Getting the Numbers Straight

There is a wide commentary on pension reform in Canada.

One report says that the catalyst for the interest in pension is based on the protest by Nortel workers last week in Ottawa. The article called Canada's pension system is in play cited 4,000 protesters in Ottawa to protest the bad deal the Nortel pensioners are getting.

All levels of government responded with comments about the pension system and how to save it. Flaherty tackles pension shortfall As well all of the current pension reform proposals in Canada were revisited in the press. One of the best recaps of the pensions reforms in front of Canadians was put together by Monica Townson. The report makes for an excellent read.

Also last week the Globe and Mail ran a great series called Retirement Lost.

Bitter Victory

When I started this blog there were very few comments about the coming pension crisis in Canada. Many of the early reports I posted were newslinks from around the world. These reports detailed the plight that was about to descend on pensions in Canada. Very few reports were in the Canadian press.

This leaves me pondering where my blog will take me now that pensions are a front page news item every day.

One area that I see as lacking in the Canadian press is a complete understanding of the numbers of pensions.

Although this blog is called Fair Pensions For All, most Canadians will never have a pension. We all will at one point want to retire. The focus of the debate needs to move from pensions to retirement savings. It is too bad there is not a good single word term for retirement savings in the same way there is for pensions.

The Real Numbers
Most Canadian are not part of any pension fund and never will be. In fact only a small portion of Canadian are members of pension plans and very few are members of gold-plated plans.

Joe Meyer was actively posting in the comments section of the Globe and Mail pension series. He has a good understanding of the issues around the subject. What is your professional background Joe?

Joe focused in one of his posts on actual pension numbers in Canada. Statscan produced a series that looked in depth into pensions. Pension coverage in Canada

We know that in October there were 14,091,000 employees in Canada. Of employees in Canada 3,433,000 or 24% work for the government. Most government workers have the gold-plated pensions known as final salary pensions. Statscan shows 82% are covered with mainly final salary plans (defined benefit pensions or DB).

Statscan shows there are a total of 4,538,192 workers covered under DB plans. Of these 1,900,360 are in the private sector. So, 17% of the private sector has DB plans.Most of these would not be gold-plated.

Gold-plated pensions are based on the past 3 or 5 years of working income. Most plans in the private sector have much lower income replacement targets and much longer average earnings periods. For example, a public sector pensions is targeted to replace 70% of final 3 years working salary. In the private sector it may be 50% or 60% of total career earnings.

The other major type of plan in Canada is called a defined contribution plan. These plans cover less than one million Canadians.

So it is disappointing to see all levels of government talking about DB pension issues. These plans cover only a very small portion of the population. Lets expand our focus to Fair Retirement for all Canadians. Most Canadians have no Pension Pot at all.

Winning the Pension Lottery

Please note: The figures quoted in this Blog are based on current actuarial estimates for full pension eligibility. There may be factors that will create minor changes to any individual's actual final numbers.

There is going to be a new President at McMaster University.

This position is a very important role. It is important because universities are one of the foundations of our Canadian society. One of the keys to our future. The new President is an excellent choice, a man who has shown a dedication to his profession over his lifetime. 

How much is this position worth financially to the person who holds it?
U of C president denies 'lack of transparency' on $4.75 million pension payout

To the current President it is worth a pension valued at about $5.4 million. The new President should expect no less and in five years will have a pension valued at this much. In the meantime he will get an annual salary of around $500,000.

McMaster president's contract revealed

Today the incoming President has a pension valued at $3.1 million. The next 5 years will, conservatively, bring a windfall of $2.9 million into his pension. This is on top of the $500,000 taxpayers will pay him.

In my calculation his compensation over the next 5 years is worth over $1,000,000 per year. His salary will be half of that and the other half is a pension increasing at $500,000 per year. However, over that time the taxpayers will be told he is only receiving $500,000 per year.

Public sector bonuses must be more transparent

This calculation of his value is quite conservative because he will merit additional increases every year. In fact the current President saw his income rise from $305,000 in 2005 to $524,000 last year. This increase since 2005 added $2.4 million onto his pension value.

Based on 15% annual increases the current President received, the increases of the incoming President should bring his pension over $10 million.

Not bad pay for the next 5 years?

Paying the consequences - Big Debt Brag

The Canadian Taxpayers Federation released a report about the consequences we will have to pay for the action of our governments today.
Big Debt Brag? Canada's Debt 22nd Worst in OECD! Kevin Gaudet wrote and excellent piece that should be a wake-up call for all governments. Lets hope they listen.
There are many implications of the actions our government are taking today. Here is one perspective called World faces crisis over taxation

The Lid Blows OFF in Alberta

Over the past couple of weeks in Alberta there have been several new reports on the compensation packages of senior government officials.

The compensation levels for many public sector employees at the top have been skyrocketing. As in all Canadian provinces the biggest spending areas in Alberta are Healthcare taking 36% of the provincial budget and Education using 26% of the budget.

It is in these areas that Alberta had trouble controlling spending on employee compensation.

Last week we spoke about a $4.57 Million package that was given to the President of the University of Calgary after 9 years of employment. The President was just the leader of the posse that collected a huge increase in compensation over the past few years.

Although these headlines appear alarming they are just the tip of an iceberg. The annual salary costs pale in comparison to the pension compensation that is created by these huge increases in salaries.

It is not only in the education sector that Alberta senior servant compensation is out of whack. There are troubles in healthcare and right across the civil service.

The Tip of the Iceberg
In order to explain the real costs let me share an email I got last week from my friend and pension expert Leo Kolivakis from the Pension Pulse

For a male age 65 in 2009 with an annual Retirement Pension of $70,000 indexed at 2.5% with a 60% survivor component the present values are:

(1) using a discount rate of 5% : $1,254,426
(2) using a discount rate of 6% : $1,131,461

Both scenarios assumes that the pension payment occurs on January 1st of the given year. Mortality follows male mortality as assumed under the 23rd CPP Actuarial Report.

This refers to the cash value of a defined benefit pension. The present value refers to the amount of money that is required to be in the pension plan for a typical government gold-plated pension plan.

For a defined benefit pension plan a cash value of 16 to 18 times the annual pension payments is required.

So What
This shows clearly what happened in the case of the U OF Calgary pension. The President was earning $440,000 and was entitled to a 70% or $308,000 per year pension. In order to fund this he needed a pension cash value of $4.9 million, which the taxpayers happily provided. The Calgary Herald reported $4.75 million. 

The President earned his pension cash value over a 9 year period. That was an average into his pension plan of $544,000 per year. More than his annual salary. Yet his compensation was "officially" only his salary.

Most senior government executives have set-up specially protected plan in their own names. They call them Supplementary Pensions Plans. Check you local government's annual reports and likely you will see one of these listed. It is for any government official making more than the annual CRA (Revenue Canada) allowance for pension contributions. Yes they have made special rules for themselves!

Annual compensation increases are the killer because every increase gets amplified in the pension by 16 times.The taxpayer has to pay for both. It is a misrepresentation of the true compensation of these employees. Yet all of the pension contribution is a tax-free payment to a government employee. You and I would have to a pay tax on the portion of pension contribution received over and above our annual RRSP limit.

The Lid Blows Off!
In the article today about the Premier of Alberta's office staff we saw huge increased last year.

Lets look at one situation the Premier's Chief of Staff. His salary last year was $253,000. If it was up 16% last year it was $218,000. This is an increase of $35,000.

The cash value of his pension is another matter. Remember that the pension is 70% of final average salary. Last year the cash value required for his pension was $2.4 Million. With his salary increase the cost of his new pension is $2.83 million. That is an increase of $430,000.

Here is a good video of a similar situation earlier this year in Vancouver. Vancouver's CFO gets gold-plated pay package

More reports on the disaster in Alberta
Auditor general questions hefty salaries, severance for senior executives
Government 'restraint': Do as I say, Not as I do
Alberta pays out $44M in bonuses
Public Soundsoff

The Pension Crusades

Activity has started up on the pension front as the fall begins. The summer was a little slower as everyone took a well needed break from what had happened in the economy over the past year.

Last week on a personal level there were some successes in the pension crusade and some disappointments.

A colleague and mentor of mine, Paul Holmes congratulated me on a article in the professional association magazine Forum. I was surprised as I was not aware of the article.

Forum is the official publication of Advocis, the Association for Life Insurance Financial Advisors. The Editor's article was a called The Haves and Have-Nots. It spoke about the pension dilemma.

There are already rumblings about the fairness of the system that rewards a certain class of workers with defined benefit pension schemes linked directly to salaries. One person leading the crusade to address the gap between the retirement haves and have-nots is Bill Tufts, a Hamilton-based pension specialist with WB Benefit Solutions.

On his blog he calls public sector pensions "the biggest economic issue in 2009". Tufts is calling for increased transparency of public sector pension plans and pushing the notion of a supplemental pension plan for private workers.

It was nice to be recognized in the industry I have worked for the past 15 years. However, the part about supplemental pensions was not quite accurate. I don't know how we as a society can afford them with the high tax rates we have as a country. The association had come from the Globe and Mail article with Roy McGregor, where I mentioned them as one option available.

It is too bad there is not a link to the whole article on line but the magazine is a professional association publication. You can access the site of Advocis and check out their recommendation for pensions in Canada. It is Encouraging Small and Medium Sized Firms To Participate in Pension Plans

One disappointment of the week was the reporting on the University of Calgary President's pension. U of C to pay Weingarten $4.75M pension

Unfortunately the reporter for GlobalTV in Calgary who wrote the script for a TV newsclip had a very limit background on financial matters. She could not believe that the $4.75 Million paid to the President was based on 70% of his salary. We did not know his salary but I have a rule of thumb for estimating the cash value of pensions. An annual final salary pension has an equivalent cash value worth 16 times the annual pension.

In the case of the President I had estimated that the pension was worth $300,000 per year. We did not know right away but found out later that his current salary is $441,000. A pension at 70% of this would be $308,000 per year. Gross this up 16 times and you need a pension cash value of $4.9 million. Pretty close to the original amount quoted.

The reporters challenge was that over 30 years a $300,000 pension would pay out more than $9,000,000. This is correct however, the pension still is estimated to earn 5% per year and the payout is calculated for Cost of Living about 2.5%. Try running the calculation on a spreadsheet for 30 years. You will see there is still almost $400,000 left but don't forget about the surviving spouse.

The disappointment was the reporter had not covered pensions before. She found it difficult to grasp the concepts involved. Therefore she resorted to interviewing the official spokesperson at the University and other with vested interests. They too were collecting taxpayer funded pensions. Note the one comment about the $50,000 annual pension. Gross this up by 16 times and it is worth $800,000.
The Global TV Newsclip can be seen here at 39 minutes.

Oh well... win some lose some... It was a good experience fo me trying to clarify this muddy issue.

This only reinforces the purpose of this blog. That is to inform the public, public policy influencers and the media about how these pensions really work.

The High Cost of Government

In the Vancouver Sun today there was an article today from Veldhuis at the Fraser Institute. He notes that in BC the Finance Minister pointed out in a speech, "provincial health spending has risen by 45 per cent" since 2002. And that there was a 4.9-per-cent increase over last year's total spending of $38.3 billion.

What is the highest single expense of all BC government organizations?
Compensation costs. (Wages, benefits and pensions)

At most government organizations the compensation package is well in excess of 50% of total expenses. At hospitals in BC it is 75% of total costs and at University of British Columbia it is 60% and I could not find school boards but in Ontario it is usually 75%.

The increases last year in these packages were enough to drive the total increase in government spending. For example, the compensation costs at UBC increased 8%. Work out the total rise in spending if the largest expense at 60% (compensation) goes up 8% and everything else stays the same. What will be the total increase?

The annual compensation costs for The Fraser Health system rose 7.8% last year and 7.5% the year before.

In the most recent budget there is about $30.1Billion available for discretionary spending. BC Budget and Fiscal Plan PDF The three top spending areas from page 11 are:

Health Services -......... $14.1Billion - 46%
Education -................. $ 5.1B - 17%
Advanced Education ....$ 2.1B - 7%

Compensation increases are why spending goes up every year with no perceptible increase in services. If these compensation packages were bench-marked to the private sector they would actually fall substantially. The CFIB estimates compensation costs would fall 19% in education and almost 25% in healthcare.

Here is why the wheels are falling off.
Vancouver's CFO gets gold-plated pay package
A brief retirement in West Vancouver

PS - Whenever I need a good laugh I always go to the BC Pension website. There is a series of short videos about the BC defined Benefit Pensions plan. They are outrageous and funny at the same time. Like a bad late night Infomercial. BC Pension Videos

Supplementary Plans and Pension Shortfalls in Alberta

Alberta and the rest of the Western Premiers are Pushing for new Pension Plan

It is a great idea but how will it be funded?

The Fraser Institute figures that already we work more than 5 months before we start to save money for ourselves. How can we save more money for the Supplementary Plan?
Fraser Tax Freedom Day Video

As a self-employed individual I pay into the CPP (Canada Pension Plan)at the rate of 9.9% of my income, up to the YMPE. It provides me with a replacement of 25% of the YMPE.

Where can I come up with more money to pump into a government run pension plan? The only way is to reduce the taxes I pay every year. This would leave me more money to fund into my personal plan. However, this will never happen because I have several public sector pension plans I need to fund.

In Alberta the public sector pension plans are billions short. This despite the fact that over the past 30 years taxpayers have funded billions into these plans. Alberta's Public Sector Plans Short Billions

The public sector pension plans pay a replacement income of 70% of final salary for life. There are thousands of public sector retirees earning more than $100K per year in pensions. And they pay much less into their pension plans than self employed taxpayers pay into the CPP program.

Great idea lets hope we can make it work.