Thursday, October 29, 2009

Canada's New Public Option?


Frank Swedlove, President of the Canadian Life and Health Insurance Association, wrote an editorial for the National Post stating that a new government pension plan is not necessary:

The financial crisis has elicited much hand-wringing and introspection about the need for a drastic overhaul of Canada's pension system. Canadians are increasingly concerned about their retirement income security. In addition to declining membership in defined benefit (DB) pension plans, these concerns have been dramatically heightened by market downturns that began last year -- with the result that we now hear calls from some quarters for government-sponsored defined contribution (DC) pension plans. To answer those calls with such plans would be a mistake.

Governments are quite rightly asking how to ensure that the retirement savings of Canadians grow, are secure and will generate adequate income when needed. Canada's life and health insurers welcome this interest.

This emphasis on retirement planning is a positive development and the life and health insurance industry has supported recent government reviews of the pension system and continues to work with governments to find solutions. Proposals from governments, think tanks and the private sector should all be considered.

What, then, will encourage more Canadians to save for their retirement and encourage their employers to assist them and offer pension security?

First, we need to recognize that both the public and private sectors have already done a great deal to contribute substantially to supporting Canadians in retirement.

The publicly-funded Old Age Security (OAS) program and the CPP offer important forms of basic assistance. Given recent funding reforms, the CPP is recognized around the world as a successful universal DB plan. But OAS and CPP are not intended to be the only sources of retirement income for Canadians.

Privately-run RRSPs, including group plans, supplement public plans through a wide range of offerings tailored to meet the needs of individuals and their employers. Such plans are a reasonable and cost-effective alternative for some employers who wish to help their employees save for the future.

And then there are DC and DB pension plans that are an integral part of the retirement income for many Canadians.

As service providers to over 70% of the pension plans in Canada, and an even larger share of employer-sponsored group RRSPs, Canada's life and health insurance companies expertly manage the retirement plans of many Canadians. We see some simple ways to encourage pension participation, provide more predictable retirement incomes and reduce costs to consumers.

Governments can encourage much greater participation in pension plans by streamlining and simplifying pension rules. Rather than building something brand new, legislative changes could use existing private-sector infrastructure to expand options.

For example, multi-employer pension plans are currently available to some Canadians, typically those in construction trades, where individual tradespeople may work for many employers over the course of a year. Pension contributions are made by each employer to a single plan, based on the number of hours worked.

Building on this model, multi-employer plans could be offered to all Canadians by eliminating current legislative requirements for an employment relationship between the sponsor and the members. In effect, any employer, and even the self-employed, could participate in a large-scale plan that would provide professional management and increase economies of scale.

Permitting default enrolment into a plan, perhaps at reduced contribution levels for new employees, would increase levels of earlier participation in a cost-effective way. And allowing automatic increases in contribution rates based on age, tenure or seniority would gradually move employees to more robust savings levels.

Similarly, since pensions are currently regulated at both federal and provincial levels, harmonization of pension laws could significantly reduce compliance costs that erode investment returns.

Secondly, Canada's life insurers already offer guaranteed retirement income products that allow individuals to securely shift from asset accumulation into the retirement payout phase. Newer insurance products build on this secure foundation, providing potential market growth while guaranteeing a base level of income. In effect, they combine the income security of traditional DB pensions with the predictable costs of DC plans.

While some of the proposed government-sponsored DC plans have similar characteristics to the expanded multi-employer plans, establishing new government-run pension plans introduces a number of potential disadvantages. One is that it creates a monopoly with the consequential lack of flexibility and innovation.

Second is an expectation by taxpayers that such plans would guarantee retirement income levels, rather than simply invest funds, which could have dire fiscal consequences in the future. Finally, such an arrangement duplicates the infrastructure that the private sector already has in place.

Canada's pension system can work even better with some minor but key adjustments to existing legislation. A massive redesign involving government sponsorship that could introduce new risks to the public purse is simply not required.

It was only a matter of time before the insurance industry got out to peddle its "private sector solution" to fixing the pension problem. But as I have written before, the insurance industry's pension fix is really no solution at all because it leaves far too many Canadians without an adequate retirement income.

When it comes to the pension pie, the insurance industry wants a big piece of the action. Notice how the editorial sounds a lot like those fear-mongering campaigns from U.S. health insurance companies, warning us of the "dire fiscal consequences in the future". The only thing missing was "we don't want a public option for pensions".

The Canadian insurance industry is out to protect its profits. They charge huge fees for those multi-employer plans they manage. They know that they can't compete with a well-governed public pension plan, just like U.S. health insurance companies can't compete with a well-run government healthcare plan.

Of course, the key in all this is good governance, something which wasn't even mentioned in the latest pension reforms. Kathryn May of the Ottawa Citizen reports that more than 500 on federal payroll top $200K:

The Harper government shelled out salaries and bonuses exceeding $200,000 to more than 500 federal employees last year, according to newly released documents.

The largest number of federal workers in a single department who topped the $200,000 mark are at National Defence, where about 160 military personnel earned salaries in that range or higher. That includes the military’s top brass, but 37 are of the top wage-earners are dentists and 108 are doctors.

Defence officials say the forces have to pay such salaries to attract medical specialists from the private sector. In recent years, it also offered signing bonuses to new medical recruits. The military doesn’t pay bonuses.

The list of the country’s top-paid bureaucrats and political appointees was tabled in the House of Commons this week in response to an order paper question by the NDP.

They include about 160 deputy ministers, associate deputy ministers, agents of Parliament, and heads of agencies commissions and tribunals. The appointments to these top jobs are political or governor-in-council appointments overseen by the Privy Council Office.

There are four levels of deputy ministers and all make more than $200,000. Last year, they ranged from about $208,000 to a $300,400 for most senior deputies — who can also earn up to 39 per cent of their salaries in performance pay and bonuses.

The size of the executive cadre in the government has grown steadily over the past decade and so have the number of assistant deputy ministers whose salaries have cracked $200,000. Treasury Board reported that among the government’s 5,400 executives about 69 EX-5s made an average of $214,000 last year — compared to 14 three years earlier. Salaries are in the $186,000 range, plus up to 25 per cent in bonuses.

The RCMP and Canadian Security Intelligence Agency reported that only RCMP Commissioner William Elliott and former CSIS director Jim Judd made salaries over $200,000, but noted that didn’t include staff who made overtime.

After Defence, the next largest single cluster of $200,000-plus wage earners were at the Public Sector Pension Investment Board, the arms-length corporation that lost $9.5 billion last year managing the pensions of Canada’s bureaucrats, military and RCMP. Its president and CEO, Gordon Fyfe, earned the biggest payout of $1.2 million in salary and bonuses.

Its executives can earn bonuses between 95 per cent and 180 per cent of their salaries. The top six executives, whose bonuses were reported, collected about $3.8 million in annual and deferred bonuses.

The PSPIB was warned by some MPs on a finance committee in April against paying bonuses in a recession and with such lagging performance. The board of directors determines executive pay.

However, PSPIB officials said executives received no bonuses for last year’s fund performance. They did, however, receive bonuses for the “personal objectives” they met in 2009, as well as for the fund’s performance between 2004-2007 which had been deferred as a “retention” tool to ensure executives stayed on.

The CBC reported 22 of its executives — whose salaries ranged from $125,000 to $375,000 — to the $200,000-plus list. The Business Development Bank reported eight of its executives topped $200,000. There were also seven at Canada Housing and Mortgage Corporation; seven at the Export Development Corporation; five at the Bank of Canada; three at the Royal Canadian Mint and five at VIA Rail.

The salaries for Crown corporation executives vary from $134,700 to a range of $410,000 to $482,40 for Canada Post president Moya Greene.

The government’s executive pay is determined by a special advisory committee, led by Carol Stephenson, dean of the Richard Ivey School of Business at University of Western Ontario. The committee studies the market and recommends salary, performance pay and bonus packages for all executives, deputy ministers, other governor-in-council appointees and CEOs of Crown corporations.

With the recession, the advisory committee recommended executives face the same wage controls as other public servants this year and performance pay remain at least year’s levels.

The Harper government’s Expenditure Restraint Act forced wage controls on most federal workers in departments and agencies to try and rein in spending. It gave executives the same wage package it imposed on unionized employees: 2.3 per cent in 2008 and 1.5 per cent in each of the next three years.

The restraint act, however, doesn’t apply to some Crown corporations, including larger ones like VIA Rail, the Mint and Canada Post.

PSP Investments lost 23% in FY2009, underperforming its policy portfolio by a staggering 5.1% and they still managed to dole out $3.8 million in annual and deferred bonuses to "retain" their top executives. Doesn't Wall Street come up with the same silly arguments?

And it's not just PSP Investments. With the sole exception of the Caisse, all the major public pension plans doled out big bonuses last year despite disastrous results. CPPIB's senior managers were smiling all the way to the bank after they lost 19% in FY2009.

I can just hear them now: "Stop being so coy, Leo, you know the rules of the game". More like I know all the games most large public pension funds play with their private market benchmarks so they can get away with big (bogus) bonuses at the end of the year.

The Ontario Municipal Employees Retirement System (OMERS) recently announced it's reducing its reliance on external GPs:
The CAN$43bn (€27.4bn) pension fund has decided to move away from externally managed funds and into direct private equity investing, with the goal of shifting its private equity portfolio from 80 per cent direct investments from the current 35 per cent, according to reports.

The pension’s goal is to reduce externally managed investments to 20 per cent of its portfolio. Currently, OMERS’ private equity portfolio is 65 per cent invested through fund managers and 35 per cent through direct investments. The fund reportedly has a target of ten per cent allocation to private equity.

The fund has expanded its global reach over the past year by opening offices in London and New York. At the time of opening the London office, OMERS president and CEO Michael Nobrega said that the fund’s “long-term goal is to invest 42.5 per cent of our net investment assets in private markets on a global basis.” OMERS has $5bn of capital interests in real estate and infrastructure assets in the UK.

OMERS provides retirement benefits to 380,000 members on behalf of over 900 different employers in the province of Ontario, Canada.
So OMERS has a long-term goal of investing 42.5% of its net investments in private markets and it want to shift its private equity portfolio to 80% direct investments from the current 35%.

I have already written on why OMERS is betting big on private markets. Sounds like Mr. Nobrega wants to pull off another Borealis Infrastructure, spining off the private equity group to make a killing in the process. You got to wonder why is he placing so much of the focus on private markets?

Also, if infrastructure investments are so hot, why did Ontario Teachers', the second-largest investor in Macquarie Infrastructure Group, sell its stake ahead of the global toll road operator's expected move to sever its relationship with investment banking parent Macquarie Group:

According to a number of traders who did not want to be named, the 244.7 million securities in MIG representing 10.8 per cent of its issued capital -- crossed on the Australian stock exchange before trading began yesterday -- were sold by Canada's Ontario Teachers Pension Plan Board.

Canada's largest private pension fund, with over $C87 billion ($90bn) in assets at December 2008, OTPP held an 11.7 per cent stake in MIG at June 30, behind only Macquarie's 17.3 per cent stake on the register.

The stake was being offered to institutional investors at a floor price of $1.40 a security through an institutional bookbuild handled by JPMorgan, the traders said.

Securities in MIG were down 11c to $1.43 yesterday. The planned sale by OTPP comes as MIG mulls a split of its toll roads into two separate listed entities with different leverage and growth profiles and also considers severing its management agreement with Macquarie in an effort to make the group more palatable to investors and boost security-holder value.

The proposed split, which many market watchers expect to be revealed at MIG's annual meeting on October 30, follows a review that has stretched over a number of months as the group has grappled with debt of around $30 billion across a portfolio including some highly leveraged and poorly performing road assets that are concentrated in Europe and North America.

A move to internalise management at MIG would follow a similar move completed last week by global airport fund MAp and would be the latest step by Macquarie to distance itself from a listed funds model as it instead focuses on growing its global investment banking operations.

However, MAp endured much shareholder criticism and even legal challenges from investors concerned over the generosity of the $345m its independent directors agreed to pay to Macquarie in lieu of the bank receiving ongoing management and performance fees from the fund, and traders said this could have contributed to the decision by OTPP.

"I don't think that Ontario Teachers were particularly enthusiastic about the fee that is going to have to be paid to Macquarie if they do go down the path to internalise management, so I believe that may be a sticking point," said Justin Gallagher, head of Sydney sales trading at RBS.

OTPP has been a major investor in listed Australian infrastructure companies. It is also the third-largest shareholder in MIG's rival toll road group, Transurban, in which it has a 12.2 per cent stake valued at $700m, and last month sought to increase its stake in Bristol airport to 50 per cent after agreeing to buy 35.5 per cent of the British gateway from MAp for pound stg. 128m ($230m).

Mr Gallagher said the strength of the Australian dollar was probably also a factor in OTPP's decision

The strength of the Australian dollar was a factor behind the unwinding of a major "long-term" asset? It sounds to me like Ontario Teachers' lost lots of money on that deal, providing more evidence that when it comes to private markets, they too are flying off course.

So given all these spurious investments in private markets by public pension funds, why am I still arguing for a public option for pensions? Because, it's the only viable long-term solution to the pension crisis. But to make this work, we need to address the serious governance gaps that still plague our public pension plans. Ignoring them will only lead to more abuse in the compensation that is being doled out to senior pension executives who by and large are delivering mediocre results.

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