At a loss for words

A spinoff from these events is an almost unprecedented level of hysteria. The newspaper headlines haven’t helped, but neither has the big public pension funds’ reporting of their results through the media. Call it a case of unintended consequences, but it comes down to one little word: loss.

OMERS said in their release that they “lost” over $8 billion in 2008. A spokesman for the endowment fund of the University of Toronto said “a loss is a loss” when describing his fund’s approximately 30% decline in value for the year. Ontario Teachers said its fixed-income portfolio “lost” almost $7 billion in the same period.

These self-confessed “losses” begot some pretty sensational (hysterical?) headlines: OMERS reports $8-billion loss (Globe and Mail). OTPP’s $21.1b loss worst in its history (Financial Post). Even groups such as the CPP Investment Board that are meticulous in the way they report their results get tarred with the same brush: Having lost $17.2 billion, David Denison’s CPPIB sees silver lining (Globe and Mail).

No wonder people haven’t been feeling so good lately. But are these really “losses” at all? One thing is clear: once the wire services pick up a release and brand it a “loss,” the papers and the media follow suit and keep on repeating it like a mantra.

Clearly, there is something wrong here. It is highly improbable that any fund actually “lost” the billions of dollars that are being bandied about. In order for a loss to occur, the fund would have had to sell the assets in question or write down their value for some specified reason. The decline in value of the portfolio, which is what is really being reported, simply reflects the quarterly or annual mark to market the fund is obliged to acknowledge. In other words, it’s an accounting issue, not a matter of recognizing an economic loss; and over time, the portfolio may (and probably will) be able to be marked up.

Obviously, on certain transactions there will be actual, realized losses. Closing out futures or other derivative positions (for currencies, equities, bonds or whatever) at disadvantageous terms will result in an actual loss. Or simply in virtue of the high volatility of portfolio turnover, losses will be taken and capital redeployed. But the staggering, multi-billion dollar “losses” being touted by the press are in all likelihood more accounting fiction than actual economic fact (as in, we’re going to have to reduce pension benefits/increase employee contribution rates.)

It’s interesting that the biggest “loser” in the Canadian pension fund sweepstakes for 2008, the Caisse de dépôt et placement du Québec, seems to have got it right. Check this out: unrealized decreases in value, or paper losses, totalled $22.4 billion in 2008, or 56.3% of the net investment results of -$39.8 billion. And: “The year’s net investment results of -$39.8 billion (of which 56% is unrealized decreases in value).” The press slammed them too, but this is detailed and transparent coverage. Given the hysteria the newspaper headlines have engendered, the Caisse deserves points at least for getting the messaging right at their end.

The communications challenge for the big funds is managing the headline risk of these whopping, multi-billion dollar numbers as a number. They’re all whopping numbers, but as a percentage, the numbers being reported are in line with what you would expect and in some cases surpass peer group or even market returns.

That’s why it would be a very good idea to try to rid the pension fund reporting lexicon of the word loss—both at the fund and media level. Call it an impairment, a decline in value, paper loss, unrealized loss or whatever, but stop using that miserable four letter word..

Brian Noble is principal with Financial Communications, which specializes in corporate and financial communications for the Canadian financial and pension industry. He can be reached here.