(P&I) The Pension Shame

The Pension Plan

Drama. Once again, the CPPIB (Canada Pension Plan Investment Board) has delivered an accounting error as its return in the last three months, the first quarter of its fiscal 2018, claiming an increase of $9.8 billion in our assets or $5.7 billion net of the $4.1 billion which we paid into it; on the $316 billion under management, that’s a return of 1.8% for the quarter marked to market (nominal) and it doesn’t put any new money into our pockets or health care plans before, maybe, 2021, they say.

As a rule, we should expect that the pension plan and endowment fund boards of directors, their portfolio managers, and the actuaries who certify these plans, don’t know what they’re doing; they might be competent, but we still need to assume that they don’t know what they’re competently doing.

The Dismal US Experience

Or if they do, it’s a scandal because these people are playing with our money and they can’t prove that they are investing it, that is, they can’t prove 100% capital safety guaranteed and 100% liquidity as required and a hopeful but not necessarily guaranteed return above the rate of inflation.

The “acid test” is that assuming that there are no further investment gains beyond those that are guaranteed and that there are no further investment losses beyond a definite floor that is also guaranteed, how long can the plan run and pay benefits in the foreseeable future, which is this year, next year, the year after, and so forth, say N-years, and the success of the plan is measured by “N is a non-decreasing number”, year-after-year, every year and not just some fictional number decades away that doesn’t exist or pay any benefits until then.

And if there’s a problem, that is N (this year) < N (last year), then it needs to be addressed right away by taking down some of the “investment float” into the guaranteed capital, and raising the floor of the definite losses by taking some of those losses against the float, or buying the appropriate insurance, all of which are an expense to the nominal returns but a guarantee of future real income now.

Where’s my money?

For example, a minimum investment return is 15% per year because that’s a typical return for actually owning a company and running it – and we own a company capitalized at $300 billion or more, as above, which doesn’t pay taxes and also receives a welfare benefit of $15 billion or so, a year – and the random return (8%) on $300 billion or more in the $80 trillion world market of companies and the market for them, becomes more difficult to obtain by betting on it and not investing in it.

In other words, $300 billion, and even larger plans such as the $800 billion Statens pensjonsfond Utland (SPU), is just a cork bobbing and weaving in a $80 trillion market that turns over about $2 trillion every day for reasons that have nothing to do with economics or statistics.

Despite all of the promises and projections of the portfolio managers, and all of the calculations of the actuaries, a pension plan or endowment fund needs to do three things every year:

Check, our alternatives provide a non-negative real return every year and we don’t need the capital right away even though we’re getting offers to buy our interest every other day.

Check, our bonds provide 100% capital safety and we could hold them to maturity regardless of inflation surprise.

Check, our equities provide 100% capital safety and a hopeful return above the rate of inflation, also known as a non-negative real return every year and they provide all the liquidity that we might need absent the fortuitous maturity of our bonds or alternatives.

Just say “No”.

And if that doesn’t happen, buckle-up for problems that we, the taxpayers, are going to have to pay for again (CBC News, September 8, 2014, Cash-strapped Nova Scotia towns ‘blindsided’ by police pension plan).

For more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“,  “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.

And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more on what risk averse investing has done for us this year, please see our recent Posts on “(B)(N) The Delivery Warriors – Amazon, Alibaba and JD.com” or “(B)(N) The FANG Report – Facebook, Apple, Netflix, and Google“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”). The Canada Pension Bond®™, The Medina Bond®™, The Barometer®™, the Free Market Yield®™ and Extreme Economics®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.