Leo's Pension Pulse

My friend over at the Pension Pulse Leo Kolivakis has run a very successful and insightful pension blog since 2008. He always has very informative insights and discussions into the pension world. 

I sent him an email yesterday that he had analyzed by the former Chief Actuary of the Canada Pension Plan (CPP), Bernard Dussault. Leo posted his response to my email. It makes for very informative and interesting dialogue.

Put Leo on your blog list as he does an excellent job and for the past 3 years had made a post on pensions every day, even the weekends!

Day of Reckoning on California Pensions?

I hope you enjoy this discussion 

Bill Tufts 

Fair Pensions For All

The Pension Monster comes to Canada

Like the great Ogopogo monster in the Okanagan Valley in BC there is a monster that everyone knows is out there but it is rarely ever seen. 

Today the Pension monster surfaced in Montreal in an article from the Montreal Gazette. The article is 

Island mayors to ask Quebec for pension relief

Montreal Island's two most senior political leaders are planning to ask the provincial government for a special law to help curtail the growing local tax burden associated with municipal pensions.

This is an unusual move because most politicians in Canada get a ride on the monster as well. It is a personal conflict of interest for politicians to castigate the monster because he is their friend as well, most city politicians have a pension funded by taxpayers. 

According to their plan, people who are currently receiving a municipal pension would not be affected. Only current and future municipal employees would see lower benefits - but not retroactively.

Current employees would keep whatever entitlements they have built up over time, based on years of service already accumulated. But changes would be made over time to reduce benefits going forward.

The problem with pensions they way they are designed today is that they are unsustainable and unfair to taxpayers. 

In Westmount, employees with 30 years of service can retire at age 50 with 75 per cent of the average of their last three years of earnings. This has encouraged a lot of early retirements in Westmount, which is why the westend suburb now has almost as many retired workers on its books (236) as full-time equivalent employees (295). Soon, Westmount will be like General Motors, with more retired than active workers.

Part of the problem is that pensions are based not on what the city or employees contributes but on what the employees earn when they retire. Employee compensation in Montreal has been skyrocketing like all governments at all levels across Canada. 

Another article in the Gazette shows how this happened. So much for economies of scale

The spending of the island's municipalities rose from $2.7 billion in 2002 to $4.1 billion in 2011. That's a jump of 50.1 per cent -21/2 times the inflation rate.

Salaries have gone up by 29 per cent, well above that 20-per-cent inflation rate. How, you ask, can this be? Hasn't the Tremblay administration been holding increases to no more than two per cent a year? Yes, but that does not tell the full story. Ways exist to get around it. One is "grade inflation:" People get new titles, qualifying them for raises. Another is overtime. A third is arbitrators' rulings. Last year, for example, an arbitrator gave police a 1.5-per-cent "metropolitan premium" because their work was more difficult than that of other Quebec police.

But benefits -mainly pensions -are growing far faster. As the table indicates, they've grown by 126 per cent since the merger. A major reason is the 2008 recession, which inflicted great losses on pension funds. Provincial law requires municipalities to compensate for these losses. Prodded by Trent, the Tremblay administration plans to appeal to Quebec to reduce municipalities' need to compensate so generously.

But another reason for this 126-per-cent rise is that municipal pensions are far more generous than those in the private sector. Firefighters, for example, earn $65,585 after 41/2 years' service; they can retire after 30 years with 73 per cent of salary and after 41 years with -incredibly - 100 per cent.

There are solutions but is there political will? 

The current practice of paying out generous defined benefit pensions is unsustainable fiscally - and unsupportable politically, Trent said. Two thirds of Canadians don't have any pension plan at work at all, he noted.

"Why should they, through their municipal taxes, be supporting these very generous pension benefits?"

Taming the Beast 

We have all seen the monster and we know that the ride he provides for some is very comfortable, but like most monsters, for the average person he is very dangerous. 

I was recently invited to a conference in California about pension reform. There was a lot of discussion on how to tame the beast. One idea focused on the ability of municipalities to go bankrupt in order to off load the legacy liabilities they have. Another large part of  the discussion surrounded the extent to which pension can be rolled back or more appropriately made more sustainable. 

One word of warning is that implementing new rules for future employees will not control costs for the city. The articles above mention that new employees coming into the system are not being hired as full time employees but as contractors. This trend will continue. 

Because of the ponzi like nature of  defined benefit pensions the need fresh contributors  coming in to be sustainable.

Benefits must be amended for existing employees. 

A top labour lawyer at the conference examined the concepts that will allow for the changing of future benefits for existing employees. part of it is on vesting rights. 

Vesting - Vesting means that you are unconditionally entitled to receive the pension you have earned under the pension plan, whether that benefit is payable now or sometime in the future. 

Accrual - refers to the level of benefits that the employee has already earned based on the number of years employees have worked.

Example 

Before I begin my analysis let me say that I respect the hard work of police and firefighters across our country. It is part of what makes our democracy strong.

We only need to look across the world to see what is happening in other countries to appreciate what we have here. I am only talking about effective pension management solutions, not denigrating any public sector worker. 

Lets look at the firefighter above. Assume we have a firefighter who has worked 15 years. Assume he is earning $70,000 per year.  

The usual formula for pension accrual for "public safety workers" is 2.33% for every year the employees works. 

Based on his current employment record he has vested his pension with 15 years of working, So based on the formula he will get 2.33% X 15 years equals 35% of his income. He has accrued 35% of his income and this is vested because he has completed this amount of time. 

The future earning he has will accrue at the same rate 2.33% and each year that he works becomes another year of "vested" service. 

What the big question in Canadian law is "Can the future accrual rate be changed?" 

The firefighter when he first began working he had an accrual rate on his pension based at 2%. Changes over the last 10 years have boosted the accrual rate to 2.33%. When the change was made all of his past service was changed to the new accrual rate. This boosted the liability substantially for all municipalities across Canada because the change was made retroactive for all the years public safety employees had already worked. 

In this example say a firefighter had been with the city for 25 years. Under the 2% accrual rate he had a vested pension worth 50% of his salary but the day after the pension changes were made he had a pension worth 58% of his earnings. At 30 years the number was 60% versus 69.99%. 

Pension earnings in Canada's public sector have always been based on a target replacement ratio of 70% of the worker's salary. So the firefighter above at 30 years working had the target pension at an accrual of 2.33% compared to the old plan where he would have had to work 35 years to get the 70% replacement pension. 

Confusing I know. 

Potential Solutions 

In California the solution that Jeffrey Chang presented was that future accrual rates can be changed but the vesting had to stay in place. This seems like a reasonable solution. 

Convert DB to DC 

The first solution would be to change the nature of the plan convert it from a defined benefit (DB) to a defined contribution. It is only the public sector that has DB plans based based on these generous accrual rates. The employee would be vested to his current DB portion but any future pension would be based on a DC plan accumulating future pension contributions. 

Hybrid - Multi-Tier 

Why should the public sector employee get a pension substantially greater than the working Canadian's average wage. Give them a base of say 50% replacement income and any additional contributions they or taxpayers make go into a DC plan. So they would be guaranteed the 50% but any portion over and above would be calculated on a DC formula. 

Eliminate Final Pay Formulas 

The example for the earnings of the firefighter above is understated. They used a salary estimate that is estimated on the average wage of a firefighter in Montreal. Based on the salary grid and on seniority a firefighter going into retirement has a much large salary. It is the final years that are used to calculate the pension. In the private sector it is done on a career average basis. This opens the door to much abuse in order to raise salaries in the last few working years to enhance pensions. Why use only the last 3 or 5 years of salary to base the pension?

Cap Pensions

What is a reasonable limit for pensions? Our work shows that a formula base on the average working wage is a good solution, Why should a public sector employee retire at age 50 earning for the rest of his life substantially more than the average working taxpayer. A moving formula could be say 1.5 times the average Canadian working wage. This should be more than reasonable pension income. Earlier this week we wrote about an Ontario worker who is currently on track for a $750,000 per year pension, of course funded by taxpayers. An alternative would to be to place a dollar cap on pension for example $95,000 per year. Currently across Canada at all levels there are tens of thousands of retired government workers earning in excess of $100,000 per year in pensions.

Raise the Retirement Age

Canadians in the past had a targeted retirement of age 65. A majority of workers today will work far past that age and a minority will be working into their 70's. Why should the public sector retire as young as age 50? 

Eliminate Double dipping 

Many of those retired firefighters will continue working after they retire with no reduction in their pensions. Even more insulting many will return to government to continue working.

The conclusion is that changes have to be made. The longer we postpone the changes the more painful it will be for taxpayers and employees. 

Taxpayers will suffer big drops in the services that government can provide as they struggle to pay employee legacy costs. 

For employees the risk is great too. Many have 40 years to go in retirement. This is a long time and there are many financial challenges that face Canada in the years ahead.

We need to move to pensions that are fair for all and sustainable. 

 

Bill Tufts 

Fair Pensions For All

Weekend funnies

Today's headlines are so funny you have to laugh. 

London Ontario -Police swell sunshine list by 68%

Paramedics in Ottawa ecstatic over a salary increase of 13 % despite wage freeze in Ontario

Disillusioned over 4.4% wage hike in Edmonton 

St Albert - Councilors and employees approve themselves big wage increase

In Regina out-of-scope healthcare employees get 18.8% or $70,000 raise.

It is ironic I had just finished writing a letter to the Leader Post. The letter pointed out the game of leapfrog being played by the executives that had just given themselves handsome raises. I wrote that

Despite all of the wordsmithing about out-of-scope employees, salaries significantly "under market" and comparing it to pirates in Alberta salary increases of 20% or $70,000 per year are a taxpayer rip-off. How much did they pay consultants to get a report that justified these types of increases?

Don't expect it to end anytime soon. Consultants will soon be reporting to healthcare executives in Alberta that Saskatchewan just got raises valued at 20% and they should be getting the same. The it will be Saskatchewan's turn again. It's just a game of leapfrog that keeps putting taxpayers further and further behind.

 The Leader Post article stated that 

The health regions, the Saskatchewan Cancer Agency and SAHO worked with The Hay Group, a management consulting firm, to do the market review, which indicated that some pay ranges (bands) were no longer competitive. A broad range of out-of-scope health-care jobs include administrative positions, nursing supervisors, program directors, vice-presidents and CEOs.

Then the next report I saw that was the cause for uncontrollable laughter. It was the report  from St Albert. This is where the councilors and employee both went to the taxpayer trough. 

And how did they justify it? 

Council approved a compensation review implementation plan and a compensation philosopy policy, both in reaction to a compensation report delivered by the Hay Group in November.

Be watching for the next report.... I wonder how much taxpayers have to pay for these consultant reports. For some they are priceless.

Here is another update on a report done by the same group in Vancouver. City staff survey produces $92,000 bill

Rob Ford commissioned the same group to make a compensation report. Here is what the report by the same group said to the mayor of Toronto Councillors should reject raise, budget chief says

Nothing New  
This game is going on for a long time.  My only thought is what are these guys thinking?


Across North America government are suffering financially. Taxpayers have suffered job losses, reduced wages and a significant portion of wealth was lost in the stock markets. Yet 
the cities listed in the above headlines continue on like we are still living in boom times. 

When will they bump up against the ceiling of reality? Or maybe they believe the following article and think they can turn the ship around with more spending? 
  
Government budget cuts pose threat to recovery

Deep spending cuts by state and local governments pose a growing threat to an economy that is already grappling with high unemployment, depressed home prices and the surging cost of oil.

Lawmakers at state capitols and city halls are slashing jobs and programs, arguing that some pain now is better than a lot more later. But the cuts are coming at a price — weaker growth at the national level.

Across the country, governors and lawmakers are proposing broad cutbacks — lowering fees paid to nursing homes in Florida, reducing health insurance subsidies for lower-income Pennsylvanians, closing prisons in New York state and scaling back programs for elderly and disabled Californians.

"The massive financial problems at the state and local levels 

But those same governments cut spending at a 2.4 percent rate at the end of last year. And economists predict they will slash their budgets by up to 2.5 percent this year — potentially the sharpest reduction since 1943. The deepest cuts are expected to occur in the first six months of this year.

The worst cuts so far_ 3.8 percent — came in the January-to-March period of 2010. That was the sharpest quarterly drop since late 1983, when the U.S. economy was recovering from a severe recession. Most economists think the cutbacks this year will exert an even bigger economic drag than last year.

Many governors, including those in Florida, New York and Colorado, are pursuing tighter budgets. Their proposals include laying off public workers and teachers, reducing spending for education and health care, and ending some social services. They're also targeting public pension funds and health insurance plans and seeking larger contributions from public employees.

State and local budget experts fear the cutbacks will intensify this year. States are struggling to close budget gaps of about $125 billion for the upcoming budget year, according to the Center on Budget and Policy Priorities.

State and local governments have cut more than 400,000 jobs in the past two years. Budget pressures will force an average of 20,000 more job cuts each month for the rest of this year

Bill Tufts 

Fair Pensions For All

Ontario Hydro - Abusing Taxpayers

It looks like electric rates are rising again in Ontairo. The OPG wants an increase of over 6%. They made the 6% look like a bargain as they originally were asking for a 9.6 per cent rate increase. Don't be deceived about it being over green energy or a $18 Million fine they had to pay.

It is about the machine feeding itself. The rate increases are due to outrageous compensation packages paid by OPG. My recent blog on Hydro Ontario showed how most of the cost of running the organization was associated with the huge labour costs. 

Well there is a sister to Ontario Hydro called OPG. It employs about 12,000 across Ontario. Over half of these employees or about 7,900 showed up on the Sunshine List for 2009. This is the list of earners on the government dole making in excess of $100,000 per year.

The Sunshine List only shows the salaries of these employees. It does not include the total compensation they receive in pensions and benefits. For most of these employees the taxpayers of Ontario will kick in another 35% towards these fringe items.  So that a employee that shows up with $100,000 on the Sunshine List is costing the taxpayer around $135,000,

Assuming that the employees on the Sunshine List earned just $100,000. their total compensation cost you as a taxpayer over $1 Billion. Of course there are all those employees not on the list probably earning close to $100,000 and many on the list far exceed the $100,000 threshold.

Obscene Compensation
The number of employees on the Sunshine List from OPG is an insult and affront to Ontario taxpayers. But they are just small fish compared to the big Kahunas. (Joe M keep me posted on this),

A 2009 compensation report from OPG shows the real damage to taxpayers of the irresponsible use of taxpayer money to fund the personal pension plans of those running the organization.

Although the numbers seem to be fraudulent and put out as some sort of a joke, I think they are real. That makes them even more horrifying. We can see why Clitheroe wanted to sue taxpayers over her paltry $350,000 a year pension.
Statement of Executive Compensation - OPG

The first portion of the report on page 7 shows the pension and compensation values of the senior executives. A new President and CEO was awarded a 3 year agreement beginning in 2009. That is all the time he will need to become faboulously wealthy and get onto the next government appointed job.

His total compensation was $1.591 Million in 2009. It only shows as $1.011 Million on the Sunshine List  for the same year. This compensation appears to be only for half the year as the outgoing CEO and President made $1.717 Million the same year as well and $3.451 Million the previous year. Of course the outgoing President only shows earnings of $2.475 Million on the Sunshine List the same year he made the $3.451 million.

Thats not all 
There is lots more pain to come for taxpayers. The employees working for OPG have a long list of special benefits they are paid. None of these benefits are paid to the private sector but are part of the public sector collective agreements. They include a laundry list of goodies such as retiree health care plans (for those who retire before 60, they still get benefits), sick time payouts, vacation leave payouts and termination severances.

The total liability on these benefits is close to $2 Billion. See page 125 of the OPG Annual Report  

In 2009 the company contributed $ 271 million into the company pension plan. Since the wages are so low at OPG employees only contributed $ 86 Million into the plan.Most companies in the private sector split the cost of pensions with their workers. At OPG employees contribute only 24% into their gold-plated plans.

Oh by the way. This is not enough money for the pension fund. They are figuring these rates at 7% rate of return for the pension fund. Any guesses who will be covering future shortfalls?

OPEB's or Other Post employment Benefits are escalating at OPG. They are a debt paid to employees who no longer work there but participate in the other benefits. Can you imagine your employer saying here is your gold watch but we are going to pay for your health benefits for the next 10 or 15 years? As you leave we will pay you for 20 years worth of sick days you did not take. We know it is hard to take 10 sick days a year.

More to Come
If you are not feeling ill already go to page 8 look at the value of the pensions for the executive. The NEW CEO is "entitled" to $750,000 year or $62,500 per month at age 65. Of course, this amount will increase every year and probably by the end of his contract will be close to $1 Million. That is $1 Million a year in pensions payments for retiring.  

One executive member has already accumulated in excess of $4 Million in pension entitlements. One would think that someone earning $750,000 a year could save for their own retirement. How do you spend all that money? You would not have to save any of it for retirement, that has already been taken care of by taxpayers.

This is the real reason Clitheroe tried to sue Ontario taxpayers for a $33,000 per month pension. She had pension envy.

Bill Tufts
Fair Pensions For All

"Boot Camp" Examines Pension Cloud over Government Budgets

Over the past week I was in California.

It was  chance to get away and do some work writing for the upcoming book I am writing with Lee Fairbanks called Pension Plunder.

I was invited to the Bootcamp by Jack Dean the publisher of Pension Tsunami.

Jack works with California Pension Reform CFR and they were the hosts for the event. California provided a nice break from winter and the Bootcamp provided me with a good reason for a get-away

I had a chance to share lunch with Marcia Fritz the founder of California Foundation for Fiscal Responsibility  and Scott Baugh Former Republican Leader, California Assembly. It was a very interesting day and provided lots of insight into issues that elected officials and city managers have in dealing with the aging time bomb. 

The seminar was a sell out and there were an additional 350 people listening to the program live over the internet. There were a wide range of people in attendance from self proclaimed unions thugs to elected city councilors, mayors and taxpayer groups.  At lunch we were joined by the City Manager and an elected official from Loma Hills California. 

The event was presented to better help key decision makers better understand the pension tsunami and hear about timebombs set to go off for municipalities around California.  The biggest surprise were the costs of OPEB's (Other Post Employment Benefits). 

Although the focus of the event was California all governments at all levels have identical problems when it comes to the issue of employee entitlement packages. A lot of discussion was had around the changes that have to be implemented in order for the system to survive. 

Marcia told me the biggest challenge of the issue is understanding exactly what the problem is and making people aware.  There is a lot of myth and misinformation out there about the problems that exist and the Bootcamp was a great way to start to begin the discussion on what needs to be done. 

The feature speaker was Girard Miller and he had some very interesting perspectives. His presentation was called The Power of No. He has written many articles and papers about pensions and the key issues surrounding reform. Poor Pension Math

I hope that in future blogs I will be able to share some of the details of the information that we heard. There was a wide range of experts and they focused on those issues that can make a big impact for taxpayers and their employees. 

"Boot Camp" Examines Pension Cloud over Government Budgets

 Lawmakers Head to Pension Boot Camp

Bill Tufts 
Fair Pensions For All

Ontario Hydro a big shock for taxpayers

Ontario Hydro releases 2010 results.
http://www.newswire.ca/en/releases/archive/February2011/10/c9885.html

Every year taxpayers in Ontario are made aware of how Ontario Hydro is being used by its employees as their personal piggy bank.

Politicians and management refuse to stand up to the Hydro employee unions and in fact have promised to guarantee their gold-plated benefits and well into the future. The government makes the promises and you will be paying for them

The top earners from the Sunshine List every year are usually from Hydro. Last year the head of Ontario Hydro was third on the list at $977,000 and the head of Ontario Power Generation came in first making more than $2.2 million.

In addition to the top dogs Hydro over 2,000 employees make it to the list that reports on employees earning over $100,000 per year. This number is only the base salary paid.

Salaries are only part of the story. Employees at Hydro also earn gold-plated pensions and platinum benefits. Benefits and pensions contributions are worth about an extra 35%.

Ontario Hydro just reported their 2010 results and the trend to skyrocketing pension and benefits costs continues. This year Hydro paid almost half a billion dollars for these benefits.

This year the company paid combined pension and benefits expenses of $ 453 million. Costs were $191 million  for pensions and $262 for benefits.

Pensions costs have skyrocketed from $86 million in 2006 to $191 million this year. This is a 122% increase.

In most companies the employees are responsible for a portion of their retirement costs. In the private sector a 50/50 contributions is standard practice. At Hydro however, the employees contribute only 15% of the cost of the gold-plated pensions. Over the past 5 years the company has contributed $585 million into the pension plan and employees made a paltry $99 million contribution.

Employees are entitled to pensions unheard of in private sector. They are entitled to 70% of their average terminating salary. Employees hired before 2005 get a pension based on their top 3 years of salary. Newer employees are entitled to a 5 year average plan.

A recent piece of taxpayer paid propaganda was mailed to Ontario households with a warning from McGuinty that hydro rates will rise for many years to come in Ontario. Now we know why.

The story only gets better. Ontario Hydro does not have to pay all of its costs incurred in a single year. There is a category called Future Employee benefits or OPEB's, Other Post Employee Benefits. These are benefits accrued this year but to be paid in future years. It is a loan to employees for future goodies. The liability of OPEB's at Hydro is now just short of one billion dollars. The actual total this year is $980 million up from $716 million in 2005. An increase in liability of 36% since 2005.

OPEB's mean that Ontario taxpayers in addition to paying gold-plated pensions pay for more benefits at the time of retirement or after they retire.

Some of the OPEB's include the employee termination packages such as vacation time payout and vacation time payouts. A bonus to be received for terminating employment. Also most will retire around age 55 they are entitled to full health benefits until age 65.

The total of goodies paid to employees plus the loans you have made to them have added up to $2.9 Billion over the past 5 years. Hydro has returned to taxpayers a profit of $ 2.4 Billion.

Please don't be fooled by election bribes in the form of energy tax credits from the provincial government. For Ontario taxpayers Ontario Hydro continues to be a shocking experience.


Bill Tufts
Fair Pensions For All

Great Canadian Pension Reform Debate and PRPPs

In a recent edition of the Daily Reckoning the author Bill Bonner had this to say about fairness.

And here's another important point. Since more wealth is only interesting from a RELATIVE point of view...that is, it is only useful when it gives you higher status...a normal, healthy human being cares more about "fairness" than he does about absolute wealth. Of course, fairness can mean practically anything you want it to mean. It can mean fairness of opportunity - as in, we all play by the same rules. Or it can mean fairness of outcome - as in, we all end up in the same place.

In an up and coming economy, with limited government and low taxes - like the US in the early part of the last century - people care more about fairness of opportunity. People are making money. They're creating status for themselves. Things change fast. You are responsible for creating your own wealth, power and status.

Later, as the economy matures, fairness of outcome becomes more important. New wealth is harder to get. It's harder to move "up" in society. People get a hold of the government and turn it into a zombie- protector. They use it to make sure the rich get richer and the poor stay poor.

The banking and investment community is currently in the process of positioning themselves for the PPRP. Terence Corcoran commented on pensions in his article entitled The Great Pension Myth.

If you missed the news and don't have a clue about what these new PRPPs might be, don't worry. I'm not sure the ministers even know what they are. There's certainly no possibility of PRPPs coming into existence any time soon. The politicians issued a brief description of what pooled pensions might look like, then they "tasked federal, provincial and territorial officials to work collaboratively to examine, among other things, changes that would be required to permit defined contribution Pooled Registered Pension Plans across Canada."

While experts have been on the pension-reform case since the stock-market crashes of the last decade undid their pension models, the issues -- technical, ideological, economic, tax, political, jurisdictional and regulatory -- are numerous and complicated. They don't lend themselves to easy solutions, unless you're a union leader and can parade mythologies as reasonable options. All we need, they say, is a massive expansion of the Canada Pension Plan to give all Canadians generous pensions.

The core mythology of pensions is the all-too widely accepted idea that it is possible and even easy for individuals to get more out of their savings and investments beyond a reasonable but modest rate of return. That's the great pension fantasy, an extravagant promise that somehow there is free money to be had.

There are, essentially, only three sources for this free money. 1) New funds can be voluntarily contributed by corporations and employers offering pensions as an employment perk, adding to the total savings returned to the individual. 2) New money can be taxed from others and transferred between generations or income groups to provide higher returns to one set of individuals at the expense of others -- a form of wealth redistribution. 3) Expert investment advisors and managers can achieve dramatically superior investment returns that will reward each individual with larger retirement savings and payments than they could achieve on their own.

There are no other possible sources of bonus pension benefits beyond what the individual contributes. One of those sources, moreover, has proven to be mythical. The stock markets have turned out to be unreliable over the long term, and expert managers rarely emerge as superior performers. It is also logically impossible for all pension managers to beat the market.

The Great Canadian Pension Reform Debate is essentially an attempt to come up with a new way to keep the fantasy alive. However complicated the issues, Canadians should know this basic fact: There is no free pension payoff and any extra returns and bonus payouts will have to come from somewhere.

In an excellent piece the Alberta Venture magazine produced a thoughtful analysis of the current pension situation in Canada.Second Life

Things aren’t much better when it comes to employer pension plans, given the fact that Albertans have the dubious distinction of having the lowest corporate participation rates in Canada. Nationally, approximately 40 per cent of employees belong to a registered pension plan (RPP) offered through the workplace. In Alberta, though, that figure drops to 33 per cent, and if you take out the RPPs in the public sector the total shrinks further to just 18.3 per cent. Mintz thinks that’s a reflection of Alberta’s low union rates relative to other provinces, and the Alberta Federation of Labour agrees. As its 2009 policy paper, The Looming Crisis in Retirement Incomes, states: “It’s simply a fact that workplace pensions are rapidly becoming a thing of the past in non-union companies, and unless the rate of unionization rises, we can expect further declines in pension coverage.”

As a result, the next generation of Albertan retirees are even less prepared than other Canadians for their so-called golden years. Pension analysts caution that Canadians on average are currently on track to replace only half of their pre-retirement income, when 60 to 70 per cent is the generally recommended guideline for comfort. But Alberta’s “replacement ratio” is only 45 per cent, which again is the country’s lowest. In fact, according to a University of Waterloo retirement study funded by the Canadian Institute of Actuaries, two-thirds of private-sector workers currently earning between $30,000 and $100,000 won’t have enough retirement income to cover basic living expenses. Canada still has the lowest poverty rate among seniors in the world, but how much longer will that last?

Governments around the world are particularly worried about the state of the first pillar, government-funded pensions and programs, which will be under even greater pressure in the years to come as the massive baby boomer demographic becomes a senior citizen explosion. Under such a scenario, the sheer volume of new retirees drawing on entitlement programs would threaten to deplete reserves that a comparatively smaller workforce won’t be able to replace in time for their own retirement. Germany and Australia have already reacted to this potential crisis by raising the eligible retirement age from 65 to 67, while the United States and Great Britain are quietly shifting theirs to 67 and 68 respectively. Here in Canada, calls for an increase to CPP premiums have come from labour leaders and the political left, but in December of 2010 Finance Minister Jim Flaherty announced that the Canadian government would go in a different direction. Rather than making significant changes to the CPP, the government instead decided that it will create a new pension instrument called the Pooled Registered Pension Plan, a voluntary program that will be administered by the financial industry.

While the shakiness of the first pillar is grabbing headlines worldwide, the second and third pillars aren’t in much better shape. When Nortel declared bankruptcy and refused to honour its pension obligations, retirees discovered that the once ironclad reward of a corporate pension for years of dedicated service may be no more than a hollow and unenforceable promise. Others watched their retirement funds evaporate as RRSP savings lost up to 30 per cent of their value during the recent economic downturn and related stock market collapse. And as more soon-to-be retirees approach their golden years without having paid off their mortgages, even the idea of cashing in by downsizing one’s home is becoming a dubious option.

Beginning in the late 1990s, businesses began to shift the burden of providing for retirement from their shoulders and back onto those of their workers. The gold-plated defined benefit pension plans of the past are fast becoming an endangered species in corporate Alberta, rarely seen outside the safe confines of unionized and public-sector workplaces.

The defined benefit plan guarantees a worker a set income for life after retirement, one that’s usually indexed for inflation. The precise amount is determined by an employee’s cumulative contributions from years of service and the total wages that they earned during that time. If that sounds a bit like CPP, it’s no coincidence. The CPP is a classic example of a defined benefit plan, although one that’s maintained by the government rather than a corporation.

For businesses, the defined benefit system system worked well in an era when employees tended to stay with one company for the bulk of their career. It also reflected the spirit of the time, one in which corporations took on a paternalistic role in their relationship with employees in exchange for their loyalty. Not surprisingly, corporations were more adept at reading the writing on the wall about the looming pension crisis than governments were, and they acted accordingly. Several decades ago they realized that saddling themselves with predetermined payments to an ever-increasing pool of former employees, who also happened to be living longer, was no longer financially sustainable.

If the plus-45 set is mourning the passing of the defined benefit pension plans that their parents enjoyed, there’s a younger generation of workers who may not even know what they’re missing. Kristin Smith, a pension lawyer with Spectrum HR Law LLP in Calgary, feels the up-and-coming generation of employees have moved past the direct benefit versus direct contribution debate. “Most have never had a direct benefit plan so it’s not an issue. For them it’s something from the past that their parents had.”

Something else their parents didn’t have is responsibility for managing their own portfolios. “Employees must become more engaged in their retirement future,” Smith says. “But are they prepared to do so? Some do better than others, but employees who invest conservatively in low-risk default options like money markets or GICs may find they aren’t earning enough to pay for their retirement.” The issue of financial literacy comes up over and over again at conferences, she says, but it’s yet to be adequately addressed. Making matters more complicated is the fact that companies are legally prohibited from providing direct advice for group RSP or direct contribution plans. But, Smith says, they can help with financial education by bringing in outside advisors and providing the best information available in order to encourage employees to make good choices.

This leads us to the current plan on the table the Pooled Pension Retirement Plan. A good overview of what is currently know about the PPRP was released on a blog by http://calgary-accounting.com - What is the framework for Pooled Registered Pension Plans?

So far the plan is well thought out and building on previous work done on retirement savings plans. On of the key foundations that can be seen in the PPRP design is the work of CAPSA. This work was initiated to deal with the decline of defined benefits pension plan. It set out the guidelines that employers needed to adhere to to properly manage defined contribution savings plans in the workforce.


Bill Tufts 
Fair Pensions For All

The future of pensions in Canada

 
Recently Arnold Schwarzenegger spoke at the Montreal Board of Trade. An article about his event was posted in the Montreal Gazette I am a little bit unique. In his first comments he spoke about the pension issue.

In California, public pension underfunding was pegged at about $50 billion, but analysis by university researchers revealed it was $500 billion, he said.
"Now the federal government is for the first time looking into what is the liability (for) each state. This will be a disaster in the future when it all comes out," he told a Board of Trade of Metropolitan Montreal luncheon.
"Right now they know about it and they should do something about it and they haven't done anything about it."

By now everyone recognizes that there is a pension tsunami coming. We are still not aware of the true extent of the damage it will cause and a lot more investigative work needs to be done to disclose the real numbers. 

In anticipation of the seriousness of the tsunami some policy makers are attempting to bring about changes that will deal with the crisis. One of these is a recent proposal to allow American state to go bankrupt. The proposal was outlined in an article from the Los Angeles Times and was written by Jeb Bush, past Governor of Florida and Newt Gingrich, a Presidential hopeful. In Better off bankrupt they highlight their proposal.

During the 2008 financial crisis, the federal government reacted in a frantic, ad hoc fashion, tapping taxpayers for bailouts galore, running roughshod over the rights of bondholders and catching the American people unaware and unprepared. In contrast, we still have time to prepare for the looming crisis threatening to engulf California, Illinois, New York and other state governments.

The new Congress has the opportunity to prepare a fair, orderly, predictable and lawful approach to help struggling state governments address their financial challenges without resorting to wasteful bailouts. This approach begins with a new chapter in the federal Bankruptcy Code that provides for voluntary bankruptcy by states, a proven option already available to all cities and towns across America.

The figures for next year's budgets are staggering. California, which faces a $25.4-billion budget shortfall, will pay $100,000+ pensions to more than 12,000 state and municipal retirees this year. A Stanford study puts the state's unfunded pension obligations at more than half a trillion dollars. Illinois has a $15-billion budget deficit, prompting its governor and lame-duck Legislature to hike its personal income tax rate by 66%. New York, where 73% of the government workforce is unionized, is staring at a $10-billion deficit.

One of the key issues they try to address is:

Second, as with municipal bankruptcy, a new bankruptcy law would allow states in default or in danger of default to reorganize their finances free from their union contractual obligations. In such a reorganization, a state could propose to terminate some, all or none of its government employee union contracts and establish new compensation rates, work rules, etc. The new law could also allow states an opportunity to reform their bloated, broken and underfunded pension systems for current and future workers. The lucrative pay and benefits packages that government employee unions have received from obliging politicians over the years are perhaps the most significant hurdles for many states trying to restore fiscal health.

Recently Paul Helyer was quoted in the Winnipeg Press regarding his retrospective look at the Canada Pension Plan. The article was called Best pension plan we never got

When the original plan was presented to the Pearson cabinet in the spring of 1963, I considered it unimaginative because it addressed solely the amount of retirement income, and then only in part.
It ignored other critically important areas such as portability (from job to job), early vesting rights in private plans, the gross inequities between citizens and the economic impact of another pay-as-you-go program that would be paid from current taxes.

I considered the proposal thoughtfully and came to the conclusion that I couldn't support another unfunded plan in addition to the old age pension. It was too much at odds with the long-term interests of the baby boom generation, which would have to pay the taxes for both.

I decided to oppose the proposal to the best of my ability and, when I lost, as seemed inevitable, resign.

The alternative was universal, funded, totally portable, fully vested from Day 1, equitable, and adequate to meet the needs of all retirees. In effect, from the day a student got his or her first paycheque from McDonald's, deductions from both employer and employee would be made and deposited to the latter's retirement account.
The system would apply universally to both part-time and full-time employees in all income brackets, and be merged with all existing plans with grandfathered benefits so no one would be worse off as a result of the transition. The self-employed would be included.
Funds would be administered by 10 or 12 large Canadian financial institutions that would have included the big banks and insurance companies as well as major trust companies (before the banks were allowed to buy or merge with the trusts in order to eliminate competition).

The CPP plan did not enjoy the swift and easy passage its sponsors had hoped for. Provincial acquiescence was far from automatic.
In fact, Quebec decided it would prefer a funded plan of its own so the CPP could no longer be touted as a national plan.
Federal scouts were sent to Quebec and they came back recommending that Ottawa adopt the Quebec plan, that was partially funded, if only to make it look national in scope.
When this was agreed, the PM said the compromise was sufficient that I should stick with the ship, which I did.
When I review the file on the CPP, however, I shake my head in dismay. Every problem that could arise, did. The plan was badly underfunded so deductions had to be raised; political interference in management of the funds has been a source of constant irritation to those who seek objectivity in these matters; and, worst of all, there is no pretense of equity that was presumably the rationale for the CPP in the beginning.
So here we are, almost a half-century later, back at square one. Based on a proven record of being unable to learn from our mistakes, one can assume the policies and politics of expediency will prevail once again. Pity!

Our system of entitlements and pensions in Canada is based on the concept of an ever growing economy. Its like a giant ponzi scheme. The new people coming in work harder and increase productivity to create more wealth. Not only enough wealth for there current needs but enough to carry the wave of retirees before them. Those who are now on pensions and need healthcare.
It's the demographics stupid (Clinton). 
For the past 15 years that I have been in the financial services industry we have been selling all of the features of an economy growing under the tsunami of baby boomers. We all know the story starting with diapers and going through to mutual funds. Everything the boomers needed exploded. 

Now we want to sell a different story that demographics are not important any more. We won't end up like Japan. Pensions are sustainable. Let's not be so sure. 


At the recent CFA (Chartered Financial Analyst) conference in Edmonton, one CFA noted the future may be anything but friendly. Looking ahead to modest recovery -- or to Armageddon

The scariest of the forecasters was Richard Worzel, billed as Canada's leading futurist, who said "forecasting one year is crazy," and opted to dwell on what the next decade holds. He says in the next 10 years the TSX will decline 70 per cent, the S&P500 some 75 per cent, the Canadian 30-year bond yield falls to 1.25 per cent, the Canadian dollar to 80 cents US, gold will soar to $2,375 US an ounce, and oil will dive to $47 US a barrel. In other words, the future is anything but friendly.

"Over the next 10 years we will see slowing labour-force growth, which means lower GDP (gross domestic product) growth; steadily rising oil prices and other forms of inflation, which will further slow economic growth; steadily rising numbers of natural disasters disrupting economic activity; and a financial debacle that will make the crash of 2008 look like a Sunday school picnic."

Worzel said that with three-quarters of the Earth's surface covered in water, and virtually all our discovered oil on or very close to land, we're not running out of oil, merely of cheap oil.

One hope for salvation is that "over the next 10 years we are going to see a 1,000-times increase in the power of computers, and that allows the potential for dramatic increases in productivity."
And otherwise?

"There's a highly predictable financial disaster coming towards us due to our own bad habits, bad planning and bad behaviour," he said.

"The U.S. deficit is higher than anytime -- other than when it's been at wartime -- in the last century. And it's happening at the worst possible time in history because of the aging of the biggest generation in history, the baby boomers."
He said pension and health-care liabilities will spread well beyond Europe.

"America will suddenly look like Greece, with civil servants picketing in the streets and demanding that their benefits not be cut, while sitting governments have no choice but to do so. The same demographic problems and same over-promises made to civil servants and same financial pressures in retirement and health-care benefits will bedevil all developed countries, including Canada.

"The Canada Pension Plan is actually in very good shape because of the reforms made in 1996, but health care is a huge liability in Canada."

The motto for investors, like the Boy Scouts, is "be prepared."
"Conduct yourself as if it were business as usual now," Worzel said. "But have a Plan B in your back pocket for when the world goes to hell in a handcart.
"And when that day comes, head for the exits without looking back, because it's going to be bad."

The train wreck is coming, how bad will it be and how can we best mitigate the damage? 

Bill Tufts 

Fair Pensions For All