Friday, September 21, 2012

Ontario Eyes Two New Super Funds?

Ontario’s cash-strapped government is considering the creation of two massive pension funds to manage the retirement savings of public-sector workers – everyone from nuclear engineers and university professors to hospital custodians.

The two funds together would manage just over $60-billion in pension assets. One, with $46-billion in assets, would emerge as the third-largest public-sector fund in the province, ranking behind the Ontario Teachers’ Pension Plan and the Ontario Municipal Employees Retirement System.

The reforms are under consideration as governments at all levels grapple with massive deficits in their public pension plans, thanks to sluggish investment returns, relatively generous benefits and an aging work force that is retiring in record numbers. The problem is particularly pressing in Ontario, which is under enormous pressure to curb spending and erase a projected $14.8-billion deficit. Pension expenses alone will account for nearly 30 per cent of the total increase in program spending between now and fiscal 2017-18, Toronto-Dominion Bank economist Don Drummond warns in a report commissioned by the government.

Pooling pension plans in the broader public service would be a win-win for the government. Economies of scale would reduce administration costs, and the funds would have greater buying power to make large investments, including in government projects. But there is pushback from labour groups. The big concern is that employees in funds where employers pay a disproportionate share of the cost will be forced to make higher contributions.

Officials in Finance Minister Dwight Duncan’s office met this week with executives at several public sector funds to discuss the government’s plans for putting pensions on a more sustainable footing, according to sources close to the talks.

A senior government official said finance officials are still investigating different options, and no formal policy decisions have been made. “It’s very early days,” he said.

According to the sources, employees of the province’s four electricity entities, including Hydro One and Ontario Power Generation, would have their pension assets pooled together to create one fund with just under $15-billion in assets under management.

The Society of Energy Professionals, which represents 8,300 employees in the electricity sector, says in a written submission to an adviser hired by the government that consolidation should only occur as part of collective bargaining. The society is concerned that its employees will be subject to a 50-50 funding arrangement. Currently, employees contribute $1 on average for every $2 from their employer.

“The government is taking a long, hard look at those numbers,” the unnamed government official said.

A second pooled fund would manage not only the pensions for employees in many universities and community colleges but also the $12-billion fund set aside to safely store decommissioned nuclear reactors as well as plans for members of the Ontario Public Service Employees Union and the Workplace Safety and Insurance Board.

Fifteen universities have some form of defined benefit plan with combined assets of over $13-billion, according to the National Union of Public and General Employees. Combining these assets with OPSEU, which manages $13.7 in assets, as well as the others would create a giant pooled fund with $46-billion in assets under management.

One source close to the talks said he was “shocked” that Mr. Duncan was considering putting so many different funds under one roof.

“He was thinking big was better,” said another source.

The government used the budget last March to signal to public-sector employees that it is no longer prepared to use taxpayers’ money to bail out shortfalls in their pension funds. Total pension expenses grew 13 per cent a year on average from fiscal 2006 to fiscal 2011, says the Drummond report. Left unchecked, the report says, pension expenses will triple by fiscal 2018.
I'm not "shocked" at all and will openly state that Mr. Duncan is doing the right thing consolidating these pensions. What surprises me is that the government is creating two more super funds instead of splitting the pensions between OMERS and Ontario Teachers' Pension Plan (there may be good reasons for this).

In any case, once the funding details are worked out, this is a win-win for the government and for pension beneficiaries. It's not just economies of scale, pooling resources together to create bigger funds will allow these funds to engage in all sorts of activities smaller plans cannot do. They just need to make sure they get the recipe for success right, focusing on scale, governance, internal capabilities, and investment horizon.

By the way, I've already discussed why consolidation makes sense in the seven simple truths of public employee pensions and revisited simple truth #6 to review the impediments to consolidation in the United States.

But even in the US, things are changing. The Sacramento Bee reports, Auditor General Jack Wagner Calls for Consolidation Of Pennsylvania's 3,200 Municipal Pension Plans:
Auditor General Jack Wagner today proposed that the state's 2,600 municipal pension plans be consolidated into a statewide system for different classes of employees such as police officers, firefighters and non-uniformed employees.

Wagner said that consolidation would yield higher investment return rates for municipal employees, reduce administrative expenses and help reduce the need for increased contributions from taxpayers. The General Assembly's failure to reform the state's municipal pension system will lead to higher bills for taxpayers in the near future, Wagner warned.

"Pennsylvania has too many small and underfunded municipal pension plans that could cost taxpayers millions of dollars to maintain," Wagner said. "Consolidation is the best way to preserve benefits for retirees and future retirees while protecting taxpayers from higher tax bills they can't afford."

Wagner made his comments after presenting the Public Employee Retirement Commission with a new report completed by the Department of the Auditor General, which showed that 36 percent of the state's municipal pension plans are considered distressed. The special report is available to the public at www.auditorgen.state.pa.us.

The report shows that 52, or 2 percent, of the plans are seriously underfunded with less than 50 percent of their plan liabilities covered. Those 52 plans, which are classified as severely distressed, could place an even greater tax burden on many Pennsylvania taxpayers, Wagner said.

The Commonwealth of Pennsylvania has more than 3,200 local government pension plans -- about one-fourth of all the municipal plans in the United States. The plans provide benefits to police officers, firefighters, and non-uniformed personnel.

The Department of the Auditor General is responsible for auditing about 2,600 of Pennsylvania's 3,200 local government pension plans; the remaining 600 are county and municipal plans over which it has no jurisdiction.

According to Wagner's report, about two-thirds of the 2,600 local government pension plans audited by the Department of the Auditor General have 10 or fewer members. It says the 2,600 local government pension plans hold $10.2 billion in assets and $17.4 billion in liabilities for an aggregate funding ratio of 58 percent.

Wagner's special report, titled the Analysis of Local Government Pension Plans, covered the period July 1, 2009 to June 30, 2011. The report noted that nearly 1,000 of the state's local government pension plans audited by the Department of the Auditor General are underfunded by 8 percent or less, according to the most recent valuation reports submitted to the Public Employee Retirement Commission.

"With Pennsylvania mired in the worst economic recession since the Great Depression, and the fact that many of Pennsylvania's local government pension plans are facing serious funding deficits, government officials at all levels must consider new ways of ensuring that local government pension plans are adequately funded, and that taxpayers don't bear an unfair burden in meeting those benefit obligations," Wagner said. "For the sake of Pennsylvania taxpayers, the time has come to seriously consider alternative ways of shoring up the funding deficits of local government pension plans including, but not limited to, consolidation of plans."

According to data taken from the most recent available actuarial valuation reports dated Jan. 1, 2011, Wagner's report noted:
  • The assets of 52 plans identified as severely distressed totaled $760 million and liabilities totaled $1.69 billion, for an aggregate funded ratio of 45 percent.
  • The assets of 234 plans identified as moderately distressed totaled $5.6 billion and liabilities totaled $10.6 billion, for an aggregate funded ratio of 53 percent.
  • The assets of 663 plans identified as minimally distressed totaled $3 billion and liabilities totaled $3.9 billion, for an aggregate funded ratio of 79 percent.

Act 44 of 2009, the Municipal Pension Plan Funding Standard and Recovery Act, requires underfunded pension plans to proffer a distress recovery plan. For example, a plan that fits the severely distressed criteria is required to aggregate its pension funds for administration and investment as a single trust fund; establish a revised benefit plan for newly hired employees; and submit an administrative improvement plan to the Public Employee Retirement Commission.

The Department of the Auditor General released 2,023 audits on local government pension plans from July 1, 2009 to June 30, 2011; 648, or 32 percent, contained findings resulting in $2,074,829 due to the commonwealth, in addition to other monetary effects totaling $5,022,549.

Wagner's special report identified seven common deficiency areas of pension plans, which affect the plans' ability to ensure compliance with state laws and the financial health of the plans. The finding with the greatest impact on the financial health of the plans' was the failure of municipalities to pay the minimum municipal obligation of the pension plan in accordance with Act 205, which totaled $4.4 million.
Wagner's special report also noted that a total of 78 findings cited municipal pension plans for providing excess benefits to plan members between July 1, 2009 and June 30, 2011, thus, increasing the plan's pension costs and reducing the amount of funds available for investment purposes or for the payment of authorized benefits or administrative costs.

Wagner said the General Assembly should consider consolidating local government pension plans into a statewide system for different classes of employees – police, firefighter and non-uniformed. An alternative solution would be to maintain the existing system of individual pension plans but consolidate their administration into one entity such as the Pennsylvania Municipal Retirement System or the State Employees' Retirement System.

Wagner also said that the General Assembly also should consider amending the formula for the allocation of General Municipal Pension System State Aid funding to ensure that distressed pension plans receive additional funding when properly managed.

The Department of the Auditor General is legally required to distribute the 2-percent foreign fire and casualty insurance tax funds to municipal pension plans in accordance with the provisions of Act 205 of 1984. In 2011, Wagner's office distributed $361.6 million in pension allocations to benefit municipal pension plans statewide. Furthermore, in July 2008, Wagner initiated a new policy within the Department of the Auditor General which established that errors resulting in an underpayment of state aid to a municipality may, under certain circumstances, be rectified by the distribution of additional state aid to affected municipalities. This resulted in $687,623 of state aid reimbursements to qualifying pension plans.
Consolidation of all these local plans is essential for all states and provinces. Ontario is on the right path but I would like to see other provinces follow suit.

Unfortunately, in Quebec our new Premier, Pauline Marois, is more interested in using Quebec's pension fund to help fend off  takeovers:
New Quebec Premier Pauline Marois, who fought the U.S. takeover bid for home-improvement chain Rona Inc, said on Wednesday that the role of Quebec's pension fund should be strengthened to keep corporate headquarters in Quebec hands.

The separatist leader made the comments as she named former academic Nicolas Marceau as finance minister in her new government, telling him that part of his mandate was "to restore order to our public finances."

She said Marceau would also propose revisions to the mandate of the province's pension fund, the Caisse de depot et placement du Quebec, so that it would promote economic development and work to "keep the strategic decision-making centers here."

Even before she took power, the Caisse had taken an increased stake in Rona, which is headquartered in Quebec, during the C$1.8 billion ($1.86 billion) bid by the U.S.-based Lowes Cos Inc, which has since been withdrawn.
Someone should remind Madame Marois that the Caisse already does enough to promote economic development in Quebec and that fighting takeovers isn't always in the best interests of our province. The Caisse lost more than  $7 million (on paper) 'defending' Rona and this is just poor use of pension money.

Instead, Quebec's new government should look at what Ontario is doing to bolster its retirement plans and also move ahead in consolidating hundreds of local and city plans to achieve economies of scale. The money can be managed by the Caisse or we can follow Ontario and create a new fund.

Finally, even in Ontario, teachers aren't happy.  Below, thousands of teachers pushed back against the Dalton McGuinty government's plan to legislate wage freezes and reductions in sick benefits. Wouldn't like to see their reaction if the government ever cut their pension benefits, which isn't in the cards right now.