Wednesday, January 27, 2016

Ontario's "Wynning" Pension Strategy?

Matt Scuffham of Reuters reports, Ontario pushes ahead with new government pension plan:
Ontario, Canada’s most populous province, said on Tuesday it will push ahead with the launch of a new government pension plan rather than counting on an expansion of the country’s existing federal plan.The Ontario Retirement Pension Plan (ORPP) is set to be introduced in 2017 and is designed to benefit the two-thirds of workers in Ontario who do not have an employer pension plan, provincial officials said.

“Our government is unwavering in its focus on ensuring a financially secure retirement for every worker in our province through the Ontario Retirement Pension Plan,” province Premier Kathleen Wynne said.

Ontario has taken a two-track pension strategy since 2013, preparing to introduce the ORPP while also waiting for a possible expansion of the Canada Pension Plan (CPP), the federal plan that covers most working Canadians.

However, Ontario Finance Minister Charles Sousa said it had so far proven too difficult to get the necessary agreement required among Canada’s provinces to expand the CPP.

“We advocated strongly for a CPP enhancement, as did the federal government, but the consensus was not to be had,” Sousa told reporters.

Like other governments around the world, Canada faces a challenge to provide for its aging population. By 2024, more than 20 percent of Canadians are expected to be age 65 or older, the traditional retirement age, according to federal government data.

“Changes in the nature of work are compounding the problem. The working world is no longer dominated by single job careers and guaranteed workplace retirement plans,” Wynne told reporters.

Under the new Ontario plan, by 2020 every eligible worker in Ontario will be part of either the ORPP or a comparable workplace pension plan. The lowest-income earners will not be required to contribute.

The plan, which will start paying benefits in 2022, is designed to pay out up to 15 percent of individuals’ earnings over their career if they contribute to it for over 40 years.

It particularly targets younger workers at smaller companies who may be well paid but are not offered a pension as part of their benefits because it is too expensive for their employer to provide one. Wynne said it will only have a limited benefit for older workers.
Ashley Csanady of the National Post also reports, Ontario pension plan going full steam ahead toward 2017 launch — just don’t ask the cost to run it:
Deductions from the Ontario Retirement Pension Plan will start coming off paycheques in less than a year, but the province still can’t say how much it will cost to run.

Premier Kathleen Wynne was joined by two ministers Tuesday to announce more details of the pension plan, including the fact spouses or a designated beneficiary can reap its benefits after a contributors dies. And like the Canada Pension Plan, those benefits will be indexed to increases in wages and the cost of living.

An independent actuary will be able to approve 0.2 per cent contribution increases if the fund runs low on cash and anyone earning less than $3,500 a year will be exempt from enrolling.

Those tidbits and some technical details prompted Wynne and Associate Finance Minister Mitzie Hunter to proclaim the design of the ORPP is “now complete.”

That design, however, excludes one key point: how much the administration of the plan will cost. CPP, for example, costs about 1.2 per cent each year to run, and many private sector pension plans costs between two and three per cent, though it can be higher.

Hunter said the ORPP is “going to mirror the CPP as closely as possible” but couldn’t yet pin an exact number on its costs. She said large, public-service pension plans in Ontario are very successful and are helping to determine how the ORPP will be administered.

“We expect that it will be very much in the similar range as CPP and those very large plans,” she said.

Pension expert Ian Lee, an assistant professor at Carleton University’s Sprott School of Business, is one of many prominent economists to ring alarm bells about the ORPP. Like Kevin Milligan at the University of British Columbia and Jack Mintz at the Calgary School of Public Policy he questions the very assumption that a mandatory savings scheme is necessary. He also doubts the ORPP can be run as efficiently as the much larger CPP, as the government hopes.

“I do not think it’s possible (to) bring the cost anywhere near that of the Canada Pension Plan, simply because it won’t have the economies of scale,” Lee said, simply because there won’t be enough people — even with six million expected enrolees — for the ORPP to match its federal counterparts efficiencies.

A Conference Board of Canada report released in December found the ORPP would, over the long run, benefit the Ontario economy, and that for many workers it would prove a more cost-effective form of savings than private investment. The report found someone earning $60,000 a year and contributing to the ORPP for 40 years would, on average, see $188,000 more in pension benefits by retirement age than someone who invested privately.

“I have a great deal of respect for the Conference Board of Canada but until we see those numbers (from the province) I don’t think they can make such a statement,” Lee said.

The ORPP will start a phased roll out in 2017 and the province expects six million Ontarians to be enrolled by 2020. Benefits are expected to start flowing in 2022. Anyone without a comparable workplace and their employer will be required to contribute 3.8 per cent of their income for the first $90,000 earned annually. Someone making $45,000 would pay about $16 a week into the plan to be matched by his employer for a total of $1,710 a year, which after 40 years would make him eligible for $6.410 in annual benefits.

Business groups and the provincial Progressive Conservatives maintain the ORPP will amount to a “payroll tax” that will hurt employment.

I began this comment with articles from the Globe and Mail and the National Post so you can get a feel of how politicized the debate on Ontario's new pension plan (ORPP) has become.

Where do I stand on this debate? My title pretty much says it all and let me tell you that Canadian newspapers are doing a lousy job explaining the advantages of this new pension plan as well as that of enhancing the CPP for all Canadians.

First, some of the pension experts quoted in the National Post article are completely clueless. In particular, when Ian Lee states “I do not think it’s possible (to) bring the cost anywhere near that of the Canada Pension Plan, simply because it won’t have the economies of scale,” he simply doesn't know what he's talking about.

Yes, the CPPIB is huge and can use its size to negotiate fees and costs down, but the ORPP is going to be a young plan which is just getting started. As such, it has the luxury to take a different approach from CPPIB and emulate Canada's top pension plan, the Healthcare of Ontario Pension Plan (HOOPP) which does everything internally and has the lowest administrative costs of any large public or private defined-benefit pension plan.

As the ORPP gets much bigger and needs to start investing in external managers, it can then start taking the approach Ontario Teachers' Pension Plan or CPPIB takes, but this debate on administrative costs is just plain silly until we get more details of who will be hired to run the pension plan and what approach they will take.

For me, it all boils down to governance. Ontario has some of the best pension talent in the world, and if they place the right board of directors in there and pay pension fund managers properly, they will have no problem attracting competent people who can manage assets internally and keep costs low.

In fact, the ORPP is in a great spot to use the same governance model that has helped Ontario Teachers, CPPIB  and most of Canada's top ten pensions to succeed and it can go a step further and improve on the existing governance to get better alignment of interests over the long run.

Second, the reason why Ontario is going it alone on the ORPP is because Canadian politicians are petrified to expand the CPP once and for all, especially now that the economy is going through a crisis. In my opinion, this is the stupidest, most shortsighted decision that our politicians are making and they're squandering a golden opportunity to enhance the CPP once and for all.

Importantly, and I can't overemphasize this, good pension policy makes for good economic policy. Bolstering a country's retirement system to provide more defined-benefits will end up bolstering economic activity over the long run, lower social welfare costs of pension poverty, and reduce the debt by increasing sales and other taxes. These are all advantages of well governed DB plans.

There is a more important political and philosophical argument to be made here. When Democratic candidate Bernie Sanders talks about "healthcare being a fundamental right," Canadians from all political parties understand exactly what he's talking about.

A well functioning social democracy should provide three basic pillars: free healthcare, free education and retirement benefits people can count on till they die no matter what happens in the volatile stock market dominated by big hedge funds, big banks and high-frequency traders.

Right now in Canada, we have the first two pillars but are lacking any initiative on tackling that third pillar. The debate has become so politicized to the point of absurdity. It's high time Canadians realize the brutal truth on defined-contribution plans and accept the fact that the current path isn't working and will only condemn more people to pension poverty.

As I've stated before, there shouldn't be four or more views on defined-benefit plans, there should only be one view, we need to bolster public DB plans for all Canadians. And I emphasize public because apart from a few exceptions (HOOPP, CN, Air Canada and a few others), most private DB plans are crumbling and failing to deliver on their pension promise.

I think it's high time we create a few more large public defined-benefit plans in Canada and get rid of private DB plans altogether. We can staff these new plans with existing talent pool across public and private DB plans and bolster the retirement security of all Canadians. 

I realize my views aren't going to sit well with right-wing nuts who constantly fret over "big government" or small business groups that oppose "payroll taxes" (even if pension contributions aren't taxes!). But I've thought long and hard about pensions, have worked at two of Canada's largest public pension funds, and have dedicated eight years of my life writing a blog on pensions and investments to educate many clueless Canadians on what goes on in markets and at big pensions and why a sound pension policy is so important.

I'll share something else with you. My brutally honest comments on pensions haven't won me many friends at Canada's top ten. Sure, a few subscribe to my blog, but nobody is hiring me even though they know I have MS and I'm the best damn senior pension analyst who produces more in a week than most of their senior analysts do in a year (I'm not saying this to sound arrogant, it's the brutal truth!).

What else? Despite having progressive multiple sclerosis (and doing well) and defending the rights of the poor and disabled on my blog, I'm actually a fiscal conservative at heart, believe in free markets, competition and responsible and accountable governments that spend wisely. My views on expanding the CPP have nothing to do with my politics even if I can make a solid economic case for it over the very long run.

In fact, a friend of mine, a die hard Conservative, had this to share with me in a recent email exchange where I told him rising inequality is very deflationary (we were talking about 5 books billionaires don't want you to read):
There is no doubt that it is. Extreme inequality also breeds civil unrest and, as much as the extremely wealthy think they are untouchable, it is difficult to stop a lynch mob.

The "win at all costs" mentality is really shortsighted.

Same concept goes for the debate between DC and DB pensions. In the long term, DC pensions transfer retirement risk to the government because if people do not save enough, social systems will need to step in and make up the difference.
Now, if my friend who is a die hard Conservative (who like me, thinks Harper bungled our economy up!) gets it, I'm shocked that many Liberal and NDP politicians still don't get it.

As such, I applaud Premiere Kathleen Wynne and her team for going it alone and introducing a new pension plan that will bolster the retirement security of all Ontarians. The rest of Canada's leaders should stop dragging their feet on enhancing the CPP and follow Ontario's lead and introduce real change to Canada's pension plan (thus far, Justin Trudeau's Liberals have failed to impress me with their asinine, populist pension gaffes).

Below, Ontario Premier Kathleen Wynne and Minister of Finance Charles Sousa share structural details on the proposed Ontario Retirement Pension Plan. BNN’s Paul Bagnell reports on those details.

Again, take what you read and see on the ORPP with a shaker of salt. There's so much nonsense being spread out there by so-called pension experts which are truly clueless. Canada's politicians need consistency in the national pipeline debate but much more importantly, they need consistency on the national pension debate.

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