Thursday, March 19, 2009

Bolstering Canada's Pension System?

I spent a good part of my Wednesday morning at the pension hearings that came to Montreal:
Following up on a promise from last month’s budget, the federal government on Monday announced details of a public consultation process on the regulation of private pension plans that fall under Ottawa’s jurisdiction.

Finance Minister Jim Flaherty’s office said public hearings will take place in eight different cities, beginning March 13 in Ottawa and ending April 17 in Winnipeg.

"Many Canadians are concerned about the long-term viability of their pension plans," Flaherty said in a statement. "The government wants to hear people’s views on how we can strengthen the security of pension-plan benefits and ensure that the framework is balanced and appropriate."

The hearings will be chaired by Ted Menzies, Flaherty’s parliamentary secretary and an Alberta MP.

“We announced this consultation process in January, and we committed to getting it up and running quickly because this issue is important to many Canadians,” Menzies said.

The federal government regulates private-sector pension plans for employees working in sectors under its jurisdiction, including banking, telecommunications and interprovincial transportation. Such pensions account for about seven per cent of private pension plans in Canada, said the Department of Finance.

The public consultations take place as follows:

• March 13 in Ottawa

• March 17 in Halifax

• March 18 in Montreal

• March 20 in Toronto

• April 14 in Vancouver

• April 15 in Whitehorse

• April 16 in Edmonton

• April 17 in Winnipeg

Mr. Menzies did an excellent job chairing the hearing and there were some other representatives from Finance Canada taking notes and assisting him. The consultation tour is critical for the long-term viability of our pension system.

I missed the first couple of presentations from Bell Canada and CSN, but I got to hear what the representative from CN Investment Division and the consultant from Morneau Sobeco had to say.

The presentations were solid and several ideas were bounced around like increasing the amortization period for pension funding to ten years, increasing transparency, securing pensions by allowing pensioners to have first right on a company's assets if it goes under.

You can read all about the background to this consultation tour by clicking on this link to the Department of Finance website. There you will find a consultation paper and an email where anyone can send comments (

Most of the speakers today will submit their comments and these will be made available on this website once the consultations are finished.

I spoke very briefly this morning, hammering the point that a "nuclear bomb has already exploded" and that I saw this coming years ago.

I emphasized that we need to bolster governance by focusing on transparency, accountability and risk management. I mentioned that benchmarks used to compensate senior pension officers must reflect the risks of the underlying investments. I stressed the need for independent performance audits, above and beyond financial audits. I also mentioned that we need to ensure that OSFI and other regulators have sufficient resources to track what is going on in these pension funds.

But what struck me today were that very few people showed up to the hearing and most of them were retired and current workers from Air Canada, Nortel and other companies.

One by one, these workers expressed their anger towards regulators, pension consultants, companies and the government. There was a fellow from Nortel who retired and was worried about his pension. there was a retired worker from Air Canada who said that back in 2004, they increased the amortization period and four years later they are still in a mess. There was another guy who spoke about the increase in depression cases at his company as workers fear the worst.

In short, there is real fear out there and these people came to express their concern and their dismay at the way their pension promises were squandered, leaving them in a most precarious position.

I couldn't help thinking that all those "pension experts" who spoke at the beginning are investment professionals or consultants, far removed from the struggles of the people they invest for.

I include myself in this group of people. It's rare that you get to hear the worries of retired workers or current workers first hand. Where was Henri-Paul Rousseau today? Where were the presidents of other major pension funds? These are the people behind the numbers. These are the people paying your big fat bonuses when you do well and your golden parachutes when you get fired.

Today, the Globe and Mail reports that seven major companies, including Air Canada, Canadian Pacific Railway Ltd. and Bell Canada, are urging Ottawa to ease rules on pension plans, saying they are too onerous:

Current regulations in Canada are making an already tough situation for the airline and others even worse by forcing huge increases in pension contributions by corporations, Air Canada chief executive officer Montie Brewer said in an interview.

“This is not a bailout,” Mr. Brewer said. “We're looking for a recalibration in the interest of all parties that doesn't involve money being paid out by the government. It's recalibrating how the pension payments are made and how the deficit is decided.”

Mounting pension woes are “sapping the energy of Canadian CEOs at a time when we should be growing our companies and making them healthier,” he said.

Air Canada effectively funnels revenue from the first four passengers boarding a plane toward pension payments, and the figure could increase to the first six travellers as the airline's pension deficit widens, Mr. Brewer said. He hopes to hear back from federal officials by late spring on what changes may be in the offing.

While he declined to name others pushing for reforms, an industry source said the other six firms are CP, Bell Canada, MTS Allstream, Canadian National Railway Co., Canada Post and Nav Canada.

The group is supported by the Federally Regulated Employers - Transportation and Communication (FETCO) organization, whose members include Telus Corp. and the Canadian Broadcasting Corp.

FETCO submitted a consultation paper on pension reform this week to the Department of Finance, backing earlier lobbying by seven chief financial officers and their CEOs.

Ottawa kicked off consultations on federally regulated private pension plans last Friday, and will wrap up the cross-country tour in Winnipeg on April 17.

A Finance Department spokesman declined comment on Tuesday on submissions by Air Canada and others.

Mr. Brewer said Air Canada is at a competitive disadvantage to WestJet Airlines Ltd., which doesn't have a pension plan, and U.S. carriers such as American Airlines Inc., Continental Airlines Inc. and Delta Air Lines Inc., which are subject to more lenient funding requirements than in Canada.

“The pension rules in Canada are so strict that they're putting more risk onto the plans. We have to carry this extra burden. The best protection for any pension plan is a healthy company,” he said. “It's the No. 1 issue facing our employees and our pensioners.”

Montreal-based Air Canada, struggling with a $3.2-billion pension solvency shortfall, is trying to persuade Ottawa to make changes this year, with Mr. Brewer complaining that onerous funding contributions are stifling the growth of Canadian corporations.

Companies in a variety of sectors already had been keeping a watchful eye on their growing pension deficits or shrinking surpluses even before last year's global financial crisis and stock market plunge. CP's pension deficit, for instance, nearly quadrupled to $1.6-billion at the end of last year, compared with Dec. 31, 2007, while Air Canada's deficit soared 172 per cent. CN had an $881-million pension surplus at the end of 2007, but has yet to calculate a 2008 valuation.

Last fall, Ottawa offered temporary relief for federally regulated plans, granting them a 10-year amortization period rather than five to help bridge differences between their asset values and their pension obligations.

Air Canada and others say they are lobbying the government for a permanent change, but without certain conditions such as member consent and letters of credit attached to the temporary measures.

New measures being sought would have the effect of reducing the volatility in pension funding. Air Canada contributed $456-million to its employee defined benefit plan last year, but faces sharp increases in payments in the years ahead, including potentially more than $800-million for 2009 under current rules, Mr. Brewer said. The carrier's pension plan had assets of $9.7-billion at the end of 2008.

Freeing up money for companies to spend on capital projects instead of pension funding will “help generate economic stimulus,” Mr. Brewer said.

U.S. corporations have more flexible solvency payment schedules than Canadian firms, which are seeking to have the “AA corporate bond index” used in determining solvency liabilities instead of historically lower government bond rates, Canadian firms argue. Another proposal is to have a “smoothing mechanism” for solvency funding purposes to reduce wild swings in contributions.

Global investors have noticed the pension burden in Canada, and “that makes it harder for us to attract investment,” Mr. Brewer added.


Group of Seven: Air Canada, Bell Canada, MTS Allstream, Canada Post Corp., Nav Canada, Canadian National Railway Co. and Canadian Pacific Railway Ltd.

Pension contributions in 2009 of seven firms, if five-year amortization: $3.5-billion

With 10-year amortization: $2.4-billion

Supporting cast: FETCO (Federally Regulated Employers - Transportation and Communication) organization, including Canadian Trucking Alliance, B.C. Maritime Employers Association, Iron Ore Co. of Canada, Maritime Employers Association, Canadian Airports Council, Purolator Courier Ltd., Canadian Broadcasting Corp., Telus Corp., Via Rail Canada and Western Grain Elevator Association. All of the companies, with the exception of MTS, are members of FETCO.

For their part, labour groups are troubled by corporate pleas for reforms, arguing that such proposals amount to a seismic shift that will burden employees and retirees:

Union officials warn that pension plans will be severely weakened if corporations are allowed to reduce their annual funding obligations, as proposed by seven major companies lobbying the federal government for reforms.

“It's a transfer of risk to the plan members, be it current employees or retirees. We don't think this is responsible,” said Captain Paul Strachan, chairman of the master executive council at the Air Canada Pilots Association.

He was responding yesterday to proposals by Air Canada and six other organizations that urge Ottawa to relax regulations, which they say effectively force companies to increase their contributions as pension deficits grow or surpluses dwindle. The other firms pushing for more lenient funding requirements are Bell Canada, Manitoba Telecom Services Inc., Canadian Pacific Railway Ltd., Canadian National Railway Co., Canada Post and Nav Canada.

Ian Markham, director of pension innovation at consulting firm Watson Wyatt Canada, said permanent changes are needed for solvency funding rules and other elements must be introduced to enhance benefits security.

“The status quo is not an option,” he said. “We're trying to keep the defined benefit pension system going for many decades into the future.”

Bob Baldwin, an Ottawa-based pension consultant, said last year's stock market plunge damaged pension plan assets, and with the current economic turmoil, some companies will be hard-pressed to meet funding obligations in 2009. Last fall, Ottawa granted a short-term break to corporations by allowing a 10-year amortization period instead of five years for the purposes of calculating pension solvency for 2008. Employers say the federal government only took a small step in offering the temporary relief to federally regulated private pension plans.

Now, the group of seven corporations wants Ottawa to approve a permanent change to a 10-year amortization system, but remove restrictions such as having companies obtain letters of credit or plan member consent.

Thomas d'Aquino, president of the Canadian Council of Chief Executives, said the need for reform isn't limited to federal jurisdiction. “Provinces including Alberta, British Columbia and Ontario are in the process of reviewing their respective pension systems, and the issue is affecting employers in all jurisdictions,” he said in a letter this week to federal Finance Minister Jim Flaherty. “These overlapping reviews create both a risk of further inconsistencies between jurisdictions and a historic opportunity to co-ordinate badly needed reforms,” Mr. d'Aquino wrote.

Lawyer Simon Archer at Koskie Minsky LLP, a Toronto law firm whose clients include unions at some of the companies lobbying the government, said the proposals threaten to produce “a tectonic shift in risk from shareholders to employees and retirees. These companies cannot obtain credit in current markets, and so they are instead asking the government to act to transfer financial risks to employees and retirees.”

Ottawa kicked off consultations on federally regulated private pension plans last Friday, and will wrap up the cross-country tour in Winnipeg on April 17.

Susan Eng, vice-president of advocacy at the national seniors group CARP, said she's outraged by the corporate proposals. “The employers claim that they're out to protect pensioners, but they're not,” she said. “The reality is that companies have pensions obligations.”

The companies do have pension obligations, but most of them have not taken them seriously. Instead of protecting the downside, they got overexposed to stocks as they fixated on this unrealistic 8% rate of return.

Worse still, they bought hook, line and sinker the garbage that pension consultants were feeding them to "diversify' away from stocks and bonds into alternative investments without properly understanding the risks of these investments.

The ensuing disaster didn't materialize right away, but eventually this Ponzi scheme had to come to an end, exposing the myths of "stocks for the long run" and "alternative investments will always offer risk-adjusted absolute returns".

The reality is that these pension funds took excessive risks with other people's money so that senior pension officers can enrich themselves. One by one, presidents of major pension funds are telling us that this is a once in a lifetime event and not to worry because markets will come back and everything will be fine over the long-run.

This is pure fantasy. I agree with the former Bank of Canada governor David Dodge who in an exclusive interview to the Globe and Mail today, a year after he left the bank, said that Canada and the world are facing a long and deep recession that will fundamentally alter the nature of capitalism:

Recovery “is not going to be as quick as everybody thinks,” he said on Tuesday. “I think anybody would be dreaming in Technicolor to think that you're going to get through this by the third quarter of this year.”

The Bank of Canada has forecast a fast turnaround for Canada, with growth resuming in the second half of this year and soaring to 3.8 per cent next year, although downward revisions to that rosy outlook are in the works. Mark Carney, the current governor, suggested last weekend that the global economy was deteriorating faster than he thought and the next forecast in April will reflect that pessimism.

For his part, Prime Minister Stephen Harper has boasted that Canada will lead the turnaround. Ottawa expects a healthy recovery that will bring its books back into surplus by 2013.

“They're not going to do that. It's totally unrealistic,” said Mr. Dodge, who is now a senior adviser at law firm Bennett Jones LLP.

While the financial breakdown that underpins the global crisis can be repaired, it will be years before bank lending revives, which will slow a bounce back in the global and Canadian economies, he said.

In the meantime, he sees unemployment climbing to above 10 per cent in Canada, as well as a permanent, painful contraction of several mature industries such as automobile production and newsprint, and a sober reassessment of investment in oil sands.

Policy-makers, especially in Canada, need to be thinking longer-term and more “sensibly” about their recovery plans, he said, rather than setting up spending plans that just paper over today's problems or “piss money down a rat hole” in the hopes of a quick recovery.

Even though Mr. Dodge made his name across Canada for leading the fight to eliminate the deficit in Canada in the 1990s when he was deputy minister of finance under Paul Martin, the former bureaucrat did not balk at the idea of running sizable deficits for a few years to help resolve a recession – as long as the money is spent wisely.

Canada can afford to run deficits for a few years in order to rebuild and emerge from the crisis in good shape, he said, doing some quick math on the fly to calculate how much interest Ottawa would have to pay to service a rising debt load.

But rather than obsess on designing short-term programs that will expire in a couple of years with the aim of returning quickly to surplus, he said, Ottawa should be spending in areas where there will be a payback to the Canadian economy later in the next decade, and where governments have not been able to spend sufficiently in the past.

“Everybody was afraid to do anything that has a tail because of the sense that this was going to be short and sharp,” Mr. Dodge said. “But I just don't think it's going to be short and sharp, not because of what we in Canada are facing, but because it's going to take a while for the world to come back.”

Urban infrastructure should be a key target for government spending, but won't benefit much from short-term programs that rely heavily on provincial governments and the private sector to match federal spending, he said.

Information technology in the health-care sector should also be a prime target, he said, since it is badly needed and there are now plenty of human resources in the technology sector who could be put to good use.

“We're thinking of it as stimulus, somehow, as a bridging exercise, instead of recognizing that it will be a somewhat longer period of recovery and that we really need to do some of these things to augment our productivity down the line.”

As recovery takes hold, Ottawa could then raise taxes a bit – by, say, increasing the GST by a percentage point – to nurse the country's books back to health.

“A little bit of tax here and there would do it,” Mr. Dodge said.

He always opposed the federal government's move to cut the goods and services tax by two percentage points in the first place. The hole the tax cuts made in government revenue left Ottawa with a structural deficit at the end of the 2007-2008 fiscal year, he said – even though the Finance Department won't admit it.

So, raising the GST to make up for recessionary spending “is a very sensible way to do it.”

But the world will never go back to the way it was, according to Mr. Dodge.

Economies have recovered from previous recessions as companies and consumers took advantage of low interest rates to take on debt and grow. But this time, building up such leverage is not an option because credit markets are dysfunctional.

Even after global policy-makers have figured out how to absorb toxic assets, banks – including Canadian banks – will face steep loan losses because of their exposure to overburdened households and failing companies. Banks will be in no shape to resume lending for years to come, Mr. Dodge predicted.

And the fast-and-loose ways of investment bankers that juiced up growth in the past decade will no longer be acceptable, he said. Rather, the West will take some lessons from China on how to control capital markets.

For years, the West has pressured China to “liberate” its financial markets and let prices float freely. But the ongoing global crisis will mean that China could give the West some lessons too, Mr. Dodge said.

For Canada, that means the Canada Mortgage and Housing Corp. should be cracking down more on who gets mortgages. It also means stricter regulation of securities.

But it could also mean that Toronto could take advantage of its relatively stable banks to become a globally competitive financial centre, Mr. Dodge added.

Still, Canadian banks will face some tough times in the months ahead, he said, as loan losses mount.

“Our guys are, I'd say, reasonably well provisioned. But even they will struggle to absorb what are inevitably going be loan losses that are probably larger than the provisions they've taken on their books already.”

The recession will also force Canadians to re-evaluate their economic dependence on commodities, Mr. Dodge said. Commodity prices will recover one day, but the recession has made it clear that the oil sands are precarious since they are such high-cost entities, and new investment is risky.

Canadian policy-makers made a mistake to not save more of the bounty that flowed from high commodity prices over the past few years, he said, suggesting they should have set aside revenues in a special fund like Norway.

But the recession should also draw attention and money to Canada's hydro resources in the North, and should prompt innovation in green technology, he added.

“We ignore [global warming] at our peril.”

We have also ignored many problems in our regulatory and pension system for far too long - at our peril. The pension time bomb has exploded and we are racing against the clock to try to patch things up.

As I listened to these retirees describing their plight, I couldn't help but think that one day I will be their age worrying about my retirement security. These people deserve better than what is being offered to them.

In fact, we all deserve better than the current system of casino capitalism. For far too long, we entrusted pension managers, consultants and financial gurus with our hard earned money.

It is time we hear what workers and pensioners have to say about their money.

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