How Pensions Can Fix Their Funding Problems (w/ Leo Kolivakis)
ED HARRISON: Let me ask you then, in terms of let's say that there's more downside risk coming, and therefore even the Canadian pension companies can have some of them, can have some underfunding, what are the mechanisms through which pension companies can deal with that underfunding going forward in terms of topping up their balance sheet. I know there are things like inflation, getting rid of the indexation, but maybe you can give me the whole panoply of things that they can do. LEO KOLIVAKIS: Canadian pension plans which manage assets and liabilities, Ontario Teachers' Pension Plan, Healthcare of Ontario Pension Plan, HOOPP which you already had an interview with Jim Keohane, which I thought was a great interview, they are able to do several things, but one of the primary things they're able to do is-- well, first of two things, they lowered the discount rate even more and their discount rates are already extremely low relative to what US pension funds are discounting their future liabilities. Second, they are able to implement conditional inflation protection, where for a period of time, pensioners will receive less inflation protection until the plan is fully funded again and then they can restore that inflation protection, even restore it retroactively, which is what they've done in the past whenever they run into problems. That is a huge mechanism, a huge lever that allows them to address any underfunded status they will encounter in the future because of this crisis. A lot of US pension funds, in fact, almost all of them I know, except maybe for Wisconsin cannot do this, and that's an issue. ED HARRISON: Then what do you do if you can't do that? How do you deal with the underfunding to bring it back up to a level that's adequate? LEO KOLIVAKIS: Well, in the US, the problem is what they're going to have to start doing is taxing more at the worst possible time. Already, you have an economy that's getting decimated with 26 million plus people being unemployed all over the US, and now you're going to start taxing businesses and corporations to talk about underfunded public pensions. Can you imagine how this is going to play out on Main Street? Then at the same time, you're bailing out big banks, big hedge funds, big private equity funds, and so this is why I think what's going to come to the end, when we reach a point, I won't call it a boiling point. We're not there yet, but when we do reach that point, I think there's going to be a mass [?] of public pensions. Unfortunately, they won't be addressing the structural issues, i.e. the lack of governance and other issues that are affecting these pensions. This is going to create what I call zombie pensions. The reason why they're going to bail out these pensions to be quite honest with you is they're bailing out Wall Street and the big private equity funds and hedge funds, which use these public pensions as perpetual funding mechanisms. ED HARRISON: What about where the Fed is acting in terms of municipal bonds? How does that play into it? LEO KOLIVAKIS: The Fed is basically nationalizing all asset classes. The Fed's balance sheet is going to the moon as far as I can tell so far. The problem with what the Fed is doing as it's helping pension stabilize some of their assets and it's helping states, but it's not going to be enough to help the underfunded status of these pensions. Buying municipal bonds, unless the Fed starts buying pension obligation bonds massively, which I don't see that happening, there's going to be a day of reckoning. We're not there yet. We're not close to being there yet, but when it happens, it will be very concerning for a lot of pensioners and members of these public pensions.