Guest Post: CPPIB Gets Grilled in Ottawa

Submitted by Leo Kolivakis, publisher of Pension Pulse.

The third meeting of the Standing Committee on Finance focusing on pensions took place on Tuesday morning, placing more senior pension executives on the hot seat.

Before I continue, let’s recap what happened at the two first meetings. I went to Ottawa last week to expose the bogus benchmarks pension fund managers were using in private markets and hedge funds to justify their outrageous bonuses.

Two days later, PSP Investments’ (PSPIB) CFO, John Valentini, was on the hot seat, getting grilled for refusing to answer some basic questions on performance and bonuses.

You’d think that after watching that grilling the folks at the Canada Pension Plan Investment Board (CPPIB) would be wise enough to come to Ottawa better prepared to answer some very tough questions.

Apparently not. The two representatives of the CPPIB that appeared this morning were Don Raymond, Senior Vice-President, Public Market Investments and Benita Warmbold, Senior Vice-President and Chief Operations Officer.

You can read more about them and other senior executives at CPPIB by clicking here. Notice that prior to joining CPPIB, Mr. Raymond worked at Goldman Sachs for seven years and Ms. Warmbold worked eleven years as a Managing Director and CFO of Northwater Capital Management Inc., a well known fund of hedge funds in Canada. This is important information to keep in mind as I review today’s hearing.

You can view the entire meeting in English by clicking here (note French only version and floor version in both languages are also available and the transcripts will be available on this site).

There were other witnesses speaking today including:

  • Jean-Claude Ménard, Chief Actuary of Canada from the Office of the Chief Actuary which is independent but situated within the Office of the Superintendent of Financial Institutions of Canada.
  • Keith Ambachtsheer, President of KPA Advisory Services and founding director of the Rotman International Center for Pension Management (ICPM). Mr. Ambachtsheer has written books, including The Pension Revolution, and more recently an article for the C.D. Howe Institute, The Canada Supplementary Pension Plan (CSPP).
  • Shirley-Ann George, Senior Vice-President, Policy at the Canadian Chamber of Commerce.
  • Serge Pharand, Vice-President and Corporate Comptroller, Canadian National Railway
  • Renaud Gagné and Germain Auclair, Communications, Energy and Paperworkers Union of Canada.

I enjoyed listening to all speeches. Mr. Ménard immediately made his speech available on the OCA’s website. He is a consummate professional who has profound respect for Parliamentary institutions which why he and his team take transparency and accountability seriously.

I have said it before and I will say it again: The Office of the Chief Actuary of Canada is THE model for transparency and accountability. If only other government departments and Canadian Crown corporations were run like the OCA, we’d have a lot less waste and a lot more accountability.

For his part, Mr. Ambachtsheer raised several excellent points on the The Canada Supplementary Pension Plan (CSPP). Where I disagree with Mr. Ambachtsheer is on how he blindly defends the governance of the large Canadian pension funds, including their outrageous bonuses based on bogus benchmarks in alternative investments.

[Note: Mr. Ambachtsheer should come clean and say who pays for his services at KPA Advisors: the pension funds or the beneficiaries who those pension funds invest on behalf of? If the pension funds are his clients, it’s hardly surprising he defends their governance model, ignoring some of the weaknesses in their compensation structure.]

Mr. Gagné and Mr. Auclair rightly noted that while the auto sector and banks are getting bailouts, the forestry industry has been getting decimated and is being ignored by the federal government.

Let me add something here. I read an article today about a Newfoundland man and his wife facing financial ruin because of troubled newsprint giant AbitibiBowater’s decision to suspend his pension:

“Devastated, really,” said Wilson Pike, 61, a former seasonal woodsworker for AbitibiBowater in Grand Falls-Windsor who opted to leave his job three years ago for a type of early retirement program.

AbitibiBowater, which has applied for bankruptcy protection in Canada and the U.S., said Friday it cannot maintain such programs.

“I figured I was set until I was 65. But now I don’t know where to turn, really,” said Pike, who had worked for Abitibi for 41 years.

Wilson and his wife Beverly lead a modest life on a budget of $1,200 per month.

Because the Abitibi payments have stopped, the two are using Canada Pension Plan payments to cover this month’s rent, and have about $200 left to pay for groceries and cover their other bills.

“I know that seems a little to some, but it’s our survival,” said Beverly Pike, who is legally blind and has no income of her own.

“My husband has enough on his shoulders to worry about, taking care of me. We didn’t need this extra stress.”

Beverly’s medical bills last year reached $9,000. Abitibi had allowed them to buy into the company medical plan for about $100 per month.

“Canada Pension is not going to cover it. So what we’re going to have to decide to do is either we have medical insurance, or if we eat,” she said.

“It’s just as simple as that, ’cause there’s not enough money to go around.”

The Pikes said they are hoping that a court challenge planned by the Communications, Energy and Paperworkers Union will force AbitibiBowater to restart its payments.

If that doesn’t work, Pike said he will have to re-enter the job market to make ends meet.

Keep Mr. and Mrs Pike in mind as you listen Mr. Raymond and Ms. Warmbold defend the outrageous bonuses that were handed out to the senior executives at the CPP Fund.

The table below was taken from page 54 of CPPIB’s 2008 Annual Report

(click to enlarge:)

In case you can’t read it clearly, let me go over the top four compensation packages doled out in fiscal year 2008 which ended March 31st, 2008 (same fiscal year as PSPIB):

1) David Denison, President and CEO: total compensation 2008: $4,163,966 (his base salary is $475,000)
2) Mark Wiseman, Senior VP, Private Markets: total compensation 2008: $3,107,840 (his base salary is $325,000)
3) Don Raymond, Senior VP, Public Markets: total compensation 2008: $2,626,073 (his base salary is $325,000)
4) Graeme Eadie, Senior VP, Real Estate Investments: total compensation 2008: $2,515,431 (his base salary is $300,000)

During question period, Ms. Warmbold evaded a direct question asking her to disclose the performance for fiscal year 2009 which just ended on March 31st. (I guess they are not finished valuing those private market investments!).

Mr. Mulcair noted that Mr. Raymond has a higher base salary than the Prime Minister of Canada and the Chief Justice of the Supreme Court of Canada.

I would argue that the Prime Minister of Canada and the Chief Justice of the Supreme Court of Canada are grossly underpaid, especially when you compare their responsibilities to those of the senior executives at CPPIB.

But that’s not the point. The point is that Canadian public pension fund managers are paid too much for what they claim to be delivering. And what are they doing to justify these outrageous bonuses? They are increasingly shifting assets into private market investments and hedge funds where it’s easier to game performance benchmarks so they can continue to scam the system and claim “significant value added”.

[Note: Read Steven Chase’s article in the Globe and Mail, Curb CPP managers’ bonuses, opposition urges.]

When pressed to diclose the performance benchmarks for private markets, Mr. Raymond remarked that they do account for leverage (news to me), but he did not disclose what these benchmarks are composed of so we cannot verify his claims.

My question to both CPPIB and PSPIB is if the Caisse discloses all their benchmarks, including those of private markets (private equity, real estate, and infrastructure) then why do they refuse to disclose them?

PSPIB cites “competitive reasons” (what the hell does that mean?) and CPPIB does not properly disclose their private market benchmarks in their annual report or investment policy.

I will repeat it once again: unless you disclose all the benchmarks governing public market and private market investments, you simply do not know whether the reference portfolio used to compensate pension managers accurately reflects the liquidity risk, leverage and beta of the underlying investments.

I can show you 100 ways of how to scam pension plans by using bogus benchmarks in private markets and hedge fund investments. I can also show you how some accountant can write up or write down assets by one single magical stroke of a pen.

What’s a clear indication that a benchmark does not reflect the risks of the underlying investments? Well, take a look at the 2007 real estate returns from the large funds:

(Click to enlarge:)

Whenever a fund is handily beating a benchmark in “private markets” or “hedge funds”, year in and year out, you can bet your taxpayer dollars there are shenanigans going on. I have never in my life seen such incredible outperformance in the public markets (does your mutual fund outperform the Dow or S&P 500 every single year by 10%, 20% or 30%?!?!?)

Bottom line: Unless we augment financial audits by comprehensive performance, operational and fraud audits, our large public pension funds are vulnerable to further abuses. It is a scandal.

And let’s call a spade a spade: the compensation packages at these large Canadian public pension funds is a scandal. All upside, no downside. If they screw up, most of these guys walk away with a golden parachute.

Again, while Mr. Raymond and Ms. Warmbold defend their compensation based on a “four year rolling return”, there are people like Mr. and Mrs. Pike struggling to get by on next to nothing.

My eyes rolled behind my head when I heard Mr. Raymond claiming the reason they avoided non-bank asset-backed commercial paper (ABCP) at CPPIB is that their compensation allowed them to attract bright people to analyze these investments.

Give me a break! Do you really think the folks over at CPPIB are that much brighter than the pension managers at the Caisse? I can assure you they’re not, and in many areas, they are a much weaker.

Mr. Raymond said the “focus on short-term results” is not in the best interests of beneficiaries. Agreed, but when you are losing billions and claiming value added in private markets without properly disclosing the benchmarks of those private markets, you are scamming the system.

I had lunch today with a former colleague of mine who was a senior public market pension manager. He knows all about the nonsense surrounding the benchmarks in private markets. He never had a free lunch trying to beat public market benchmarks.

He also had a great idea. “They should scrap the four year rolling returns, keep long-term incentives in escrow and use clawbacks if the fund or a particular portfolio suffer a hit. They should all get decent salaries, but not these outrageous salaries, bonuses and generous retirement benefits.”

Let me end this comment by asking CPPIB to post their remarks on their website. I find it inexcusable that those remarks are not already posted there for public scrutiny. You claim to be transparent but all I see is “selective transparency” as long as it suits you and your compensation.

And one final thought on compensation. Nobel-prize winning economist, Paul Krugman wrote a excellent op-ed column in the New York Times called Money for Nothing.

I quote the following:

Still, you might argue that we have a free-market economy, and it’s up to the private sector to decide how much its employees are worth. But this brings me to my second point: Wall Street is no longer, in any real sense, part of the private sector. It’s a ward of the state, every bit as dependent on government aid as recipients of Temporary Assistance for Needy Families, a k a “welfare.”

I’m not just talking about the $600 billion or so already committed under the TARP. There are also the huge credit lines extended by the Federal Reserve; large-scale lending by Federal Home Loan Banks; the taxpayer-financed payoffs of A.I.G. contracts; the vast expansion of F.D.I.C. guarantees; and, more broadly, the implicit backing provided to every financial firm considered too big, or too strategic, to fail.

One can argue that it’s necessary to rescue Wall Street to protect the economy as a whole — and in fact I agree. But given all that taxpayer money on the line, financial firms should be acting like public utilities, not returning to the practices and paychecks of 2007.

Furthermore, paying vast sums to wheeler-dealers isn’t just outrageous; it’s dangerous. Why, after all, did bankers take such huge risks? Because success — or even the temporary appearance of success — offered such gigantic rewards: even executives who blew up their companies could and did walk away with hundreds of millions. Now we’re seeing similar rewards offered to people who can play their risky games with federal backing.

So what’s going on here? Why are paychecks heading for the stratosphere again? Claims that firms have to pay these salaries to retain their best people aren’t plausible: with employment in the financial sector plunging, where are those people going to go?

No, the real reason financial firms are paying big again is simply because they can. They’re making money again (although not as much as they claim), and why not? After all, they can borrow cheaply, thanks to all those federal guarantees, and lend at much higher rates. So it’s eat, drink and be merry, for tomorrow you may be regulated.

Or maybe not. There’s a palpable sense in the financial press that the storm has passed: stocks are up, the economy’s nose-dive may be leveling off, and the Obama administration will probably let the bankers off with nothing more than a few stern speeches. Rightly or wrongly, the bankers seem to believe that a return to business as usual is just around the corner.

We can only hope that our leaders prove them wrong, and carry through with real reform. In 2008, overpaid bankers taking big risks with other people’s money brought the world economy to its knees. The last thing we need is to give them a chance to do it all over again.

I sincerely hope that the leaders who sat in on these hearings at the Standing Committee on Finance heed my advice and further investigate the activities at these large public pension funds.

It is time to have special hearings focusing exclusively on public pension funds. Bring in the CEOs and chairs of the boards of PSPIB and CPPIB and ask them some very tough questions on how they added value in public and private markets. It’s public monies they are managing so they should be held accountable for their decisions.

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  1. Peacenik

    These guys lose money overall and get two and three and four million dollars in bonuses. The over-compensation of all executives has got to stop. And should be clawed back.

  2. DownSouth

    At the steepest point of the hill there was a little burial-ground, with a Cross and a new large figure of Our Saviour on it; it was a pour figure in wood, done by some inexperienced rustic carver, but he had studied the figure from the life–his own life, maybe–for it was dreadfully spare and thin.

    To this distressful emblem of a great distress that had long been growing worse, and was not at its worst, a woman was kneeling. She turned her head as the carriage came up to her, rose quickly, and presented herself at the carriage-door.

    “It is you, Monseigneur! Monseigneur, a petition!

    With an exclamation of impatience, but with his unchangeable face, the Marquis looked out.

    “How, then! What is it? Always a petition!”

    “Monseigneur. For the love of the great God! My husband, the forester.”

    “What of your husband, the forester? Always the same with you people. He cannot pay something?”

    “He has paid all, Monseigneur. He is dead.”

    “Well! He is quiet. Can I restore him to you?”

    “Alas, no, Monseigneur! But he lies yonder, under a little heap of poor grass.”


    “Monseigneur, there are so many little heaps of poor grass.”

    “Again, well?”

    She looked an old woman, but was young. Her manner was one of passionate grief; by turns she clasped her veinous and knotted hands together with wild energy, and laid one of them on the carriage-door–tenderly, caressingly, as if it had been a human breast, and could be expected to feel the appealing touch.

    “Monseigneur, hear me! Monseigneur, hear my petition! My husband died of want; so many die of want; so many more will die of want.”

    “Again, well? Can I feed them?”

    “Monseigneur, the good God knows; but I don’t ask it. My petition is, that a morsel of stone or wood, with my husband’s name, may be placed over him to show where he lies. Otherwise, the place will be quickly forgotten, it will never be found when I am dead of the same malady, I shall be laid under some other heap of poor grass, Monseigneur, they are so many, they increase so fast, there is so much want. Monseigneur! Monseigneur!”

    The valet had put her away from the door, the carriage had broken into a brisk trot, the postilions had quickened the pace, she was left far behind, and the Marquis, again escorted by the Furies, was rapidly diminishing the league or two of distance that remained between him and his chateau.

    The sweet scents of the summer night rose all around him…~

    –Charles Dickens, A Tale of Two Cities

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