This page has been archived and commenting is disabled.
Canada's Biggest MEPP in Dire Straits?
Tony Van Alphen of the Toronto Star reports, Workers in big pension plan could soon face cuts in benefits:
Canada’s
biggest multi-employer pension plan says thousands of members could
soon face future benefit cuts of 15 to 50 per cent depending on
negotiations with companies.
The Canadian Commercial Workers Industry Pension Plan (CCWIPP),
with 130,000 active members, said in a recent letter to members that
companies in Ontario will need to increase their contributions by up to
40 cents an hour per worker by Sept.1 just to maintain current levels
for future benefits.
Wayne
Hanley, a senior trustee of the plan and president of the United Food
and Commercial Workers, also said Thursday that if some employers don’t
agree to negotiate adequate contributions in new contracts or in
special bargaining, the amount of future benefits could quickly plunge
by 50 per cent.
“If
there is no additional negotiated contributions as of Sept.1, then
members of the plan with that employer will go on to a benefit scale
that is up to 50 per cent of what they are accruing on a future basis,”
Hanley said in an interview.
He added the situation of continuing funding shortfalls in the plan could lead to labour unrest.
“There may be a few strikes over this,” Hanley said. “This is an important issue to the members.”
The
letter from trustees also disclosed that inactive members who have
left a contributing employer but are still eligible for a pension will
take a 40-per-cent hit on future benefits next month. However, those
inactive members over 50 years of age who would be eligible to draw a
pension now won’t be affected by the reductions.
The
plan, which has assets of more than $1.58 billion, provides benefits
to about 20,000 retired union members and their spouses. It also has
130,000 active members working at more than 300 employers and another
150,000 deferred or inactive members.
The squeeze on the plan’s finances has not affected the pensions of retirees or accrued benefits of active members.
In
the letter, the trustees said a significant recovery in 2009 hasn’t
made up for the steep decline in financial markets in the second half
of 2008.
“Assets
have shrunk while liabilities have increased, leaving large unfunded
liabilities,” the trustees’ letter added. “The CCWIPP, like all others,
did not escape the financial crisis which has affected the funding
status of the plan considerably.”
The
trustees warned members of a “benefit restructuring” a year ago but
would not comment on the possibility of any significant benefit cuts at
that time. The plan had already cut future benefits for members by 20
per cent in 2005,
In
2008, the plan posted a negative 19.6 per cent return on investment
but it turned into a 17.1-per-cent gain last year, which outpaced many
other major plans.
The
plan has not released an actuarial valuation for 2009. But at the end
of 2008, actuarial liabilities topped assets by $759.3 million on a
“going concern” basis, which underscored the plan’s difficulties.
Trustees representing the union have pushed employers to jack up their contributions to bolster the plan for more than a year.
Hanley
said some companies such as the Metro Inc. grocery store chain have
“stepped up” in bargaining to make the adequate hourly contributions to
maintain future benefit levels.
But he said it is a major issue in current bargaining for a new contract covering thousands of workers at Loblaw Cos.
Greg
Hurst, a prominent Vancouver-based pension consultant, said active
planmembers not close to retirement should be “very concerned” if
their company closes and they become a deferred or inactive member and a
potential victim of a 40-per- cent cut.
“The
impact of a decision or circumstance (which may not be in the
individual’s control) that results in termination from the plan prior
to retirement is draconian and extraordinary,” Hurst said. “If I were a
member, I would make my concerns known to the Financial Services
Commission of Ontario and my local MPP.”
A
court fined nine trustees of the plan including Hanley and founder
Cliff Evans a total of $202,500 earlier this year for spending too much
of the fund’s money on questionable investments in Caribbean hotels
and resorts.
On those "questionable investments", Mark
Zigler
and Anthony Guidon of Koskie Zigler LLP were the defence lawyers for 5
of the 9 trustees for the Canadian Commercial Workers Industry Pension
Plan,
whom the Ontario Court of Justice found guilty on December 7, 2009 of
the offence of failure to supervise the Investment Committee as was
prudent and
reasonable, as it related to the 10% limit that was to have restricted
the
plan's investment in Caribbean resorts and hotel properties, contrary to
section 22(7) of the Pension Benefits Act. Madame Justice Beverly Brown
imposed a fine of $18,000 on each defendant for a total fine of $162,000
plus victim surcharge (you can read more on this case by clicking here).
I went over the CCWIPP's 2009 Annual Report. The results were impressive, especially in public markets and hedge funds:
- The
Canadian Commercial Workers Industry Pension Plan (the “Plan”) had a
strong year in 2009, achieving an aggregate rate of return of 17.1%,
which outperformed the average Canadian pension fund return of 15.4%. - The
Plan’s investment portfolio generated investment income of $232
million, increasing its net assets to approximately $1.6 billion. - The equity component (both domestic and foreign) of the Plan’s investment portfolio realized a combined 68.3% return in 2009, which outperformed each of its respective
benchmarks
(S&P/TSX Composite and MCSI World - CAD) of 35.1% and 12.9%. As at
December 31, 2009, the Plan’s total equity allocation was valued at $657
million. - The fixed income component of the Plan’s investment
portfolio achieved a 7.5% rate of return in 2009, which outperformed its
benchmark (DEX Universe Bond Index) of 5.4%. Included in the Plan’s
fixed income investments are a series of segregated long-term bond
portfolios, collectively valued at $268 million, which are under
management by CIBC Global Asset Management. - The hedge fund component of the Plan’s investment portfolio achieved a 32.9% rate of return in 2009,
which outperformed its benchmark (HFRI Hedge Fund of Funds Index - CAD)
of negative 3.8%. The Plan invests in hedge funds in an effort to
increase diversification and generate returns, in both rising and
falling markets, that are not highly-correlated to major stock market
indices. As at December 31, 2009, the Plan’s total hedge fund allocation
was valued at $90 million. - The private equity/private debt component of the Plan’s investment portfolio achieved a negative 28.2% rate of return in 2009.
However, based on the assets held within this asset class, there is no
industry-recognized benchmark from which to draw a comparison. The
portfolio generated income of $5.3 million, which was offset by: a)
currency adjustment in the amount of $38.6 million, resulting from the
appreciation of the Canadian dollar; and, b) a negative market value
adjustment in the amount of $55.2 million, resulting from the economic
impact of the post-2008 worldwide reduction in travel on the Plan’s
hospitality-related investments. As at December 31, 2009, the Plan’s
total private equity/private debt allocation was valued at $233 million. - The real estate and loan component of the Plan’s investment portfolio realized a negative
0.8% rate of return in 2009.
As in the case of private equity/private debt, based on the assets held
within this asset class, there is no industry-recognized benchmark from
which to draw a comparison. As at December 31, 2009, the Plan’s total
real estate allocation was valued at $51 million, the largest portion of
which is comprised of the Plan’s investment in Citi Plaza
(www.citiplazalondon.com), a mixed-use commercial property located in
London, Ontario.
Weakness in 2009 was concentrated in
the private equity and private debt portfolio, which should recover in
2010. However, I'm not familiar with the funds they chose to invest in
this space, and cannot comment further on their performance and track
record.
The outperformance in hedge funds is undoubtedly related to the strategies selected.
Remember, 2009 was the year of big beta, so I'm not surprised their
hedge fund portfolio did well relative to the HFRI Fund of Funds Index.
The latter is not an appropriate benchmark if they're investing all the
assets in L/S funds or other strategies which did extremely well last year as equity markets
rallied sharply off their March lows. (Note: HFRI Fund Weighted Composite Index, HFRI Equity Hedge Index, HFRI Convertible Arbitrage Index, and HFRI Fixed Income Corporate Index returned 20%, 25%, 58% and 31% respectively in 2009. For details, click here).
But the biggest concern remains the plan's funded status:
The
Plan’s actuary, Buck Consultants, prepares an annual valuation of the
Plan’s financial position, which is filed with the Ontario regulatory
authorities (Financial Services Commission of Ontario). The most recent
valuation established a going-concern funding deficiency of $760 million
as at December 31, 2008, based on a $1.68 billion actuarial value6 of
assets and total liabilities of $2.44 billion. A going concern funding
deficiency is not uncommon for a multi-employer pension plan (MEPP),
particularly in the aftermath of the 2008 market meltdown.
The
going-concern funded status assumes the Plan continues indefinitely. The
Plan was 69% funded7 as at December 31, 2008, a decline of 12% over the
previous year, and not surprising given the financial turmoil of 2008.
The very favourable investment performance in 2009 will have a positive
impact on the financial position of the Plan.
On
a windup basis the Plan was 42% funded as of December 31, 2008, meaning
that, if the Plan had been wound up on that date, accrued benefits
would have had to be reduced significantly.
As part of the process
in dealing with the deficiency in the 2008 valuation, the Trustees
have approved a Funding Improvement Plan (FIP) designed to provide the
Plan with a more solid financial foundation. In addition, the Plan is
electing to become a Specified Ontario MEPP (SOMEPP), which allows for a
more favourable funding framework to be applied.
Hopefully
none of the companies will be closing their doors anytime soon. One
major governance concern I have is in regards to the
trustees:
The Plan is administered by a Board
of Trustees, consisting of an equal number of individuals appointed by
UFCW Canada and by the participating employers.
The
Trustees receive no personal benefit, financial gain or fee payment
from the Trust Fund for their role as fiduciaries of the Plan.
I happen to think you need some outside, independent experts (eg., an
independent professor of finance with no industry ties whatsoever or a
retired senior pension officer) to help them manage this fund. Trustees
should be paid and they should be held accountable for the decisions
they take on behalf of plan members. Most of these multi-employer plans
suffer from poor governance, leaving them exposed to corruption and
questionable decision-making.
Finally, while the funded status is a concern, the situation isn't
hopeless. It's just that they need to raise contribution rates to close
the gap and make up for the shortfall left after 2008. They're not
alone. Others are also struggling with the same issues, which bolsters
the case for an enhanced Canada Pension Plan (CPP).
»
- advertisements -
***Feedback***
Jim Murta, who publishes his thoughts on his actuarial blog, sent me this comment:
And Bernard Dussault, the former Chief Actuary of Canada, relayed his thoughts to me:
It's becoming evident that the actuarial calculations of pension plans both public and private, have been based on growth assumptions fuled by the irrational exuberance of the great ponzification. Methinks all of us will be recalculating our future incomes based on more real numbers.
My apologies, I beefed up the comment above and corrected some typos.
A common private sector pension quandary. At least all the public sector employees can still feel warm and cuddly because they know that any shortfall caused by the gamblers that roll their plans dice will be covered by the taxpayer. If I read the chart you attached it still seems to confirm that no pension plan exists anywhere that had lifetime returns that exceeded a Certificate of Deposit.
Leo, a note re your calls over the past year that equities wouldn't (appear to) crash. While almost everyone has been on your case (include me) - you've been righter than most. Certainly you've understood the political ramifications of a falling market (even if it is 99 stocks shuffled by machines) on the 6 o'clock news and that the ruling class wouldn't allow that.
exportbank,
It is in the interest of the financial oligarchs to reflate risk assets, and keep the giant Ponzi scheme going. All the HFT in the world won't change this. As long as the Fed stays on the sidelines, keep buying the dips. I am already starting to see bubbles forming...still in early stages...but they're forming.
2008: -19.6% 2009: +17.1%
That means their assets on Jan 1, 2010 were 94% of what they started 2008 with. But somehow this plan is trying to convince its members that ought to result in a 40% cut?
If they fall for this, it will demonstrate how stupid union members are. "oh no the financial crisis could cost us half our pension!" wrong, dummies, it was your inept and/or corrupt union leaders and pension managers who had been misleading you for years previously about your pension's underfunding.
Perhaps more telling is its 7-year return of 4.8%. If the fund was assuming 7%/8%/9%/10%, then it would now have only 86%/81%/76%/71% of the anticipated assets.
The strength of the Canadian dollar during this timeframe (USD 0.64 at the beginning of 2003, USD 0.96 at the beginning of 2010) has also affected returns. For example, since the beginning of 2002 I have a CAGR of 16.5% in USD--but that's only 10.4% in CAD.
CAD 10 year return 5.5%
Welcome to the depression Canuck Bitchez!
"Assets have shrunk while liabilities have increased, leaving large unfunded liabilities,” the trustees’ letter added. “The CCWIPP, like all others, did not escape the financial crisis which has affected the funding status of the plan considerably"
That's right me'lud. My income shrank whilst my over indulgent expenditures skyrocketed, leaving large unfunded liabilities. I, like others, did not escape the glutonous gratuitous consumption crisis which has affected the funding status of my personal financial situation considerably. But dont worry me'lud, my trustee credit card will take care of it.