Saturday, November 17, 2012

Ontario Set to Pool Pension Assets?

Karen Howlett of the Globe and Mail reports, Pooling pension assets of public-sector workers in Ontario urged:
The Ontario government has been advised to follow the lead of other jurisdictions within Canada and internationally by creating a massive pension fund to manage the retirement savings of public-sector workers.

A report commissioned by the government says pooling various pension plans together under one roof would create economies of scale, reduce administration costs and broaden investment opportunities, particularly for smaller funds.

The report, released on Friday, recommends that the new pension fund manage at least $50-billion in assets. “There is strong evidence to suggest that large pension funds outperform smaller and medium-sized funds,” says the report, written by William Morneau, executive chairman of consulting firm Morneau Shepell.

Ontario already has three large funds – the Ontario Teachers’ Pension Plan, the Ontario Municipal Employees Retirement System and the Healthcare of Ontario Pension Plan, which together manage just over $212-billion in assets.

But it also has dozens of tiny funds that each manage less than $1-billion in assets. The report says a group of funds that together manage assets of $100-billion on behalf of a diverse group of public-sector workers – ranging from university professors to hospital custodians and public transit employees – should be considered for the pooled arrangement. It recommends that the government introduce legislation making participation mandatory.

Finance Minister Dwight Duncan was not available for comment on Friday. He asked Mr. Morneau to look at pooling pension-fund assets to help the cash-strapped province curb spending and erase a projected deficit of $14.4-billion.

Mr. Morneau estimates that creating a pooled fund would produce annual savings of between $75-million and $100-million. British Columbia and Alberta both have investment firms that manage pooled assets from several public-sector pension plans. Britain is looking at similar measures.
Ontario's Finance Minister, Dwight Duncan, released this statement on Bill Morneau's recommendations:
Today, Dwight Duncan, Minister of Finance, issued the following statement in response to Bill Morneau's recommendations on broader public-sector pension pooling:

"In the 2012 Ontario Budget, our government announced its intent to create a framework that would facilitate the pooling of pension fund asset management. At the end of May, I announced that Bill Morneau was appointed to help determine the advantages of pooled asset management for Ontario's public-sector pension funds and, if appropriate, a path to implementation.

Today, I want to thank Mr. Morneau for the excellent work he has done in making recommendations for implementing pooled asset management for Ontario's public-sector pension funds.

Mr. Morneau met with or spoke to over 100 people and groups, representing labour and management at Ontario's broader public-sector institutions; managers as well as current and former leaders of large Canadian pension funds; investment management professionals; interested industry associations; and retirees.

As the next step in this process, our government is asking individual plans, affected stakeholders and others to provide their feedback on the report's recommendations. This information will help inform the government's position as it reviews the report and develops an implementation plan that will continue to build upon Ontario's internationally recognized pension plan model and make the management of public-sector pensions even stronger."
You can read the entire report, Facilitating Pooled Asset Management for Ontario’s Public-Sector Institutions, by downloading the PDF file here or going through various sections of it here.

The report is well written and provides a good discussion on the potential cost savings for public sector entities as well as an interesting discussion on the structure of governance where Mr. Morneau states:
The government’s control, influence and ability to intervene should be clearly defined and restricted by legislation, but should enable oversight where necessary, including adequate reporting requirements to ensure accountability and transparency. Supporting that goal, the Corporation’s board should have a prescribed mandate requiring it to serve and act in the best interests of its clients, thus ensuring that the board’s duties and responsibilities are to its clients and not to the government.
I actually think the report understates potential cost savings as larger, well governed pension plans are able to lower costs on many fronts, engaging in activities that smaller plans don't have the resources to do.

Interestingly, Morneau ends off the governance section by stating the following:
Upon establishment of the Corporation, the Minister of Finance would appoint the initial chair of the board, whose first priority would be to establish the nominating committee and generate the board. The Minister of Finance would appoint directors only until such time that quorum was reached and the board could regenerate itself.

Thereafter, to ensure some level of external oversight, since the Minister would have no influence over the composition of the board, the government should have the legislated right and responsibility to audit the governance of the Corporation. While I expect it to be unlikely, if determined necessary through a transparent audit process, the government should have the authority to require a director to resign for cause, and in extreme cases, have the authority to dismiss the entire board.
No mention of what those "extreme cases" requiring the dismissal of the entire board would consist of but the recommendations follow best governance standards applied at many other large Canadian public pension funds governed by independent investment boards that operate at arms-length from the government.

Once again, Ontario demonstrates leadership in being at the forefront of public pension management. By pooling these assets, it's doing what British Columbia and Alberta are doing and can even set the standard that other provinces should follow (I'm thinking of Quebec which is more focused on revamping Bill 101 than on tackling Quebec's fiscal crisis and pooling pension assets of cities and municipalities that are facing chronic deficits).

But not everyone is pleased with Ontario's proposed changes. Antonella Artuso of the Toronto Sun reports, Ontario Tories call for more transparency in public pensions:
Ontario taxpayers are being kept in the dark about potentially billions of dollars in unfunded public pension liabilities, Tory MPP Julia Munro says.

“Adding to our financial pressures are public sector pensions that we have created but now find ourselves unable to pay,” Munro said Friday. “Ontario’s public sector pensions are facing an unfunded liability that could add up to billions of dollars and Ontarians are on the hook.”

The Tories will release a white paper Monday with proposals on “sustainable retirement security.”

Ontario Finance Minister Dwight Duncan made public a report by pension investment adviser Bill Morneau Friday that calls for the pooling of pension fund asset management in the public sector.

“I am pleased to report there is a significant opportunity for pension funds to realize benefits from the economies of scale and other advantages that a pooling framework would generate,” Morneau says in his report. “Implementation of such a framework would reduce duplication and costs, broaden access to additional asset classes and enhance risk management practices.”

There are more than 100 public pension funds in Ontario.

Munro said she doesn’t object to the pooling framework but finds the savings small in comparison to the overall looming problem that public pensions appear to owe their workers billions of dollars more than they can afford to pay out.

“The government must be clear with taxpayers about who is responsible for funding deficits of public sector pensions,” she said. “However, the Liberals will not even admit the scope of the problem or acknowledge the long-term threats to our pension system.”

Aly Vitunski, a spokesman for Duncan, said the Morneau recommendation offers a savings to taxpayers of $100 million.

“The PCs always tell us chase every penny of savings possible, however Munro claims these savings are insignificant,” Vitunski said in an e-mail. “She’s off the mark on this one and by a lot.”
Munro is engaging in classic fearmongering, spreading misinformation on transparency, accountability, and who is ultimately responsible for public sector pension deficits. She either didn't read the report carefully or she doesn't understand pension governance 101.

Also, go back to read Jim Leech's response to Bill Tufts and dose of reality where he clearly states that Ontario Teachers' sponsors are working together to tackle their pension deficit and taxpayers are not on the hook. The Oracle of Ontario uses one of the lowest discount rates in the world to value their liabilities.

As I stated in my last comment on Canadian pensions flying off course, we need new thinking in tackling corporate Canada's pension deficits. Public sector pensions are in much better shape but even there, much needs to be done to address pension funds dragging down cities. Ontario's proposal to pool public sector pension assets is definitely a step in the right direction.

Below, Canada's Finance Minister Jim Flaherty talks about his fall economic update and his government's attempts to balance Canada's budget. No mention of whether he's prepared to scrap PRPPs. -:)