From IceCap Asset Management January Investor Presentation
Most Canadian pension funds are banking on 7% annual returns forever. Over the next few years, this unrealistic expectation will cost the respective governments and companies millions in shortfalls.
In the USA, the California Public Employees Retirement System assumes it will earn over 7.75% annual returns. This false hope will result in over $6 billion a year in lower than expected investment income, that will also have to be paid by the financially challenged state (ie. taxpayers).
Meanwhile, Thelma O’Keefe continues to quietly sock away 5% of her paycheck each and every week and has no idea what all the fuss will be about when she is eventually told her pension benefits will be slightly less than originally promised.
Over 50 years ago, the average worker started to earn pension benefits and has been dreaming of working less, and golfing more, ever since. The Defined Benefit Pension Plan has been the rock of this dreamy foundation and is certainly a costly beast to say the least. Once the auditors, actuaries, custodians, lawyers, administrators, consultants, performance measurement guys, trustees and investment managers have been paid for their services, is there little wonder most of these retirement funds are running a little short.
Yet, the primary reason most people fall asleep with even a slight mention of the words “pension funds” is due to the complexities and confusion resulting from this cumbersome investment scheme.
However, after 3 quick espressos you’ll see that the entire pension spectrum boils down to an educated guess as to how much money the pension plan will have to pay out to its retirees, and how much money its investments will pay in to the pension plan itself.
This “pay-out-in” dynamic is a precarious balancing act to say the least. Should guesstimates for either one fall short, the difference will have to be made up by tax payers for government pension plans, and by profits for company pension plans.
It is widely known by now that practically every government in the Western World is drowning in debt with no signs of growth anywhere on the horizon. Unfortunately, this looming pension funding problem could not have come at a worse time for these government supported pension funds.
Meanwhile, most companies are certainly flush with cash and are infinitely better off than their public pension fund counterparts. However, even this enviable position will not help due to the expectations of great stock and bond market returns.
Ever since the Western World pushed the debt envelope too far and proceeded to allow its governments to orchestrate one ill conceived bailout after another, investors of all shapes and sizes – including billion dollar pension funds and the little old ladies, have had to push their risk envelope too far and assume way too much risk in an effort to increase their investment returns.
Full presenation: