blog22mar2009

Hot Off the Web- March 22, 2009

WSJ’s McQueen reports that “Worry grows over insurers as ratings slip” . Investment losses and in some areas higher than expected claims, have forced states to take over in excess of half million policies. Some individuals are concerned, not just because of recent ratings downgrades but even if the rating of the insurance company is stellar, because of recent problems with credibility of ratings. Recommendations include buying policies only from top rated companies, buy several policies to stay under state guarantee limits, borrow from cash value policies to secure cash, don’t cash annuity before understanding full implications of surrender charges.

Brett Arends in WSJ’s “What the Fed’s bond buy means to you” suggests that this a great time to lighten up on over priced (low interest) 10-30 year Treasury bonds and replace them with inflation protected ones. Because “with the government running the printing presses at full throttle, inflation, sooner or later, has to be a high probability. The dollar is already heading south on similar fears.”

Brett Arends also looks at the effect of dollar cost averaging (i.e. investing the same dollar amount each month into the market) during the depression in WSJ’s “Dollar cost averaging during the downturn” (key word here is ‘during’, not about recovering the lost capital on had in the market at the start of the depression). This approach gives up on trying to time the market bottom in the hope of making a killing, most people won’t get the timing right. With dollar cost averaging, starting in September 1929, “they recovered fast. When the market turned, those who stuck quietly to their plan got repaid quickly. Forget that stuff about 1954. According to Ibbotson data, someone who dollar cost averaged was back on level terms by 1933. And by 1936 he had doubled his money (though the crash of 1938 then knocked him back to evens for a while).”

In Globe and Mail’s “Finding tax relief for your battered portfolio” Tim Cestnick suggests saving opportunities for your 2008 tax return, among them: carrying losses back up to three years, don’t forget losses on defunct securities, and make sure to include reinvestment dividends in your ACB calculations.

In Globe and Mail’s “Annuities: High returns, but at a stiff price” you can read about the issues to consider before plunging into an annuity: loss of control of capital, loss of capital upon death after guarantee period, inflation, risk of insurance company failure. (You can read even more about annuities in my blogs on the subject at Annuity I , Annuity II , Annuity III , and Annuity IV .)

A useful story for American readers is Walecia Konrad’s NYT story “Going abroad to find affordable healthcare” about medical tourism. Costs can be 20% of those in the U.S. She also discusses when such an approach may be appropriate and how one may go about finding the right facility. There a number of links provided to help explore this approach to treatment.

Financial Times’ John Dizard writes aboutTwo easy ways to spot an investment con”. The two questions you must ask are: (1) “Is it too good to be true?” (returns too high and/or too consistent for the stated strategy; and of course don’t forget to make sure you understand the ‘strategy’) and (2) “Do you know where your children are?” (i.e. understand the investment company’s internal operation: custodian, money flow sequence, etc). Also worth understanding the characteristics of a con artist: often religious fanatic, little alcohol consumption, collector of well-known people, obsessive cleanliness. (By the way the FT.com’s Wealth section with Dizard, Altucher and Tilson columns stopped updating around mid-February due to FT cost reduction efforts; this is a real loss, but at least John Dizard’s column will continue to be available in FTfm.) Another related article in the Financial Times is John Kay’s “How the ‘Madoff twist’ entices the astute” . Kay suggests that many financially astute individuals still fall for scams because “The fraudster hints at impropriety, but implies that the target will be the beneficiary rather than the victim. The suggestion – I will call it the “Madoff twist” – has two advantages. It provides a possible explanation of the source of promised (unrealistic) gains. And it encourages the victims to keep quiet until – perhaps even after – the deception is exposed.”

Now let’s look at a few interesting pension related articles this past week.

First one is in the Globe and Mail by Keith Ambachtsheer entitled “Wanted: new pension champion for Canada” discusses the disastrous state of Canada’s pension system whereby only 20% of the private sector workforce has an employment based pension. Yet despite studies by numerous provinces, and the C.D. Howe Institute (CSPP proposal) all confirming the urgent need for a coordinated national or regional plan, what is still needed is a Champion. Ambachtsheer asks: Will it be B.C.’s Campbell, or Alberta’s Stelmach, of Liberal leader Ignatieff or Prime Minister Harper? (The proposed individually funded solutions are there to be executed, all that’s needed now is a Champion to drive…urgently…time is running out for a whole generation of Canadians.)

Derek deCloet’s “The future of pensions: Share the risk” writes in the Globe (along the same lines) that not only is private sector coverage with some sort of employment based guaranteed pension limited to just 20% of the workers, but even those who have one can’t count on it! Air Canada, BCE and others have pension underfunded by hundreds of millions of dollars (not to mention Nortel in bankruptcy protection with a likely deficit of about $1B in the Ontario plan alone) due to many years of pension plan malpractice, not just the recent drop in the market. The problems are systemic. One solution is to “water down the guarantees” and replace the fixed pension payments with target pension payments, so that in bad years the pensions would perhaps be somewhat lower and in good years may perhaps be somewhat higher than the target, and remove the risk of the sponsoring company going bankrupt and pensioners having to take a massive pension cut. (Of course pension plan governance would have to change, having the sponsor be the plan administrator is a disaster for pensioners- the sponsors’ numerous pension related sins are both of commission and omission.) So going forward, a shared risk approach is likely the only way out of this mess (but for existing commitments they should be delivered. Pensioners, unlike younger workers, have no means of recovery).

Bloomberg’s Lui and Batino report that “Asia Pensions dump shares for bonds, funding stimulus” . The risk appetite of Asian pension plans is decreasing though many of these funds already had relatively low asset allocations to equities compared to aggressive Canadian and American practices. (U.K. pension funds started the move years ago to much more liability driven investment approach for pension funds, while in Canadian/American companies continued to gamble with the pensioners’ assets (in the hope) for lower pension plan contributions. One unmentionable company, OK it’s Nortel, used the discount rate, for calculating going concern valuation and annual pension contribution, equal to the expected return rates; i.e. the more risk they took, the higher the expected return, but then simultaneously also lowered the liabilities due to the higher discount rate, set equal to the higher return rate expected from a riskier asset mix, so you further minimize the required annual contributions. If some of these companies would have brought the same level of innovation to running their business as they brought to pension plan contribution reductions, the pensions would no doubt be more secure.)

And speaking of pension liabilities, in “Liability driven investment”, the Financial Times has dedicated an entire section with almost a dozen articles looking at the evolving landscape of liability driven investment. (Note that liability driven approach is a given for well run pension plans, the issues discussed here are how to implement the pension portfolio without simply using bonds only to match the bond-like pension plan liabilities.)

The Globe and Mail’s “Major firms push Ottawa for pension reform” describes how a number of major Canadian corporation like Air Canada, BCE and others “are lobbying the government for a permanent change, but without certain conditions such as member consent and letters of credit attached to the temporary measures.” (If they want to get out of their pension plan commitments, they need to first make the plans whole and then hand over the plan assets to a national or regionally run pension administrator, to make sure that their hands are completely removed from the cookie jar and the pension plan is run for the benefit of the pensioners.)

And finally, the believe it or not story of insensitivity and greed of Nortel executives who after having destroyed the company, filed for bankruptcy protection, allowed the pension plan to be only 60% funded, now firing thousands of employees without severance payments, yet they had the nerve to approach the Court for permission to pay themselves bonuses “Nortel may pay executive bonuses during bankruptcy” . (By the way, the Court approved the bonuses!)

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