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Canada's New Public Option?
Submitted by Leo Kolivakis, publisher of Pension Pulse.
Frank
Swedlove, President of the Canadian Life and Health Insurance
Association, wrote an editorial for the National Post stating that a new government pension plan is not necessary:
The
financial crisis has elicited much hand-wringing and introspection
about the need for a drastic overhaul of Canada's pension system.
Canadians are increasingly concerned about their retirement income
security. In addition to declining membership in defined benefit (DB)
pension plans, these concerns have been dramatically heightened by
market downturns that began last year -- with the result that we now
hear calls from some quarters for government-sponsored defined
contribution (DC) pension plans. To answer those calls with such plans
would be a mistake.
Governments are quite rightly asking how
to ensure that the retirement savings of Canadians grow, are secure and
will generate adequate income when needed. Canada's life and health
insurers welcome this interest.
This emphasis on retirement
planning is a positive development and the life and health insurance
industry has supported recent government reviews of the pension system
and continues to work with governments to find solutions. Proposals
from governments, think tanks and the private sector should all be
considered.
What, then, will encourage more Canadians to save
for their retirement and encourage their employers to assist them and
offer pension security?
First, we need to recognize that both
the public and private sectors have already done a great deal to
contribute substantially to supporting Canadians in retirement.
The
publicly-funded Old Age Security (OAS) program and the CPP offer
important forms of basic assistance. Given recent funding reforms, the
CPP is recognized around the world as a successful universal DB plan.
But OAS and CPP are not intended to be the only sources of retirement
income for Canadians.
Privately-run RRSPs, including group
plans, supplement public plans through a wide range of offerings
tailored to meet the needs of individuals and their employers. Such
plans are a reasonable and cost-effective alternative for some
employers who wish to help their employees save for the future.
And then there are DC and DB pension plans that are an integral part of the retirement income for many Canadians.
As
service providers to over 70% of the pension plans in Canada, and an
even larger share of employer-sponsored group RRSPs, Canada's life and
health insurance companies expertly manage the retirement plans of many
Canadians. We see some simple ways to encourage pension participation,
provide more predictable retirement incomes and reduce costs to
consumers.
Governments can encourage much greater
participation in pension plans by streamlining and simplifying pension
rules. Rather than building something brand new, legislative changes
could use existing private-sector infrastructure to expand options.
For
example, multi-employer pension plans are currently available to some
Canadians, typically those in construction trades, where individual
tradespeople may work for many employers over the course of a year.
Pension contributions are made by each employer to a single plan, based
on the number of hours worked.
Building
on this model, multi-employer plans could be offered to all Canadians
by eliminating current legislative requirements for an employment
relationship between the sponsor and the members. In effect, any
employer, and even the self-employed, could participate in a
large-scale plan that would provide professional management and
increase economies of scale.
Permitting default enrolment into
a plan, perhaps at reduced contribution levels for new employees, would
increase levels of earlier participation in a cost-effective way. And
allowing automatic increases in contribution rates based on age, tenure
or seniority would gradually move employees to more robust savings
levels.
Similarly, since pensions are currently regulated at
both federal and provincial levels, harmonization of pension laws could
significantly reduce compliance costs that erode investment returns.
Secondly,
Canada's life insurers already offer guaranteed retirement income
products that allow individuals to securely shift from asset
accumulation into the retirement payout phase. Newer insurance products
build on this secure foundation, providing potential market growth
while guaranteeing a base level of income. In effect, they combine the
income security of traditional DB pensions with the predictable costs
of DC plans.
While some of the proposed government-sponsored
DC plans have similar characteristics to the expanded multi-employer
plans, establishing new government-run pension plans introduces a
number of potential disadvantages. One is that it creates a monopoly
with the consequential lack of flexibility and innovation.
Second
is an expectation by taxpayers that such plans would guarantee
retirement income levels, rather than simply invest funds, which could
have dire fiscal consequences in the future. Finally, such an
arrangement duplicates the infrastructure that the private sector
already has in place.
Canada's pension system can work even
better with some minor but key adjustments to existing legislation. A
massive redesign involving government sponsorship that could introduce
new risks to the public purse is simply not required.
It
was only a matter of time before the insurance industry got out to
peddle its "private sector solution" to fixing the pension problem. But
as I have written before, the insurance industry's pension fix is really no solution at all because it leaves far too many Canadians without an adequate retirement income.
When
it comes to the pension pie, the insurance industry wants a big piece
of the action. Notice how the editorial sounds a lot like those
fear-mongering campaigns from U.S. health insurance companies, warning
us of the "dire fiscal consequences in the future". The only thing
missing was "we don't want a public option for pensions".
The
Canadian insurance industry is out to protect its profits. They charge
huge fees for those multi-employer plans they manage. They know that
they can't compete with a well-governed public pension plan, just like
U.S. health insurance companies can't compete with a well-run
government healthcare plan.
Of course, the key in all this is
good governance, something which wasn't even mentioned in the latest
pension reforms. Kathryn May of the Ottawa Citizen reports that more than 500 on federal payroll top $200K:
The
Harper government shelled out salaries and bonuses exceeding $200,000
to more than 500 federal employees last year, according to newly
released documents.The largest number of federal workers in a
single department who topped the $200,000 mark are at National Defence,
where about 160 military personnel earned salaries in that range or
higher. That includes the military’s top brass, but 37 are of the top
wage-earners are dentists and 108 are doctors.
Defence
officials say the forces have to pay such salaries to attract medical
specialists from the private sector. In recent years, it also offered
signing bonuses to new medical recruits. The military doesn’t pay
bonuses.
The list of the country’s top-paid bureaucrats and
political appointees was tabled in the House of Commons this week in
response to an order paper question by the NDP.
They include
about 160 deputy ministers, associate deputy ministers, agents of
Parliament, and heads of agencies commissions and tribunals. The
appointments to these top jobs are political or governor-in-council
appointments overseen by the Privy Council Office.
There are four
levels of deputy ministers and all make more than $200,000. Last year,
they ranged from about $208,000 to a $300,400 for most senior deputies
— who can also earn up to 39 per cent of their salaries in performance
pay and bonuses.
The size of the executive cadre in the
government has grown steadily over the past decade and so have the
number of assistant deputy ministers whose salaries have cracked
$200,000. Treasury Board reported that among the government’s 5,400
executives about 69 EX-5s made an average of $214,000 last year —
compared to 14 three years earlier. Salaries are in the $186,000 range,
plus up to 25 per cent in bonuses.
The RCMP and Canadian Security
Intelligence Agency reported that only RCMP Commissioner William
Elliott and former CSIS director Jim Judd made salaries over $200,000,
but noted that didn’t include staff who made overtime.
After Defence, the next largest single cluster of $200,000-plus wage earners were at the Public Sector Pension Investment Board,
the arms-length corporation that lost $9.5 billion last year managing
the pensions of Canada’s bureaucrats, military and RCMP. Its president
and CEO, Gordon Fyfe, earned the biggest payout of $1.2 million in
salary and bonuses.
Its executives can earn bonuses between 95
per cent and 180 per cent of their salaries. The top six executives,
whose bonuses were reported, collected about $3.8 million in annual and
deferred bonuses.
The PSPIB was warned by some MPs on a finance
committee in April against paying bonuses in a recession and with such
lagging performance. The board of directors determines executive pay.
However,
PSPIB officials said executives received no bonuses for last year’s
fund performance. They did, however, receive bonuses for the “personal
objectives” they met in 2009, as well as for the fund’s performance
between 2004-2007 which had been deferred as a “retention” tool to
ensure executives stayed on.
The CBC reported 22 of its
executives — whose salaries ranged from $125,000 to $375,000 — to the
$200,000-plus list. The Business Development Bank reported eight of its
executives topped $200,000. There were also seven at Canada Housing and
Mortgage Corporation; seven at the Export Development Corporation; five
at the Bank of Canada; three at the Royal Canadian Mint and five at VIA
Rail.
The salaries for Crown corporation executives vary from
$134,700 to a range of $410,000 to $482,40 for Canada Post president
Moya Greene.
The government’s executive pay is determined by a
special advisory committee, led by Carol Stephenson, dean of the
Richard Ivey School of Business at University of Western Ontario. The
committee studies the market and recommends salary, performance pay and
bonus packages for all executives, deputy ministers, other
governor-in-council appointees and CEOs of Crown corporations.
With
the recession, the advisory committee recommended executives face the
same wage controls as other public servants this year and performance
pay remain at least year’s levels.
The Harper government’s
Expenditure Restraint Act forced wage controls on most federal workers
in departments and agencies to try and rein in spending. It gave
executives the same wage package it imposed on unionized employees: 2.3
per cent in 2008 and 1.5 per cent in each of the next three years.
The
restraint act, however, doesn’t apply to some Crown corporations,
including larger ones like VIA Rail, the Mint and Canada Post.
PSP Investments lost 23% in FY2009,
underperforming its policy portfolio by a staggering 5.1% and they
still managed to dole out $3.8 million in annual and deferred bonuses
to "retain" their top executives. Doesn't Wall Street come up with the
same silly arguments?
And it's not just PSP Investments. With
the sole exception of the Caisse, all the major public pension plans
doled out big bonuses last year despite disastrous results. CPPIB's
senior managers were smiling all the way to the bank after they lost 19% in FY2009.
I
can just hear them now: "Stop being so coy, Leo, you know the rules of
the game". More like I know all the games most large public pension
funds play with their private market benchmarks so they can get away
with big (bogus) bonuses at the end of the year.
The Ontario Municipal Employees Retirement System (OMERS) recently announced it's reducing its reliance on external GPs:
The
CAN$43bn (€27.4bn) pension fund has decided to move away from
externally managed funds and into direct private equity investing, with
the goal of shifting its private equity portfolio from 80 per cent
direct investments from the current 35 per cent, according to reports.The
pension’s goal is to reduce externally managed investments to 20 per
cent of its portfolio. Currently, OMERS’ private equity portfolio is 65
per cent invested through fund managers and 35 per cent through direct
investments. The fund reportedly has a target of ten per cent
allocation to private equity.The
fund has expanded its global reach over the past year by opening
offices in London and New York. At the time of opening the London
office, OMERS president and CEO Michael Nobrega said that the fund’s
“long-term goal is to invest 42.5 per cent of our net investment assets
in private markets on a global basis.” OMERS has $5bn of capital
interests in real estate and infrastructure assets in the UK.OMERS
provides retirement benefits to 380,000 members on behalf of over 900
different employers in the province of Ontario, Canada.
So
OMERS has a long-term goal of investing 42.5% of its net investments in
private markets and it want to shift its private equity portfolio to
80% direct investments from the current 35%.
I have already written on why OMERS is betting big on private markets. Sounds like Mr. Nobrega wants to pull off another Borealis Infrastructure,
spining off the private equity group to make a killing in the process.
You got to wonder why is he placing so much of the focus on private
markets?
Also, if infrastructure investments are so hot, why did Ontario Teachers', the second-largest
investor in Macquarie Infrastructure Group, sell its stake ahead of the
global toll road operator's expected move to sever its relationship with investment banking parent Macquarie Group:
According
to a number of traders who did not want to be named, the 244.7 million
securities in MIG representing 10.8 per cent of its issued capital --
crossed on the Australian stock exchange before trading began yesterday
-- were sold by Canada's Ontario Teachers Pension Plan Board.
Canada's
largest private pension fund, with over $C87 billion ($90bn) in assets
at December 2008, OTPP held an 11.7 per cent stake in MIG at June 30,
behind only Macquarie's 17.3 per cent stake on the register.
The
stake was being offered to institutional investors at a floor price of
$1.40 a security through an institutional bookbuild handled by
JPMorgan, the traders said.
Securities in MIG were down 11c to
$1.43 yesterday. The planned sale by OTPP comes as MIG mulls a split of
its toll roads into two separate listed entities with different
leverage and growth profiles and also considers severing its management
agreement with Macquarie in an effort to make the group more palatable
to investors and boost security-holder value.
The proposed
split, which many market watchers expect to be revealed at MIG's annual
meeting on October 30, follows a review that has stretched over a
number of months as the group has grappled with debt of around $30
billion across a portfolio including some highly leveraged and poorly
performing road assets that are concentrated in Europe and North
America.
A move to internalise management at MIG would follow
a similar move completed last week by global airport fund MAp and would
be the latest step by Macquarie to distance itself from a listed funds
model as it instead focuses on growing its global investment banking
operations.
However, MAp endured much shareholder criticism
and even legal challenges from investors concerned over the generosity
of the $345m its independent directors agreed to pay to Macquarie in
lieu of the bank receiving ongoing management and performance fees from
the fund, and traders said this could have contributed to the decision
by OTPP.
"I don't think that Ontario Teachers were
particularly enthusiastic about the fee that is going to have to be
paid to Macquarie if they do go down the path to internalise
management, so I believe that may be a sticking point," said Justin
Gallagher, head of Sydney sales trading at RBS.
OTPP has been
a major investor in listed Australian infrastructure companies. It is
also the third-largest shareholder in MIG's rival toll road group,
Transurban, in which it has a 12.2 per cent stake valued at $700m, and
last month sought to increase its stake in Bristol airport to 50 per
cent after agreeing to buy 35.5 per cent of the British gateway from
MAp for pound stg. 128m ($230m).
Mr Gallagher said the strength of the Australian dollar was probably also a factor in OTPP's decision
The
strength of the Australian dollar was a factor behind the unwinding of
a major "long-term" asset? It sounds to me like Ontario Teachers' lost
lots of money on that deal, providing more evidence that when it comes
to private markets, they too are flying off course.
So
given all these spurious investments in private markets by public
pension funds, why am I still arguing for a public option for pensions?
Because, it's the only viable long-term solution to the pension crisis.
But to make this work, we need to address the serious governance gaps
that still plague our public pension plans. Ignoring them will only
lead to more abuse in the compensation that is being doled out to
senior pension executives who by and large are delivering mediocre
results.
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"The majority of people are still in the "when we get back to normal" mode but fail to look at the huge pile of debt that isn't being addressed by governments anywhere."
As Sprott showed in the document that TD posted a couple days ago, it won't matter what kind of entitlements and government-funded benefits the public wants them to provide, if the government won't be able to pay for it. While I don't think Canada has the $140 trillion in combined debt/unfunded obligations that the US has, this can end up being a real problem when the bubble pops, if the d+uf obligations to population ratio is the same.
Anyone who thinks Social Security, Medicare (or other government-funded healthcare systems), pensions, etc. can be paid for in perpetuity while collossal debt and funding obligations are in place, without making that country an economic vassal, is living in Fantasyland.
Just what we need - another level of fees. Pensions (or lack thereof) coupled with health care costs are a much larger problem than the public realises. Insurance companies need to get their hands on more cash-flow to offset the junk sitting in their "black-boxes of assets".
The majority of people are still in the "when we get back to normal" mode but fail to look at the huge pile of debt that isn't being addressed by governments anywhere. Canada hasn't had the massive real estate correction yet and house prices there have doubled over the past 9-years as well while income has stagnated (of course, that doesn't hold true for the public sector).
Bloomberg reports that U.S. public pension funds lost $600 billion last year:
Assets of the 100 largest public retirement systems, accounting for 89 percent of public pension activity, fell to $2.2 trillion, the lowest in five years, the Census Bureau said.
Why do I get this sick feeling in my gut that there won't be enough money in the pot to secure a good pension for everyone in the future? No matter what we do, can anyone guarantee future growth that is comparable to the past couple of decades? And if that fails to materialize, the only option I see is more payouts and less benefits, and that burden will be placed on the workforce that is already struggling to make do with less. We don't need to be encouraged to save. We need wages that will keep up with the real cost of inflation so our savings won't erode away over time.