"Big CPP" Dragged Into Canadian Politics?

Via Pension Pulse.

Another federal election campaign in Canada (sigh!) and this time pension politics are front and center. Les Whittington of the Toronto Star reports, Liberals propose supplementary public pension plan:

A
Liberal government would earmark an extra $700 million a year for
low-income seniors and create a supplementary public pension plan to
help Canadians save for retirement, Liberal Leader Michael Ignatieff
says.

The
party’s proposed expansion of the Guaranteed Income Supplement would
provide the poorest of seniors with an extra $650 a year, Liberal
officials said.

If
elected, the Liberals would also quickly open discussions with the
provinces to gradually increase premiums and benefits of the Canada
Pension Plan, the party announced.

“Canadians
who work their whole lives to provide for their families deserve a
secure retirement,” Ignatieff commented during a campaign stop in
Vancouver.

He
said the situation is urgent because 75 per cent of Canadians working
in the private sector do not have a registered pension plan.

Strengthening
the CPP can only be done in concert with the provinces, Ignatieff
noted. “This is a case where the federal government of Canada has to
step up and provide leadership on pensions. We’ve had no leadership
from Mr. Harper on pensions in five years.

“So
what we want to do is sit down with the provinces . . . and work out
with them how we get there. And it’s going to require something that
Mr. Harper doesn’t seem to know how to do, which is sit down with the
premiers and say, ‘We’ve got a common Canadian challenge, which is how
to provide retirement security for all Canadians.’ ”

The
main innovation promised by the Liberals is a Secure Retirement
Option, or SRO, which would allow employees to top up their retirement
savings through a supplementary plan administered by the CPP board.

It would allow employees and employers to voluntarily contribute to a
tax-deductible retirement fund. An individual’s annual contribution
ceiling would be determined by his or her RRSP contribution limit.
Contributions to an RRSP and the SRO could not, when combined, exceed
the individual’s annual RRSP contribution ceiling.

The
Liberals said the plan would offer a low-cost, secure savings option.
Ignatieff also proposed a Stranded Pension Agency to help manage the
private pensions of employees left stranded when a company goes
bankrupt.

In
government, the Conservatives expressed interest last year in
gradually strengthening the CPP but instead opted to begin work on a
Pooled Registered Pension Plan, which would be administered by banks
and insurance companies.

The
Conservatives said they were offering this plan because negotiations
with the provinces over enhancing the CPP were dragging on without
agreement.

Opposition parties and union leaders said the new private
plan proposed by the Conservatives would do little to address the
problem of low retirement savings for average Canadians.

In
the recent federal budget, the Conservatives proposed an increase in
the Guaranteed Income Supplement of $300 million annually to provide
more assistance to low-income seniors. The NDP, which had asked for a
$700-million increase, said the Conservatives’ measure was inadequate,
citing it as one of the reasons the NDP would not support the Tory
budget.

Jonathan Chevreau of the National Post attacked the Liberals' proposal stating, Liberals push Big CPP as retirement saviour over Tories’ Pooled RPPs:

Four
months after the Conservatives opted instead to beef up employer
pensions, Liberal Leader Michael Ignatieff has revived the idea of an
expanded “Big CPP.”

He also promises
to match the NDP’s pet project of giving the country’s poorest seniors
top-ups to the Guaranteed Income Supplement, a measure that was also in
last week’s short lived federal budget.

As announced Wednesday
in Vancouver, Ignatieff also promised a new Secure Retirement Option
(SRO), billed as a voluntary and portable tax-deductible savings option
backed by the publicly-run Canada Pension Plan.

Secure Retirement Option has same contribution limits as RRSPs

The
so-called SRO would let workers save an extra 5 to 10% of pay, using
the same contribution limits as RRSPs. And in an odd shot at
higher-income earners, the Liberal press release says this will “prevent
upper income earners from accessing an unfair amount of tax
sheltering.”

That’s curious, given that the total amount of
tax-sheltered retirement savings, whether through RRSPs or employer
pensions, has long been about half of what it is in the U.S. or the
U.K. Also, according to Towers Watson actuary Ian Markham, those
voluntary contributions will erode individuals’ RRSP contribution room,
which may mean no new net savings from the program.

The
pension industry debated reform throughout 2010, with a gradually
expanded Big CPP favoured by labour leaders. The CPP entails a form of
payroll tax, with contributions split between employers and employees,
so an expanded CPP would require higher premiums from both.

Tories, financial industry favor PRPPs

However, in December, Finance Minister Jim Flaherty instead unveiled proposals for Pooled Registered Pension Plans
or PRPPs, aimed at letting small and medium size businesses share
resources and cut costs through traditional employer pensions. The goal
is to help out the estimated 3.5 million middle-income private sector
workers who have no employer pension.

The PRPP has already had
initial negotiations with the provinces, so is already moving down that
path, Markham says. “The Feds did agree the provinces are free to
force employers to offer a PRPP. I wonder if the Liberals would go down
that path as well?”

Ignatieff acknowledges three quarters of
private-sector workers are not in employer pensions (RPPs) but
dismisses PRPPs as being fraught with “risk, complexity and hidden
management fees.” They offer “little more than RRSPs already offer” but
naturally appeal to the banks and insurance companies that will manage
them, he said.

But the Liberal
analysis is off base when it declares many RRSPs have annual charges of
2% or more. That may be true for those who hold mutual funds in their
RRSPs, but it’s patently untrue for self-directed RRSPs holding
individual stocks or exchange-traded funds.

Ignatieff also
accuses Stephen Harper of “abandoning” the CPP and delivering no
serious pension reform the last five years, conveniently forgetting
2009’s revolutionary Tax Free Savings Accounts, pension splitting and
now the PRPPs.

Labour likes Big CPP, especially in addition to their lush pensions

One
reason Labour likes an expanded CPP is it promises a guaranteed or
“defined” benefit that will be there regardless how financial markets
behave. Ignatieff reminded voters that (under Lester Pearson), the
Liberals created the CPP in 1965. A backgrounder says any such expansion
requires approval of two thirds of the provinces but most support a
gradual expansion of the plan.

Quebec may be a
problem since it runs its own QPP separate from the CPP. Ian Markham
says in its recent budget, Quebec said contributions would have to be
hiked just to maintain existing benefits. In addition, just two weeks
ago, Quebec proposed its own version of a PRPP.

Gradual CPP expansion OK only if done right

A
gradual expansion of the CPP is a good idea but only if it is done
right, says Fred Vettese, chief actuary with Toronto-based Morneau
Shepell. “That means responsible employers who already provide pension
coverage should be able to pare back that coverage dollar for dollar to
reflect the increase in CPP.”

But that’s not what labour groups
have in mind, Vettese says. “They want to see a bigger CPP pension
cheque in addition to the employer pension they already get, and in
some cases the resulting pension will be excessive.”

Consultant
Greg Hurst, of Vancouver-based Greg Hurst & Associates Ltd.,
agrees: “Higher CPP benefits would unnecessarily benefit those who
already have good pensions. It will also cost taxpayers more money to
support higher CPP contributions of public sector employers, that
already offer very generous pension plans.”

Secure Retirement Option a voluntary DC pension

The
Secure Retirement Option (SRO) resembles the voluntary savings plan
proposed by pension consultant Keith Ambachtsheer and others, Vettese
says:

This would be a pure defined contribution
arrangement with one pool of assets and would be run by the Canada
Pension Plan Investment Board. This isn’t a bad idea in most respects,
and in fact it may be more workable than Pooled Registered Pension
Plans (PRPPs), which the various provincial governments are currently
struggling to define.

The one problem with SRO is that it
concentrates even more of the nation’s retirement savings in government
hands rather spreading risk by involving other sources, including the
private sector. As the recent pension problems in the U.S., France or
Spain (or even the Caisse de Depot) suggest, a government-led pension
solution works well until it doesn’t.

Of the SRO,
Hurst says the financial industry already delivers pension programs for
employees of medium and larger enterprises at costs lower than current
administration and investment costs of the CPP. He favours the
Tories’ PRPP:

PRPPs have the prospect of making such
lower cost options also available to employees of smaller businesses
and the self-employed. For my money, the PRPP concepts of making it
mandatory for employers to offer a pension plan or PRPP access, with
automatic enrollment of employees with an opt-out option are likely to
be far more effective in providing pensions to those Canadians that do
not currently have them. Abandoning the progress made with the
provinces on the PRPP Framework will only serve to further delay
meaningful pension reforms.

Both are possible but three-way balance needed

Actuary
Malcolm Hamilton, worldwide partner with Mercer’s, has said he favours
a “modest” expansion of CPP but that the gradual nature of it will be
of little use to those already near retirement. There’s room for both
an expanded CPP and PRPPs, he told me in December.

Most
financial planners believe retirement should be like a three-wheeled
tricycle, with income coming from a government wheel, employers and
private savings. Government already provides Old Age Security, GIS and
the CPP (albeit with premiums from employers and workers), while
individuals have RRSPs, TFSAs and taxable investments.

It’s the
employer wheel that seems wobbly and it seems to me that by focusing on
employers, the Conservatives’ PRPPs provides more balance than a Big
CPP. But it’s no surprise proponents of Big Government also want a Big CPP.

Mr.
Chevreau makes some good points on the success of TFSAs, introduced by
the Conservatives, but his defense of PRPPs and his attack of
supplementary CPP is way off base. It shows that he has no clue
whatsoever about the benefits that come from having retirement money
managed by the Canada Pension Plan Investment Board (CPPIB) or other large Canadian defined-benefit plans. Let me go over Mr. Chevreau's main points and highlight my concerns.

First,
any article that cites actuaries and investment experts from private
firms like Towers Watson, Morneau Shepell, Greg Hurst & Associates
Ltd and Mercer is hardly objective. Mr. Chevreau should disclose what
percentage of their business comes from private Canadian businesses as
opposed to the large Canadian defined-benefit (DB) plans? I hazard to
guess that almost all their business comes from the private sector as
opposed to the large public DB plans which is why they're not going to
publicly endorse an expanded CPP proposal full force. It's too
bad the Office of the Chief Actuary of Canada can't comment on what
these actuaries are stating about a supplementary CPP proposal.

Second, while it's true that an expanded CPP would require higher premiums from both employees and employers, Canadians want expanded CPP.
It's not just public and private labour unions who are backing this
proposal, most Canadians are worried about their retirement and
rightfully so. Unlike public sector workers and politicians who enjoy
the security and peace of mind that comes from their defined-benefit
pension plans (which they contribute to), many Canadians in the private
sector have little or no savings in the form of RRSPs.

Third, Mr. Chevreau states that the Liberal analysis is "off base when
it declares many RRSPs have annual charges of 2% or more" adding "that
may be true for those who hold mutual funds in their RRSPs, but it’s
patently untrue for self-directed RRSPs holding individual stocks or
exchange-traded funds (ETFs)." Mr. Chevreau doesn't bother researching
what percentage of RRSPs are self-directed. Everyone in the financial
industry knows that mutual funds are the most common investments in RRSPs,
and as I stated many times before, Canadians who are able to save in
their RRSPs are getting raped on fees in their mutual fund investments.

Moreover,
only a tiny minority of investors with a self-directed RRSPs investing
individual stocks or ETFs are outperforming any of the large Canadian
defined-benefit plans over the last 10 or 15 years. And as I've stated
many times before, defined-contribution plans or PRPPs can't compete
with the large Canadian defined-benefit plans. Why? Because the latter
are able to pool billions in assets, negotiate lower fees, manage a
substantial portion of assets internally (thus lowering costs) and
invest and co-invest with the best public and private fund managers
across the world. For example, most Canadians are clueless about CPPIB's investment partners,
but I assure you that no DC plan I know of can invest in Brevan Howard,
Bridgewater, Apax, Lone Star, Texas Pacific Group or any of the other
top private funds listed on their site. This is an important
source of alpha, on top of the internally generated alpha, adding basis
points on their beta (benchmark) portfolio. Over the long-term, all that
alpha adds up, which is why CPPIB pays these managers big fees but
they're delivering meaningful alpha.

Fifth, I take issue with Mr. Vettese's following statement:

The
one problem with SRO is that it concentrates even more of the nation’s
retirement savings in government hands rather spreading risk by
involving other sources, including the private sector. As the recent
pension problems in the U.S., France or Spain (or even the Caisse de
Depot) suggest, a government-led pension solution works well until it
doesn’t.

Spreading risk across the private sector? Who are we kidding here? Yes,
most of the large Canadian public DB plans got clobbered in 2008, but many
have bounced back nicely and have implemented serious risk management
policies to manage their liquidity risk and protect their downside.
When private companies with DB plans go belly-up, their pension
obligations don't magically disappear. The government and taxpayers are
on the hook for a portion of their pension obligations. Just look at the
Nortel debacle.

That brings me to my final point. Diane Urquhart sent me the video below
and an article stating that the federal government of Canada has been stonewalling Nortel's disabled by killing Bill S-216 and Bill C-624. We have serious problems in Canada which I've already alluded to in my comments on the Canada bubble and Canada's mortgage monster,
but one thing we can all agree on (I hope) is that we have to defend
the rights of society's most vulnerable. It's morally wrong to stonewall
the demands of Nortel's disabled because the creditors don't want to be
placed behind pensioners and the disabled. Pensions and the rights of
the disabled must transcend politics. Let's do the right thing and give
these people what they rightly deserve and introduce essential changes
to the Bankruptcy and Insolvency Act to make sure this injustice never happens again. Don't worry, Big Business and Big Banks will survive.

Comments

[Zero Govt]

"Pensions and the rights of the disabled must transcend politics"

Transcend politics indeed... and presumably they must transcend economics, common sense and anything feasibly realistic too while you crusade swinging your moral compass Mr Kockupalotis? 

Nobody out here on Planet Private Enterprise is the least bit interested in yet another of your boring pension problems and snivelling moral string pulling on how the pigs are feeding at the trough and carving up other peoples money. If an ant, a bird and a whale with 1000th the IQ of a disabled person can live their lives independently without bailouts (socialism) from others then so bloody well can they.

If you are disabled stop feeling anybody owes you a cushy living. No cue jumping at pension cues, get in line like everybody else and i've had quite enough of so many fuking disabled parking places too (4 times more than necessary according to a recent survey).

What are you doing writing this crony crap here anyway Mr Kockup? Who do you think is listening to your bleating?? Society is bankrupt already don't you know because its been drained bailing out every blood sucking socialised wimp for decades leaving the real economy weak and emaciated to face a Depression. You want yet another bleeding heart cause, another charity case, to suck yet more out of a terminal ill patient that's already given his right arm, leg and spare kidney for every good cause? 

Here's a suggestion, stick your moral compass up your arse and go bleat and whimper somewhere else toady boy

[exportbank]

Most Canadians (much like Americans) exist to serve the public sector. The majority of families are less than 90-days away from the food bank (cut off all cash-flow from families for 3 months) so where is all this extra money for additional pension savings going to come from? The average taxpayer will have to scrimp and suffer to top up the municipal and provincial worker pension. Property taxes keep skyrocketing and when house prices plunge (just revert to the norm) in Canada the taxes won't go down on what will be an Albatross around the neck of the property owner. The recent Ontario budget is a joke based on fantasy instead of mathematics. That province is now fully engulfed in massive structural deficits that has destroyed what was once a financial powerhouse. The Zero Interest Rate policy has allowed politicians everywhere to go crazy and has pushed most pension plans to speculate in crap.

[falak pema]

It's time governments took a hair cut. That's obvious. It's time govts. taxed the super rich : those who own 40% of the collective wealth. It's time govts. created a safety net to keep work in their respective countries. And stopped the current mad-house of globalization feeding the crooked oligarchs of world financialization. We must elect strong, honest governments or we are toast on oligarch's plate. We deserve the quality of government we ELECT. If we don't do or have enforced DUE DILIGENCE with legal consequences for ALL elites we deserve the consequences.

[Kreditanstalt]

"The government and taxpayers are on the hook for a portion of their pension obligations."

Furthermore, a speaker in the video suggests that Nortel's long-term disability collectors are in the present predicament because Nortel chose to self-insure.  He suggested that they should have had outside insurance.

IN ANY OF THREE CASES ~ Nortel bankrupt, government paying or private insurance ~ innocent people are one way or another going to be paying for pension promises of corporations whose business they had no hand in.  This is what rankles me...

[AN0NYM0US]

Pensions and the rights of the disabled must transcend politics. Let's do the right thing and give these people what they rightly deserve and introduce essential changes to the Bankruptcy and Insolvency Act to make sure this injustice never happens again.

 Leo since when is there a moral equivalancy between "Pensions and the rights of the disabled"?

I agree that pensions should transcend politics and to that end the laws of the land should determine the place that pensioners, creditors etc take. I am not sure there was an implied government backstop for the pension benefits of employees of Nortel. I certainly didn't hear much squealing by Nortel employees as its share price went to the moon ten years ago. 

[Kreditanstalt]

Leo, you're splitting hairs and number-crunching again, missing the big picture. 

Which is: the whole system of employers paying into their employees' pensions is detrimental to economic health.  The entire scheme is doomed to collapse anyway under the weight of coming years of 2% returns.  And any plan in which payouts are not capped will be doubly doomed.

Even if the oldsters are paid out, inflation will eat them alive...

[falak pema]

I support the Leo strategy and rationale. But you do have a point there. The ability for enterprises to carry employee entitlement schemes in economic downturns is limited. But I think that the solution is flexible, collective bargaining, not just outright junking of the scheme. Getting the best mileage. In hard times. The trade-offs between capital and social stays a moot problem. It also has to do with the over-all protection mix at national level. Canada, alike all developed countries cannot compete with China/Bengladesh on price to price basis with the labour market pricing assymetry. There have to be QUALITATIVE barriers to entry of developed markets where societal/social criteria balance pure quantitative economic considerations : like ecological carbon imprint, or minimal labour input from consumer country.

[Gordon Freeman]

WTF "protections" are the taxpayers responsible for??  Fuck you!

[falak pema]

Not just tax payers, but consumers and job holders. You are not a one dimensional person although you reasons as such. I'll give you the benefit of the doubt and consider you multidimensional, economically speaking, like the rest of us. The job of governance is to balance all these identities of each of us. Not easy in complex societies. 

[Slartibartfast]

I'm a proud Canadian and long-time fiscal conservative, and the first rule of traditional Canadian progressive conservativism is 'if it ain't broke, don't fix it.' CPP works for the vast majority and improving/upgrading it is overdue. There's no rule that says just because it's a 'collective' programme doesn't mean it can't work. Do you really want the vast under-educated in personal finance to manage everything privately? Like that wouldn't be a disaster to be repeated over and over again.

Harper has to go...he's not a conservative, he's a republican. Sure I've got doubts and reservations about Liberal leader Ignatieff, but we've seen five years of Harper's 'methods'...enough is enough. Finance Minister Flaherty has always been an ideological dead-ender who just can't think outside the box.

[oddjob]

Ignatieff is carpet bagging scum.He should return to Harvard where he spent the majority of his adult life sponging a living.

[Slartibartfast]

As opposed to mailroom clerk sweater boy? The economist who's never practised? We've seen his act...time for something fresh. First Rule of Democracy: When in doubt, throw them out.

[Canucklehead]

So the plan is to "force" everyone into the CPP and then the politicians can use those funds in the same manner as Ireland did.  The evil financial industry can offload some dog investments at par to the people of Canada. 

So the Financial Industry is evil and that is why we need these grand government run solutions.  In turn these grand government run solutions will hire representatives of the evil financial industry who grease the governments' palms.  This financial bureaucracy will operate like the US FED and will provide no transparency and no recourse to their actions.

What can go wrong with that?

Why is there never any mention of the past successes of the CPP?  Surely they must have had some successful track record that could be held up as proof that collectivization of pension funds is the right way to go.

Leo... Leo... Leo... I hope you sleep well.  If you are at all knowledgeable about the pension industry your actions signal you are acting in a malicious manner.  If you haven't a clue and are simply spouting off as would a charlatan, then accept that label as the lesser of two evils.

[Leo Kolivakis]

Canucklehead wrote: "So the plan is to "force" everyone into the CPP and then the politicians can use those funds in the same manner as Ireland did."

WRONG! Please take the time to read this document, In the Crucible: The Governance Model of the Canada Pension Plan Investment Board at a Time of Global Financial Crisis. CPP Investment Board operates at arms length from the government and major changes to the CPP require the approval of all finance ministers, the federal finance minister and his provincial counterparts. Ireland's national pension fund was fraught with conflicts of interest precisely because their governance was weak and the government was able to interfere in investment decisions. All the answers to your questions are publicly available on CPPIB's Fact sheet February 2011. Please read it carefully.

[Canucklehead]

I hope you sleep well...

Leo, page 1 of your CPPIB Fact sheet states:

In 1996, the CPP paid out more in benefits (C$17 billion) than it received in contributions (C$11 billion).  An actuarial report projected the plan’s small contingency reserve would be exhausted by 2015.  A contribution rate of more than 14% would be necessary by 2030, effectively forcing future generations to fund current pension obligations.

... That statement does answer all of my questions.  Now on 15 years later, nothing has been fixed.

Leo, you are just plain evil.  In this area where you proclaim you are an expert, you cannot do anything but cut and paste.  Any challange to your mantra results in more cutting and pasting.

The point of your article is lost on the readers.  If you represent the "expert" in the pension field, it is best for the individual to stay as far away from the collectivised notion that you and your handlers are promoting.  You follow the same ethics as a pump n' dumpster.

Go line your pockets somewhere else.  Don't pick on little old ladies.

[falak pema]

Good point : I would like to see LK's response to this

[Dan The Man]

I'm a proud Canucklehead...we kick ass anywhere...but our politicians are embarrassing baffoons.

[mogul rider]

Leo don't start OK, my day isn't going well as it is.

Ok WTF!

I have moved my assets offshore to Jersey so I don't f'in care. They can tax the deaf (and will) for all I care.Communism has crept into all western politics with the politburos deliberately destroying the wealth of their people.

The politburo elites deserve their shitkicking when the zombies awaken with no money for food. Canadians will go fucking Tunis soon enough.

And when Crosby doesn't come back from his concussion then we're talking nuclear baby

No dis to the deaf

Just saying

[Coldfire]

Canadians want expanded CPP...

Yes, paid for by other Canadians.

[Leo Kolivakis]

"Yes, paid for by other Canadians."

Sorry, but that's a load of crap. People will work to get these pensions. If you fund it properly, using a realistic discount rate, it can and will work.

[infotechsailor]

"People will work to get these pensions. "

- - regardless of market performance.

no matter how much you work, just because you work for government doesn't mean you deserve a guaranteed ROI at the expense of the taxpayer. that is the load of crap.

[Gordon Freeman]

It's your "logic" that's a load of crap, you free-loading twit...

[mogul rider]

Why wouldn't welfare cases want more welfare?

just saying

[anony]

With the exception of the Dagny Taggarts and John Galts, EVERYONE wants to do as little as possible, pay for as little as they can get away with and yes, paid for by everyone else.

Franklin and others early on among the founding papas said that once peter realizes he can have paulette pay the taxes that fund his wants, needs and desires, by simply voting for it, the republican democracy fails, epically.