Friday, May 9, 2014

Is the ORPP a Bad Idea?

Joe Nunes, President of Actuarial Solutions, posted a blog comment, Bad Idea #11 – Ontario Retirement Pension Plan:
Regular readers of my commentary will know that I am absolutely against the idea of our Federal and Provincial Governments expanding the Canada Pension Plan. I call this Bad Idea #17 and have written about it a couple times (you can read those commentaries here and here) and have a third installment on the way. One reader asked where they can find the entire list of bad ideas. The truth is that I had to keep some open spots in the list because I knew more bad ideas would be forthcoming.

On May 1, 2014, Ontario’s Liberal Government presented its budget which included the Ontario Retirement Pension Plan. I don’t have all the details, not because I didn’t look, but because the government doesn’t have all the details to offer at this stage. Apparently their strategy is to tell you they are doing something and then leave some room to figure out the details later. Sadly, I wish they figured out how ill conceived this idea is in all its details before rushing the news – it will be embarrassing when they have to back track or worse when they push ahead and waste a bunch of taxpayer money (think Ontario gas plants).

I guess the Liberals thought that they had no choice but to go this route after so publicly pushing the Feds and other Provinces to get on board with a CPP expansion and playing the ‘if you don’t do it with us we will do it on our own’ card. I can’t believe that they can’t find a single soul in the Ministry of Finance that can help them understand how complicated this thing is going to be (think gun registry).

The implication is that it will be just like the CPP except:
  • Employee contributions will be 1.9% of earnings up to a maximum of $90,000
  • Employers will be required to make a matching 1.9% contribution
  • Self-employed may not be required to join
  • Workers with a ‘comparable’ workplace pension plan will not be required to join
  • Not all employers will join together – rather larger employers will join first – smaller later
So – here are problems that mirror the problems that would come with an expanded CPP:
  • Funding a defined benefit plan means you need to set a benefit level and guess at a contribution rate. If the contribution rate is inadequate – the next generation of workers has to over-pay to compensate for the under-contribution by the generation ahead.
  • Additional savings of 3.8% will be meaningful to those retiring in thirty or forty years but will do little for those retiring in the next decade – especially when the program doesn’t even start until 2017.
  • CPP/ORPP are social programs and not pension plans – there will be winners and losers in the cross-subsidization game. My fear is that the losers will continue to be the low income workers that are often in poorer health and have inconsistent earnings and the winners will be those that are well educated, well paid, and already looking forward to a healthy and long retirement.
  • There is a risk – not a guarantee but a risk – that pulling these dollars from consumers and businesses might stall an already fragile economic recovery in Ontario.
But wait – before you say ‘no sir’ to this proposal, there is more – problems that are unique to Ontario’s super special go-it-alone strategy:
  • There is absolutely no leverage of the CPP infrastructure to receive contributions, invest funds, or calculate and pay benefits. To be clear – the CPP spends more than $600 million in operating expenses – how much will Ontario spend to run their mini-CPP?
  • The flat employee contribution rate of 1.9% of pay likely means that you are taking valuable take-home pay from minimum wage workers who may not need more retirement income nearly as much as they need more dollars to pay their ever increasing hydro bills.
  • It won’t be universal – some employers and their employees will be in – some will be out – so figuring out what you get when you retire will be a little less difficult than solving the Rubik’s Cube. What is really frustrating about this feature is that level contributions in a defined benefit plan only work if employees stay in the plan for a lifetime – otherwise younger workers always subsidize older workers. I can’t wait to see who they pick for Chief Actuary or the assumptions that he or she makes to justify the wonderful benefits promised for the low, low, price of 3.8% of pay.
  • Small employers, those that are least likely to already offer any sort of pension are the last to join – if they ever join at all. Maybe this compromise was intended to satisfy the Canadian Federation of Independent Business – but once again we have created the optics of helping people when we really aren’t doing anything for the people who need the help most.
I don’t know what more I can say – someone in the Ontario government is convinced that this is the way to go and either they don’t have anyone around them telling them it isn’t – or they just aren’t listening.
My thoughts very briefly. The ORPP isn't a bad idea, but this blog comment is bad. Apart from a few typos that I corrected, it's misleading. Let me share with you what Bernard Dussault, Canada's former Chief Actuary shared with me:
"In a nutshell, I find that ORPP is as good as a CPP expansion and therefore the best alternative thereto. Therefore, I find that the comments made at 'Actuarial Solutions" are unjustified complaints, overly pessimistic and not objective."
I agree, Mr. Nunes' case against the ORPP is very weak and totally biased. He obviously has an agenda just like everyone other detractor of the ORPP. Jean-Pierre Laporte, CEO of Integris Pension Management shared his thoughts on the ORPP on LinkedIn:
As one of the fathers of the Ontario Retirement Pension Plan, I must admit I was pleased to see it introduced into the last Liberal Budget in Ontario. The one difference between the version I had proposed a decade ago in Benefits and Pension Monitor's Oct. 2004 issue, and the current ORPP that is causing me concern, is its mandatory nature.

Many so-called policy experts cling to the belief that Canadians are too dumb to act in their best interest, and given a choice between saving and spending, they will spend. When one holds that belief as sacrosanct, then it follows that any new saving scheme must be made compulsory. I, on the other hand, do not think Canadians are dumb. I believe that if presented with a smart, well-thought out solution, Canadians will jump on it.

Let me provide you with some historical examples: if you compared the percentage of savings in Canada to the prime interest rate, you would see that the two move hand in hand. When interest rates were high in the 1980s, the savings rate was also quite high. Now that interest rates are rock bottom, it is no secret that Canadians look for other places to put their money.

Other examples taken from the financial world in Canada include: in the past, if you wanted to purchase a mutual fund, you had to pay a front load fee, say 6%, and then, the mutual fund would also levy an ongoing management fee, so long as you had your funds with that manager. Altamira came and said, let's get rid of that front load. Canadians responded. Altamira went from a few hundred millions in assets, to over 9 billion. ING Direct introduced no-fee, high interest savings accounts using online banking. Canadians responded and contributed billions in dollars over a relatively short period of time. CIBC copied them by creating Amicus Bank which sponsors President's Choice Financial. More recently, the federal government introduced the Tax Free Savings Account. 100% voluntary. No employer match. You'd think Canadians would have spent any discretionary income instead of going to the bank to open up a TFSA. The evidence is overwhelmingly to the contrary. 8 million Canadians got off their couch and filled out the paperwork transferring billions of dollars into these accounts.

Many retort that only the rich can afford to use TFSAs and that it isn't evidence that the average Canadian is smart about saving. I don't think Canada has 8 million wealthy people, so there has got to be middle class Canadians in that group.

Thus, the philosophical difference as to how much credit should be given to Canadians is the only difference between my original 2004 proposal to create a voluntary supplemental account to the CPP, and the 2014 ORPP.
Jean-Pierre also shared these remarks on LinkedIn regarding Nunes' blog post:
"If you are going to provide a supplement to CPP, it should not be done in Ontario alone. It should be done across the country to avoid replicating the bureaucracy that is already in place for the CPP. That alone saves the taxpayer millions of dollars. And furthermore, to avoid a payroll tax that will impact small businesses, you make the program voluntary. Good voluntary programs work well. TFSA, Canada Savings Bonds etc. All of these solutions were put on the table a decade ago. It's too bad the politicians don't always pay attention."
I like Jean-Pierre a lot, have written on him and his firm on my blog, but he's wrong that voluntary programs have worked well. Very few working Canadians invest enough in TFSAs and especially in RRSPS and even if they do, they get walloped on mutual fund fees. Most Canadians and Americans desperately need to resurrect their portfolio and they need a reality check on pensions.

The problem is most people are financially illiterate (not dumb). They don't know basic concepts like what an exchange traded fund is or how to construct a portfolio. They fall easy prey to banks, mutual fund and insurance companies who are more than happy to manage their money for a nice fee. And just like most hedge funds, most mutual funds absolutely stink!

And what about all the gurus on CNBC and other business television networks? Listen to my dad, a psychiatrist with over 40 years experience: "They all sound and look good but they don't anything about where markets are heading. It's all gambling."

Exactamundo! I have CNBC playing in the background all day and most of the time, I tune completely out. I watch it for entertainment purposes when I take breaks from trading and analyzing stocks. I like it when Rick Santelli gets his panties tied in a knot or when Cramer is pushing a stock his hedge fund buddies are dumping. In a few minutes, they will interview America's sexiest CEO (Oh lala, I can't wait!). Sure, there are good interviews, but when I see Dr. Doom warning the next crisis will be worse than 2008, I know the big unwind is coming to an end.

The point is even the experts are totally clueless. The masses are fed all sorts of garbage and we expect people to save, invest wisely and plan their own retirement. Even pension funds are fed garbage and many have gotten killed investing in all sorts of nonsense, like ABCP and structured crap. This morning I had a meeting with an Indian private equity fund doing mezzanine financing and one guy explained to me how many institutional investors are getting raped on fees in India as PE funds invest capital in public markets (what else is new?).

But the key difference is pensions pool investment risk, they pool longevity risk and they lower fees because they invest directly or use their clout to lower fees significantly. And for the broader economy, the benefits of defined-benefit pensions are greatly under-appreciated. This is why I praise the ORPP and think a lot of naysayers are dead wrong.

Would it be nice if we expanded the CPP for all Canadians? You bet but it won't happen under the Conservative government which panders to banks and insurance companies promoting silly PRPPs. When it comes to pensions, we need new leadership because the status quo will only lead to more pension poverty and higher debt in the long-run.

People need to wake up, smell the coffee, remain objective and stop pushing their own agenda. I understand why some actuaries and useless investment consultants don't want to enhance the CPP and are against the ORPP. I couldn't care less. I'm more concerned about what is in the best interest of our country and retirement system.

Below, Marc Faber of The Gloom, Boom & Doom Report, explains why he thinks there's more pain ahead for the economy, and why stocks and bonds will go down at the same time. Forget Dr. Doom, he's a contrarian indicator just like Denis Gartman. Go back to read my Outlook 2014, why deflation will expose naked swimmers and my more recent comment on The Big Unwind.

Importantly, despite the big correction in small caps, biotechs and technology shares, I would be buying this dip hard. In fact, LTK Capital Management used the selloff to load up on a few biotech shares the Baker Brothers own and I am willing to bet anything top hedge funds loaded up on Twitter (TWTR) this week and started shorting utilities.

If you think the liquidity rally is over, you're in for a nasty surprise. The second half of the year should prove very interesting. Then again, my guess is as good as yours and my dad is right, at the end of the day, "it's all gambling," which is why we should push to enhance defined-benefit pensions for all and stop attacking initiatives that do so. The ORPP isn't a bad idea, it's the best Ontario can offer until the feds wake up and enhance the CPP for all Canadians.