Thursday, October 29, 2009

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.

Tuesday, October 20, 2009

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.

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

The current outgoing McMaster President has a pension worth a pension about $5.4 million. The new incoming 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 McMaster 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, including pension contributions, 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, a shown in the Sunshine List, 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?

Monday, October 5, 2009

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

Saturday, October 3, 2009

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