Pensions

For Nortel pensioners, no doubt the story of the week is that the company is no longer trying to restructure itself but in fact it has kicked off its liquidation with the announced sale of a key part of the company.  This was followed mid-week by the CTV Ottawa story . The story speaks for itself: ““Committee warns Nortel pensions could be reduced”An Ottawa-based committee that’s been working with pensioners since January says pension and health benefits could be cut by 30 per cent, depending on how Nortel wraps up its business. A spokesperson for the Nortel Retirees and Former Employees Protection Committee says pensioners are likely to get a note with their next pension cheque, notifying them that they could face reduced pensions and health benefits as the company moves forward. However, a Nortel spokesperson denies that assertion” (Not clear if the denied assertion is the reference to a note coming with next pay-check or to the fact that pensions are about to be reduced by 30 %?) Also not clear if the government, the Court and/or regulator will step in to protect the pensioners or will allow them (us) to be disposed of like some pesky piece of debris. You will note the Export Development Corporation is funding the sale referred to below, enabling the sale without any indication of steps to protect pensioners.

The announced sale is good news for those staying on with Nokia in the fire-sale deal reported by Bert Hill in the Ottawa Citizen’s City billed as ‘heart’ of research for Nokia . However bad news for pensioners is that Nokia will take on no liabilities for “underfunded Nortel pension plans or severance for people it does not hire”. With 1000s of people who will be leaving Nortel over the next few months as a result of asset sales and firings, the court should re-evaluate the 69% CV payout level for these departing staff or stop CV option until the true state of the plan is understood. Just as earlier departing employees this year walked away with CV on assumed 86% valuation which on a little further reflection turned out to be on 69% (or maybe even lower once we get real pricing from a willing insurance company), if the next wave leaves with 69% payouts there is a risk that further irreparable damage is caused to pensioners should the ultimate annuity purchasable from an insurance company be even lower than 69% with remaining assets. Every CV dollar paid out at over 50% given the current lack of information is at risk of being removed at the expense of the least able to cope group, the pensioners remaining in the plan. (You may wish to read the earlier blog on CVs Too little, too late!- 50% interim CV payments would be more appropriate.)

Real Estate update: Canada and US/Florida

Teranet-National Bank (Canadian) House Price Index covering April 2009 was issued this week. Compared to last year Vancouver, Calgary and Toronto are down -10.9, -9.8 and -7.6 respectively and are down from their peaks by -11.9, -13.3 and -11.3 respectively. Montreal, Ottawa and Halifax are still in the positive territory compared to a year ago, but only just. During April only Montreal and Halifax show small price increases, while the other four cities in the index showed small in-month decreases. (You recall last week that there was anecdotal evidence from real estate agents that buyers were bidding prices up in Toronto in May, but the April index value doesn’t yet show any indication of the price amelioration.) And the Globe and Mail’s Alia McMullen asks “Is Canada’s housing market tanking or taking off? as she wonders which one is right, the (decreasing) Teranet-NBC index or the realtors’ (increasing) MLS median? The answer is that “The (MLS) figure can be skewed by the mix of homes that were sold with the location, size and type of home all impacting price.” The Teranet data is based on same home re-sales.

On the Florida real estate front the Sun-Sentinel reports that (real estate industry sourced) median “home prices keep tumbling” but the lower prices coupled with low mortgage rates bring out buyers so “Home sales in May rise 47% in Broward; 5% in Palm Beach County” (We should have a more reliable view of prices next week when the Case-Shiller index comes out on next Tuesday.) Part of the answer to increasing volume may also be rising foreclosures, which are now starting to be driven also by condo associations. In WSJ’s “Condo boards take on lenders” , Nick Timiraos reports that “as more condominium owners default on home loans, the amount of unpaid dues owed to condo associations is piling up. To collect the arrears, some condo boards have begun foreclosures on units already seized by banks.” Apparently, banks do not pay condo dues on defaulted properties until they take over the titles, which can take 18 months after the owner walks away from the mortgage. In condo complexes where there are a large percentage of defaults, the pain drives associations to place liens against units, or “taking title to units from delinquent owners and renting them to tenants until a bank initiates foreclosure.”

Aline van Duyn writes in Financial Times’ “Ill winds threaten US housing’s green shoots”  indicates that according  to new forecasts New York is in for another 40% drop in property prices in addition to the 20% drop to date. The outlook for housing is “better” than it’s been for years (due to the disastrous performance of the past couple of years) primarily due to stabilization of activity level and better value/affordability. But not everybody agrees; Whitney Tilson suggests that “recent signs of stabilization are misleading”. The continuing rise of unemployment over 10% will result in additional foreclosures and lower prices.

Taxes

In the Globe and Mail’s “Leaving the country? Tax risks abound”  Tim Cestnick discusses the rules used by the Canadian government to determine if you are a resident for tax purposes. The primary considerations are “dwelling place, the residence of your spouse or common-law partner, and the residence of your dependants.” Secondary considerations include: personal property in Canada, social toes, economic ties, provincial health insurance, driver’s license, vehicle registration. If you depart Canada for tax purposes, tax will be due for the deemed disposition of your assets at market prices (except RRSP/RRIF and Canadian real estate).

Retiree Lifestyle

In the WSJ’s “To move or not to move” Ellen Graham looks at the trade-offs between staying in place and moving to a continuing care community (where one moves/buys into a community often offering high end facilities/services when one is healthy and then “as the need arises, you can move to assisted living or skilled nursing care in the same community. Some places say they won’t discharge you even if you outlive your money. And your heirs can often recoup most of the buy-in price.”) Some seniors who decided to move into them consider these facilities as a “gift to our children”, saving them the problems when they become (often suddenly) incapacitated. Ms. Graham’s investigation led her to stay in place for now, though she is “compiling a dossier of emergency alternatives” and writes that “I console myself that the future is unknowable, and we’re probably kidding ourselves to think we can micromanage every eventuality”.

In Barron’s “The myth of 2016” Gene Epstein reports that the projected year of 2016 when the  US Social Security system outflow is expected to exceed inflow of funds will likely be deferred given that the over 55 labour participation rate has been growing from 30% in 1990 to 41% currently and projected to be 50% by 2020. While this trend obviously started before the recent financial/economic problems, the trend will no doubt be reinforced by the damage inflicted on many retirees’ savings. Of course there are limits to the labour rate participation such as availability and willingness to absorb the over 55 group and how long their health will permit them to participate. Similarly, David Rosenbergof Gluskin Sheff reports “that the only segment of the population that is gaining jobs is the 55+ age category…in fact, over the last year, those folks 55 and up garnered 630,000 jobs whereas the other age categories collectively lost over six million positions.”

Financial Advisers

Kim and Lucchetti write in WSJ’s “Big change in store for brokers in Obama’s oversight overhaul”that “buried in President Obama’s proposed regulatory overhaul is a change that could upend Wall Street: Brokers would be held to a higher “fiduciary” standard that would compel them to place their client’s interests ahead of their own.” This is the old suitability vs. fiduciary debate; and there should little debate here, you should be using only a broker or planner who is prepared to sign up to fiduciary standards, even before the new regulations come in.

WSJ’s Shelly Banjo reports the strains that wealth managers’ business models are under as a result of recent stock market swoon in “Reconsidering wealth managers” . A combination of the drop in market prices and the fact that one quarter of HNWI withdrew asset from their investment management firms resulted in about 25% drop in assets under management (AUM) at the 15 largest firms surveyed. (I suspect that large firm’s business models won’t change as a result, but it may move small forms faster to a fee for service model, away from AUM approach.) It is no better in Canada, Steve Ladurantaye reports in “Investors grow frustrated with advisers” . This year only 24% of investors would recommend their advisors to friends/relatives compared to 32% last year. In another advisor related article that could be classified as comitragedy (?), Jonathan Chevreau reportson the case of “pensioners, including a couple of doctors, lost $3.8 million of their savings. They are accused of subjecting 56-year-old James Amburn to a four-day ordeal in which he was beaten, had his ribs broken and was burned with cigarettes. “

In the Globe and Mail’s “Having a serious spat with your advisor?”Gail Bebee tells readers not just how to complain, but also describes the various self-“regulatory” bodies of the investment industry in Canada

Personal finance and investments

David Adler in Barron’s “The new way to crunch your numbers”reports on “using liability driven investing to better meet your retirement goals”. This is the asset-liability matching approach used particularly successfully recently by more conservative pension plans. Quoting a Seattle wealth manager’s approach he divides goals into three buckets: “lifestyle, risk-taking and legacy. Each carries with it different level of risks and rewards the client is willing to tolerate”. An example is a grandchild’s college expenses which may be funded with four zero coupon bonds corresponding with college years. He also discusses the lack of perfect instruments to hedge liabilities. For example while annuities are a good longevity hedge, you are exposed to inflation and counter-party risk. Similar problems exist with TIPS (low returns), regular bonds (inflation). After the recent market meltdown, no doubt that more individuals will look at not just the asset side in preparation for retirement, financial planners would do this as part of the Investment Policy Statement portion of the plan.

In Financial Post’s “Play it safe with life-cycle investing” Jonathan Chevreau discusses some of the principle  of  life cycle investing and refers to in Paula Hogan’s article of a couple of years ago  “Life-cycle investing is rolling our way” (You can also read my earlier blog summarizing Life-Cycle Investing: Chevreau actually refers to some of my comments in that blog “while insurance companies sell downside-protected segregated funds or variants such as GMWBs. But these still entail some stock market risk and, as Peter Benedek, a financial blogger, says at RetirementAction.com, introduce counter-party risk and higher costs. Benedek says investors can follow Bodie and settle for a “smaller but more certain piece of cake” but frets this may be hard to swallow for those who wish to have it all if they do all the right things.” That was written in 2007, and no doubt people are much more ready to accept “insurance” after the market crash, however one might suspect that the risk is lower today and the price for the insurance is even higher now as insurance companies are trying to shore up their balance sheets.) In any case, despite of what you may read elsewhere that life-cycle investing may be related to use of life-cycle or target-date funds, life-cycle investing is about looking at financial risk management much more holistically that just portfolio diversification.

NYT’s Tara Siegel Bernard discusses the view emerging from the recent stock market drop that “For older investors, old rules may not apply”. Specifically she talks about emerging sentiment from some corners that stocks may be inappropriate near or in retirement. John Bogle personally uses stock allocation of (100-age). Target-date funds are reducing the risk near retirement, e.g. Schwab 2010 fund reduced its equity allocation from 50% to 40%. Some planners used to reduce the stock allocation for clients by 1% each year, and have now switched to 2%/yr starting at age 60. For near-retirees whose assets are just meeting their needs, some suggest TIPS. If you got out before the crash, John Bogle suggests that you start getting back in gradually over two years. If you choose annuities as a way to cover basic expenses, then spread it among four companies perhaps staged over 3-10 years in the hopes that you don’t lock in at an unusually low level of interest rates.

Sophia Grene writes in the Financial Times’ “Finra warns on leveraged ETFs”  that “leveraged and inverse exchange traded funds are under threat in the US as regulators have effectively ruled out their sale to retail investors.” Handle with care; these are not designed to work as expected beyond one day.

Financial Post’s Jonathan Chevreau writes that “Index fund pioneer John Bogle says investors getting killed by ETFs”.  To be clear, he is not talking about the fact are getting killed in the various esoteric  ETFs (not all ETFs are “good” by definition), but people are underperforming even in “good” ETFs because of their trading behaviour and poor timing decisions; i.e. due to market euphoria buy-high and then in panic sell-low. Bogle says that these “good” ETFs are ideally suited for buy and hold investor.

In “Ishares Canada launches World and Emerging markets ETFs” the Financial Post’s Jonathan Chevreau  brings to readers’ attention the launch of the unhedged World and EM index based ETFs and the fact that they sport  higher MERs (0.45% and 0.82%) than similar ETFs available from Vanguard (VT =0.3% and  VWO=0.27%) (Not much value added here, except that you can buy it in Canadian dollars.)

WSJ’s Craig Karmin reports in “Active managers get cold shoulder” that “A growing number of big investors are concluding that stock and bond pickers failed to add any value during the market turmoil and are shifting to index funds, a move that threatens to cut profits for asset managers.” “…about one in five institutional investors said they have recently shifted money away from active managers and into passive index strategies. That is up from just 4% who expected to make that shift when asked from July to October 2008.” He also reports that some pension funds are moving to indexes even for bond funds, as last year the gap between top and bottom quartile active bond fund managers widened from 0.5 to 6%.” Rather than try to pick winners, many institutional investors are more worried about being stuck with losers, so they now are choosing index funds.”

And finally, “Time to re-examine target-date funds” “Returns of 2010 target date funds in 2008 ranged from minus 3.6 per cent to minus 41 per cent,” said Ms Schapiro. This raised the question of whether “regulatory changes, industry reforms or other revisions are needed with respect to target date funds”.