Caisse de dépôt - What's Not Being Said that Should Be

The enormous $39.8 billion or 25% investment loss by the Caisse in 2008 has received a lot of main stream press coverage of the "how could this happen", "who is at fault" and "never happen again" kind.

Maybe it just has not hit home yet but Quebecois including most of my relatives need to be concerned about the implications for them since the Caisse manages their public pension funds. Unfortunately, there seems to be little questioning or analysis by mainstream media, nor hard data forthcoming from the authorities on the key questions - what is the effect of the loss on the ability to provide promised pensions?

Yesterday in a press conference, Quebec Finance Minister Monique Jérôme-Forget when asked whether the loss would result in contributors having to pay more responded with the weak and unsatisfactory "we don't know that yet". Apparently several of the pension funds who rely on the Caisse to generate the investment return to pay for pensions issued statements that contributions would not be raised as a consequence, nor that the pensions are in danger.

There isn't any data to back this up however. An audit of the solvency of those funds, just as is routinely done for private pension funds by regulators, would seem to be an urgent priority.

A few worrying notes on this situation:

• the five year return of 3.1% by the Caisse was barely positive in real terms as inflation averaged about 2%
• the five year benchmark index return cited by the Caisse is 4.1% per year so the Caisse has under-performed by 1% a year; is the 4.1% the minimum required to meet the objectives of pension plans? if it is, then the plans have a problem
  
• some pension plans are apparently (see sentence at bottom of this Globe article by Konrad Yakabuski) wanting to remove their funds from management by the Caisse
• compared to its benchmarks, the Caisse under-performed in almost every asset class in 2008, whether domestic or foreign, hedged or unhedged, which seems to indicate its whole system was flawed, not just ABCP or the effects of exchange rates; only private equity investments outperformed, and that by a lot
  
• the Caisse admin cost of 21.2 basis points or 0.212% ( somewhat similar to the MER of mutual funds) compares poorly to the 0.15% of the CPPIB as I posted in my look at the CPPIB - why should the bigger Caisse have a higher MER, isn't there supposed to be an economy of scale? Is this higher admin cost a symptom of unduly aggressive active management?
• to use the example of one of the pension plans whose funds are managed by the Caisse, a news report in April 2008 stated that the RREGOP (Régime de retraite des employés du gouvernement et des organismes publics) had a surplus of $6 billion. The Caisse website says the RREGOP had $46 billion invested with it as of Dec.31, 2007. If the RREGOP fund lost the Caisse average of 25%, then it might be down 0.25*$46 billion = $11.5 billion, which would wipe out the surplus and create a substantial deficit.
• this Canoe article raises the possibility of contribution rate increases by the RREGOP in 2011 but cites a CARRA press release saying that retirement benefits would not be cut. How can they say one but not the other with any believability? Money doesn't come out of thin air - if the investment returns are now in a giant hole, who will pay - present retirees, future retirees or the taxpayer?
• with all the criticism of unduly risky practices at the Caisse, it is sure the changes will bring about less aggressive / less risky investing by the Caisse in future, which of course will lower possible returns. So there will be less chance to make up any shortfall.
  
• the final worrying factor is that there seems to a common view, as I have posted recently, that future market returns will be quite a bit less than they have been in the last 20-25 years. If that's the case, the shortfall will be even harder to make up.
  

Instead of playing the finger pointing exercise in which politicians and Caisse managers take turns saying it wasn't their fault, their time would be better spent telling the public the truth about the future and thinking how to get out of the mess.