Tuesday, April 28, 2015

Federal Budget Boosts Federal Pensions?

BNN reports, Federal budget promises to review pension investment rules:
The government says it will review a rule that prohibits federal pension funds from holding more than 30 percent of the voting shares of a company.

The Federal Budget said Canadian pension funds are among the most experienced private sector infrastructure investors in the world, but currently face limits on their investment activities.

The government plans to launch a public consultation “on the usefulness” of the current prohibition.

But Ian Russell, President of the Investment Association of Canada, tells BNN rolling back investment limits for pension funds will have big consequences.

“Those pension funds do not pay tax. So the dividends that flow from those investments would not be non-taxable,” said Russell. “Secondly, there is scope for a significant concentration of corporate Canada and voting control among these large tax-exempt pension funds.”

The rule covers large federal government pension plans, so amendments would not affect Canada’s major provincial pension plans such as the Caisse de dépôt et placement du Québec or the Ontario Teachers’ Pension Plan.

“Lifting the 30-percent rule is certainly something we would welcome and we will be participating in the public consultations,” said Mark Boutet, vice-president of communications and government relations for the Public Sector Pension Investment Board (PSP Investments), which invests on behalf of federal government employees.
I'm curious to see how these consultations will go but lifting the 30-percent rule would help Canada's large federal government pensions, which includes PSP Investments and CPPIB, to invest more of their assets funding private Canadian infrastructure projects.

Of course, if you're going to implement such a change, why limit it to big federal pensions? Why not allow all of Canada's large public and private pensions to enjoy the same investment opportunities as their federal counterparts? This would be the fair thing to do.

As far as reaction to the federal budget, CUPE's analysis blasted the Conservatives stating it was a dead giveaway to the rich and had this to say on retirement security and pensions:
The measures in this budget on retirement security will overwhelmingly benefit the wealthy with their private savings, while other changes they are considering will put the retirement savings of working Canadians at risk, with the introduction of ‘target benefit plans.’
  • Reduces the minimum amounts seniors must withdraw from their RRIFs after they reach age 71.
  • Increases the annual contribution limit for TFSAs to $10,000.
  • Considering changes to pension laws to allow federally regulated employers to establish target-benefit pension plans and to income tax laws to enable provinces to also establish target benefit plans.
While the change to RRIFs will help some seniors and is supported by seniors’ organizations, only half of all seniors have RRSPs or RRIFs, so this measure will largely benefit the few who are better off, while reducing tax revenues.

The real pension crisis is that 6 in 10 workers don’t have any workplace pension plan. Much better would be to improve the Canada Pension Plan (CPP) and Guaranteed Income Supplement (GIS) so all Canadians could depend on decent incomes in retirement. Labour has a fully-costed proposal to double CCP benefits, which is supported by provinces, pension experts, the NDP, and the Canadian public.

CUPE also called for the government to cancel its plan to increase the retirement age for Old Age Security (OAS) and the GIS to 67. These cuts will mean middle-class Canadians will lose about $13,000 in retirement income and nearly a quarter million future seniors per year could face poverty, all the while Conservatives provide huge tax cuts to the wealthy through TFSAs. The NDP has also committed to reversing this change and restoring the age of retirement to 65.

The Conservative government is intending to give the green light to federal jurisdiction employers to establish target benefit plans that will allow them to walk away from the pension promises they have already made. Workers and all those affected should also vigorously oppose this.

The budget also announced that Conservatives are considering changes to allow pension funds to own more than 30 per cent of the shares of a company. This is intended to facilitate further privatization of infrastructure investments through P3s and could increase the volatility of pension fund investments.
I agree with CUPE on some points, but totally disagree with it on others. Increasing the TFSA limit will predominantly help rich Canadians with high disposable incomes as they will tuck away more or their income into tax free savings but it will also help people with RRIFs shift assets into TFSAs.

Still, the net effect of this policy is to boost assets at Canadian banks, mutual fund companies and insurance companies. In other words, it's another dead giveaway to the financial services industry. It will boost the profits of the ultra wealthy Desmarais family, which owns mutual fund and insurance companies, but will do nothing to help average Canadians retire in dignity and security (only enhancing the CPP for all Canadians will achieve this goal).

Where I disagree with unions is their insistence on maintaining the retirement age at 65 when Canadians are living longer and working longer and their myopic and Marxist position that privatizing infrastructure is a terrible thing and will increase the volatility at Canada's large pensions.

This is utter nonsense and shows you unions don't want to share the risk of their plans or are clueless when it comes to longevity risk, managing assets and liabilities, and the important role Canada's large pensions play in terms of investing in infrastructure projects around the world. These private market investments have risks but because of their long investment horizon and steady cash flows, they offer important characteristics to pensions from a liability-hedging perspective.

There are many advantages of investing in Canadian infrastructure through P3s. It just makes sense as the risk of the projects will be shared by the private sector, but since these are Canadian projects, there is far less regulatory or legal risks than investing abroad and no currency risk, which is good for pensions hedging for Canadian dollar liabilities.

If you look around the developed world, you will see many cash strapped governments that have no funds to invest in much needed infrastructure projects. Canada is no different. Our large pension funds can play a key role here but only if the federal government allows them to invest more in domestic private infrastructure projects.

Are there tax implications to lifting the 30 percent rule? Sure there are but there are also big benefits. I find it abhorrent that a relatively rich and vast country like Canada has no high speed trains to connect our cities, not to mention our roads, bridges, ports and airports are a total disgrace and need major investments. Where is the money to fund such projects going to come from?

The Caisse's deal with the provincial government to handle some infrastructure projects offers a blueprint but the federal and provincial governments need to do a lot more to allow Canada's large pensions to invest in domestic infrastructure projects.

Of course, lifting the 30 percent rule will be met by vigorous opposition in corporate Canada because it's weary of giving our large public pensions more power to vote against their senor executives' excessive compensation packages. I happen to think this is a good thing and hope to see our large pensions torpedo any excessive compensation packages that aren't based on measurable long-term performance objectives.

Those of you who want to read more on the federal budget can read Mackenzie Investments' 2015 Federal Budget Bulletin. It covers the main points well and provides a good overview for individual investors.

As always, if you have anything to add on lifting the 30 percent rule, please email me at LKolivakis@gmail.com. I got to get back to trading these schizoid markets dominated by computer algorithms. Short sellers are ripping into biotech shares this week, similar to last year's big unwind. Just remember this, where there's blood, there's big opportunity. Below, a list of small biotech shares I'm tracking that are getting killed so far this week (click on image):



As I've repeatedly warned in the past, trading small cap biotechs isn't for the faint of heart. You can lose 30% on any given week, and sometimes a ton more in a single day (check out the 70% haircut Aerie Pharmaceuticals experienced after it announced phase III results that didn't meet expectations).

Public markets are volatile by their very nature but some segments are frighteningly volatile. This is another reason why Canada's large public pensions are increasingly shifting assets into infrastructure, real estate and other private markets. Why should they play a rigged game where they're destined to lose against big banks and big trading outfits? It makes more sense for them to invest in low volatility assets that provide stable cash flows over a very long investment horizon and where they have more control over their investments.

Below, the CBC reports that Canadian cities say they need $123 billion to update roads, public transit, and water systems and another $100 billion for new projects to meet growing demands (2013 report).

If there was ever a time to lift the 30 percent rule to boost infrastructure investments by our large pensions, it's now. Our infrastructure needs are growing and the federal government needs to do something about this dire situation or else Canada will look like a third world country in a decade (I'm grossly exaggerating but driving on Montreal's decrepit and congested roads really pisses me off!!).

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