Has the COVID Crisis Spilled Over to Pensions? (w/ Leo Kolivakis)
ED HARRISON: Welcome to Real Vision. Here I'm talking to Leo Kolivakis who is the founder and editor, publisher of Pension Pulse. You're a pension expert, Leo, and I'm talking to you because we're in the middle of a crisis that really I think is affecting pensions and I want to get your perspective on what the effect exactly is on pensions, their solvency and what the risks are going forward. Thanks for joining us. LEO KOLIVAKIS: Thanks for having me, Ed. I'm glad to be here and glad to talk about pensions, the pandemic and how it's affecting pension plans all over the world. The first thing I would say is the obvious, that pensions are getting clobbered on two ends. One, the assets are getting hit, spot markets are getting hit, their public and private market assets are getting hit when you have shutdowns of global-- synchronized shutdowns of global economies. The other thing I would say is they're getting hit on the liability front as interest rates declined to record low levels, and that is particularly worrisome because the funded status of these pension plans really are deteriorating fast as interest rates declined so rapidly to levels we haven't seen in decades. ED HARRISON: You and I, we were talking before we got on camera a little bit about how to think about pensions, which ones are in trouble, which ones are not. I think the takeaway that I had is a lot of it has to do with one, governance before the crisis, and two, your funding status, which are intertwined to a certain degree. Maybe you can talk about that in the context of Canada, where you are, and the United States where I am. LEO KOLIVAKIS: The way to think about this is the same way you think about any company that came into this crisis with strong balance sheets, little leverage, they will be able to weather the storm a lot better. They're going to get hit, but they're going to be able to weather the storm a lot better than companies that came into this crisis with really bad balance sheets, high leverage, and that were struggling going into this crisis. Now, let's take that into the context of Canadian, US pension funds. Canadian pensions came into this crisis very well-funded. They were fully funded or overfunded in some cases and had surpluses and that was the cushion that provided-- this is the cushion that would provide them, allows them to withstand the crisis. However, they are going to get hit, obviously, they're going to get hit, everybody's going to hit but they will be able to capitalize on the dislocation in markets across public and private markets, and probably come out of this ahead four or five years down the road, but probably they will come out of this ahead four or five years down the road. US pension funds came into the crisis underfunded, 70% funded side was the average, but many of them were below 50%, which I call chronically underfunded status. Those chronically underfunded state pensions, not only they're going to get hit on the assets and liabilities side of things, they're going to get hit because they're not going to be able to capitalize on these dislocations of markets because they need the money to pay out pension benefits. A lot of them are, I'm worried are not going to be able to recover from this crisis, especially if the duration of the crisis is a lot longer than what we are currently anticipating. That's what worries me. There's a lot of uncertainty that's still out there. I believe the duration of the crisis is very much underestimated and that's going to affect all asset management firms, including pensions. ED HARRISON: The most interesting thing in everything that you just said for me was the whole concept of being underfunded and not being able to take advantage of opportunities as they arise as we come out of this recession. I know that South Korea is a country that has come out of the first wave of the pandemic first, and I noticed on your site, you were talking about CPP IB. That's the Canadian Pension Plan Investment Board and a counterpart in the Netherlands getting into South Korea in a logistics company. Tell me, is that the thing you're talking about? Are those the opportunities that you were discussing? LEO KOLIVAKIS: Correct. Think about it this way. That deal, by the way, it was like an encore joint venture. They have already had venture with this logistics company in Asia called ESR. APG and CCPIB basically added more money to buy more logistics facilities in South Korea, and that's a long term investment theme for them, which is the Asian consumer, the rise of e-commerce, that makes absolute sense. The strong balance sheets of Canadian companies that can't overstate this is it allows them to take advantage of opportunities as they arise and take advantage of dislocations in the markets, whether it's public markets or private markets. The other thing that Canadian pension funds have, because they went into this crisis with very strong balance sheets, is they are able to leverage off their balance sheets. They're even able to borrow more to take advantage of any dislocations the markets are seeing. The reason why they do this is the cost of borrowing is cheap relative to the long term returns they can make across public and private markets. Unfortunately, many US pension funds are not able to do this. They're not able to leverage for a lot of reasons, but primary reason is their balance sheets are terrible.