Wednesday, November 27, 2013

Crown Corporation Pensions in Trouble?

Vanessa Lu of the Toronto Star reports, Canada Post faces $1B pension shortfall:
Canada Post warns it will need a significant cash infusion by the middle of next year to meet pension payment obligations estimated at $1 billion.

“Based on our current financial projections, we believe we are going to require additional liquidity by mid-next year,” said Canada Post spokesman Jon Hamilton. “We’re talking to the shareholder, the government, about options to address the challenge.”

Hamilton had no specifics about what that might entail, whether it would be increased borrowing or a subsidy, though Hamilton said Canadians have made it clear they don’t support such government subsidy.

The warning about a cash shortfall was tucked inside the corporation’s third quarter earnings, which were released Thursday. The Canada Post segment lost $129 million, before tax, in the third quarter, an improvement from last year’s $161 million, in the same period.

The improvement was attributed to labour savings, as the company adopts changes to delivery methods, including having one carrier deliver both parcels and letters in a small van.

For Canada Post, the obligations of the pension plan are a growing concern, in part due to low interest rates. While the plan has assets with a market value of $17 billion, its pension solvency deficit – the amount needed to meet obligations if it were wound up – is estimated at $5.9 billion as of the end of 2012.

Canada Post has been making its current service contribution to the pension plan, with $203 million paid in the first three quarters of the year, estimated at $269 million for the year, plus special payments of $28 million.

According to the management discussion & analysis report, in 2012, the federal government allowed Canada Post to delay making back payments to top up the deficit until June 2013, but then extended it again until June 2014, but it will be on the hook for $1 billion in 2014.

“These options include seeking additional pension regulatory relief and securing additional financing,” the report says. “Canada Post is also looking for support to restructure its business model and pension plan framework to assure its long-term financial sustainability.”

Canada Post is trying to figure out how to reinvent itself in the age of email, texting and Skype. Letter mail volumes keep falling, dropping 7 per cent – or 73 million fewer pieces -- in the third quarter, compared to the same period a year ago.

Parcel revenues were up by $32 million, or 11 per cent in the third quarter, thanks to increased online shopping. Volumes were up by more than 1 million items from the same period last year, but it wasn’t enough to offset the drop in mail demand.

Canada Post is looking at ways to cut costs including looking at ending door-to-door delivery or alternate-day delivery, though it has no timelines of when it will put forward a proposal.

“Our focus is on transforming the business to serve the future needs of Canadians,” said Hamilton. “There is a lot less mail and a lot more parcels.

“We have been gathering feedback from Canadians so that we can put forward the changes that are needed,” he added.

It is unclear what the federal government will do. In March, Air Canada, which was also facing a whopping pension solvency deficit, won an extension to stretch out its outstanding payments.

Under that deal, the airline promised to pay at least $150 million a year, with an average of $200 million a year, totaling at least $1.4 billion until 2021. In return, Air Canada had to cap executive pay and is barred from issuing any dividends or share buybacks

Transport Minister Lisa Raitt is in charge of Canada Post, and her office declined to say what measures are being discussed, emphasizing Canada Post is responsible for its own operational decisions.

“Since 1981 Canada Post has had a mandate to operate on a self-sustaining financial basis. We are very concerned that they are posting significant losses,” the statement said.
My advice to Canada Post is to immediately stop delivering mail every day. Traditional mail should be delivered only three times a week, on Monday, Wednesday and Friday. Exceptions can be made for business parcels and important registered mail, but Canada Post needs to cut costs and compete more effectively with UPS and FedEx.

Canada Post's Pension Plan is headed by Doug Greaves who has an impressive resume:
Doug Greaves, Vice-President Pension Fund and Chief Investment Officer, has extensive investment management experience in bonds, equities and alternative investments. Doug joined Canada Post at the inception of its Pension Plan in 2000, and was responsible for developing and implementing the Plan’s investment strategy, hiring all Plan employees and establishing Plan administration and investment operations. Today, Doug is responsible for managing all aspects of the $15-billion Plan, including pension investment and plan member administration activities.

Doug has broad investment experience managing Canadian and U.S. equity and bond portfolios as well as private equity and real estate investments. Prior to joining Canada Post, he held senior investment positions with Workers Compensation Board, Ontario Municipal Employees Retirement Board and North American Life Assurance Company.

Doug received his Honours in Business Administration (HBA) from the Richard Ivey School of Business, University of Western Ontario, and is a CFA Charterholder. Doug is a member of the Pension Investment Association of Canada, the Canadian Coalition of Good Governance and the Institute of Corporate Directors. Doug is also a member of the Investment Committee of the United Church Pension Fund.
You can review the report to members here. The 2012 Report to Members contains a stern warning from Deepak Chopra, Canada Post's President and CEO:
“Defined benefit pension plans across Canada are facing unprecedented challenges. The size of (the) demographic and economic shift can no longer be managed by investment returns alone. Even with a healthy Plan sponsor, in the absence of meaningful changes to the pension plan, the Corporation simply cannot sustain the Plan’s funding requirements.
Not all Crown corporations suffer the same fate as Canada Post in terms of their pension plan. The CBC, another Canadian Crown corporation, has an excellent pension plan. You can view highlights from the CBC Pension Plan's annual reports on their website. I checked out the highlights of their 2012 Annual Report and note the following:
  • Net Assets have increased for a 5th straight year to $5.3 billion at December 31, 2012 (2011: $5.1billion);
  • The Going Concern surplus is now in excess of $1 billion (2011: $947 million) and results on a Going Concern funding ratio of 124% (2011: 123%);
  • The Solvency deficit increased to $(519) million (2011: $(385) million) and results in a Solvency funding ratio of 91% (2011: 91%);
  • 2012rate of return was 8.1% vs. the asset benchmark of 7.5%;
  • 4-year annualized rate of return was 12.5% vs. the asset benchmark of 11.9%;
  • Benefit payments totalled $254 million in 2012 (2011:$238million);
  • Fund administrative costs were $21 million and equates to 30.2 cents(2011:42.0 cents) per $100 of average assets which is less than the benchmark comparative of 65.9cents per $100;
  • Overall member service satisfaction levels of the Pension Benefits Administration Centre remain high with 93% (2011:92%) of the members surveyed rating services as excellent or good.
Debra Alves, the Managing Director and CEO of CBC's Pension Plan, and her small team are doing an outstanding job managing the plan. Their solvency deficit doesn't really concern me and even though they're not part of Canada's top ten, their four-year annualized rate of return is among the best for Canadian public pension plans.

Now, it's not fair to compare Canada Post's Pension Plan directly to CBC's Pension Plan and that is not the purpose of my post. I'm sure Doug Greaves and his team are doing a great job and the billion dollar pension deficit is not their fault. Canada Post has been hemorrhaging  money and a pension plan is only as strong as its sponsor.

But that brings me to my topic du jour. There are a bunch of Canadian Crown corporations that have their own defined-benefit pension plan and we know little or nothing about the state of these pension plans unless disaster strikes and they run to the federal government asking for money to plug the hole.

I was told the Treasury Board is reviewing the pension plans of all Crown corporations and will release a similar report to the one it did reviewing their governance framework. Such a report, as well as a separate one from the Auditor General of Canada, is long overdue. Canadians deserve to know the state of the pension plan of every single Crown corporation. They should adopt the same transparency as CBC and Canada Post, publishing annual reports on their pension plan.

One thing I do know is that some Crown corporations have moved away from defined-benefit plans, much to my disappointment. For example, the Export Development Corporation (EDC), one of the oldest and most important Crown corporations in Canada, no longer offers DB plans to its new employees, only a DC plan. The Business Development Bank of Canada (BDC) still offers a DB plan to its employees and last I heard, its plan is in very good shape (still, the BDC should publish a separate annual report on its pension plan like the CBC).

As far as CPPIB and PSPIB, the two giant Crown corporations managing pensions, their employees are offered defined-benefit plans but they are not allowed to invest in their own fund. I remember complaining about that to Gordon Fyfe when I was working at PSP but he told me the rules were put in place to reduce conflicts of interest (pretty stupid rules because you want your pension fund managers to have skin in the game!!!).

Anyways, all this to say we need a hell of a lot more transparency on the pension plans of Crown corporations and I think CBC is the model to follow in this regard. Canadians are fed up with the lack of transparency in the federal government and they deserve to know a lot more about what is going on with their Crown corporations. The Treasury Board should publish an annual report on Crown corporation pension plans.

Below, a CBC interview with Denis Lemelin, the national president of the Canadian Union of Postal Workers, on the future of Canada Post (September, 2013).