Friday, December 13, 2013

Tackling Quebec's Pension Deficits?

Rhéal Séguin of the Globe and Mail reports, Quebec government aims to resolve pension deficit:
The Quebec government is proposing an ambitious strategy to begin resolving the deficits of a growing number of pension plans within two years.

Several of the province’s 863 private pension plans, which cover 1.2-million people – half of them retired – have a total deficit of $26-billion.

The problem is nationwide, but the Quebec government’s proposal is unique and is part of an effort to break the private-sector trend of moving away from defined-benefit plans.

“Defined-benefit pension plans are in danger. … These are the best pension plans available to workers, and we need to protect them,” Labour Minister Agnès Maltais said. “We have no choice. We have to settle this problem. The status quo is no longer possible.”

Ms. Maltais said she will table two bills next year, one to set the conditions for workers and employers to negotiate how to resolve their companies’ pension deficits, and another to define the financial terms to ensure the solvency of defined-benefit plans.

Quebec has been considering supplementary payments for older retirees under the Québec Pension Plan, but it would require higher contributions. Ms. Maltais said that to keep Quebec’s business environment competitive, Canada Pension Plan premiums also have to go up. Ontario and other provinces are attempting to get Ottawa to boost contributions to the CPP, and Quebec will join them to press the demand at the upcoming federal-provincial meeting of finance ministers.

The Quebec government proposal to ease the financial troubles of private pension plans will give workers and employers until December, 2014, to negotiate a solution for their company. If talks fail, they will have another six months with the help of a conciliator. If they reject the conciliator’s report, the province’s labour relations board will determine a final agreement.

The government will also make it mandatory for workers and employers each to bear half of the costs of pensions in the future. Rules will also be changed to provide more flexible and less costly ways for companies to replenish the capital in their pension plans to prevent insolvency and protect benefits in closings or bankruptcies. The province is hoping these changes will encourage companies to stay with defined benefit plans rather than adopting pensions with fewer benefits.

“The plan by itself doesn’t settle everything, but it is certainly an important step in the right direction to ensure the viability of part of our retirement plans and improve the financial security of retired workers,” said Yves-Thomas Dorval, president of the province’s influential business lobby group, the Conseil du patronat.

Labour groups also applauded the initiative but criticized the 50/50 cost-sharing and the plan to give more powers to the labour relations board.

“We will actively participate [in discussions], but giving a third party the power to rule on an issue compromises the fundamental principle of free negotiations,” said Denis Bolduc, secretary-general of Quebec section of the Canadian Union of Public Employees.

The government plans to hold consultations early next year with labour organizations, employer associations, retirees and a coalition of student and young unionized workers on the proposed private pension plan changes.

Similar forums will be held to tackle the pension deficits in municipalities and universities which are estimated at $5-billion. This does not include the $28.3-billion liability for pension plans covering the entire public sector. However Ms. Maltais said public pension plans remained on a solid financial footing
Kevin Dougherty of the Montreal Gazette also reports, PQ takes aim at pension reform:
Quebec’s labour minister has presented a plan to address the province’s beleaguered defined-benefit pension plans.

On Thursday Agnès Maltais, who is responsible for the Quebec Pension Plan, announced the Marois government’s response to the D’Amours report on the retirement system and pension reform that was tabled last spring. Among its recommendations to address pension fund deficits was a longevity pension, to be paid from age 75.

“You can see Christmas is coming soon since I am presenting a government action plan on pension plans,” Maltais said.

Municipal and other public pension regimes in the province have a $5-billion deficit, private plans are $26 billion in the red and university pension plans, with total obligations of $5 billion, have an $800-million deficit.

The Régie des rentes du Québec, in addition to paying out pension benefits to Quebecers who contributed in their working years, also oversees 860 defined benefit pension plans in the province, with assets of $100 billion and 1.2 million participants, half of them retired.

Denys Jean, who heads the Régie des rentes, explained that the pension plans have not recovered from the contraction of financial markets, following the 2008 crash, and interest rates have not been so low since the 1950s.

The D’Amours report proposed a five-year plan to correct the situation.

Maltais said that after hearing testimony at National Assembly hearings on the report, there is a consensus among the parties in the assembly to move faster.

She has proposed a two-year plan, starting with forums from January to the end of April, where employer and employee associations can discuss solutions face to face and make recommendations. This would set a framework for negotiations and criteria that the Commission des relations du travail, Quebec’s labour relations board, could apply to resolve differences.

“I think we have gone farther than I thought we could,” Maltais said.

The minister says she will present a first bill in April or May, setting in law the parameters of the reform, with a second bill, incorporating recommendations of the discussion forums, in the fall of 2014.

The government’s main proposal is a guideline calling on employees and employers to share pension costs 50-50.

Maltais is focused on three types of pension plans: private sector, municipalities and universities.

Under the two-year process she has proposed, there will be a six-month period of negotiations.

If there is no agreement, another six months will be allotted for conciliation.

And if that fails, the two sides will go to the labour relations board, which has the power to impose a settlement.

Quebec City Mayor Régis Labeaume campaigned for the right to lockout municipal employees, a request rejected by the Parti Québécois government.

“They have the necessary tools,” Maltais said. “The partners will find the solutions.”

Private pension plans, which now must show they are solvent, will instead have to meet a more flexible norm called “improved capitalization,” while public sector pensions will still be required to be solvent.

Maltais explained that she decided on two methods of financing because improved capitalization would increase the deficits of municipalities and universities.

Christian Dubé, of the Coalition Avenir Québec, said Maltais was proposing an “inaction plan,” saying his party wanted a bill in 2013 to give cities the power to impose solutions, saying this is “a very sad day.”

Nicole Ménard, of the Quebec Liberals, said Maltais lacks leadership by proposing a two-year delay, and “visibly wants to put off decisions until after the election.”

Quebecers could face a spring election if the Marois government is defeated on its budget, expected before Easter.

Denis Bolduc, Quebec director of the Canadian Union of Public Employees, applauded the Maltais plan, with reservations, saying the 50-50 approach lacks flexibility, and rather than resorting to the labour relations board, the parties should seek negotiated settlements.

The Conseil du patronat du Québec employers group said it pleaded with governments for years to deal with the pension problem and was pleased Maltais “listened and proposed solutions to resolve the problem.”
Finally CTV News reports, Quebec planning pension plan overhaul for public employees:
The provincial government is planning a public pension makeover for all employees of municipalities, universities, and hospitals in Quebec.

Under legislation to be tabled next year, public employees would be responsible for 50 percent of their pension plan contribution.

It's a recommendation that was made by the Amours committee on financing and retirement planning as a way to make up the shortfalls in pension funds for civil servants.

At the moment many institutions and municipalities contribute 70 percent toward retirement while employees make up the remaining 30 percent.

That costs the city of Montreal almost half a billion dollars a year -- because previous city governments were not contributing as much as they were supposed to.

Labour Minister Agnes Maltais said that shortfall is why the provincial government has to step in.

"Our pension plans are in danger," said Maltais.

To make up the shortfall Quebec is proposing that unions and management discuss issues and then begin negotiations.

If there's no agreement after six months the two sides would then meet with a mediator.

If after another six months there's no deal the labour relations board could impose a solution.

"I do think everybody was waiting for a move from the government," said Maltais.

However Denis Coderre, the mayor of Montreal, was hoping things would move faster.

"The process that they're proposing, you have a full two years? I mean it's way too long," Coderre said.

Unions are now worried that their members may wind up strapped for cash now in order to pay for retirement later.

Jean Lortie, Secretary General of the CSN, said it will be difficult for many to increase their retirement savings.

"Imagine in the place, municipality or in university, you pay only 20 percent for your defined benefit pension fund, and then suddenly you're being asked to pay 50 percent," said Lortie.

860 pension plans affecting 1.2 million people fall under the government's proposal.

I applaud Labour Minister Agnes Maltais for finally beginning the process of reforming Quebec's private and public sector pension plans.

Unfortunately, I agree with Montreal's mayor, by the time we get through the two year period of consultations, it's going to be too late. For years Quebec has been sweeping the pension problem under the rug and the chicken has come home to roost.

I'm particularly disturbed about municipal and city pension deficits. I'm glad to see Montreal Mayor Denis Coderre and Quebec City Mayor Régis Labeaume join forces to tackle this and other problems:
Coderre said the two cities would be asking for laws granting Montreal and Quebec City special status to recognize their positions as the province’s major metropolis and its capital, as Ontario has done with Toronto. Special status would allow cities more autonomy to tackle issues like immigration, infrastructure, economic development and new ways of producing revenue other than property taxes, which generate 70 per cent of Montreal’s income.

The two mayors joined a meeting of the Union of Quebec Municipalities in the afternoon, at which the mayors of Quebec’s major cities demanded new legislation giving municipalities the power to settle pension plan agreements with their unions after one year of negotiations. The pension plan deficit for Quebec municipalities stands at $5 billion.

“For the elected officials of municipalities, the time for working groups has passed,” said Union president Éric Forest. “We have behind us three years of consultations and warnings from the leading experts in the field. The mayors of Quebec’s largest cities demand the government put legislative solutions on the table and to discuss it in a parliamentary commission to find the best solutions.”

Coderre and Labeaume last met Monday in Quebec City, for the first time since the municipal elections of Nov. 3. They said their priorities were greater autonomy and new forms of financing from the provincial government, in keeping with the larger role municipalities play in the provincial and global economy. They also took the time to bury a perceived hatchet — some media had been focusing on a spat that erupted after the elections, when Coderre said Labeaume needed to calm down over the issue of pension plans, and Labeaume responded Coderre was power-tripping the day after becoming Montreal’s new mayor.

Chief on the agenda then as well was the issue of pension benefits for unionized municipal employees that are draining municipal resources — Quebec City has an $800-million -deficit, Montreal a $2.5-billion deficit, and both are threatening to grow even larger as workers age and retire. Paying into the pension plans eats up 10 per cent of Montreal’s annual $5-billion budget.
Clearly Quebec City and Montreal can't afford the status quo. Pension payments are draining their city coffers. They need to follow New Brunswick and move to a shared risk model for their defined benefit plans (just make sure they get the COLAs right).

But adopting a shared risk model isn't enough. The Quebec Government needs to read my New York Times comment on the U.S. public pension problem as well as the sound advice Bernard Dussault, former (1992-1998) Chief Actuary of the Canadian government for the CPP, OAS and Public Sector Pension Plans, shared on my blog here.

More than anything, Quebec drastically needs to improve the transparency of its city and municipal pension plans. Here are some of my quick recommendations:
  • Create a new public pension plan that consolidates all city, municipal and university pensions
  • Make sure you adopt world class governance standards
  • Slowly introduce shared risk, phasing it in over five years. Unions will whine but tough luck!
  • And force all underfunded private defined-benefit plans to transfer their pension management to this new public pension plan.
These are quick recommendations but the time has come for drastic action on pensions. My last recommendation is based on my biased opinion that most companies shouldn't be managing pensions at all. They should focus on their core business and let a well-governed public pension fund manage the assets.

Another more controversial recommendation is to finally break the Caisse in half.  It's too big, too bureaucratic, and in my humble opinion, it has to be parsed into two separate entities. There are too many fiefdoms still in place at the Caisse and this won't change until you shake this mammoth Quebec fund up.

But my biggest beef is governance. When I was working at the Caisse investing in hedge funds and funds of funds, it took me 15 minutes to figure out Montreal's Norshield Asset Management was a fraud. Amazingly, the city of Laval and Sherbrooke invested millions in this fund of funds run by John Xanthoudakis, a real slick (and not particularly bright) snake. It made me wonder how many city officials he greased to get them to invest in his Ponzi scheme.

Governance, governance, governance! I can't stress this point enough. Everyone wants a piece of the pension pie and now more than ever, pension fund managers and their supervisors need to be vigilant.

Below, Michael Sabia shares his thoughts on the Caisse de dépôt et placement du Québec and the development of the pension fund industry in Montreal. The Caisse recently bought a 27% stake in the Port of Brisbane from Global Infrastructure partners for or more than A$1 billion (CAD$908 million). This is all part of its big bet on emerging markets.