Sunday, September 27, 2009

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.

Friday, September 18, 2009

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

Monday, September 14, 2009

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.

Saturday, September 12, 2009

Pensions battle for profits

Earlier in the week my Pension Socialism blog touch on the large ownership interests that pension have in our country.

One of the threats that I see is the large pools of capital that are being accumulated and invested by public sector pension plans. They love monopoly or oligopoly type investments. Profits are high with a lack of competition .

The type of investment they like include public infrastructure or utility type companies. Many of these have a very high level of entry because of the capital required to build the systems. Think of the monopoly Bell had to build Canada's phone system.

In the next few years many of these monopolies will be moving into the hand of Canada's public sector pensions.

The Ontario Teachers plan was very eager to get Bell Canada last year. Telecommunication in Canada is a very restricted industry with huge profits for its players. Any encroachment in those industries will affect profitability. The cost of monopoly in Canada

It was interesting to see how the telecommunications industry oligopoly is protecting its interests. A Globe and Mail article cited this information:
Rogers Communications Inc., Canada's biggest wireless company, has asked the federal regulator to conduct intensive public reviews of two new entrants to the marketplace.
Rogers, as well as Telus Corp. and BCE Inc.'s Bell Canada, have won third-party status at the CRTC hearings Sept. 23 and 24 to determine Globalive's future. They are arguing that the Toronto-based company, which has received its financial backing from Egyptian telecom giant Orascom Telecom Holding SAE, does not meet foreign ownership and control rules.

And of course cut dramatically into profits. The door must be closed to competition at all costs!

The decision and recommendations on this policy will be made by bureaucrats who happen to be members of a pensions fund that just happens to own major shares in all of Canada's telecommunication companies.

What do you think the decision will be. It is a foregone conclusion.

Wednesday, September 9, 2009

The Socialism of Pension Funds

Some of my earliest research into pension funds led me to the writings of Peter Drucker. He envisioned in the 1970's that a move towards power in the hands of the worker through their ownership of the means of production. This ownership would be controlled by worker's pensions.

The 1970's were the beginning of large scale funding into pension plans. For example, most of the $100Billion accumulated into Ontario's Teachers Pension was saved over the past 30 years. The CPP Canada Pension Fund has accumulated over $100 Billion in a very short time.

Socialism is occurring in most developed economies around the world. It is occurring through pension funds.
Socialism refers to various theories of economic organization advocating state, worker or public ownership and administration of the means of production and allocation of resources... Contrary to popular belief, socialism is not a political system; it is an economic system distinct from capitalism

Long Term Implications
What will be the long term implications for capital markets and hence the means of production of the world being controlled by pension funds?

Some estimates place the total market value of the TSX at around $1.2 trillion. In Canada pension plans own a very substantial portion of those assets. The Economist

The major Canadian pension plans are owned and controlled by public sector unions. The Ontario Teachers for example, owns the a major portion of commercial property in Canada. As well they love monopoly and infrastructure industries where profits are in the range of 20% to 25% every year.

Political Implications
What will be the long term political implications?

The influence of pension funds around the world is going to have major implications on political policies. What is the impact of public sector unions controlling through pension funds most of a country's wealth?

Public sector unions are have very strong political views and the investments that they control will have major political influence. The public sector unions(CUPE) has very strong vies and opinions on several major social and political issues.For exampe the web site of CUPE speaks out on many issues:
Trade - Foreign policy
Mandatory retirement
World Bank
Social services
Highways - Toll roads

These are all important issues. However, I am not sure that the public sector union view is always the best solutions for many of the problems facing our country.

Political Impotence

For some time I have had the view that the politicians in this country have less impact on government workings and policies than the union bureaucracy. Now the bureaucracy now has the economic levers as well.

Despite the rhetoric the public sector unions do not always represent the best interest of the Canadian public. In a fight over what is best for society and what is best for the unions, the unions always side with members.

We have the situation that the long term government policies are set and impacted by government union members.

When it comes to making decisions will the unions do what is best for Canada or what is best for their pension funds? One example of this is the 407 Highway in Toronto. It is one of the most expensive highways in the world.

Is the pricing on this road based on what is best for the economic movement of goods around the metro area or what is in the profit interests of the pension plans that own the 407?

Beaten at Our Own Game
As we see the rise in Pension Socialism in the western world we are at risk of being overtaken by the BRIC (Brazil, Russia, India, China) countries. With the rise of the middle class in these countries the rise of capital will be staggering.

The Wall Street Journal today reports that Pension Funds in Asia Passed Europe's in 2008. What will happen as more and more the workers in these countries begin to accumulated capital into pension funds? China starts pension plan trial for 800 mln farmers
These pensions funds will want to start to invest in the popular investments of pensions funds:
Real Estate
There will be many very interesting developments to come in the years ahead.

Tuesday, September 8, 2009

Unions have the spotlight for Labour Day

Labour Day is a good time to remember the workers in our society who are the backbone of Canada. There have been many songs dedicated to the average on the street worker.

We like to think of labour as the type of worker personified in the Garth Brooks song - American Honky Tonk Bar

Although this type of image works well for the union movement in Canada it is far from the reality of their membership. Most unions in Canada are public sector unions. These unions receive compensation packages far and above the average Canadian. Most will retire with platinum pensions valued close to $1 Million and health care benefits most North Americans can only dream of. All funded by you as a taxpayer!

This all makes for great rhetoric. The Labour Day message of the OFL states that
Don’t try to tell one of the 222,000 Ontarians who lost their job in the past year that this recession is over.
How many government workers do you know that lost a job last year?
And don't try to tell those seniors who have seen their pensions evaporate.
How many public sector workers saw their pensions reduced?
There is no recovery until there is a jobs recovery. There is no recovery until those who cannot find work are able to draw from the EI program that they helped fund. There is no recovery until pensions are secured and our seniors can enjoy their retirement years in comfort and dignity.
Lets all get government jobs and there will be no worries!
I guess maybe in addition to pension envy I am suffering from union envy. Bill's pension envy

The Toronto Star ran an article about the changeover of the leadership of the CUPE and OFL.
The article points out:
The CAW, Canada's largest private sector union, has not been affiliated with the OFL since 2000
The membership of the OFL is almost exclusively government workers.

The public sector in Canada employees almost 3.4 million or 24% of all employees in Canada. Statscan points out there are 4.5 million unions members in Canada. It would seem that all but about 1.1 million union members in Canada work for the public sector.

One interesting blog was posted about the changing leadership at the OFL. It is from Canada Free Press

Monday, September 7, 2009

Pension changes ahead this fall

The climate is ripe for changes in pensions in Canada and throughout the developed world. This fall numerous government and public policy groups will be examining, dissecting and discussing pension reform.

Leo at the Pension Pulse reported on a BBC report about the Labour party proposing limits to the amount of pensions that public sector employees can get. Like most governments the bottomless pot is starting to run out. The same applies here in Canada as we look at how we will fund a multi-billion dollar pension and benefits shortfall for public sector workers.

The CD Howe estimates the shortfall in the public sector pensions and benefits in excess of $400 Billion. That is a lot of future tax dollars that Canadians will have to cough up. Will they be willing to cough or will they demand changes? Margaret Wente

I think that we should implement at Sunshine List of public sector pensions. Public Sector Pension Club

At the same time the coming discussions on pensions will hopefully uncover some of the abuses to taxpayers that exist. These include the multi-million dollar entitlements of some public sector employees, double dipping, pensions without sufficient contributions and the early retirement provisions of public sector workers.

There are some in our society that need to be protected. A recent article in the Toronto Star highlighted the risk of women in poverty in Canada. There is a risk for many more in our society to fall behind in the coming years. The next high risk group is seniors. Seniors poverty

All we can ask for is a fair system whereby the public sector gets the same type of entitlements afforded to average taxpayers.

The public sector is not entitled to their entitlements. Especially at the risk of others in society and certainly not at the taxpayer's expense.