Hot Off the Web- February 10, 2014

Contents: Retirement stock allocation, tax pressure on dual US-Canadian citizens in Canada, more scrutiny on dually registered advisers, aggressive approach to retirement savings, Canada’s house prices continue to escalate but known risk factors unlikely to burst bubble, Quebec court: pension underfunding is a “deemed trust” which has priority over secured creditors just one of many signs of shifting opinion in support of earned pension benefits? Canada Post union fears Crown won’t honour pensions? Ontario pension reform head of steam building, Zweig: TIPS and pure longevity insurance for personal pension, Canada’s private sector pension system unraveling further, Bitcoin opportunity: a means of exchange not a currency or speculative asset, ETFs to dominate mutual funds in a decade, the eroding middle class, emerging markets: boom or bust?


Personal Finance and Investments

In the WSJ’s “How much stock should you own in retirement?” Kelly Greene looks at some of the expert recommendations on stock allocation in retirement. Her list includes in addition to the old (100-age) rule of thumb, the following: (1) reduce allocation (to reduce sequence of return risk around retirement) to between 20-50% when approaching or early in retirement and then gradually increase 1%/year to between 40-80%, (2) the “bucket” approach whereby one divides the “portfolio in five equal buckets of different risk levels”; the lowest risk bucket (comprised mostly with cash-like investments) is designed to cover the next five years of expenses, while the other four are used annually to fund the lowest risk bucked and are re-adjusted to their initial asset allocations (e.g. 2nd bucket 80/20 bond/stock, 3rd 50/50, 4th 30/70 and 5th 100% risky assets), and (3) Bogle’s rule (100-age) but counting expected pensions and Social Security as part of the bond allocation (for a 65 year old by multiplying annual benefits by 15) but older retirees might consider adding a little more stock to the mix. (By the way, Charles Ellis in his “Winning the losers’ game” used to recommend 100% stock allocation for any assets not needed in the next ten years.)

In the Globe and Mail’s “Dual citizen? It’s best not to ignore the tax rules” David Israelson writes that “if you’re a dual Canadian-U.S. citizen, it’s wisest to try to comply with their rules. It will cost at least $500, in many cases more, to have an accountant prepare your forms. You should fill out the proper forms to declare your bank accounts and RRSP – and, unfortunately, stay away from RESPs and TFSAs” (But see next article for just announced changes to RESPs and TFSAs). And starting in 2015 Barrie McKenna reports in “Ottawa to give IRS information on Americans living in Canada” to comply with U.S. FATCA law. Exclusions will include RRSPs, TFSAs, and RESPs; “Also excluded are accounts at credit unions with less than $175-million in assets and at smaller institutions where the vast majority of customers are Canadians.” The article notes that the agreement modifies the Canada-US Tax convention, but doesn’t say if there are other changes as well.

In Reuters’ “ Wearing two hats triggers compliance headaches for advisers” Suzanne Barlyn reports dually registered firms, “one of the fastest growing sectors”,  (with the SEC as Registered Investment Advisers requiring ‘fiduciary’ level of care AND with FINRA as brokers only requiring ‘suitability’ level of care) should be expecting increased scrutiny from the SEC in particular in areas such as: how to make sure that customer understands the level of care they are getting for each part of their assets, and potential “differences in regulations for record-keeping, disclosures”.

Daily Finances “10 ways to boost your retirement savings” lists Olivia Mitchell’s recommendations to boost your savings, including: aim for 100% of pre-retirement income, retire after 65, save 25% of your income, assume that you’ll be living to 100, get financially educated and others.


Real Estate

In the Globe and Mail’s “Toronto home prices surge, again ‘outpacing family incomes’” Michael Babad reports that Toronto sales fell 2.2% in but average selling prices were up over 9% and the benchmark price was up 7.1% in January compared to a year ago; condo prices were up 4.8%. The article also notes that Vancouver and Calgary sales and prices advanced as well.

Also in the Globe in Michael Babad’s “What it would take for the Canadian housing market to crash, and why Pimco says it won’t” quotes Pimco’s Devlin that “While we think the housing market in Canada is overvalued and due for a correction, the correction will likely happen over several years.” A bust could be triggered by either a sharp interest rate increase, or spike in unemployment rate, or disruption in mortgage credit, none of which are likely to happen.


Pensions and Retirement Income

First a very interesting Quebec ruling which Blakes InHouse calls “a major shift in Quebec law” by declaring pensions “deemed trusts (having) priority over secured creditors in bankruptcy”, except perhaps in the case of debtor-in-possession lender. The ruling discussed in “Pension trust trumps creditors in Timminco” appears to explicitly apply to employee and employer contributions as well as underfunding of the plan.  (I am wondering if and how this could be leveraged to the benefit of Nortel pensioners in Quebec in particular (but for those in other provinces as well)? Clearly the ground is shifting; while five years ago “deemed trust” argument may have been perceived by some as a long-shot not worth playing, recent developments suggest that “deemed trust” argument has legs in case of employer bankruptcy with underfunded pension plan- if so, that would be about time. I hope that the RRQ and/or the Quebec government and Morneau-Shepell will call the Nortel bankruptcy court on this.) (Thanks to VK for recommending.)

In Pensions&Investments’ “Canada’s high court rules MTS must repay C$43 million to pension fund” because it violated a promise not to use the existing pension surplus at time of privatization to reduce MTS’ pension costs. (Thanks to Jean Lesperance  of CanadianFinancial DIY for recommending.)  By the way in Bloomberg’s “Detroit bankruptcy exit plan threatens munis as pensions favored” Christoff and Chappatta report that “Detroit’s proposal to restructure its $18 billion of debt by paying pensioners at more than twice the rate of some municipal bondholders threatens to increase borrowing costs for localities throughout Michigan.”

(While each ruling (and restructuring proposal) mentioned above may only apply to the specific circumstances/jurisdictions in question, it is encouraging to see an increasing number of outcomes in favor of pensioners (typically financial naives) who are often the victims of various corporate (or government) financial manipulations and end up holding the bag when the employer goes bankrupt. Unfortunately, Nortel pensioners have not had any court rulings so far in their favor, even though they were hit with a 41% reduction in pensions and loss of health and life insurance.)

In the Globe and Mail’s “Unions want Canada Post ousted as pension administrator”  McKenna and McFarland report that “Canada Post’s unions want the Crown corporation replaced as administrator of its badly underfunded pension plan, citing potential conflicts of interest and a refusal to fix the plan’s problems.”  In some way this is really strange especially since the article notes that “Canada Post is a Crown corporation, Ottawa is on the hook for all of its financial obligations”, so any concerns about inability to pay earned pensions should be really academic unless they are worries that the Canada’s federal government will repudiate these (and other) pension obligations. (Or perhaps the concern is about future changes pertaining to yet unearned pension benefits?)

In the Financial Post’s “Ontario government taps more big names to push pension reform” Barbara Shecter reports that Ontario has tapped  David Denison (former CPP head), Bill Morneau (of Morneau-Shepell), Jim Keohane (Ontario Pension Plan), Keith Ambachtsheer (Rotman Pension Centre), Susan Eng (CARP Advocacy) and Melissa Kennedy (Ontario Teachers’ Pension Plan) for a technical advisory group, in addition to Paul Martin who was announced as special advisor earlier. (Quite a powerful advisory group; hopefully they will also explore other options for Ontario beside an expanded CPP-like solution; cheaper, better, faster acting and more broadly encompassing solutions are available. The expanded-CPP proposal has sucked out all the oxygen from other pension reform options; perhaps it’s an opportunity to broaden the field of consideration.) And just out from Adrian Morrow in the Globe and Mail where he reports that “Ontario invites rest of Canada to get on board with new pension plan”.

In the WSJ MoneyBeat’s  “Retiring on your own terms” Jason Zweig discusses a recent Financial Analysts Journal article by Sexauer and Siegel entitled “A pension promise to oneself” in which they argue that  you need to save 22 times the annual income you want during retirement and “invest patiently in low-risk assets and structure the payouts to provide steady income during a long retirement”. Specifically he suggests that if you want, say, $100,000 income in retirement and not have to worry about it, then you need $2,000,000 TIPS portfolio from which you can draw $100,000 inflation adjusted per year for 20 years and then take $200,000 and buy a “a deferred life annuity up front. That type of insurance generates a constant payout before inflation that will cover your income needs if you live past age 85”. (Using TIPS is no doubt the safest approach, but it is expensive. However, note the pure longevity insurance option is getting more air time as an important element in a credible retirement plan. Unfortunately this construct is still not available in Canada; perhaps Ontario pension reform experts will consider this in their deliberations.)

BenefitCanada’s “DB pension coverage continues to drop” rounds out the selection of pension articles this week by bringing Canada’s dire pension situation into stark focus. Not only is the private sector registered pension plan (RPP) coverage continuing to shift from DB to DC, but the overall private sector coverage declined to 24% from 28% in the 10 years ending in 2011. (So much for Canada’s pension system; it was never a promise, just a pretend (as Nortel pensioners found out), but now it’s not even pretend for most Canadians in the private sector.)


Things to Ponder

In the Financial Times’ “Bitcoin is far more than a currency for speculators”  John Gapper discusses the real Bitcoin opportunity, a means of exchange rather than a virtual currency or a speculative asset. “It is a challenge to the banking system and may allow the quick and cheap exchange – and transfer of ownership – not only of currencies but also of other assets, goods and services. It fixes a fundamental gap in the internet.”

For those of you might be interested in a bullish perspective of ETFs you can read’s “The future of ETFs: Why we expect huge growth” where Matt Hougan opines that “ETF assets will top mutual fund assets within 10 years”. The ETF advantages will drive it to replace mutual funds as the dominant vehicle because of its inherent advantages: lower taxes, intraday tradability, superior liquidity (lower spread) than underlying securities, diversity (new product is being added in the “smart beta” and active fund space), further institutional penetration (insurance companies and advisor intermediated market) and individual penetration (can build commission free diversified portfolio for annual cost of 11 bps). Hougan also has a list of concerns such as: toxic products, “half of ‘smart-beta’ is probably junk”, pay-to-play (as an enabler for commission free trading of ETFs). (All in all this is a good overview of ETF trends.)

In the NYT’s “The middle class is steadily eroding. Just ask business world” Nelson Schwartz reports that there has been  a dramatic shift in share of personal consumption expenditures between 1992 and 2012 with top 5% earners’ share increase from 27% to 38%, top 20% of earners’ share increased from 53.4% to 61%, and that of the bottom 80% decreased from 46.6% to 39%.

And finally, in the Financial Times’ “Emerging markets are badly served by ETFs” John Authers opines that “the notion of trading in complicated, heterogeneous and often illiquid (emerging) markets using ETFs has had its day.” He mentions other approaches which might work better like: CEFs or fundamental index or small rather than large caps. But Matt Hougan in’s “ETFs aren’t ruining EMs” disagrees violently based on the supporting data provided by Authers. Also on emerging markets is Steve Johnson’s “Developing world is contrarian buy” article where he points to the forward P/E for MSCI World and MSCI Emerging Markets indices to be 14.9 and 10.1, respectively! Then Gideon Rachman in the Financial Times’ “The future still belongs to emerging markets” opines that  “The reason for this is that the factors that have propelled the rise of non-western economies in the past 40 years still apply… today’s turmoil will not change the fact that emerging markets will grow faster than the developed world for decades to come.” But in Bloomberg’s “Mobius says Emerging-Market selloff to deepen amid outflows Mobius the emerging market pioneer says he is looking at opportunities but not buying as yet, since the market may pull back further. But…and but… (I have been overweighed in emerging markets on a market, but not PPP basis, and it hasn’t been fun lately. But I am sitting tight on my target asset allocation on the equity side of my portfolio at 25% Canada, 30% US, 25% EAFE and 20% Emerging Markets, and counting on the people of emerging markets to continue to be driven by their hunger to raise their standard of living closer to what they see on their TVs.)



  1. Jim Pike · · Reply

    Like you I’m in the rest of the world including emerging and do it via Vanguard’s Total World Stock ETF (VT)….so far so good, has a good dividend payout

    1. Hi Jim,
      Yes VT is a great way to capture the entire equity world in a capitalization weighed manner with a single ETF! I just checked, and as of end of 2013 it had an 8.9% EM allocation, and a reasonably good dividend $0.47 in 2013 on a ETF priced at about $20 at the beginning of last year and $23.50 now.
      It’s worth noting that the Canadian content is indicated at 3.6%, so Canadians who might want a little more home bias in their equity allocation would have to beef that up with something like XIU or VCE. Regards…Peter

      1. Hi Peter – XDV is my preferred Canadian content ETF to complement VT. Low expense ratios all round – no matter what happens there’s 1 1/2 % more for me by avoiding the mutual fund trap, thanks to the constant reminders in your newsletter. All the best – Jim

      2. You did better with XDV ( on price and dividends)than if you had chosen my selection XIU or VCE, but I wanted a somewhat better sector diversification in general and lower concentration in the Financial sector in particular…so far you are ahead… 🙂

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