I'd be curious to know how many advisors keep close track of how Canadian pension plans set up their asset allocation and what discount rates they assume.

There are some world-class pension funds in Canada, especially OTPP for the teachers. It has relatively modest assumptions — 4% plus inflation — and has fairly consistently beaten that. Yet, there is still a funding shortfall. At the other end of the scale is CalPERs, again, a world-leading pension fund, despite some bad investments in real estate and private equity. They're the assumed rate of return is 7.75% — which seems a bit heroic — but if it were lowered, hundreds of municipalities would be on the hook for contributions to make up the shortfall.

The U.S. public pension crisis — it affects many states — is an interesting illustration of thinking that the future will take care of itself, assuming history reverts to the mean. But that clearly hasn't happened.

In the private sector, companies will have to assume for corporate purposes a rate of return on pension plan assets equally to the interest paid on AA bonds — roughly about 5% these days. That's going to change many assumptions (remember when GM was expecting a 9% return).

Does this affect your own thinking?

I wish pension plans had the same reglatory requirements as we do regarding reporting so people could see that their pensions experience voilatility just like their investments with us do, but that's another topic.

But showing clients that their investments with us use similar asset allocation strategies as we do (assuming "we" do) helps them to understand and accept our recommendations I think. Like their pension plans, their RRSPs should include a component of real estate, small cap (even venture capital) just like the big boys they tend to admire. CPPIB publishes their asset class diversificaton on their website.

I think there will be a popular revolt against taxpayer funded pension plans. Or at least I hope there will be. It's crazy that people with no employer pension plans of any kind are funding and backstopping the pension plans of their fellow citizens. Google "Michael Lewis California and bust" for some insight on what gold plated benefits can do to governments. Demographics will eventual implode all DB pensions. Kill them all now and switch to self funded plans that don't rely on current worker to retiree ratios. No worries about corporate failures either because alternative forms of retirement savings are fully vested to the employees when the money goes in (e.g. no Nortel catastrophes).