Wednesday, February 17, 2010

Pension Crisis is a Myth? Not for Nortel Disabled!


I promised to shift my focus back to pensions. Jack Mintz wrote an article yesterday in the National Post claiming that the pension crisis is a myth:

The myth that the pension system is in crisis grew out of the 2008 financial crisis. Canadians saw an average 20% loss in their portfolios. Pension plans had a similar experience with some becoming insolvent. Nevertheless, a 2009 DBRS survey of 70 defined benefit plans showed that most pension plans were in relatively good shape. The OECD has ranked Canada’s pension system as one of the most sustainable in the world with elderly Canadians having disposable income equal to 95% of working Canadians, third highest of industrialized economies. The poverty rate among the elderly — less than 5% — is one of the lowest among OECD countries

Household net worth at the end of the third quarter of 2009 is six times disposable income, roughly the same as in 2000 at the height of the high-tech boom. Canadians have $5.9-trillion in net assets, including $2-trillion in Canada/Quebec Pension Plan assets, Registered Pension Plans and RRSPs. Housing and real estate equity accounts for another $1.9-trillion and other financial and non-financial assets, net of consumer debt, total $2-trillion (the latter is likely underestimated since Statistics Canada measures private corporate shares at book, not market value).

Given that pension and RRSP withdrawals are fully taxed, Canadians have more retirement assets in the form of housing or financial assets than they do in pensions or RRSPs. These other assets, including housing that can be downsized at retirement, cannot be ignored in any assessment of retirement income adequacy. Certainly, the system is not perfect. But there is no pension crisis. Ask the provincial ministers of finance after surveying the evidence. Dwight Duncan, Finance Minister of Canada’s largest province, was pretty clear about this point after the December Whitehorse meetings.

The claim that Canadians are not saving enough is generally not true — at least 80% are saving sufficiently for retirement. As several studies concluded, Canadians with less than $40,000 have been well protected by government transfer programs, the C/QPP and tax policies with retirement income adequacy at 90% or better. High-income Canadians (those with more than $100,000) have lower replacement income (ranging from 50% to 70%). However, the OECD argues that 50% replacement income at retirement is often adequate for upper-income households, much less than the 70% typically claimed.

The middle-income group is the current focus. But here studies, once incorporating other financial assets besides pensions and RRSPs, show that most have adequate levels of retirement support. The best study by Statistics Canada suggests that about a fifth to a quarter of middle-income Canadians (about 600,000 retirees) have inadequate retirement income below 60% of after-tax working income.

However, the analysis does not incorporate tax-free housing and private corporate assets, which are significant retirement assets. We also do not know how much of this middle-income group with low retirement income has lost jobs during their career, suffered from family breakups, arrived to Canada late in their working lives or have significant assets tied up in their own private business whose income is not included in tax files. This information is needed to figure out the best policies to address any shortfalls.

The third myth is that Canadians must have an occupational pension plan to have adequate retirement savings. A recent Statistics Canada study by Ostrovsky and Schellenberg published late in December raises serious doubts about this claim. The authors show that individuals without occupational pensions have better replacement income at retirement than those who do. Obviously, the investment returns net of fees for various saving instruments have not undermined the ability to ensure adequate retirement income. Even if one ignored employment earnings after the age of 65 (people without RPPs work more in later years), Canadians without pensions have more RRSP, financial income and capital gains compared to market income of those who have a pension, regardless of income.

Some have argued that the RRSP system has failed but even this claim is not supported by evidence. Most lower-income Canadians do not always contribute to RRSPs since they have sufficient retirement income through other means. Over 60% of unused RRSP contribution room is in this category. Leaving out this group, a large proportion of Canadians contribute to RRSPs for many consecutive years. Compared to pension funds, RRSPs provide flexibility to savers since the funds could be used for family emergencies and other contingencies without being locked-in.

Some argue that, unlike existing retirees, working Canadians will have difficulty earning good investment income in the future. However, this is just an assertion and not based on any particular modeling. Instead, a different argument could be hypothesized. The return on assets could rise if global saving rates, expected to decline due to heavy indebted governments and aging in industrialized countries, are inadequate to support abundant capital spending on infrastructure, alternative energy supply and economic growth in emerging countries. With excess demand for saving, the return on investment rises, making it easier to fund retirement needs. Certainly, no easy conclusion can be reached without better analysis.

Overall, Canadians have shown that they have made good decisions for themselves. True, some Canadians might have inadequate savings for their retirement and the system could always be made to perform better than now. Those issues will be addressed by Ministers in the future. In the meantime, we should not panic into adopting measures that are not evidence-based.

I think someone should show Jack Mintz a recent BMO survey which showed one third of Canadians have no RRSPs and of those who do, an overwhelming majority (80%) are not confident that their RRSPs investments will provide enough for their retirement. Nearly half of the respondents feel they do not contribute enough to their RRSPs to meet their retirement goals.

But hey what pension crisis? It's all a myth according to Jack Mintz, the appointed "expert" on the subject. Why are Canada's public service unions not breathing easier after meeting with Treasury Board president Stockwell Day? Apparently he did little to assuage public servants' fears that their pay and benefits will end up on the table when the Conservatives deliver their "roadmap" in next month's budget to dig Canada out of the deficit.

But hey what pension crisis? Everything is fine and dandy according to Jack Mintz. Perhaps Mr. Mintz should step out of his Ivory tower and meet up with Nortel's disabled workers who are still fighting for a pension deal:

Nortel employees on long-term disability leave say they will fight a deal reached between the failing company, themselves and Nortel pensioners.

Some disabled employees, including Jennifer Holley and Arlene Plante, are going to Toronto to oppose court approval of the deal, which is scheduled for March 3.

Plante said she's fighting the agreement announced on Feb. 8 because it doesn't offer any protection beyond the end of 2010.

In addition, it requires employees and former employees to give up their right to sue Nortel Networks Corp. and oppose the payment of $92 million in bonuses to Nortel executives. Nortel asked U.S. and Canadian courts to approve the bonuses last week.

Plante said the payments are obscene. The company maintains that it needs to pay the bonuses in order to hold on to key employees until necessary work is complete.

"The agreement is immoral," said Diane Urquhart, an independent financial analyst who has been helping the disabled employees.

Urquhart said that money would go far if it were used instead to fund the disabled workers' health and welfare trust. However, she said, the law does not require Nortel to provide for the replacement income and health benefits of the disabled under the current circumstances.

The 400 employees on disability are in a difficult position because the 12,600 pensioners are largely satisfied with the deal.

Plante admitted that the minority of employees on disability are also poorly equipped for their fight.

"We're not lawyers," Plante said. "We don't know how to do things like affidavits and motions."

Holley expressed frustration about the position disabled employees are in.

"We've got to kill ourselves trying to get this stuff together that we have no experience with," she said.

Nortel filed for bankruptcy protection in January 2009 and since then, most of the company has been sold off.

On Feb. 8, the company announced it had reached a deal with its pensioners and its employees on disability leave, who feared they would lose their benefits when the company is finally dissolved. The agreement includes a commitment from the company to pay long-term disability benefits and pensioners' health benefits until the end of 2010.

In addition, workers who were laid off without severance will each get a $3,000 lump-sum payment. The company will continue to administer its pension plans until the end of September, and then a new administrator will be appointed.

The pensioners, who are facing a $2.5-billion shortfall in their pension plan, are also partially protected by the Ontario government. Finance Minister Dwight Duncan announced Feb. 7 that the first $1,000 of their monthly pension payments will be guaranteed under an emergency pension insurance fund.

Diane Urquhart is absolutely right, this agreement is downright immoral. She has completed an exhaustive analysis of the agreement, Nortel Disabled Bulldozed into Accepting Poverty for Life and Bonuses for Executives. Diane sent me this message:

My main conclusion is that this Feb. 8th agreement is offering life to the long term disabled employees in the short term of 2010, provided they agree to live in poverty for the rest of their lives and agree to not oppose the Nortel executives and key employees getting the additional incentive payments that were announced on Feb. 8, 2010. John Doolittle, Corporate Leader of Nortel, is providing scraps off the table for the LTD employees, while protecting his own $1.7 million compensation for each year of 2010 and 2011. The 418 LTD employees are having their lives and quality of life sacrificed by the acceptance of this Feb. 8th agreement for the benefit of the 17,749 Nortel Canadian pensioners, the Nortel executives and key current employees, the U.S. junk bond owners and other large unsecured creditors.

The reasons for my conclusions are set out in the new report.

I plan to make additional communications to you about the steps that dissenting LTD employees will be undertaking in order to correct the mistakes that have been made in this Feb. 8th agreement affecting them before this matter comes to court on March 3rd. Fortunately, there is a process for the LTD employees who decide to oppose this Feb. 8th agreement to do so by filing a Notice of Appearance by 10:30 a.m. Eastern Time on March 1st. The LTD employees are now forced to hire independent legal counsel at their own expense and I am getting calls from LTD employees who are not well enough and cannot afford to send independent legal counsel to be heard in court on March 3rd.

Ideally, the Feb. 8th agreement will be amended before this Notice of Appearance submission deadline so that the stress on the Nortel LTD employees will be contained and there are no personal crises that result from it.

But who cares about Nortel's disabled? Certainly not Jack Mintz or even those other Nortel pensioners that cut a deal for themselves and left their disabled colleagues out to dry.

If you want to see the reality of many disabled in Canada, look no further than the story of Sharon Segal who was diagnosed with Multiple Sclerosis almost 35 years ago. Like far too many other disabled Canadians, Sharon is caught in the disability poverty trap.

But hey, it's all a myth, there is no pension crisis according to the Jack Mintzes of this world. Give me a break! Have they no shame in making such silly declarations?

***CARP Speaks OUT***

Message from Susan Eng, VP Advocacy at CARP:

How is it possible for Jack Mintz to keep a straight face and write:

Most lower-income Canadians do not always contribute to RRSPs since they have sufficient retirement income through other means. Over 60% of unused RRSP contribution room is in this category.

It doesn’t even make sense on its face. He would have more credibility if he said that lower income people do not make the needed RRSP contributions because they don’t have the money. These are precisely the people who need a broad based universal pension plan.

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