Friday, August 6, 2010

Canada's Biggest MEPP in Dire Straits?

Tony Van Alphen of the Toronto Star reports, Workers in big pension plan could soon face cuts in benefits:

Canada’s biggest multi-employer pension plan says thousands of members could soon face future benefit cuts of 15 to 50 per cent depending on negotiations with companies.

The Canadian Commercial Workers Industry Pension Plan (CCWIPP), with 130,000 active members, said in a recent letter to members that companies in Ontario will need to increase their contributions by up to 40 cents an hour per worker by Sept.1 just to maintain current levels for future benefits.

Wayne Hanley, a senior trustee of the plan and president of the United Food and Commercial Workers, also said Thursday that if some employers don’t agree to negotiate adequate contributions in new contracts or in special bargaining, the amount of future benefits could quickly plunge by 50 per cent.

“If there is no additional negotiated contributions as of Sept.1, then members of the plan with that employer will go on to a benefit scale that is up to 50 per cent of what they are accruing on a future basis,” Hanley said in an interview.

He added the situation of continuing funding shortfalls in the plan could lead to labour unrest.

“There may be a few strikes over this,” Hanley said. “This is an important issue to the members.”

The letter from trustees also disclosed that inactive members who have left a contributing employer but are still eligible for a pension will take a 40-per-cent hit on future benefits next month. However, those inactive members over 50 years of age who would be eligible to draw a pension now won’t be affected by the reductions.

The plan, which has assets of more than $1.58 billion, provides benefits to about 20,000 retired union members and their spouses. It also has 130,000 active members working at more than 300 employers and another 150,000 deferred or inactive members.

The squeeze on the plan’s finances has not affected the pensions of retirees or accrued benefits of active members.

In the letter, the trustees said a significant recovery in 2009 hasn’t made up for the steep decline in financial markets in the second half of 2008.

“Assets have shrunk while liabilities have increased, leaving large unfunded liabilities,” the trustees’ letter added. “The CCWIPP, like all others, did not escape the financial crisis which has affected the funding status of the plan considerably.”

The trustees warned members of a “benefit restructuring” a year ago but would not comment on the possibility of any significant benefit cuts at that time. The plan had already cut future benefits for members by 20 per cent in 2005,

In 2008, the plan posted a negative 19.6 per cent return on investment but it turned into a 17.1-per-cent gain last year, which outpaced many other major plans.

The plan has not released an actuarial valuation for 2009. But at the end of 2008, actuarial liabilities topped assets by $759.3 million on a “going concern” basis, which underscored the plan’s difficulties.

Trustees representing the union have pushed employers to jack up their contributions to bolster the plan for more than a year.

Hanley said some companies such as the Metro Inc. grocery store chain have “stepped up” in bargaining to make the adequate hourly contributions to maintain future benefit levels.

But he said it is a major issue in current bargaining for a new contract covering thousands of workers at Loblaw Cos.

Greg Hurst, a prominent Vancouver-based pension consultant, said active plan members not close to retirement should be “very concerned” if their company closes and they become a deferred or inactive member and a potential victim of a 40-per- cent cut.

“The impact of a decision or circumstance (which may not be in the individual’s control) that results in termination from the plan prior to retirement is draconian and extraordinary,” Hurst said. “If I were a member, I would make my concerns known to the Financial Services Commission of Ontario and my local MPP.”

A court fined nine trustees of the plan including Hanley and founder Cliff Evans a total of $202,500 earlier this year for spending too much of the fund’s money on questionable investments in Caribbean hotels and resorts.

On those "questionable investments", Mark Zigler and Anthony Guidon of Koskie Zigler LLP were the defence lawyers for 5 of the 9 trustees for the Canadian Commercial Workers Industry Pension Plan, whom the Ontario Court of Justice found guilty on December 7, 2009 of the offence of failure to supervise the Investment Committee as was prudent and reasonable, as it related to the 10% limit that was to have restricted the plan's investment in Caribbean resorts and hotel properties, contrary to section 22(7) of the Pension Benefits Act. Madame Justice Beverly Brown imposed a fine of $18,000 on each defendant for a total fine of $162,000 plus victim surcharge (you can read more on this case by clicking here).

I went over the CCWIPP's 2009 Annual Report. The results were impressive, especially in public markets and hedge funds:
  • The Canadian Commercial Workers Industry Pension Plan (the “Plan”) had a strong year in 2009, achieving an aggregate rate of return of 17.1%, which outperformed the average Canadian pension fund return of 15.4%.
  • The Plan’s investment portfolio generated investment income of $232 million, increasing its net assets to approximately $1.6 billion.
  • The equity component (both domestic and foreign) of the Plan’s investment portfolio realized a combined 68.3% return in 2009, which outperformed each of its respective
    benchmarks (S&P/TSX Composite and MCSI World - CAD) of 35.1% and 12.9%. As at December 31, 2009, the Plan’s total equity allocation was valued at $657 million.
  • The fixed income component of the Plan’s investment portfolio achieved a 7.5% rate of return in 2009, which outperformed its benchmark (DEX Universe Bond Index) of 5.4%. Included in the Plan’s fixed income investments are a series of segregated long-term bond portfolios, collectively valued at $268 million, which are under management by CIBC Global Asset Management.
  • The hedge fund component of the Plan’s investment portfolio achieved a 32.9% rate of return in 2009, which outperformed its benchmark (HFRI Hedge Fund of Funds Index - CAD) of negative 3.8%. The Plan invests in hedge funds in an effort to increase diversification and generate returns, in both rising and falling markets, that are not highly-correlated to major stock market indices. As at December 31, 2009, the Plan’s total hedge fund allocation was valued at $90 million.
  • The private equity/private debt component of the Plan’s investment portfolio achieved a negative 28.2% rate of return in 2009. However, based on the assets held within this asset class, there is no industry-recognized benchmark from which to draw a comparison. The portfolio generated income of $5.3 million, which was offset by: a) currency adjustment in the amount of $38.6 million, resulting from the appreciation of the Canadian dollar; and, b) a negative market value adjustment in the amount of $55.2 million, resulting from the economic impact of the post-2008 worldwide reduction in travel on the Plan’s hospitality-related investments. As at December 31, 2009, the Plan’s total private equity/private debt allocation was valued at $233 million.
  • The real estate and loan component of the Plan’s investment portfolio realized a negative 0.8% rate of return in 2009. As in the case of private equity/private debt, based on the assets held within this asset class, there is no industry-recognized benchmark from which to draw a comparison. As at December 31, 2009, the Plan’s total real estate allocation was valued at $51 million, the largest portion of which is comprised of the Plan’s investment in Citi Plaza (www.citiplazalondon.com), a mixed-use commercial property located in London, Ontario.

Weakness in 2009 was concentrated in the private equity and private debt portfolio, which should recover in 2010. However, I'm not familiar with the funds they chose to invest in this space, and cannot comment further on their performance and track record.

The outperformance in hedge funds is undoubtedly related to the strategies selected. Remember, 2009 was the year of big beta, so I'm not surprised their hedge fund portfolio did well relative to the HFRI Fund of Funds Index. The latter is not an appropriate benchmark if they're investing all the assets in L/S funds or other strategies which did extremely well last year as equity markets rallied sharply off their March lows. (Note: HFRI Fund Weighted Composite Index, HFRI Equity Hedge Index, HFRI Convertible Arbitrage Index, and HFRI Fixed Income Corporate Index returned 20%, 25%, 58% and 31% respectively in 2009. For details, click here).

But the biggest concern remains the plan's funded status:

The Plan’s actuary, Buck Consultants, prepares an annual valuation of the Plan’s financial position, which is filed with the Ontario regulatory authorities (Financial Services Commission of Ontario). The most recent valuation established a going-concern funding deficiency of $760 million as at December 31, 2008, based on a $1.68 billion actuarial value6 of assets and total liabilities of $2.44 billion. A going concern funding deficiency is not uncommon for a multi-employer pension plan (MEPP), particularly in the aftermath of the 2008 market meltdown.

The going-concern funded status assumes the Plan continues indefinitely. The Plan was 69% funded7 as at December 31, 2008, a decline of 12% over the previous year, and not surprising given the financial turmoil of 2008. The very favourable investment performance in 2009 will have a positive impact on the financial position of the Plan.

On a windup basis the Plan was 42% funded as of December 31, 2008, meaning that, if the Plan had been wound up on that date, accrued benefits would have had to be reduced significantly.

As part of the process in dealing with the deficiency in the 2008 valuation, the Trustees have approved a Funding Improvement Plan (FIP) designed to provide the Plan with a more solid financial foundation. In addition, the Plan is electing to become a Specified Ontario MEPP (SOMEPP), which allows for a more favourable funding framework to be applied.

Hopefully none of the companies will be closing their doors anytime soon. One major governance concern I have is in regards to the trustees:

The Plan is administered by a Board of Trustees, consisting of an equal number of individuals appointed by UFCW Canada and by the participating employers.

The Trustees receive no personal benefit, financial gain or fee payment from the Trust Fund for their role as fiduciaries of the Plan.

I happen to think you need some outside, independent experts (eg., an independent professor of finance with no industry ties whatsoever or a retired senior pension officer) to help them manage this fund. Trustees should be paid and they should be held accountable for the decisions they take on behalf of plan members. Most of these multi-employer plans suffer from poor governance, leaving them exposed to corruption and questionable decision-making.

Finally, while the funded status is a concern, the situation isn't hopeless. It's just that they need to raise contribution rates to close the gap and make up for the shortfall left after 2008. They're not alone. Others are also struggling with the same issues, which bolsters the case for an enhanced Canada Pension Plan (CPP).

***Feedback***

Diane and Hugh Urquhart sent me this link to the web of characters involved in the Canadian Commercial Workers Industry Pension Plan Investments. Diane added also sent me her thoughts:

My reading of this CCWIPP situation is that there is little accountability anywhere, because there are so many unions and employers involved and the beneficiaries are primarily lower income women. It does seem there is little investment expertise at the Board of Trustees and the lawyers and actuaries seem to be using the fund as a cash cow.

I cannot believe that the trustees who were just fined for being above the 10% single investment limit still have their jobs.

I read this December 7, 2009 prosecution decision against the 9 trustees at the Canadian Commercial Workers Industry Pension Plan defended by Mark Zigler of KM. The fines and consequences would have been more onerous had the Crown prosecutor brought in expert evidence.

http://www.canlii.org/en/on/oncj/doc/2009/2009oncj586/2009oncj586.html

[236] As set out above, the court finds that the Crown has failed to lead sufficient evidence to prove guilt as against the named members of the Board of Trustees and the Investment Committee in relation to the offences of failure to exercise the care, diligence and skill of a person of ordinary prudence in dealing with the pension plan assets, contrary to s. 22(1) of the Pension Benefits Act, arising from the failure to call expert evidence addressing the relevant issues in this trial. Accordingly, the court enters a finding of not guilty in relation to counts 3, 4, 6, 7, 10, 11, 13 and 14 in the information.

Fraser Milner Casgrain report on latest legal developments concerning multi-employer plans says:

The Canadian Commercial Workers Industry Pension Plan (“CCWIPP”) is Canada’s largest private-sector multi-employer pension plan. It has nothing to do with the much smaller multi-employer pension plan called Canada-Wide Industrial Pension Plan (“CWIPP”). The website of CCWIPP says:
  • it provides pension benefits to 290,000 current and former members of the United Food and Commercial Workers (UFCW) and has 328 participating employers
  • it is administered by eight trustees, four appointed by the union and four appointed by employers: Canada Safeway, Loblaws, A&P and Metro Richelieu
  • employers contribute approximately $108 million annually; employees do not contribute
  • it has assets of approximately $1.4 billion

Two significant events in the life of CCWIPP concluded in 2009:

(a) civil lawsuit for $1 billion

A civil lawsuit in the form of a “representative action” for $1 billion was commenced at the end of 2006, in Ontario. It was dismissed in 2009.

Many participating employers of CCWIPP were (and remain) completely ignorant of this lawsuit, since they were not served with the claim. The defendants who were expressly named, and served, were the individual trustees, the participating employers who had appointed representatives to the board of trustees (the “appointing employers”), and Kraft

Canada Inc. The plaintiffs sought approval to have Kraft Canada Inc. named as the representative defendant for all participating employers who did not appoint representatives to the board of trustees (the “non-appointing participating employers”). This “representative defendant” aspect of the litigation made it unnecessary for the plaintiffs, at the outset, to serve all of the non-appointing participating employers.

The plaintiffs were three individual members of CCWIPP, who were suing on behalf of all CCWIPP members. The claim against the participating employers was essentially that they had a fiduciary obligation, and owed a duty of care, to the members of the plan. They knew or ought to have known that the trustees were not qualified to make investment decisions. The plaintiffs alleged that the participating employers failed to properly supervise the trustees.

There were some changes to the solicitors who represented the plaintiffs, during the course of the litigation. The “appointing employers” and Kraft Canada Inc. were successful in getting the consent of the plaintiffs to dismiss the claims against them, in April 2008. A year later, the remaining defendants obtained a court order dismissing the claim on the basis of delay. It remains to be seen whether new civil litigation will be commenced as a result of the convictions obtained by the Crown in the charges described as follows.

Jim Murta, who publishes his thoughts on his actuarial blog, sent me this comment:
The multi-employer plans for non-union employees that are being promoted are called target benefit plans. Theses promise a defined benefit pension with a fixed contribution rate from the employer. The employees' contribution rates are subject to change, depending on investment earnings. Pensions can also be reduced if the plans run short of money. In these plans all the risk is shared by employees and retirees. The employers have no risk as their contribution rates are fixed. Provincial governments have yet to approve these arrangements, but they are certainly on the table and being promoted.
Bernard Dussault, the former Chief Actuary of Canada, relayed his thoughts to me:

MEPPs are large target plans (though more DC than DB). Nothing beats a CPP-like plan: the CPP is somewhat rightly characterized by some experts as a target plan, but both its contribution and benefit rates are subject to much more stability than and MEPP plan.

And Susan Eng, VP Advocacy at CARP, sent me these comments:
As you know, an essential part of the PEI announcements was allowing the private sector to craft a MEPP-type alternative to expanding the CPP or any other supplementary DB plan

Already highlighted by the Finance Ministers is the cost [MER?] which industry has already said would be "competitive" - which stands to reason since any fund manager with tens of Billions in the portfolio can achieve that cost level. But this not the only issue.

One issue highlighted by this example is that the employers get to "negotiate" their contribution - even though their contributions were meant to be fixed or defined. In a private contract, there is always room for negotiation. The CPP does not allow for any such interference and the vulnerability that is inherent in it.

Another is the governance structure - a board of trustees that is representative [but not knowledgeable nor accountable] creates a false sense of security. This is the board that allowed certain risky investments which fell harder than the others which were hit in the recent downturn like every other fund.

Finally, the buffer that the CPP depends on most of all is the constant stream of mandatory contributions - and no negotiations.

All this is to say we have to monitor developments carefully. Perhaps it's all a hollow election promise. But the private sector will be working over time to bring products through the door that has been opened to th
em.

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