Wednesday, February 22, 2012

Is 'Pension Envy' Misguided?

Denis Bolduc, secretary-general of the Quebec regional office of the Canadian Union of Public Employees (CUPE), wrote an op-ed article for the Montreal Gazette, Pension deficits aren't the fault of public-sector workers:

Today and tomorrow in a hotel in downtown Montreal, some 600 representatives of the Canadian Union of Public Employees are holding a think-tank session to discuss the future of their pension plans.

Our meeting is being held against the backdrop of a rise in public discourse of voices criticizing supposedly "overly generous" public-sector pension plans.

Governments and employers are painting public-sector workers as part of a privileged class, and are moving to strip these so-called privileges from them.

Quebec City Mayor Régis Labeaume is leading the attack. He is urging the Quebec government to change municipal pension plans in order to help cities and towns reduce their operating costs.

Pension-plan deficits are a sad reality. However, changes such as those proposed by Labeaume place responsibility for these deficits on the backs of workers rather than the true culprit: the financial crisis of 2008 and the economic collapse that ensued.

Canada and the rest of the world are emerging from the worst global economic recession since the 1930s. Thanks to stronger regulation and some good luck, Canada wasn't hit as badly as the United States and European countries. But there is no doubt that recovery will be slower and more difficult than in previous recessions.

Huge losses as a result of irresponsible speculation in the stock market are largely to blame for current deficits in pension plans. Banks then lowered interest rates, which in turn affected bond-market returns. This had a bearing on pensions plans because the two most important components of pension plans are stocks and bonds.

We were promised that a "free market" would lead us into an era of unprecedented prosperity. Undeniably, as the Wall St. fiasco has shown, this has not been the case. That said, trade unions know that they must take action and that doing nothing is simply not an option.

So, what should unions be doing?

First, it must never be forgotten that pension plans were built using salary money that employees agreed to forfeit, in exchange for a retirement plan. Some commentators contend that public-sector workers are stealing from the public purse. This misconception is offensive. The money in pension plans was always negotiated as deferred salary. Pensions, therefore, must be looked at on a long-term basis, and solvency of plans should consequently be measured over the span of a career. Deficits in place as this particular moment in time should not be used as an excuse to slash benefits.

CUPE Quebec is one of the first major trade unions to sit down with its members, as we are doing this week, to think through the current pension crisis. Pension plans are complex entities and each plan has its own set of rules and regulations.

We shouldn't forget that there was a time in Quebec when there were surpluses in our municipal pension plans. When that was the case, did you ever hear of Quebec municipalities offering to lower taxes because of those surpluses? Of course you didn't.

During those golden years, employers were making their pension contributions using money taken directly out of pension-fund surpluses. There was nothing strictly illegal about this. The surpluses legally belonged to them, just as deficits belong to them.

Municipalities had no qualms about sticking their hands in the cookie jar when it was convenient for them. But now that pension plans are struggling with deficits, municipalities aren't so sure they want sole legal responsibility anymore. That's not fair: workers expect their employers to do the right thing.

Public pension programs - Old Age Security, the Guaranteed Income Supplement, the Canada Pension Plan or Quebec Pension Plan - are proven successes. However, there is a problem with these plans. They really don't pay out very much. The labour movement as a whole is running a major campaign right now to improve benefit levels. We are advocating a doubling of Quebec Pension Plan benefits, to be phased in over a period of seven years.

Currently, a majority of Canadian workers do not have a workplace pension plan, and one-third has absolutely no savings set aside for retirement. The loss of supplemental pension plans would mean an increase in poverty among seniors, which in return would mean higher costs for the government in health care and social services.

It's about time the general public hears our voice on this issue. These are our pensions.

When it comes to pensions, the general public is asleep, completely oblivious to what is going on. They only wake up to whine about pensions when someone threatens to raise the retirement age or cut their benefits.

Mr. Bolduc raises some excellent points above. In the good years, municipalities and companies loved dipping in the cookie jar but now they can't unload pensions fast enough. Some companies are acting more responsibly. For example, Ford Motor Co. will pump $3.8 billion into its global pension plans this year as it tries to get them closer to fully funding their obligations and will "de-risk" by investing its plan assets more heavily in bonds (see Leon Cooperman below):

The outsized cash contribution and shift to bonds reflect Ford's push to offset the challenges posed by rock-bottom interest rates, market volatility and lower expectations for investment returns.

"With the lower returns, over time you need to be putting more into the plan to meet your liabilities," Morningstar analyst David Whiston said. "Your liabilities don't change. You still have to fund the plan."

Assets in Ford's pension plan earned 7.7 percent in 2011, better than the broader U.S. stock market, which was flat, but lower than the expected 8 percent return. Ford's long-term return forecast is now 7.5 percent.

In the filing, Ford said it expected its pension assets to match future benefit obligations in the next few years. If Ford fully funds its pension plans by around 2015, the stock could spike to $24 a share, nearly double its current level, Citigroup analyst Itay Michaeli said last month.

Since Ford has already reinstated its dividend and chances for a share buyback are slim, Whiston of Morningstar said "the next best use of cash" is for Ford to fund its pension plan.

Many other companies are in a similar situation which is why they're scrapping defined-benefit plans for new employees and winding down existing ones. And interestingly, while private plans are de-risking, most public plans are taking on more risk, pumping billions in alternative investments.

This brings me to another point raised in Mr. Bolduc's article. Instead of demonizing public sector workers, we should be making the case for boosting DB plans for everyone. I said it before, companies shouldn't worry about pensions, they should worry about their business. Pensions should be a public good and countries that understand this will have a competitive advantage over those that solely rely on defined-contribution plans or some variant of them.

If you bring this up in public policy debates, people immediately jump out of their seats and bring up the unsustainable pensions in Greece and how they contributed to their fiscal crisis. Well, the truth is pensions were overly generous in Greece but there too, the crisis wasn't just due to an over-bloated public sector. It's more complicated than alluding to the fable of ants and grasshoppers.

Finally, everyone is to blame for the pension crisis. Wall Street speculating like crazy, pension fund managers taking stupid risks to make unrealistic return targets, and unions who refuse to accept that times have changed drastically and they need to make compromises to shore up their pension plans. As far as municipal pensions, they need to roll them up into large, transparent, well governed public defined-benefit plans (consolidate!!).

Below, Leon G. Cooperman, chief executive officer of Omega Advisors Inc., talks about the outlook for the U.S. economy and investment strategy, warning investors to steer clear of bonds. Cooperman speaks with Erik Schatzker on Bloomberg Television's "InsideTrack."

Also, watch a debate on "pension envy" on The Agenda with Steve Paikin:

There is a great divide in the pension world: those who are on defined contribution plans, and those predominantly public sector workers who are on defined benefit plans. Is one group getting the short end of the pension stick?
I think both groups are getting the short end of the stick, which is why it doesn't surprise me that a new poll shows half of all Canadians have little or no confidence in the future of the Canada Pension Plan. Unfortunately, as long as our governments drag their feet on meaningful pension reform, the trend toward pension poverty will accelerate. When it comes to pensions, all Canadians deserve better.

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