Fixing 'Systemically Significant' Institutions?

President Barack Obama wants to strengthen the government's authority over financial institutions in a sweeping attempt to modernize a regulatory latticework that failed to detect early signs of a worldwide crisis:

The president was to detail the administration's overhaul plan on Wednesday, recommending new powers for the Federal Reserve; a new consumer protection agency to govern lending and credit; and new rules that would reach into currently unregulated regions of the financial markets.

An 85-page draft of the administration's plan details an effort to change a regulatory regime that Obama's economic team maintained had become too porous for the innovations and intricacies of the today's financial markets.

With Congress already embroiled in health care legislation, Obama has set an ambitious schedule, pushing lawmakers to adopt a new regulatory regime by year's end.

Obama said Tuesday his administration was going to put forward "a very strong set of regulatory measures that we think can prevent this kind of crisis from happening again."

The financial sector and lawmakers from both parties concede the need for significant changes in the rules that govern the intricate and interconnected world of banking and investment. But the details of Obama's proposal already are facing resistance, signaling a tough sell for a president who is spending major political capital on his health care overhaul.

Under Obama's plan, the Fed would gain power to supervise holding companies and large financial institutions considered so big that their failure could undermine the nation's financial system. But even as it gains new powers, the Fed also would lose some banking authority to a new Consumer Financial Protection Agency.

Obama's proposal would require the Fed, which now can independently use emergency powers to bail out failing banks, to first obtain Treasury approval before extending credit to institutions in "unusual and exigent circumstances."

The expanded Fed role and the new consumer regulator are likely to be the two main political flash points in the administration's proposal. Many bankers oppose a new consumer protection regulator and many lawmakers worry the Fed could become too powerful. Friction over those points could slow any major overhaul.

Besides having the Federal Reserve supervise "systemically significant" institutions, Obama will recommend a council of regulators, which would include the Fed, to monitor risk throughout the broader financial system. The arrangement is designed to prevent crashes like those that felled AIG and Lehman Brothers.

I wonder if CalPERS, CalSTRS and other major U.S. pension funds fall under the scope of "systemically significant" institutions. I think they should as should major insurance companies.

In other regulatory news, Reuters reports that a bill was introduced in the U.S. Senate on Tuesday that would require advisers of hedge funds, private equity, venture capital funds and other private investment pools to register with the Securities and Exchange Commission:

The bill, introduced by Senator Jack Reed, chairman of the banking subcommittee on securities, would require advisers that manage more than $30 million in assets to register with the SEC. Smaller funds would be supervised by states.

It's about time that the large private funds register with the SEC, not that this means much. The SEC still needs to hire competent people who understand what these large funds are doing and what risks they're taking.

So far, we have heard lots of tough talk on regulation, but I have to ask, where is the beef? No mention of reintroducing the Glass-Steagall Act of 1933 and I have to agree with this BBC commentator who is highly skeptical and believes the U.S. regulation still leaves gaps.

In Canada, the Toronto Sun reports that MPs supported the motion to claw back pension execs bonuses:

MPs told the federal government to claw back $7 million in bonus payments to top Canada Pension Plan executives yesterday.

The NDP motion -- which passed with all-party-support -- aims to recoup millions in performance bonuses to top executives at the CPP Investment Board and ban any future payouts.


"It's obscene," NDP pension critic Wayne Marston said. "They lost $24 billion and they wiped out the last four years of contributions in that loss. How can you justify any kind of a bonus to people who have failed?"

Despite losing $23.7 billion last year, four top executives saw their base salaries jump from $1.47 million in total to $9.3 million in total, the 2008-09 CPP annual report says.

The CPP Investment Board is a Crown corporation responsible for investing billions of dollars in CPP contributions to fund government pensions.

The NDP motion also calls on the federal government to establish a self-financing pension insurance program, and demands the feds ensure workers' pension funds go to the front of any creditors' line if a company files bankruptcy proceedings.

"We insure our cars, we insure our homes and we have deposit insurance on our savings, why can't we have a system that insures our pension plans?" Marston asked.

"Right now if a company collapses, you could lose your pension," Marston said.

"All of a sudden, your fixed income is gone and there is nothing you can do about it."


Paula Klein knows how that feels. She was laid off by Nortel last December. Tomorrow, she hopes to come face to face with Nortel Networks' chief executive officer Mike Zafirovski before the House of Commons finance committee.

Klein says Nortel has paid out $45 million in bonuses to executives while it claims it can't afford to pay severance to its laid-off employees.

Of course it's obscene and the board of directors at these large public plans should be fired and replaced for allowing these bonuses in the first place. The problem is that they all come from an industry where the "club mentality" is pervasive and it's all about scratching each other's backs.

Finally, Ken Georgetti, president of the Canadian Labour Congress, writes that an improved Canada Pension Plan is best way to ensure retirement security:

The global economy is in a downturn. The crisis has put the hard-earned pensions of Canadian workers and retirees at risk. We can deal with the situation if we take the right action. But we have to improve upon the fend-for-yourself approach that has guided Canadian pension policy in recent decades. It is time that we undertake a serious dialogue about pension reform in Canada.

The Canadian Labour Congress represents 3.2 million Canadian workers who belong to our affiliated unions. We believe that everyone should have access to decent pensions to see them through retirement. The current reality is that 62 per cent of working Canadians don't have a workplace pension, and more than a third of working Canadians have no retirement savings at all.

Those at the top of the economic heap are trying to convince us that society can no longer afford to provide decent pensions. Yet Canada's top 100 employers dole out an average pension of $930,000 to their former top executives. These are gold-plated defined benefit plans par excellence.

Unionized workers, on the other hand, receive an average pension of about $25,000 a year, a figure which includes both their workplace pension and the Canada Pension Plan.

There are companies in Canada that have not adequately funded their pension plans. We know that governments turned a blind eye to this practice and even passed regulations allowing it to happen. But this problem is manageable over time.

In cases where companies can't or won't meet their obligations, governments have a responsibility to the workers who contributed to the system in the belief that their rights were protected by government regulators.

What about the two-thirds of Canadians who do not have a workplace pension? Most of them are not able to save enough for their retirement. Canada's more than 50-year experiment with RRSPs hasn't brought pension security, or value for workers' hard-earned pension savings.

Fewer than 40 percent of adults contribute to RRSPs in any given year, and returns have been decimated in recent months. The median amount in RRSPs for those taxpayers nearing retirement is about $60,000. That's enough to by an annuity of about $3,000 a year in retirement.

RRSP fund values have plummeted recently and Canadians have to tolerate some of the highest management fees in the world.

Don Drummond, the chief economist for Toronto Dominion, said recently that the RRSP experiment has failed and we agree.

The best way forward is a defined benefit plan where retirees know in advance how much they will receive in benefits. One of the easiest and most efficient way to reach that goal is to improve the CPP. That would provide financial security for people and at a lower administrative cost than RRSPs.

The CPP already covers 93 per cent of working Canadians and it has a benefit design that most workplace plans cannot match. Those benefits are indexed to inflation and portable across jobs and provinces. CPP benefits are also sensitive to the needs of those who take time off work to raise children.

Actuaries tell us that the CPP is financially sound and its assets are invested by an arms-length investment board (the Canada Pension Plan Investment Board).

The problem with the CPP is its modest level of benefits. It replaces no more than 25 percent of the average industrial wage. The maximum monthly benefit for individuals at age 65 is $908 — that's about $11,000 a year — and many people do not qualify for this amount.

Here are some options the CLC is proposing that the government of Canada consider:

  • Phase in a doubling of CPP retirement pensions over a period of 17 years.
  • Increase the Guaranteed Income Supplement of Old Age Security pensions by 15 per cent so that no senior lives in poverty.
  • Create a national system of defined benefit pension insurance, modeled on what exists through the Canada Deposit Insurance Corporation for bank and Credit Union deposit accounts.

The Canadian Labour Congress is calling for a national summit on pensions by this fall. So has Ontario's Premier Dalton McGuinty.

The summit should include our federal, provincial and territorial governments and other stakeholders, including the labour movement. A revitalized pension system could be a competitive advantage to our economy, much like our medicare system which has attracted employers from higher-cost health care jurisdictions. More emphasis on pension security could remove financial liabilities on businesses while providing better pensions for all.

We in the labour movement make no apologies for using collective bargaining to improve pensions for our members — that is what unions do. But we also want every Canadian, whether or not they belong to a union, to have access to a decent pension. Canadians have a right to security in their retirement.

Although I agree with the proposals, I am against giving the Canada Pension Plan Investment Board more power than it already has. In fact, I would rather break up some of the large Canadian DB plans and create new entities based on better governance principles.

The Investment Executive reports that with provincial finance ministers collaborating, a national supplemental pension plan could be a reality in the next two to three years, Alberta Finance Minister Iris Evans said on Wednesday:

The Alberta government has joined forces with British Columbia on the issue, calling for creation of a new pension plan for residents in the two provinces who currently have no pension coverage.

Speaking in Toronto, Evans said it would be ideal to establish such a system at a national level as opposed to provincially. With more provincial finance ministers on board with the idea, she is “reasonably confident” that a national plan could soon become a reality.

“When all the finance ministers are sitting there nodding and no one’s speaking against it,” she said, “I think the real question will come down to: How much money would have to be spent?”

By attaching a supplemental pension plan to the existing Canada Pension Plan, Evans said the costs would be minimized, which would be especially beneficial for smaller provinces.

“The economies of scale are better when we do it all together.”

The Alberta/British Columbia Joint Expert Panel on Pension Standards released a report in November calling for the creation of a supplemental pension plan for residents without pension coverage.

Consultations with the public have drawn plenty of comments on the proposal. Many employers -- and particularly smaller firms -- strongly support the idea of a supplemental plan, according to Evans. But she added that the idea faces resistance from the insurance industry.

She is encouraged by the fact that three other provinces -- Ontario, Nova Scotia, and Quebec -- have also been exploring ways of amending the pension system to enhance coverage across the country. Other provinces have also expressed interest in getting involved, Evans said.

The finance ministers are set to meet in July to present a framework to Ted Menzies, Parliamentary Secretary to the Minister of Finance, who recently led national consultations on federal pension plan legislation.

The plan is critical to address the important issue of insufficient savings among Canadians preparing for retirement, according to Evans. She said too few Canadians recognize the importance of a long-term savings strategy.

“The key objective is to make sure that people are saving,” said Evans. “Our savings by individuals are far too low.”

Added Evans: “This recent downturn in the economy has made that self-evident.”

With the economic turmoil having brought the issue to the forefront in recent months, Evans said Alberta would pursue the plan “aggressively,” aiming for implementation of a supplemental plan in the next two to three years.

Alberta seeks new markets

Speaking on the state of Alberta’s economy on Wednesday, Evans said that while challenges continue to face the province’s critical oilsands industry, she is encouraged by recent activity. She pointed to news in late May that Imperial Oil Ltd. would move forward with its major Kearl project.

“There is light at the end of this tunnel,” she said.

Alberta is working raise its profile nationally and internationally as a key global supplier of oil, and as a destination for investment as the economy emerges from recession.

After the oilsands industry gained international attention earlier this year for its harmful environmental impacts, the province is placing a particular focus on reducing its carbon footprint.

“We want that oil from the oilsands to be at least as green as the production from conventional oil and gas,” said Evans. Improving the industry’s environmental standards is critical to the sector’s markets in the U.S. and in emerging markets around the world, she added.

Is there light at the end of this tunnel? I remain skeptical and will reserve my judgment until I see more meaningful reforms.

The only thing I can tell you is that the pension crisis is a serious structural problem that needs to be addressed as soon as possible.