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What Canadian Pension Crisis?

Submitted by Leo Kolivakis, publisher of Pension Pulse.
David Olive of the Toronto Star writes Pension crisis? Not so fast:
With
its bankruptcy in January, putting in question the pension and
disability benefits of thousands of its former employees, Nortel
Networks Corp. has become an international poster child for pain
inflicted on the most innocent victims of corporate bankruptcy.
Nortel
retirees, employees on long-term disability and former employees staged
a protest at Queen's Park last week that garnered wide attention.
Elderly people in walkers and wheelchairs were in the front row. A Toronto Star photo
elicited this response from a North Carolina blogger who covers the
tech firms of Research Triangle Park, where Nortel for decades had a
huge presence:
"Please, please, please, check out this Web link
to one of the most compelling, heart-wrenching photographs I have seen
in many moons," Rick Smith, editor of the Local Tech Wire, wrote of
Vince Talotta's photo.
"Then read the story about former Nortel
chief executive officer Mike Zafirovski filing a claim for more than
$12 million (U.S.) in bankruptcy court. Doesn't that picture in the Toronto Star rip your heart? Do you feel any outrage?"
Yet,
it's perhaps too easy to grieve over the fate of Nortel and make the
leap that all or most Canadians are at risk of a lost retirement.
Canada
actually has one of the best retirement systems in the world. This
country is essentially tied with the Netherlands, Australia and Sweden
for pensioner protection, as measured by adequacy of funding, long-term
sustainability of payouts, and integrity in management in the Melbourne
Mercer global pension index released Thursday. The survey of 11
industrialized nations was conducted by Mercer, one of the leading
world corporate benefits consultants, and the Melbourne Centre for
Financial Studies.
In the United States, the trust funds for
Social Security will, by the most recent government calculation, be
exhausted in 2037. Medicare, the U.S. health-assistance program for
seniors, is expected to go broke even sooner, in 2017. According to
AARP, the leading U.S. seniors' lobby, Americans older than 55 are the
group most likely to declare bankruptcy. AARP finds that more than half
of Americans 50 and older who carry debt spend most of their monthly
income paying it down.
In contrast to
the worrisome condition of Social Security, at the current Canadian
Pension Plan contribution rate of 9.9 per cent, the CPP is sustainable
for at least 75 years.
Indeed, combining CPP and employer pension
plans, plus Canadians' prudence in building their personal retirement
nest eggs, "Canadians live in a promised land," John MacNaughton,
founding CEO of the Canada Pension Plan Investment Board wrote recently
in the Literary Review of Canada.
McNaughton was
reviewing author Bruce Little's new book on the remarkable process by
which the CPP was reformed in the mid-1990s. Remarkable because Ottawa
and the provinces worked together with unusual urgency and harmony to
reform a system headed for insolvency.
Today,
the Organization for Economic Cooperation and Development (OECD) and
the World Bank identify Canada as one of only seven nations in which
retirement assets – in government, employer and individual hands –
exceed 100 per cent of GDP.
Following those mid-1990s reforms,
Canada's chief actuary is now required to assess the efficacy of the
CPP and report publicly every three years – more often if the feds
increase benefits or make other changes. Which makes Canada the only
country with a fail-safe mechanism to promptly identify long-distant
shortfalls and make adjustments now to prevent them.
In Ontario
alone there are more than 7,500 registered pension plans, covering more
than two million plan members. It's true that across Canada, there are
some eight million people in the workforce without an employer pension
plan or a registered retirement plan. What we don't know is how many of
those eight million people are in financial distress or at risk of it.
Beginning
in the 1990s, many employers seeking to shed their pension obligations
made it attractive, through lump-sum payments, for employees to set up
their own retirement plans. That such people have fallen from the rolls
of employer pension plans hardly means they all face destitution in old
age. Indeed, many have managed their money better than the professional
money managers to whom their employers had outsourced their
pension-plan management.
There's no denying, given the recent
recession and the stock-market swoon, that ordinary Canadians have had
reason lately for concern about their retirement nest eggs. But housing
values that slumped in the recession already are recovering. And the
stock market bottomed out in March and has since made a rather
astonishing 43-per-cent recovery from its nadir.
Share values
will continue to rise, since the epic market collapse was a one-time
event triggered by a not-unreasonable panic that the world's financial
system was about to collapse. Once it became clear that world
governments would not let that happen, corporate share values began
returning to levels that reflect their true value.
To
declaim on a pension "crisis" in Canada is an alarmist approach that
needlessly scares the wits out of fixed-income retirees and gets in the
way of sensible refinements to the system that are needed. And needed
reforms are on the near horizon.
The federal Conservative
government has vowed to introduce legislation this fall to guarantee
workers at federally regulated employers – including telecommunications
firms like Bell Canada, the railroads and the banks – 100 per cent of
their pensions in the event of insolvency. In a competitive market for
skilled labour, non-government-regulated employers, if history is any
guide, will follow suit.
For Nortel pensioners and employees
reliant on disability payments, Queen's Park need only top up the
Ontario Pension Benefit Guarantee Fund (OPBGF). Unlike the CPP, the
OPBGF does not collect funds through levies on employers and employees.
It should start. And in the meantime, special legislation in Ontario,
Quebec and Ottawa can be passed to cover the delinquency in Nortel's
failure to meet its obligations.
And as I've noted in a previous
column, the failed Nortel CEO, Zafirovski, can put in a
bankruptcy-court claim for the moon and the stars. But he's just
another ex-employee obliged to line up behind the banks, bondholders
and trade creditors with very slim hopes of collecting a fraction of
the amount stated in his pro forma claim.
A shame he wasn't at
that Queen's Park rally. His standing might have improved at least a
bit if he'd been photographed alongside fellow victims of a once-proud
and sadly mismanaged enterprise.
It doesn't
surprise me that Mr. Zafirovski didn't show up at the Queen's Park
rally. Back in June, he appeared before the Standing Committee on
Finance and defended the decision to pay court-approved bonuses to
"key" executives and employees while Nortel denied severance payments to workers the insolvent company let go.
But the Canadian press has been all over this story on our "solid pension system". The Globe and Mail reports that Canada's pension system gets solid ranking:
Canada's
retirement system has been ranked fourth in the world in a new study
that compares public and private pension systems in 11 countries.
The
study by pension consulting firm Mercer concluded the Netherlands,
Australia and Sweden had the world's best pension systems, while Canada
ranked a close fourth, followed by Britain and the United States.
Germany, China and Japan were at the bottom of the list.
The
review looked at 40 factors relating to the countries' pension systems,
including the adequacy of private and public pension payments for
retirees, and the level of pension incomes compared to pre-retirement
incomes. It also looked at the rate of participation in private sector
pension plans, the level of pension assets in plans, and factors
affecting the “integrity” of private sector pension plans, such as
regulation and risk-protection.
Scott Clausen, professional
leader for Mercer's Canadian retirement consulting business, said that
while Canada's public and private pension pillars appear strong
compared to many other countries, they could still be improved.
Mercer,
for example, says Canada needs to increase the percentage of its work
force covered by company pension plans. According to Statistics Canada,
about 38 per cent of Canadian workers had a company pension plan in
2007. Excluding public sector employees, about 25 per cent of workers
in the private sector had a company pension plan.
“The
prevalence of private pension plans in Canada continues to decrease for
employees working in the private sector,” Mr. Clausen said in a
statement.
“Simplifying pension regulations to provide uniform
pension rules across the country has been proposed by the pension
industry for years, and would greatly increase the efficiency of the
pension system.”
Mercer also recommends introducing controls to
ensure Canadians' personal retirement savings are not withdrawn early
and are preserved for retirement years, and recommends increasing the
age of eligibility for pensions as life expectancy increases.
No
country received an “A” in the study, Mercer said, with top-ranked
Netherlands earning a score of 76.1 out of 100. Canada received a mark
of 73.2, while Japan ranked worst with a score of 41.5.
After
reading all about our "solid Canadian pension system" in the mainstream media, I decided to quit Pension Pulse. What's the point? If
Mercer says we are among the best pension systems in the world, then
there is nothing to worry about, right?
Wrong. While Canada
does have one of the better pension systems in the world, on many
levels, it is among the worst. Importantly, there are serious
governance gaps that undermine the integrity of our large public
pension plans. I am not spending my time writing about pension issues
because I've got nothing better to do. I am worried about the future,
and articles like these serve no purpose but to minimize serious flaws
in our pension system.
[Note: Go back to read my testimony to the Standing Committee on Finance to get an insider's view on some of the glaring governance gaps in our public pension system.]
And for Pete's sake, whenever you
read something from Mercer or any other pension consultant, take it
with a grain of salt. It is in their interest to talk up our pension
system and that of other countries where they make a good chunk of
their consulting fees. Always read these articles with a healthy dose
of skepticism.
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As an Australian, living in Australia, I make no judgement about how good or bad the Australian pension system is compared to anywhere else. However, some implied facts in earlier posts are incorrect about the Australian pension system.
First you need to understand that there is a federal government pension system and there are also superannuation funds. They operate quite differently.
Government age pensions are available to everyone, at the same rate, subject to an income and means test. So if you are of pensionable age and your income from other sources is low enough, and you do not have "too much" in assets (but a normal house and car is acceptable), you are entitled to the pension paid by the government. It does not matter what you have earned or paid in taxes, if anything, during your life. The amount is the same for everyone.
Unlke the US, there is no notional social security fund. Pensions are simply paid from consolidated revenue out of taxes raised in the current year. So there are no investments to be adversely affected by changes in the stock market.
This probably works because the country is growing (selling huge volumes of minerals to China and elsewhere) and immigration helps to keep the age balance right. While immigration includes some indigents, there is a relatively high proportion of educated and affluent, which also helps fiscally.
In addition to the age pension, there is a system of superannuation, which is wholly individual in the sense that superannuation accounts are individually held and any payments out of them are solely dependent on what has been paid in by or for an individual and the investment earnings on those accounts.
These funds are not held by the government but are in numerous private schemes (and individuals can do it all themselves - DIY if they wish). Naturally these funds are invested in marketable securities and so are exposed to fluctuations in the value of those securities.
Payments from superannuation funds, which have some attractive tax features, are only allowed after retirement. Superannuation funds do not replace pension eligibility, though in any year income after retirement from a superannuation fund will affect the amount of government age pension for which a person is eligible and may negate the entitlement entirely.
About 20 years ago, the Australian government introduced a law that now requires an amount equivalent to 9% of everyone's salary to be paid into a superannuation fund (of the person's choice). Individuals and employers can pay in more than this amount if they choose (and the tax advantages provide an incentive to do so). Obviously the long term aim is to reduce the dependence on the government age pension.
This was introduced by a Labor party (roughly equivalent to US Democrats) government which was lead, at the time, by financially prudent politicians. It was supported and strengthened by the subsequent conservative government and supported again by the current Labor government (even though it is not as fiscally prudent as the one that made superannuation compulsory).
Many of the superannuation funds are "union" superannuation funds, ie established by major trades unions (which are key supporters of the Labor party). They are now very large funds, often accepting accounts from anyone, are run honestly though they do provide "jobs for the boys" as trustees and the like. This means that Labor's biggest organised supporter is heavily committed to the superannuation system (which is also strongly supported by the other side of politics).
At present more retirees are probably pension funded than superannuation funded. But in 20 to 30 years the balance will have swung the other way as society gets to a stage where everyone has a full working life contributing to superannuation.
Here is what one pension expert wrote me before I wrote my comment:
I don't take anything that comes from pension consultants too seriously. The fact is that Canadian, Australian, Swedish and Dutch pension funds all got whacked last year. Canada and Australia really badly since they were highly exposed to stocks. This year, they came back, but who knows what will happen next year? All these funds underperformed South Korea's national pension fund in 2008 (they wisely invested a good chunk of their assets in government bonds).
It's not just about returns, it's also about risk. I would like Mercer, or better yet the OECD, to undertake a detailed study of international pension funds and look into the benchmarks that make up their policy portfolio. Then, I would like them to use that information to properly compare pension funds, by looking at risk-adjusted returns.
And no, I won't shut down Pension Pulse even though the pension bullies can't wait for me to do so. As long as they get away with huge bonuses based on bogus benchmarks, I'll be posting away.
Can anyone give details on Japan's pension system? Here rated as among the worst-run?
There are no innocents in the pension systems.
It has always been a ponzi scheme, taking
advantage of the young, and everyone made
their decisions based on that fact. Now that
young people have abandoned the system,
and it is crashing, the participants expect
yet another subsidy, but can only look to
each other for it.
They should have been more respectful of
young people, and made sure that their systems
had sufficient circulation. People get into a good
system, and their first reaction is to block
additional participation.
The situation is unfortunate for all involved.
Older people used to know better.
Kids have no direct representation, and their
indirect representation, family/parents, was
destroyed with Family Law, so the older
generations kept voting to roll over their debt
onto the kids. Now, the older generations
have $500T in unfunded liabilities globally,
and the younger generation has opted out.
You can bet the bankers realized the
implications of young people going out of
their way to be non-productive in the old
economy. Now the older generations are
immobilized, and the younger generation
is running circles around them. As
infrastructure concerns chased the kids,
they created incredible economic activity, but
no real value.
The universities got real good at stealing their
ideas, so the kids just used the universities as
free housing, and borrowed all the money the
bankers wanted to give them.
The kids live in the virtual world, and they are
well aware that oil & physical property cannot
serve as hubs in the new economy.
Generational wars always have the same
outcome. If you want to see the real problem
with the pension funds, look at the
demographics of participation, and the talent
level of the beneficiary stakeholders.
In case anyone hasn't been paying attention,
the older generations now live in a "the
computer said, so I did" economy, in which
neither the script designers or readers have
any idea what is going on inside those
computers, and previously simple transactions
are now being routed through 18 different
transaction sights, with increasingly arbitrary
outcomes.
What happened to all that option money over
at MS, and why is that 787 still on the ground?
It is easy to see why those who continue to
pontificate on the economy, who could not
program the time on their VCRs, which are
no longer relevant, cannot see the big picture.
It is not in their interest to do so.
If you are stuck in a train heading for a cliff,
you may as well party.
I hope you are not serious when you say you are closing Pension Pulse, Leo....you deserve an award for shedding light on a financial dark space that impacts all of us.
The question in Canada (as in many other countries) is can the private sector afford all the great public sector pensions. It's a lot different hitting your 60's facing a private sector or no pension vs. a public sector retirement.
The wave of costs about to hit (pension and medical) across North America, Europe and Japan will make the current problems look small.
State and local pensions in the US already blowing out and will likely cause problems before Medicare and SS. Much of California's financial problems at both levels are rooted in lavish(compared to private) public employee retirement plans.
Tax payers are being forced to make up the difference in losses to their the benefit plan investments. Just one more form of looting.
Interesting article Leo.
Assume you are not really shutting down Pension Pulse - that would be like Zero shutting down because the banksters and politicians have managed to loot America
Pensions...the looming crisis. which one's bigger here in the US (Medicare, Social Security) will be compelling obeservation material. Keep up the fight.
As former NC resident of the Triangle region, Nortel amazed me how slowly the company circled the drain. At their peak I think ~ 9,000 folks worked at their RTP offices.
When I was at Northern Telecom (prior to the re-branding) 15-odd years ago, the company was already out to lunch and, in hard retrospect, already well down the tubes, even prior to dot-com. Jean Monty then left and proceded to destroy BCE immediately afterward. Nortel had to be the highest concentration of Asperger in Canada - chock-full of brilliant but totally wierd people.