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Time to Update Canada's Pension System!
Jody
White of Benefits Canada reports, Leech calls for pension system update:
The
failure of pension plan legislation and design to keep up with the
times is hurting the ability of Canadians to prepare for retirement,
according to the president and CEO of the Ontario Teachers’ Pension
Plan.
Jim Leech told a Toronto audience on Wednesday that the
current state of Canada’s retirement system is markedly different than
it was in 1966 when the Canada Pension Plan was made available at age
65. Life expectancy then was 72, so the gap to be bridged between the
end of a career and death was narrow.
That was then
It
is now a different world. Life expectancy for those born in 2007 is
80.7 years, according to Statistics Canada, with an additional 20 years
for those who make it to age 65. In the face of increased longevity
risk and elusive investment returns, many plan sponsors have joined the
migration to defined contribution (DC) plans in order to shift the
pension burden to the shoulders of plan members.
As a result, private sector workers are
increasingly chafing at the prospect of losing their DB plans while
their public sector counterparts enjoy a guaranteed benefit for life.
Leech cautioned that such optics are contributing to “pension envy”
which threatens to spoil the debate on pension reform.
The perception that DB plans are unaffordable to most plan sponsors is
due to two main culprits, he said. Short-sighted tax rules and court
decisions have discouraged plan sponsors from saving enough in good
times to offset losses in bad times, and “weak-kneed managements who,
out of expediency, promised unrealistic levels of future benefits in
order to dampen salary demands.”
Leech outlined the social costs of the DB to DC migration,
including the prospect of retirees outliving their savings and
ultimately costing taxpayers more in social services.
Instead
of a choice between the two plan types, Leech offers a hybrid plan as
a possible solution. He illustrated recent steps taken by British,
Dutch and Australian governments, such as raising the universal plan
to a livable pension, extending pay-as-you-go plans to all workers,
and amalgamating pension plans in order to spread out the investment
risk and lower costs.
“The Dutch also bought ongoing
sustainability by setting guaranteed pension to a career-average
compensation level, rather than a top-five-year average level, and
without indexation,” he said. “Employees can then purchase additional
credits through a DC overlay should they wish. In other words, a DB/DC
hybrid.”
Leech acknowledged
the inclination of the federal and several provincialgovernments to
allow a greater role for the private sector in pension reform, but
stressed that the current fees collected by advisors and managers
continue to be an issue.
“I think the solution is going
to come in many different ways,” he said. “But the private sector has
to address the cost issue—which is a big issue.”
His ideal outcome of the pension reform
effort would feature individual hybrid retirement accounts featuring a
guaranteed portion with a DC overlay on top of it.
“Some sort of a plan that has a 2% guarantee, so that I know if I’m
saving money every year I’m going to get 2% (returns) or better. It’s
an individual account that I can take with me everywhere I go.”
Inertia
Leech also said that the federal
government is out to lunch when it comes to the rules governing
pension plan investment laws.
He pointed out that while the
Ontario government acknowledged recommendations by the Ontario Expert
Commission on Pensions by amending the 30% maximum ownership rule for
pension plans in its latest budget, the federal government has not
indicated that similar reform is a priority.
This puts Canadian institutional investors
at a disadvantage, as foreign pension funds are able to purchase 100%
of a Canadian company while local funds cannot.
“Because of this outdated rule, we have to either bow out of the race
or construct costly, complex, time-consuming structures that eat into
our rate of return and distract our investment professionals. This is
not a theory. This is day-to-day reality that does nothing but cost
plan members and taxpayers money,” said Leech.
He called upon
the federal government to make amendments to the 30% rule a priority
in order to improve the lot of the country’s defined benefit pension
plans.
I applaud Jim Leech (as well as John Crocker of HOOPP and David Denison
of CPPIB) for taking a stance in the Canadian pensions debate. I am
not a big proponent of "hybrid" plans, preferring a universal pension
plan run by several large public pension funds with world class
governance rules, but anything is better than what we have now.
I will
go a step further and say that shifting the burden of retirement onto
individuals is simply immoral, and as Mr. Leech rightly points out, it
will end up being more costly to taxpayers in the form of social
services.
These markets are treacherous, even for the best fund
managers. It's ridiculous to think that individuals will do a better job
at handling their retirement savings than professional pension fund
managers. And yet, that's exactly what some are proposing.
As far
as the 30% rule, I agree with Mr. Leech, the federal government should
scrap as soon as possible. The CPPIB recently entered the New York
office market, purchasing a 45% stake in two prime midtown Manhattan
office towers for a combined cost of US$663-million. Some industry
watchers think this is just
the right time for such purchases:
North
America's commercial real estate market is still in pretty bad shape
overall. Chicago-based commercial real estate services firm Jones
LaSalle expects office vacancies will keep rising and rents will keep
falling across Canada and the United States through to the end of the
year. But market experts are predicting that the office market for
midtown Manhattan is already on the road to recovery.
"New York has always been one of the
first to recover," said Stephen B. Siegal, chair of global brokerage
for New York-based real estate market research firm CB Richard Ellis.
"Its market is very resilient."
"New York
is a unique case," said Dan Fasulo, managing director of commercial
property research firm Real Capital Analytics. "It is easy to say that
rates are still falling when you're looking at nation-wide averages,
but it is clear in many of the major global cities that rents and
occupancy levels have stabilized if not improved in the last three
months."
Mr. Siegal expects to see asking
rents increase dramatically for midtown office space in the coming
months.
"Once the balance of the
less-than-desirable space that in normal times is gone because it is
priced low I really believe rents will rise rapidly, aggressively," Mr.
Siegal said.
According to a recent CBRE
report, asking prices for rent in midtown fell only 4% over the last
six months, compared with a 20% drop in rents during the same period in
2009. According to CBRE, the slowing decline means average asking
rents in midtown are starting to bottom out, setting the groundwork for
an increase.
Canadian
pension funds need to be opportunistic and they need to take advantage
of deals all over the world. As long as risks are well managed,
including currency risk, then why are federal government rules
preventing them from taking full advantage of these opportunities? We
are doing ourselves a great disservice, one which will end up costing
taxpayers down the road.
Finally, on behalf of all Montreal Canadians fans, I congratulate the
Habs for their well earned
victory against the defending Stanley Cup champions, the Pittsburgh Penguins
in game 7 of an incredible series. Let 2010 be the year where we bring the Cup back to Montreal
where it belongs. Go Habs G0!
»
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Leo, love your articles, but your mind set is that of the average Canadian, who lives in LALA Land. Your living in a bubble, literally (especially real estate). Its soon going to burst. Best of Luck amigo. Hope you own some gold and farmland.
This never-ending series of the travails of Canada's pension regime (let's be honest here, there is no Canadian pension system, only a series of convoluted provincial systems) reminds me of the time we had a visitor from Canada in our New York offices, and he presented his card to all of us and then wondered why 20 people were smiling and laughing at him. So he asked me, and I told him (his card read "John Smith, MBA"), "John, we all have MBA's. It is the ticket you need to get in the door."
OK, Leo. We get it. The Canadian pension system(s) is (are) broken. The pension systems in pretty much the whole world are broken. I think about it every new valuation, when I wonder what actuarial surprises the Continuous Mortality Investigation have for me. This time around they have drawn the mortaility improvement line (yes, they literally drew it) to show me that someone born today might have a good chance to live to 160 years old. And then I pick up any one of the UK newspapers /tabloids and see article after article telling people that evil persons like me are trying to take away their "good pensions" and leave them with only shitty pensions.
And then I dream that like Augusto Pinochet, the assholes in the 50s, 60s and 70s who thought there was a free lunch to be had in making open ended promises of future security to workers in lieu of current cash should be hauled in front of some tribunal to answer for their crimes.
Full disclosure: I have a Master's in Economics, not an MBA. I am also not a CFA (do not have the patience to pass those exams over three years). So that means my card just reads Leo Kolivakis.
Yes, diversify, into higher risk equity markets . The more volatile the better. I'm smelliing a shill. Most pension funds are going to be wiped out over the next 2 to 5 years anyway, so good luck to seniors and their endeavors to grow their own food or pick through the garbage for suitable sustinence.
So you don't think it's a good time to buy Manhattan commercial real estate?
Caution: when going down a hill in a wheelchair, don't roll into a crocodile's mouth.
What is that suppose to mean?