Wednesday, October 16, 2013

Will Ontario Start its Own Pension Plan?

Adam Radwanski of the Globe and Mail reports, Ontario weighs benefits of building its own public pension plan:
Ontario’s government is considering making the province the first to offer its own public pension plan on top of the federal one.

Sources inside the government told The Globe and Mail that Finance Minister Charles Sousa will likely lay the groundwork in next month’s Fall Economic Statement, hinting that if his federal and provincial counterparts won’t agree to enhancements to the Canada Pension Plan when they meet in December, Ontario will take action on its own.

Such a move by Ontario would represent the biggest step to date in the country’s efforts to address mounting concerns about the income security of younger generations largely unable to rely on private pension plans – and a major gamble on the part of Premier Kathleen Wynne that Ontarians would be willing to take more money off their paycheques to address that problem.

Whether that’s a gamble worth taking is currently a matter of debate among Ms. Wynne’s Liberals.

Seeking eye-catching platform planks in advance of a provincial election widely anticipated for next spring, some members of their campaign team believe that it would be a hit with middle-income voters – the demographic at greatest risk of a steep decline in its standard of living at retirement age.

But the Liberals are also cognizant that requiring both workers and their employers to pay new premiums could easily be portrayed by their political opponents as a tax hike, from a government that is already under fire for misspending Ontarians money. Although the government has not yet graduated to the specifics of what the provincial plan would look like, insiders say that participation in it would almost certainly have to be mandatory rather than optional in order for it to achieve its intended purpose.

In addition to whether Ontarians are prepared to make that investment, the Liberals are also grappling with their deficit-plagued government’s ability to afford it. While the pension fund would ultimately be filled by businesses and their employees, the start-up and administration would require some government spending.

In light of that potential burden and the risk of federal-provincial duplication complicating the pension system for those who interact with it, Liberals insist that their preference would be for Ottawa to simply agree to “enhance” CPP. Heading into a November meeting of provincial finance ministers, Mr. Sousa appears generally supportive of a proposal being pushed by the government of Prince Edward Island that would involve the maximum annual CPP contribution rising from $2,356.20 to $4,681.20, and the cap on annual benefits rising from $12,150 to $23,400.

But while federal Finance Minister Jim Flaherty has expressed openness to discussing pension changes when he meets with his colleagues the following month, officials in Ms. Wynne’s government seem pessimistic about Ottawa’s willingness to significantly increase the amount paid into the program. To date, Mr. Flaherty has preferred to lean on pooled retirement pension plans to make it easier for smaller employers to offer private plans.

The provincial officials stressed that short of launching an entire provincial pension plan, Ontario could address income security with more modest measures – such as narrowly targeted benefit top-ups – if it is unsatisfied with what comes out of the federal-provincial talks.

The looming shortage of retirement savings that the provinces are seeking to address, however, is predicted to be a broad-based one. Noting that only one-third of the Canadian work force is currently covered by a registered pension plan, and that savings rates have gone down in recent decades, a report by the Canadian Imperial Bank of Commerce earlier this year warned that those born in the 1980s could face a 30-per-cent drop in their standard of living upon retirement.
Martin Regg Cohn also reports, Ontario threatens to start its own pension plan:
Waiting for pension reform across Canada is like watching paint dry: It takes forever and always needs another coat.

Now, after years of dabbling around the edges, Ontario is planning a few bold brushstrokes of its own: Frustrated by federal foot-dragging, the province is sketching out a plan for a supplementary Ontario Pension Plan.

The announcement could come early next month in the closely-watched fall economic statement to be delivered by Finance Minister Charles Sousa.

Details remain sketchy: No word yet on who would manage a potentially massive Ontario fund, the contribution levels, or whether to make it compulsory.

"This is a big piece of work," said one government official, in an actuarial understatement.

It's also something of a gambit — because the embryonic plan may never see the light of day. The surprise strategy appears to be an attempt to warn Ottawa and the other provinces that Queen's Park has run out of patience with delays and dithering on national pension reform.

Ontario's first choice is still to jump-start long-delayed negotiations to reform the outdated Canada Pension Plan. Queen's Park has long pressed for higher contribution levels by middle-class workers, arguing that CPP continues to lag most major industrialized countries in promised benefits.

Put another way, Ontario's latest ultimatum is a form of positioning: If not a sweetened CPP, a separate OPP to supplement it.

Ontario's next move depends on its recalcitrant negotiating partners. But it is clearly hoping to use its latest threat of unilateralism as a form of leverage to extract concessions on the CPP.

In Ottawa, Finance Minister Jim Flaherty has used his famously sharp elbows to rag the puck since Ontario tried to place pensions on the national agenda — skipping meetings, missing deadlines, ignoring provincial proposals. The federal Tories, echoing the concerns of big business, keep warning that economic recovery is too fragile to withstand any mandatory increases in contributions by both workers and employers.

With Canada on the cusp of more robust growth in the years ahead, the excuses are wearing thin. At a time when traditional company pensions are rapidly disappearing, CPP benefits are capped at roughly $12,000 annually — leaving middle class earners exposed in their retirement years.

That's why pensions are a sleeper issue in Canada. As voters feel more vulnerable, they may wake up to the collective inaction of their political leaders.

At their last meeting on pension reform in late 2012, federal and provincial finance ministers agreed to map out new signposts for economic growth that could allow for "modest" increases to CPP contributions in future. At the time, I wrote about a confidential 30-page discussion paper prepared by federal officials showing how it could be done. The politicians pledged to meet again this past summer, but Flaherty refused to reconvene on pensions.

Against that backdrop, Premier Kathleen Wynne hosted her provincial counterparts at the annual premiers' meeting in Niagara on the Lake last July, where they reached agreement in principle to maintain a united front on CPP enhancements. But the details of any common agreement remain elusive.

The Canadian Labour Congress and most major unions have long sought a doubling of CPP payouts. In recent weeks, Prince Edward Island has also proposed increases to benefit workers earning more than $50,000 a year (under the current CPP, any income above that amount is not counted, which explains why benefits remain relatively low).

Next week, Wynne heads out on a western swing to press her case with Alberta Premier Alison Redford and Manitoba's Greg Selinger. As a Red Tory, Redford may be more open to CPP enhancements than her predecessors, who shared Flaherty's reticence. As Canada's last remaining NDP premier, Selinger supports a stronger CPP.

But the negotiating timeline is tight:

On Nov. 1, provincial finance ministers will meet in Toronto, where Sousa is expected to bring in a more specific position from Ontario. The hope is they can set the table for a follow-up meeting by the premiers two weeks later, to be hosted by Wynne.

If she can maintain the pension momentum, Ontario would try to organize a strong push with its newfound provincial allies in time for the scheduled December meeting between Flaherty and his fellow fiannce ministers.

Either way, Ontario will be on the spot next month: Wynne and her finance minister will have to decide on the direction of their fall economic statement:

Is there enough momentum for a pan-Canadian deal on an enhanced CPP? Or are we facing yet another dead end on pension reform, requiring Ontario to go it alone?

The idea of a separate provincial pension fund isn't entirely new. Quebec runs its own QPP, although it is largely modelled on the CPP (and its investments haven't done as well lately, requiring the province to boost contribution rates).

NDP Leader Andrea Horwath proposed an Ontario-only pension in early 2010 that would pay $700 a month to the six in 10 people without a workplace plan. At the time, the Liberal government didn't bite, insisting that a national pension summit would produce better results.

No national summit ever materialized. Four years later, still waiting for the paint to dry on pension reform, Ontario is going back to the drawing board. And, belatedly, preparing its own supplementary plan.

Unable to bank on a CPP breakthrough, the province is hedging its bets with an OPP backstop.
Things are getting interesting in terms of Canadian pension politics. We are all still waiting for the paint to dry on pension reform and Ontario is right to prepare its own supplementary plan. The federal government has been pandering to the financial services industry, promoting their silly PRPP proposal, and Ontario is fed up and threatening to go it alone on pension reform.

Do I think this is the best course of action for the country? Of course not. In my last comment covering the world's best pension spots, I explained why Canada has all it needs to enhance the CPP and make our retirement system the envy of the world. But I am assuming that our politicians are willing to do what's right for the country in terms of meaningful pension reform, and unfortunately, this doesn't seem to be the case.

So Ontario is raising the ante and weighing the benefits of starting its own pension plan. This isn't the preferred course of action but when everyone else is sleepwalking on pension reform, they're willing to openly discuss creating their own supplementary pension plan. And while the start-up costs will bite initially, over the long-run, this public plan will benefit their residents and reduce their debt profile (yes, reduce it!).

Ontario already has the best private and public pension plans in the world (HOOPP and Teachers). They can consult them on this project and get advice from leading experts. They can also staff this new plan with experienced professionals from Ontario and the rest of the country. In essence, Ontario is in a great position to lead the country and tell the federal government to stop dithering on enhancing the CPP.

It's sad how we get bombarded with pre-election talk on reducing our cell phone and cable bills but nothing on pension reform. To be sure, Canadians are used to getting gouged on fees on cell phones, cable and travel because of monopolies or quasi-monopolies but they're also getting raped on fees in their retirement accounts by closet indexers. Why aren't our politicians talking about this and finally introducing meaningful pension reforms?

In Quebec, our politicians have more important things to talk about like the charter of values (unbelievable!). Mental health professionals are rightly denouncing it but the Parti Québécois sees this as the perfect divisive issue to gain popularity in their attempt to win a majority government (it will backfire badly on them). The only sensible thing the government of Québec has done in terms of pensions is renew Michael Sabia's contract for another five years (although something tells me if the PQ had a majority government, Sabia would have been out).

Let me end by reaching out to the government of Ontario to tell them if they are looking for advice and help on setting up any new public pension plan, they can reach me via email (LKolivakis@gmail.com). I can also recommend senior pension  managers to help them with this project or to staff this new fund. The ramp-up phase is typically the hardest job but it's also the best part (I know, I helped Gordon Fyfe at PSP Investments ramp up private market investments).

Below, an INSEAD interview with Jim Leech, President and CEO of the Ontario Teachers' Pension Plan. Jim talks about how he developed direct investing in private equity at Teachers. It's worked relatively well for them but larger funds like CPPIB are more focused on funds and co-investments and not flying solo in private equity.