebec (and maybe Canada). I edited my comment
and will add more funds that I missed (just contact me).

There is a lot of alpha talent in Quebec but the problem is capital is
scarce and forget seeding funds. We need more families like the Bass
family in the US to come up here and take a gamble on our alpha talent. I
would put some of our guys up with the best and brightest in New York
and London. Why are they living in Montreal instead of these big
financial centers? Because the quality of life is better here, not to
mention that we have some of the prettiest women in North America (you
notice them right away when the weather warms up!).

On Monday, I
had lunch with one of the best Canadian convertible bond arbitrage managers
in Canada, Marc Amirault, President and CIO of Crystalline Management Inc.,
a fund that has delivered high risk-adjusted returns. What I like about
Marc is that what you see is what you get. He lost weight, quit smoking
(excellent decision!), and looked a lot better than the last time I saw
him. He's a very experienced manager who is a straight shooter and
takes care of his clients.

I respect a guy like Marc who has made
it in Quebec a lot more than anyone of those hot shot hedge fund
managers in New York or London. If you can make it in Montreal, you can
literally make it anywhere. What I like about him is his background. He
worked many years at the Caisse de dépôt et placement du Québec,
so he understands the ins and outs of pension funds. He had to claw his
way to success when he ventured off on his own. Nobody handed him a big
fat cheque with no strings attached.

And when it comes to
convertible bond arbitrage in the Canadian market, very few managers have his
experience or track record. He told me all about 2008, "a tough year,"
and how crazy the US contagion got up here. "At one point there was no
market for Canadian corporate bonds. Barrick Gold bonds -- A rated --
were trading 15% above US Treasuries" (crazy!) . Some of his fund of
funds clients redeemed but his pension fund clients stuck by him, and
his fund recovered nicely.

I told him if I were a hedge fund, I would try to avoid fund of funds as
much as possible, especially the hot money out of Switzerland and
Middle East, and stick with patient capital like pension funds. Most
fund of funds redeem at the first sign of trouble. And unlike the US, a
fund in Quebec can't just put up a gate to stop redemptions (that's kiss
of death up here). I also told him that some of the best hedge funds in
the world got whacked hard in 2008, including Citadel. Back then many
investors were redeeming from Citadel and I told people on my blog to
jump on the opportunity to get into that elite hedge fund (those who
took my advice made great returns).

Crystalline Management Inc.
has some capacity left. The fund is small and Marc will cap the
convertible arbitrage strategy at a certain size. As he told me, "I'm
not into the asset gathering game, focusing all my attention on
performance, and I don't like how a lot of the pension consultants
operate, full of conflicts of interest"(tell me about it!). If you're a
small or large pension fund, I urge you to contact Marc directly
(mamirault@arbitrage-canada.com) and meet with him and his team. An
investment in a fund like his can pay off in many ways because you won't
just be getting high risk-adjusted returns, you'll be investing in an
experienced manager in a niche market who understands the importance of process over performance
(not all convertible arbitrage funds are the same, some use a lot more
leverage than others!). Just the knowledge leverage he and his team can
offer you is worth the investment and he's thinking of branching out to
more liquid strategies so he can become a top performing multi-strategy
fund.

Now, let me get to my latest topic. Bill Tufts of Fair Pensions For All brought to my attention a recent Stats Canada study. He wrote an op-ed in Digital Journal, Pension gap creating tension between haves and have-nots:

#000000;">Statscan released a report today on the status of pension plans in Canada. Most Canadians do not have a pension plan while government workers do. Now more government workers have pension plans that private sector employees.

In its report Statscan shows that pension plan membership in the private sector is falling and that most public sector employee have access to gold-plated plans. Membership fell 2.1% in the private sector as more employees were dropped from plans and the public sector on a hiring spree increased the number of employees on it's plans.

#000000;">The
recent troubles in the economy have forced more and more companies to
reevaluate the viability of pension plans. Many companies have either
changed plans to defined contribution, frozen plans to new members or
closed their pension plans completely.

A defined
benefit pension plans is one where the company or taxpayer guarantees
an income for the employee in retirement. This contrasts with the
defined contribution plan where the employees can only draw income
against the funds that have accumulated inside the pension plan.

The Labour Force Survey
done by Statscan shows employment numbers at the end of 2009. The
pension plan membership numbers were also as of the end of 2009. At that
time there were 3.4 million public sector employees and 10.6 million
private sector employees. Those with defined benefit pension plans
included 2.8 million public sector employees (82%) and 1.7 million
private sector employees (16%).

The private sector has suffered
hardship over the past three years but the public sector has remained
unscathed. There has not been much discussion around the disparity
between public sector employees with gold-plated pension and private
sector with much lower coverage.

Earlier this year the LA Times wrote an article called The pension haves vs. the have-nots.
The article asked "Can the substantial disparity between public and
private sector retirement benefits be sustained much longer? We think
that it probably cannot". It cannot be sustained financially or
politically.

There is the implicit promise in defined benefit
pensions that the employer or taxpayer will make good for any pension
shortfalls and will be responsible for guaranteeing the income stream
promised to the employees in retirement. Governments at all levels are
starting to face serious challenges from pension shortfalls. Although
the public sector pensions have been trying to suggest that the fall in
stock markets was the main reason for the pension shortfalls, this is
only a small part of the problem.

The number one determinant of
rising pension costs is skyrocketing wages. We saw this when Ontario
Teacher's Pension Plan reported it's performance for 2010, a record year for investment performance,
yet the pension shortfall grew even bigger. The same story is
happening across Canada in municipalities, universities and other
government organizations.
An irritant
for taxpayers is the fact that government are depositing ever
increasing amounts of tax dollars into the public sector plans in order
to shore them up. The report from Statscan shows the numbers.

Total
employer and employee contributions to RPPs in 2009 amounted to a
record high of $53.4 billion. Employers contributed 71% of the total,
up from 67% in 2008.

About 33% of the employer contributions,
roughly $12.6 billion, were for unfunded liabilities, more than twice
the amount in 2008.

#000000;"> Statscan does not show if the
shortfalls were paid into public sector plans or private sector ones.
We do know the $12.6 million for shortfalls was paid into defined
benefit plans because defined contribution plans cannot have an
unfunded liability. This means that just the unfunded liability
contributions averaged over $2,700 per employee. On top of that there
was the additional $40.8 billion paid into these plans, the major
portion of it by the employer.

Last
year over 60% of Canadians did not make a contribution into their RRSP
account, the largest majority stated a lack of funds was the major
reason for not making a contribution. That did not stop them however,
from contributing heftily to the pension plans of their neighbors in the
public sector. Ever increasing portions of taxes are going into these
plans.

In 2009 the total RRSP contributions for all Canadians were $33.0 billion down from $33.3 in 2008.