Monday, August 4, 2014

Ontario's Secret Pension Report?

Ron Ferguson of the Toronto Star reports, Liberals sat on report critical of bloated pensions in hydro sector:
Premier Kathleen Wynne’s government is being ripped for keeping secret a report critical of bloated, taxpayer-funded pensions in the hydro sector since well before the June 12 election that lifted the Liberals to a majority.

The 45-page study into Ontario Power Generation, Hydro One, the Electrical Safety Authority and Independent Electricity System Operator recommends dramatically lower public contributions to “generous, expensive and inflexible” retirement schemes posing a “significant risk” to electricity prices.

At Hydro One, for example, taxpayers have been contributing an average of $5 for every $1 from employees, far higher than most civil service and private sector pension plans. Two-thirds of Ontarians have no workplace pension plan.

The report is dated March 18 and was posted on the Ministry of Finance website Friday on the eve of the Civic Holiday long weekend.

“This is awfully suspect,” said Progressive Conservative MPP Vic Fedeli, his party’s finance critic, questioning Wynne’s oft-stated goal of running an “open and transparent” government.

“There was ample opportunity to release this document with good public scrutiny. What are they hiding? What didn’t they want us to know?”

NDP pensions critic Jennifer French (Oshawa) said the Liberals “have been sitting in this report for five months.”

Government officials said they had intended to make the report public after Finance Minister Charles Sousa’s May 1 budget — which was rejected by opposition parties, forcing the election — and that posting it without fanfare was an oversight.

The Canadian Federation of Independent Business said the late release of the report is a blow to Wynne’s credibility as she pushes forward with an Ontario Registered Pension Plan (ORPP) for citizens without workplace pensions.

“Why now, why not before the election so people would have known what’s happening?” said Plamen Petkov, whose lobby group opposes the ORPP as too expensive.

“We’re very worried to see government agencies where employees are paying only 20 cents on the dollar for their pensions when taxpayers pay the other 80 cents. No wonder the government itself expects electricity prices to go up 42 per cent over the next five years,” he told the Star.

“It’s really disappointing. We recommend the government clean its own house first before they ask employers to contribute $3.5 billion a year to the Ontario Retirement Pension Plan.”

The report was written by Jim Leech, a former head of the Ontario Teachers’ Pension Plan appointed last December to find ways of making electricity sector pension plans more affordable as the government struggles to eliminate a $12.5 billion deficit by 2018.

“The pensions are generous,” he concluded, noting benefits are “very close” to the maximum allowable under the Income Tax Act, “richer than most of the broader public service plans and employee contributions are also lower.”

For example, the Ontario Power Authority’s pension plan has a 50/50 employer/employee contribution ratio — a level that Leech recommends be reached within five years.

His report provides “advice on a roadmap and potential destination that is both affordable and financially sustainable,” said Beckie Codd-Downey, spokeswoman for Energy Minister Bob Chiarelli.

“The government will be reviewing the report in consultation with union representatives to assess the recommendations.”

Pensions will be subject to collective bargaining between the electricity agencies and their employees.
Maria Babbage of the Associated Press also reports, Report on bloated Ontario hydro pensions says taxpayers covering most costs:
Ontario taxpayers are putting in almost $5 for every $1 employees are putting into unsustainable pension plans at Ontario’s energy agencies, costs that pose a “significant risk” to electricity prices, according to a government-commissioned report released Friday.

Employees at the provincial transmission utility Hydro One provided a scant 12 per cent of contributions to their pension plan, compared to 81 per cent forked over by the Crown corporation, the report found.

Ontario Power Generation wasn’t much better, with employees putting in just 24 per cent of the contributions compared to 76 per cent by the publicly owned utility.

Compared to other public-sector pension plans, those at Ontario’s electricity agencies — including the Independent Electricity System Operator and Electrical Safety Authority — are “generous, expensive and inflexible,” special advisor Jim Leech said in his report dated March 18.

Employers are responsible for a larger share of the pension contributions compared to other plans and bear all risks that can increase pension costs, which are ultimately borne by ratepayers, customers and shareholders, he said.

The report also warned that none of the four pension plans, which collectively have about 18,000 active members and 19,000 retired and deferred members, is stable.

“The plans are far from sustainable,” Leech wrote. With employer contributions already high, none of the plans have the ability to absorb further market fluctuations, lower-than-estimated investment performance or costs associated with pensioners living longer.

“Should plans go further into deficit, the sponsors and, ultimately, ratepayers will be required to pay even larger contributions,” the report said.

In 2012, total contributions from all sources of the four plans were approximately $585 million, with $106 million from employees. The employer contributed $480 million, comprising about $365 million in current pension expense payments and $115 million in special payments required under law for deficits.

The report noted that all elements of the pension plans, including benefit levels and employee contribution rates, were negotiated through collective bargaining. The generous provisions include unreduced early retirement, maximum survivor benefits permitted by law and a “rich” benefit formula which uses the employee’s best three years plus bonuses in some cases, the report said.

Ancillary benefits account for a big chunk of the costs, it said, adding that the base pension represents less than 52 per cent of the total pension costs. And it’s taking its toll on the balance sheets of the government-owned corporations.

ESA, which is responsible for electrical safety, including the licensing of contractors and electricians, has absorbed a 115 per cent increase in annual pension costs into its operating budget over the last three years, the report said. In the last fiscal year, it ate up about 10 per cent of the not-for-profit corporation’s revenue.

The four energy companies also provide supplementary pension plans that provide additional benefits that are paid from the company’s general revenues, which have a cumulative unfunded liability of about $490 million.

Leech, former CEO of the Ontario Teachers’ Pension Plan, is recommending that the employer-employee contribution ratio for all four plans move to a target of 50/50 over the next five years.

The governing Liberals asked Leech to look into the energy sector pension plans following a damning report in December from the province’s auditor general.

Bonnie Lysyk found OPG contributed “disproportionately more” to its pension plan that its employees, with a funding ratio of 4:1 or 5:1, significantly higher than the 1:1 ratio in the public service. OPG is also solely responsible for financing its pension deficit, which stood at about $555 million.

The report was quietly posted on the Ministry of Finance’s website on Friday, a move the Progressive Conservatives called suspicious.

“They continue in the legislature to talk about being open and transparent, but when something like this comes along, it’s so blatantly obvious that they’ve gone out of their way,” said Tory finance critic Vic Fedeli.

“It was available before the election, it was available while the legislature was sitting and they did not release it then. They released it on the Friday of a long weekend in the middle of the summer more than four months later. That’s all very suspect, but very typical for this government.”

Skyrocketing hydro bills are the biggest concern for most of the people he spoke to during the pre-budget hearings, Fedeli said.

“When you see the cost of these pensions and you know that that transfers directly to hydro rates, it infuriates people in Ontario even more,” he added.

Beckie Codd-Downey, a spokeswoman for Energy Minister Bob Chiarelli, said the government will “review the report in consultation with union representatives to assess the recommendations.”
The Ontario Government did provide a news release late Friday morning. You can read Jim Leech's report on the sustainability of electricity sector pension plans by clicking here.

The key findings of the report are spelled out on page 17 in section 3.1 (added emphasis is mine):
Benefits in these four plans are quite similar and they are very close to the maximum benefits allowed under the Income Tax Act.

In general, benefits in these plans are richer than most of the Broader Public Service (BPS) plans and employee contributions are also lower than BPS plans in general.

As noted earlier, features of certain plans include:
  • maximum benefit accrual rates, at 2 per cent per year of service;
  • retirement calculation based on best 3 years’ average salary,
  • early unreduced retirement based on factor 82;
  • CPP bridging benefit formula;
  • fully guaranteed indexing; and
  • maximum joint and survivor benefits.
Employee contributions for plan members are generally in the range of 6 to 7 per cent of salary; recently there have been some negotiated increases in employee contributions towards 7.75 per cent. This can be compared to Toronto Hydro and other local distribution companies in the municipal sector that are part of OMERS, which offers less generous benefits whereas employee contributions are currently over 14 per cent of salary.

As a result of generous benefits and larger employer contributions these plans are expensive. As noted earlier, employers bear the majority of costs. Based on the most recent valuation reports filed with the pension regulator, the Financial Services Commission of Ontario (FSCO), the employer current service cost represents approximately 18 per cent of payroll for OPG and 19 per cent of payroll for H1.

With special payments, employer contributions represent approximately 24 per cent and 27 per cent of payroll respectively. They are also close to 24 per cent for both IESO and ESA. (See Table 4 in Appendix B for further details).
I discussed the damning report of Ontario's Auditor General which led to this report in my comment on Canada's public pension problem last December.

Jim Leech's report shows how unsustainable these plans are and how important it is to reform them and introduce risk sharing in the formula so that employees and employers share the risk of the plan equally.

Consider the compensation at these Crown agencies. Ontario released its public sector salary disclosure for 2013, which discloses annually the names, positions, salaries and total taxable benefits of employees paid $100,000 or more in a calendar year.  Just have a look at the list of employees who made over $100,000 in 2013 at Hydro One and Ontario Power Generation and you'll gain a sense as to why it's important to cap pension costs.

Admittedly, there are a lot of smart engineers working at these places so it's not their salaries per se that concern me. They make a lot less than their engineering counterparts working on Bay Street and they certainly don't make as much as Canada's public pension plutocrats (like Gordon Fyfe who raked in close to $13 million in the last three fiscal years at PSP and Jim Leech who wrote this report after retiring from OTPP with a hefty compensation and huge pension), but the point is all these salaries come with generous and unsustainable pensions which threaten Ontario's public finances.

As far as the politics of the report, at least Ontario is doing something about their pension problem, highlighting the weaknesses and what needs to be done to address them. In Quebec, we are just beginning major reforms but we need a lot more transparency in our own Crown corporations' pension plans (like Hydro Quebec) as well as many city and municipal pension plans teetering on disaster.

Montreal police have been calling in sick to protest changes to their pension plan, all part of the public sector's declaration of pension war, prompting a public hearing in late August. But unless Quebec tackles its pension deficits, it will find it harder to borrow at a reasonable rate in the future when credit agencies mark down their provincial bonds based on public pension concerns (look at Illinois and most recently, New York City, we're all heading down an unsustainable path).

Finally, I would ignore the CFIB and the Ontario Conservatives. Ontario is heading down the right path when it comes to major pension reform and the rest of Canada should follow suit. Ontario's new Retirement Pension Plan is a great idea and if the boneheads in Ottawa had any common sense, they'd be enhancing the CPP for all Canadians (the cost of inertia far outweighs the cost of any new supplementary pension plan).

Below, Prime Minister Stephen Harper slams Ontario's Pension Plan idea, prompting a response from Ontario Premiere Kathleen Wynne. Unfortunately, when it comes to pensions, the Harper Conservatives are completely clueless, shamelessly pandering to Canada's powerful financial industry which is touting PRPPs as the solution to our looming retirement crisis. They just don't get it.


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