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No Surgery Needed?
Timothy Inklebarger of Pension & Investments reports, Proposals target Canadian corporate plan funding:
Canadian
corporate pension plans will be able to negotiate funding arrangements
with participants and retirees when restructuring their plans as part
of the proposals announced Tuesday by Canadian Finance Minister Jim
Flaherty.
The proposals would amend the 1985 Pension Benefits
Standards Regulations, according to a news release from the Canada
Department of Finance.
Among the proposals were the following:
•
allow plan sponsors to secure letters of credit in lieu of making
funding payments to the pension fund, up to a limit of 15% of plan
assets;• require corporate plans to be fully funded before being terminated; and
• void any amendments to a pension plan that would reduce the plan’s solvency to below 85%.
The proposed changes are a federal initiative and would not apply to provincially regulated pension plans.
“These
changes will help pension plan sponsors to better manage their funding
obligations while providing additional protection to plan members and
retirees,” Mr. Flaherty said in the release.
Annette Robertson, spokeswoman for the Finance Ministry, could not be reached for further details.
Following a 30-day public comment period, the proposals will go to the government for further consideration.
I discussed these proposals with some contacts and here is what they shared with me:
This
is just a reprise of the announcements made earlier in the year – now
with regulations in place. None of the govt’s pronouncements in any form
give solace to the Nortel pensioners nor to anyone like them. The only
impact is in preventing pension fund deficiencies in the future by
strengthening the rules – yet they still don’t prohibit contribution
holidays and risky investments – which as you have said are the main
causes of fund deficiencies – even in good economic times and a major
disaster in bad economic times.
That is correct...it only applies to federally
regulated pension plans (banks, Air Canada, Bell
Canada...<10%)....and I am not sure it buys them much either...
clearly our current government still plans no pension reform of any
substance, see today's article by the government's mouth-piece on the
subject, Jack Mintz entitled
I read Jack Mintz's editorial below (bold comments are mine):
Facts
keep getting in the way of those who push for big changes to our
retirement income system. Most Canadians have sufficient replacement
income in retirement years and have generally paid down most of their
debt by 65 years of age. (Really? Then why is pension poverty growing and the Bank of Canada sounding the alarm on our growing debt?)
Canadian
household net wealth per dollar of income has already surpassed the
earlier 2000 peak and is approaching 2007 levels. Unlike the U.S.,
Canadians have experienced no decline in housing equity, which is now
close to $1.9-trillion. (Ah yes, the great Canadian housing boom. We're due for a major correction, especially in some of the frothier markets)
Housing
wealth is as large as all the combined assets held in pension plans,
RRSPs and CPP/QPP, although, as most Canadians know, downsizing or
reverse mortgages have no tax consequences, unlike pension and RRSP
withdrawals, which are fully taxed. On top of this, Canadians have more
than $2-trillion in net financial and business assets that are not
sheltered from tax. Modest and middle-income Canadians hold many of
these assets, not just the rich. (Along with reverse home mortgage growth come increased opportunities for fraud and scams)
As
recent research confirms, almost 90% of Canadians have managed their
affairs quite well, taking all the assets into account. On average,
most middle-income Canadians have at least 60% replacement income at
retirement. While some modest-income Canadians may not be saving
enough, others save more than they need in their retirement years. (Which recent research are you referring to Jack? Last I checked, the number of Canadian seniors living in poverty soared by 25%)
And,
Canada has done a good job in protecting the elderly from poverty.
Even with the recent uptick in poverty, with a loss in financial income
— which is a concern — Canada’s poverty rate is one of the world’s
lowest. With Old Age Security, the Guaranteed Income Supplement, CPP,
medicare, provincial support programs and tax breaks for the elderly,
most low-income Canadians maintain their consumption after retirement.
Focus instead should be directed where poverty rates are highest, such
as single-parent working families.
Some proponents of pension
reform argue that Canadians will earn poorer returns in the future than
in the past. Actually, returns on investment, once adjusted for
inflation, were quite poor in the 1970s and in the past decade. Those
with defined contribution plans or RRSPs would find a large variation
in retirement incomes depending on their years of investment, which is
why plans with at least minimum guarantees are less risky.
The
average annual return on assets has been 5.5%, which is just as likely
to be the case in the coming decades as in the past. The system is
performing well — we certainly don’t need major surgery. (How
do you conclude 5.5% is "just as likely" when US 10-year bond yields
are 3.5% -- and this after a huge recent spike in yields?!? We'll be
lucky to see anything close to 5.5% in the coming decades, even with
emerging markets leading the way).
Some nips and tucks
could help, though, to remove regulatory and tax barriers that
undermine the efficiency of retirement income markets. For example,
smaller and medium-size businesses have difficulty pooling resources in
multi-employer pension funds, since only the employer or a union
sponsor such plans. Broadening sponsorship to include financial
institutions could make it easier to develop cost-efficient
multi-employer plans. (MEPPs are full of governance issues -- just look at the problems that Canada's largest MEPP is going through. But instead of broadening sponsorship, let's just give the assets to public pension funds).
Then
there’s discrimination against the use of group RRSPs. At present,
employer contributions to registered pension funds reduce the payroll
tax base for calculating CPP, QPP, Employment Insurance and workers’
compensation payments. But this is not the case for group RRSPs, which
can be a cost-efficient mechanism to provide retirement income to
workers (and a flexible plan for employees who change jobs frequently).
(RRSPs stink! Most Canadians are better off having their retirement money managed by public pension plans!)
The
decline in defined-benefit arrangements in the private sector is also a
concern since these options enable individuals to pool risks optimally
with employers or financial institutions. Unlike defined-contribution
plans and RRSPs, defined-benefit plans and annuities allow Canadians to
share longevity risk by pooling across the population. Defined-benefit
arrangements also enable many workers to know better their income at
time of retirement, since employers or financial institutions absorb a
significant share of the risk.
In the past, both regulatory and
legal obstacles have made it more difficult for employers to offer
defined-benefit arrangements. Some employers prefer to keep
defined-benefit plans for workers as a competitive edge in labour
markets.
Recently, federal and provincial governments have improved the
treatment of defined-benefit plans, such as enabling greater surpluses
to be generated in the good years to offset declines in bad years.
However, more still needs to be done, such as dealing with an
inappropriate sharing of risks and surpluses in face of partial
windups.
And those on disability insurance need to be assured that
employers facing bankruptcy cannot have access to trust funds that are
meant to cover their benefit payments. (Yes, the disabled always get screwed. Just listen to this interview with Jackie Bodie, a disabled Nortel employee who lost her LTD benefits)
This
leaves whether CPP should be expanded. The Canadian Labour Congress
proposes the doubling of the current earnings limit of $47,200 in seven
years’ time, resulting in an estimated sharp hike in payroll taxes
from 4.95% to 7.95% each for employees and employers (almost a 60%
increase).
The virtue of the CPP is that contributions are pooled
to reduce both investment and longevity risks, which for some workers
is the only defined-benefit arrangement available to them. CPP pools
risks best since it is a mandatory savings plan, forcing all Canadian
workers to save more or reduce holdings of other assets.
Nonetheless,
a CPP expansion has consequences. Some young Canadians prefer to put
their money in a home, business or other financial assets rather than
the CPP. Small businesses will find it more costly to hire workers. As
an anti-poverty measure, CPP is less effective than the Guaranteed
Income Supplement, since the latter is available to all seniors,
whether they have worked sufficient years in the past or not.
More
important, a CPP expansion could result in a large transfer of wealth
from workers to retirees. For this reason, governments are considering a
fully funded CPP expansion to avoid inter-generational transfers — a
hard sale since payroll taxes would rise before benefits would be
received.
Some modest increase in CPP to provide more
defined-benefit arrangements makes some sense. However, bringing in
higher payroll taxes at a time when the Canadian economy is on the
rocks is rather bad timing. (Businesses
will ultimately be better off if we expand CPP! In fact, all businesses
should worry about business, not pensions. Let public and private
pension fund managers worry about pensions)
When
federal, provincial and territorial ministers of finance meet just
before the holidays, they should first focus on low-hanging fruit, such
as regulatory changes, and put off CPP expansion until the economy is
in better shape.
Bernard Dussault, former Chief Actuary of Canada had these comments to share:
There is no new issue with the CPP.
It had big ones that were addressed through the 1998 reform. Its
partly funded status is due to the insufficient contributions made from
1966 to 1996 and to granting full accrued benefits after only 10 years
of contributions to the original (1866) cohorts of contributors, which
gave rise to a huge deficit, too huge to ever be amortized. Therefore ,
our children, grand children, grand-grand children and so on will have
to pay 9.9% (half paid by employer) rather than 5.5%. Pure case on
intergenerational inequity.The CPP is not a target benefit plan and not meant to be one.
The decreased in future benefits in 1998 (the then current pensioners
were not affected) was one good mean to correct errors (re:
insufficient contributions) of the past. Real target plans do not allow
known insufficient contributions. In 1966, it was clearly reported
that the CPP 3.6% contribution rate was insufficient. It was a
political decision to go ahead with the 3.6% and leave the problems to
future generations.
Finally, Canadian policymakers should look at Australia who just announced reforms to their pension system, attacking fund fees:
Australia unveiled reforms to its A$1.3 trillion ($1.28 trillion) pension funds industry on Thursday, aiming to tackle high management fees in a move that could trigger consolidation in the sector. The The long-anticipated reforms are expected to force smaller funds to "The
Canadians
government, responding to a recent review of the huge but often
inefficient pensions industry, said it would introduce a simple,
low-fee investment product and also force funds to modernise
back-office systems to further reduce costs.
merge and trigger industry consolidation: the government estimates the
measures will rip A$2.7 billion in fees out of the industry every year
over the long term.
government is acting to reduce the unnecessary fees and charges on
working Australians retirement savings, and to remove barriers to a low
cost and efficient superannuation system, Assistant Treasurer Bill
Shorten said in a statement.
are getting raped by fees. We have some of the highest management
expense ratios (MERs) in the developed world. It's a farce, especially
since most of these mutual funds underperform market indexes. All the
more reason to expand CPP!
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I don't know how younger Canadians view the Boomers, but down here in the land of milk and honey there are plenty of young adults who would push the wheelchairs into the oven and say good riddance. If you think they are going to work harder and sacrifice to save those under-funded pensions, better think again.
Funny thing is nobody managing CPP has mentioned if the unfunded liabilities they have currently in Canada are going to be met. Last anyone of us heard any numbers coming from CPP was around 2006 and 2007.
In literally two weeks Leo, starting Jan 1st, 1000 people a week will be retiring in Canada. 1000 people, per week, for year one. It's 2700 per week in 2012. 3000 per week in 2013 That's around 300,000 people in a three year span. Throw in the 1.6 million on CPP currently, we're talking 10% of our population, 23% of the adult population.
Our demographics nor economy can sustain it. CPP be damned and the mutual fund following dipshits, this is beyond silly now even discussing the numbers because they are unfunded AND nobody seems to actually pay attention to the fact Canada doesnt have any real businesses, Nortel was the last gasp. This game is over. What should be happening is pamphlets should be handed out for the option of physician assisted suicide, the new freedom 55 plan that allows insurance policies to be cashed in by remaining spouses.
I know it sounds macabre. But to be blunt, it's that or end up shitting yourself in a home barely grasping that underwear goes under the pants eventually. Other than whining about your due on the backs of others, how about starting to look at scraping the barnicles off the ship instead of making plans to add more. Everyone in the nortel crowd, or any of those that have had pensions go tits up on them started life with the exact same chances. In terms of things like fiat currency and investing in a rigged game, the odds were 50-50 to begin with.
So you lost, do yourself a favor and teach your kids to honour their arrangements and committments, neither you or I are getting a thin red dime from anyone. Know why? Nobody cares...at all, couldn't give a fiddlers fuck. Want to make yourself heard? You know what works and it's not a long winded letter on a financial blog or an OP ed piece.
If you aren't getting paid and by proxy fed or housed by someone else's bad business management and piss poor planning. PLUS you know those bad decisions will kill a lot of people, yet nothing gets done on a federal, provincial or, HA, municipal level. What options do you have left Leo. I know you can figure it out.
CPP is a PARTIALLY FUNDED plan, not a fully funded plan. Learn the difference! And as the former Chief Actuary said, it is fine! The same views are echoed officially by the current Chief Actuary of Canada.
And that is the problem in itself. Partly funded or fully funded, what difference does it make if the outcome is zero?
Pretending to extend a system that wasn't well architected to begin with around ponzi mathematics isn't a good thing. the fact is the failure of it isn't an "if" it's a "when". All I'm seeing in the headlines is the equivalent of religious fiscal whackjobs pissing in the wind when it comes to the absolute failure of a poorly planned ponzi scheme.
The problem isn't the fact it's partly funded or fully funded, it's the fact it exists when it should have never existed in the first place. And the fact the placed politicos tell you it's fine, then not release any numbers to illustrate anything of the sort. I call bullshit on that...total hegemonic bullshit.
Canadians are so fucking dumb, swallow every load that our government offers like a second tier autistic porn star. However you keep believing it's a necessary part of the Canadian lifestyle, I'll work on other things in the meanwhile. Don't be surprised when the promise made turn to ashes and the money collected goes to someone other than you or me. Five bucks they do exactly the same thing with the pensions as (un)Employment insurance, they slush it to capitalize on some political horseshit and turn around a year later an accounce new regulations on how pensions can be collected. And much like EI make it easier to get toothpaste back into the tube than to collect your pension.
Won't be the first time and certainly be the last the public will be sold up the river in Canada. Besides, what does it matter about a group of employees that didn't hedge their bets for a company that ran about third in the world of telecom equipment manufacturing. Then instead of getting paid in MONEY, they took stock, of other crummy companies which all employees/investors were VERY aware of. It's not like it was a secret that they did this. Infact they (investors and the company) boasted about it at stockholder meetings. Remember that? The few of us that understood it was a dumb fuckin idea ran and cashed out while being called stupid and reactionary. Remember that?
Who gives a fuck about Nortel and it's "pensions". They were no more of a pension than a piggy bank is a financial institution. SUre I'm sorry there are people that are sick and need those pensions, but they were just as guility of the company actions being shareholders as the company was so you can leave out the pity poor tom routine.