Removing the Lipstick from the “Pension Pig”

Published on
February 12th, 2020
47 minutes

“History Creates Generations, Generations Create History”

Removing the Lipstick from the “Pension Pig”

The Interview ·
Featuring Konstantin Boehmer

Published on: February 12th, 2020 • Duration: 47 minutes

Why have pension funds misjudged reality for decades – and how can you profit from this mispriced risk? Konstantin Boehmer of MacKenzie Investments walks viewers through the four major design flaws that are built into pension systems worldwide. He argues that pension fund managers have overestimated their ability to generate investment returns, and have pursued desperate measures by taking on too much risk in order to compensate for these faulty return expectations. Boehmer explains how the mismatch between retirees’ goals and pension fund managers' incentives has distorted the market, and suggests a few ways to protect yourself from the pensions crisis looming on the horizon. Filmed on January 13, 2020, in Toronto.



  • JD
    Joe D.
    26 February 2020 @ 00:12
    How would one buy insurance against a state pension going the wrong way (a CDS)?
    • KB
      Konstantin B.
      3 March 2020 @ 16:53
      Yes, one could do that. Not the most liquid of all instruments, but certainly possible on a lot of states. Plan would 'need' to be large enough to matter for state (i.e. impact the creditworthiness of the state). Eventually I would expect it to be a trade (betting on the widening of the CDS) as opposed to an actual credit event (default) happening.
  • JF
    Jennifer F.
    14 February 2020 @ 01:45
    If it all goes down, won't derivatives go as well? how is that a good trade>
    • KB
      Konstantin B.
      16 February 2020 @ 19:01
      Depends - some will go up & others will go down; you can generally bet each direction.
  • JF
    Jennifer F.
    14 February 2020 @ 01:58
    how is the federal government going to bail most states?
    • TF
      Tyler F.
      16 February 2020 @ 00:02
      Printing press.
    • KB
      Konstantin B.
      16 February 2020 @ 19:00
      What Tyler said! Maybe with some detours - at first maybe a try to spread across the tax base but that does not appear strong enough to handle significant additional amounts.
  • WS
    William S.
    12 February 2020 @ 18:26
    Lets be clear - this is mismanagement on a grand scale between State/US Govt's, Regulations and Corporate CEO's/Local/State politicians. US regs allow ridiculous assumptions of discount rates and fund returns driving asset allocations that are unrealistic. Comptrollers/CFO's fund to the "minimum" allowed by law which for years was essentially zero (Airlines case in point where BK was used to terminate under PBGC rules). Instead of funding for a rainy day - funding was tied to cash flow needs of the entity at issue. Mismanagement period...same is true of the Social Security and Medicare systems. A worldwide problem - the types of plan this video addresses are what is called a defined benefit plan. Typically a promise borne by the fund for life that uses a formula based on yrs of service and salary - example 2.35%xFAEXyrs service, where FAE is Final avg earnings..typically best 36 mos out of last 5 or 10 yrs. This drives an annuity with survivor benefits, Guaranteed periods certain ( 10, 15, 20) that continue to pay the estate up to the period chosen if not exceeded after death. 401k's are what is called defined contribution - a strict percentage of salary. Easier to modify then the defined benefit plans that are usually wrapped up in bargained contracts (local gov's full of them). As long as interest rates remain low a problem that will roost at some point causing BK's at the local govt level which has already occurred but relatively small. A Messssss...
    • TF
      Tyler F.
      16 February 2020 @ 00:06
      A mess indeed. Massive government bail-outs coming our way.
  • TF
    Tyler F.
    15 February 2020 @ 23:51
    This was a great discussion, and a sobering reminder of how unsustainable the pension system is. A 7% discount rate is being used by the pension industry to value its obligations? What a joke. It is bad politics to cut benefits or ramp up the contributions, so the discount rate is simply manipulated until the desired pension funding status is achieved. Just let future generations deal with the mess.
  • FB
    Floyd B.
    12 February 2020 @ 23:00
    Well done. Thank you for including the charts in the transcript.KB is correct about ILL. and Wi. One negligent and the other prudent having made some tough decisions. The discussion about the "PUT" was disturbing because even though states like Wi. have been prudent ,we stand to bailout as Federal taxpayers the negligence of IL. politicians. By the way when I lived in IL. the state legislature called not funding the public pension funds a"pension funding holiday". Some holiday.
    • DH
      David H.
      15 February 2020 @ 21:05
  • DG
    David G.
    12 February 2020 @ 18:40
    Wish there was a ‘share’ button for all these episodes so we could put content on our social media platforms..
    • RP
      Raoul P. | Founder
      12 February 2020 @ 18:52
      There is...bottom left.
    • AL
      Alex L.
      14 February 2020 @ 03:13
      I had to disable some extensions that block common social media sharing buttons, you may need to do the same if you can't see them.
  • GF
    Gordon F.
    12 February 2020 @ 21:55
    So basically, Iceland is in a good place today because they DIDN'T bail out their banks during the GFC, contrary to all the weeping and wailing and gnashing of teeth about how terrible a decision that was. So in retrospect should all the other countries have done the same? Or would that have caused knock-on effects that really would have been bad? Which may be to say, because Iceland is small, the consequences overall were tolerable, but if a big country or banking system had done what Iceland did, it would have been much different? I was of the opinion at the time that Iceland did exactly the right thing, and that many others should have followed their example. I have a hard time now seeing that that was wrong.
    • KB
      Konstantin B.
      13 February 2020 @ 21:10
      Fair questions and points! Tend to agree, K
  • GF
    George F.
    13 February 2020 @ 12:27
    Public pension sustainability ranking by indicator does not show the indicators. The top of the chart was cut off so I can't see the column headings with the indicator name. Can you just state what the indicators were?
    • KB
      Konstantin B.
      13 February 2020 @ 21:07
      Hi George, the indicators are: Pension funded status (Plan liabilities and deficits weighted relative to plan assets, state GDP, and officially presented values to determine the relative magnitude and significance), Fund accountability (Analyzes state and plan efforts to reduce their equity risk and increase contributions to recognize and improve their funding status), Cash flow (Projecting the rate and significance of the depletion in pension fund assets at the state level as well as contribution amounts), State debt obligations (The relative measure of existing state debt obligations and pressure on state-level government systems), Payment abilities (Evaluating a state’s ability to generate excess funds either internally through budget adjustments, or through borrowing money), Tax base strength (Investigating the quality of life, economic diversity and state success by examining population traits and trends), Demographics (Estimates the absolute and relative impacts of an aging population on state government spending by examining current demographics and demographic trends). They will all have different weights. You can find the publications behind the models here:
  • JL
    James L.
    13 February 2020 @ 02:29
    Excellent and knowledgeable!
  • JH
    Jesse H.
    12 February 2020 @ 18:17
    Fantastic - thank you, Ed and Konstantin!
    • JH
      Jesse H.
      12 February 2020 @ 18:33
      I have to ask...who gave this a Thumbs Down and why?!!
    • JH
      Jesse H.
      12 February 2020 @ 18:38
      The only thing that rubs me the wrong way about this conversation - and many like it - as good as it is, is the use of the word “play.” It implies you are looking to profit off of a trend that will ultimately harm many people. I am not OK with this morally - while you may never meet the people, you are benefitting significantly due to a very harmful social trend. The nature of markets is obviously such that we are by definition creating winners and losers with every trade at every waking moment, but when it comes to a large-scale social issue harming the common person, I think it is irresponsible to profit from this (eg. shorting Greek bonds). The moral residue of these decisions definitely bothers me.
    • MH
      Martin H.
      13 February 2020 @ 02:07
      Profit moves resources from the inefficient to the efficient. You allow more harm to occur if you do not seek to generate profits. Greece needed to be restrained by short selling, that ultimately reduced the total cost.
  • RG
    Roman G.
    12 February 2020 @ 21:18
    Paraphrasing- We "maybe" make our obligations if we loan Ukraine money for 20 years. Savage.
  • AO
    Alex O.
    12 February 2020 @ 19:21
    Real vision makes for very uncomfortable viewing lately. superb content either way.
  • HC
    Hahns C.
    12 February 2020 @ 18:10
    Something missing from the US Pension part is a discussion of the surety provided by Pension Benefit Guaranty Corporation - a federal agency created by the Employee Retirement Income Security Act. There will be Treasury and Federal Reserve ramifications should future stock and bond market go sideways as RV has been warning.
  • DS
    David S.
    12 February 2020 @ 17:56
    In German hyperinflation, surviving stocks hyper inflated in DM. If the end of this debt supercycle is hyperinflation, I wonder if stock prices will hyperinflate also in US dollars? DLS
  • DS
    David S.
    12 February 2020 @ 17:51
    QEs have created P/E inflation in the stock market. This should have helped underfunded pensions invested in the US market. I wonder if this is part of the "plan." DLS
  • AW
    Amelia W.
    12 February 2020 @ 16:13
    Fascinating data and interview. I'm new to RealVision but cannot stop consuming content! I have a UK pension almost entirely in UK/US equities. Is moving a fund to self investments like gold my only option to potentially save my pension? Or is a bond heavy fund a better option here? With my current provider I can only move into various european bond funds.
    • KB
      Kenneth B.
      12 February 2020 @ 16:40
      This is a GREAT question. I'm hoping to see a reply.
    • SW
      Scott W.
      12 February 2020 @ 17:30
      One would need to better understand your age and current circumstances, lifestyle, life plans, net worth, income sources, distribution of all assets, liabilities, etc. And a caveat, be aware of the risks from heavy concentration in any one type of asset. Gold MIGHT do very well in the coming years - it probably will. But it might not. Or it might not in the time frame that you need it to perform. You might wish to consider pm miners as a (very) slight percentage allocation to capture the potential asymmetry (pm miners will very likely rise by factors higher than the underlying IF the underlying advance). But do so knowing that these perform horribly most of the time. Jared Dillian advocates an interesting blend for a diversified portfolio; his work is generally accessible.
  • KB
    Kenneth B.
    12 February 2020 @ 16:50
    Friendly encouragement to the interviewer to refrain from utterances like 'Right' and 'Hmmmm'. I think you can accomplish the same thing in connecting with the speaker with a nod of the head, which may be off camera and not distracting to the listener/watcher.
  • EK
    Edward K.
    12 February 2020 @ 16:05
    Here in California CALPERS currently has a 6.5% assumption. Can not imagine that all the upcoming retirees will NOT see a cut in their future benefits. First they will require more contributions from participating organizations, then do a private equity Hail Mary, and finally likely to recognize that all the obligations can not be met. This will blindside many future retirees as it is a seemingly generous plan.
  • GN
    Griffin N.
    12 February 2020 @ 11:35
    Great interview! Very well explained by Konstantin and great questions by Ed. However some of the infographics (about countries preparedness) were cropped in half in the video. You can find the full pictures (and Konstantins paper) here, Part 1: Part 2:
    • GN
      Griffin N.
      12 February 2020 @ 11:38
      Seems like part 1 and 2 was the same link.. Maybe someone else is better at looking. Here's all the research
    • GN
      Griffin N.
      12 February 2020 @ 11:41
      Okey, think I got it now, lol.. Part 1: Part 2: Part 3: Cheers
  • JC
    Joel C.
    12 February 2020 @ 11:41
    very well laid out thesis. this series has started well with a clear track. super educational.
  • JC
    Joel C.
    12 February 2020 @ 11:41
    very well laid out thesis. this series has started well with a clear track. super educational.
  • DS
    Darryl S.
    12 February 2020 @ 09:05
    Saw this time coming in the late 90s. I was the president of the firefighters union in NSW Australia. We attempted to replicate a DB pension scheme for new recruits and hired actuarial advice. The scheme we based it on was formed under legislation enacted in 1916. Firefighters retirement age was 60 then and remained to that date. The life expectancy for firefighters was 62.7 years in 1916. Now it is well into the 80s. Same contributions. The numbers produced by the actuaries were eye popping.
  • KT
    Kaloyan T.
    12 February 2020 @ 07:41
    Ed constantly delivers!
  • SJ
    Steven J.
    12 February 2020 @ 07:23
    Wow - very eye opening interview! Great job Ed - love the interchange and the reality check for public and private pensions. Thanks RV for this excellent content!