Wednesday, May 7, 2014

Auditor General Slams Public Pensions

Alex Boutilier of the Toronto Star reports, Harper government keeps details on public pensions secret from Auditor General:
The federal government is withholding information from the Auditor General on the long-term health of public pension plans and tax policy changes, citing cabinet and budgetary secrets.

Auditor General Michael Ferguson’s office requested the government conduct an analysis of the long-term sustainability of public pension plans — plans that could prove a “significant risk” to Ottawa’s finances. Treasury Board bureaucrats responded they already do that work, they just refuse to make it public.

“Due to cabinet and budget confidentiality, the (Treasury Board) could not share much of its analysis with the Auditor General,” officials wrote in response to the audit.

“(An interdepartmental) committee will coordinate analysis across departments to ensure the government has the information and expert advice it needs to make informed decisions on the management level.”

While it’s not unprecedented for information to be withheld from the Auditor General, Ferguson said he was “surprised” at the scope of information officials refused to turn over.

And there is no appeal process — and nobody outside the government — that can review the decision to designate documents or information cabinet confidence. Once confidence is invoked, the information cannot be released for two decades.

“I think there are maybe some weaknesses, perhaps, in our protocols. Some things that are not specifically covered and we need to go back and try and get that improved,” Ferguson told reporters in Ottawa Tuesday.

Ferguson’s office has reached out to officials at the Privy Council Office, the department that supports Prime Minister Stephen Harper, to attempt to do just that. Those discussions are in early days, however, and there’s no guarantee the information auditors sought will be released.

Treasury Board President Tony Clement noted that officials, not politicians, make the decision to designate documents cabinet confidence. Clement also pledged to work with the Auditor General’s office to try and release more information on the health of public sector pensions.

“We will continue to find ways to work with the Auditor General outside that (cabinet confidence) rule, which we do hold sacrosanct. But if there are other ways we can work with the Auditor General, we’d dearly like to do so,” Clement told reporters.

In an audit released Tuesday, Ferguson’s office reported that public sector pensions could pose a “significant risk” to Ottawa’s financial position, with pension liabilities rising to $152 billion in 2012-2013.

The audit found that the three public sector pensions studied – for public servants, RCMP members, and Canadian Armed Forces personnel – had combined assets of $72.2 billion in 2012-2013, and added $9.2 billion to the federal government’s public debt charges that year.

Strong volatility in the markets since the 2008 recession, in addition to long-term interest rates held to historic lows, have contributed to the financial risks associated with the plans. Increased longevity — the average number of retirement years have increased from 14 in 1970 to 23 in 2010 — has also contributed to increased costs. Over the last two years alone, the federal government has shored up the plans to the tune of $1 billion in special payments.

The audit passes no judgment on the long-term sustainability of the plans.

Clement said there are no immediate plans to change the structure of the pension plans, either through clawing back benefits or increasing premiums paid by public servants. The Conservatives recently moved to increase the age of eligibility for full pension to 65, and increased public servants’ contributions to their plans to 50 per cent.

“I’ve indicated over the next round of collective bargaining that for the next three years, the focus is going to be on sick leave and absenteeism, not on further pension reforms. And I feel comfortable that that’s the right thing to do,” Clement said.
You can read the Auditor General's 2014 Spring Report here. Public pensions are the first chapter and the full report on pensions is available here. The report discusses the risks these public sector pensions pose to government finances, but it also lays a scathing critique of the weak governance of these plans.

It's about time! I wrote my report on the governance of the federal government's public sector pension plan for the Treasury Board back in the summer of 2007. The government hired me soon after PSP Investments wrongfully dismissed me after I warned their senior managers of the 2008 crisis. And I didn't mince my words. There were and there remains serious issues on the governance of the federal public sector pension plan.

I remember that summer very well. It was a very stressful time. PSP was sending me legal letters by bailiff early in the morning to bully and intimidate me. I replied through my lawyer and just hunkered down and finished my report. The pension policy group at the Treasury Board didn't like my report because it made them look like a bunch of incompetent bureaucrats, which they were, and they took an inordinate amount of time to pay me my $25,000 for that report (the standard amount when you want to rush a contract through and not hold a bidding process).

If I had to do it all over again, I wouldn't have written that report. The Treasury Board buried it, and it wasn't until last summer that the Office of the Auditor General finally started looking into the governance of the federal public sector pension plan.

In 2011, the Auditor General of Canada did perform a Special Examination of PSP Investments, but that report had more holes in it than Swiss cheese. It was basically a fluff report done with PSP's auditor, Deloitte, and it didn't delve deeply into operational and investment risks. It also didn't examine PSP's serious losses in FY 2009 or look into their extremely risky investments like selling CDS and buying ABCP, something Diane Urqhart analyzed in detail on my blog back in July 2008.

I had discussions with Clyde MacLellan, now the assistant Auditor General, and he admitted that the Special Examination of PSP in 2011 was not a comprehensive performance, investment and operational audit. The sad reality is the Office of the Auditor General lacks the resources to do a comprehensive special examination. They hire mostly CAs who don't have a clue of what's going on at pension funds and they need money to hire outside specialists like Edward Siedle's Benchmark Financial Services.

Siedle specializes in forensic and operational audits. He would have seen well past PSP's tricky balancing act, and highlighted a bunch of shady dealings. For example, how did André Collin, PSP's former head of Real Estate, join Lone Star right after directing billions to that fund while at the Caisse and PSP? Collin was recently promoted to President at Lone Star, responsible for global operations (unbelievable). He's a good real estate investor but he basically bought himself a cushy job at Lone Star. Amazingly, PSP's governance rules did not forbid their senior managers from working at funds they invest with after they leave that organization (nothing was mentioned in the Special Examination).

I am glad the new Auditor General, Michael Ferguson, is looking more closely at public pensions. The Auditor General should also examine the sorry state of pensions at Crown corporations (not all but most are in dire shape). There needs to be a lot more transparency and accountability when it comes to public pension plans, especially in Canada where we love to point out the shortcomings of other systems in other countries but never take a hard look at what's going on in our own backyard.

For the most part, Canada's public pension funds are well governed, but there is a lot of work that needs to be done because there's still too much secrecy and there are issues that need to be addressed. My biggest beef isn't with outrageous compensation based on bogus benchmarks, although that is scandalous, it's with the lack of full transparency and the lack of true diversity at the workplace. How can these organizations justify not hiring people with disabilities or not publishing turnover rates and diversity statistics in their annual report? (Read my comment on reversion to mediocrity)

And all of Canada's public pension funds are guilty of this, not just PSP. I've been at the offices of PSP, CPPIB, OTPP, and even HOOPP, and they don't have buttons for people with disabilities to open their office doors easily. Luckily, I'm not in a wheelchair but I pay attention to these little details as is shows total disregard for people with disabilities and pisses me off just like when restaurants don't have easy access or bathrooms on the ground floor with easy access. The only organization where I actually saw employees in a wheelchair and easy access at key walkways was the Business Development Bank of Canada (BDC) but even they aren't doing enough to hire people with disabilities and to diversify their workforce at all levels of the organization.

One last thing worth noting. I don't think Harper's government will share any more information with the OAG or do anything to improve the governance of the federal public sector pension plan. When Treasury Board President Tony Clement says: "We will continue to find ways to work with the Auditor General outside that (cabinet confidence) rule, which we do hold sacrosanct," it's official bureaucratese for "we will maintain the status quo and couldn't care less what the Auditor General thinks."

I hope I'm wrong but I've had enough experience at Canadian public pension funds, Crown corporations and at government agencies which is why I'm extremely cynical. Nothing ever changes until a crisis hits and heads roll. And even then, the Luc Vervilles, André Collins, and Henri-Paul Rousseaus of this world still manage to land on their feet with cushy jobs while the media covers up the biggest scandal of our time.

I'm telling you, I have to finally write my book or just sit down with a reporter to write my story. It's an incredible story that needs to be told and you're only getting a glimpse of it here.

Below, the CBC reports on Auditor General of Canada's Spring 2014 Report, highlighting where the government is wasting money and mismanaging files, and where it is doing a good job. I commend Mr. Ferguson and his team for finally bringing the problem of public pensions to the public's attention but warn more work needs to be done to bolster the governance of these plans.