What Canadian Pension Crisis?

David Olive of the Toronto Star writes Pension crisis? Not so fast:

With its bankruptcy in January, putting in question the pension and disability benefits of thousands of its former employees, Nortel Networks Corp. has become an international poster child for pain inflicted on the most innocent victims of corporate bankruptcy.

Nortel retirees, employees on long-term disability and former employees staged a protest at Queen's Park last week that garnered wide attention. Elderly people in walkers and wheelchairs were in the front row. A Toronto Star photo elicited this response from a North Carolina blogger who covers the tech firms of Research Triangle Park, where Nortel for decades had a huge presence:

"Please, please, please, check out this Web link to one of the most compelling, heart-wrenching photographs I have seen in many moons," Rick Smith, editor of the Local Tech Wire, wrote of Vince Talotta's photo.

"Then read the story about former Nortel chief executive officer Mike Zafirovski filing a claim for more than $12 million (U.S.) in bankruptcy court. Doesn't that picture in the Toronto Star rip your heart? Do you feel any outrage?"

Yet, it's perhaps too easy to grieve over the fate of Nortel and make the leap that all or most Canadians are at risk of a lost retirement.

Canada actually has one of the best retirement systems in the world. This country is essentially tied with the Netherlands, Australia and Sweden for pensioner protection, as measured by adequacy of funding, long-term sustainability of payouts, and integrity in management in the Melbourne Mercer global pension index released Thursday. The survey of 11 industrialized nations was conducted by Mercer, one of the leading world corporate benefits consultants, and the Melbourne Centre for Financial Studies.

In the United States, the trust funds for Social Security will, by the most recent government calculation, be exhausted in 2037. Medicare, the U.S. health-assistance program for seniors, is expected to go broke even sooner, in 2017. According to AARP, the leading U.S. seniors' lobby, Americans older than 55 are the group most likely to declare bankruptcy. AARP finds that more than half of Americans 50 and older who carry debt spend most of their monthly income paying it down.

In contrast to the worrisome condition of Social Security, at the current Canadian Pension Plan contribution rate of 9.9 per cent, the CPP is sustainable for at least 75 years.

Indeed, combining CPP and employer pension plans, plus Canadians' prudence in building their personal retirement nest eggs, "Canadians live in a promised land," John MacNaughton, founding CEO of the Canada Pension Plan Investment Board wrote recently in the Literary Review of Canada.

McNaughton was reviewing author Bruce Little's new book on the remarkable process by which the CPP was reformed in the mid-1990s. Remarkable because Ottawa and the provinces worked together with unusual urgency and harmony to reform a system headed for insolvency.

Today, the Organization for Economic Cooperation and Development (OECD) and the World Bank identify Canada as one of only seven nations in which retirement assets – in government, employer and individual hands – exceed 100 per cent of GDP.

Following those mid-1990s reforms, Canada's chief actuary is now required to assess the efficacy of the CPP and report publicly every three years – more often if the feds increase benefits or make other changes. Which makes Canada the only country with a fail-safe mechanism to promptly identify long-distant shortfalls and make adjustments now to prevent them.

In Ontario alone there are more than 7,500 registered pension plans, covering more than two million plan members. It's true that across Canada, there are some eight million people in the workforce without an employer pension plan or a registered retirement plan. What we don't know is how many of those eight million people are in financial distress or at risk of it.

Beginning in the 1990s, many employers seeking to shed their pension obligations made it attractive, through lump-sum payments, for employees to set up their own retirement plans. That such people have fallen from the rolls of employer pension plans hardly means they all face destitution in old age. Indeed, many have managed their money better than the professional money managers to whom their employers had outsourced their pension-plan management.

There's no denying, given the recent recession and the stock-market swoon, that ordinary Canadians have had reason lately for concern about their retirement nest eggs. But housing values that slumped in the recession already are recovering. And the stock market bottomed out in March and has since made a rather astonishing 43-per-cent recovery from its nadir.

Share values will continue to rise, since the epic market collapse was a one-time event triggered by a not-unreasonable panic that the world's financial system was about to collapse. Once it became clear that world governments would not let that happen, corporate share values began returning to levels that reflect their true value.

To declaim on a pension "crisis" in Canada is an alarmist approach that needlessly scares the wits out of fixed-income retirees and gets in the way of sensible refinements to the system that are needed. And needed reforms are on the near horizon.

The federal Conservative government has vowed to introduce legislation this fall to guarantee workers at federally regulated employers – including telecommunications firms like Bell Canada, the railroads and the banks – 100 per cent of their pensions in the event of insolvency. In a competitive market for skilled labour, non-government-regulated employers, if history is any guide, will follow suit.

For Nortel pensioners and employees reliant on disability payments, Queen's Park need only top up the Ontario Pension Benefit Guarantee Fund (OPBGF). Unlike the CPP, the OPBGF does not collect funds through levies on employers and employees. It should start. And in the meantime, special legislation in Ontario, Quebec and Ottawa can be passed to cover the delinquency in Nortel's failure to meet its obligations.

And as I've noted in a previous column, the failed Nortel CEO, Zafirovski, can put in a bankruptcy-court claim for the moon and the stars. But he's just another ex-employee obliged to line up behind the banks, bondholders and trade creditors with very slim hopes of collecting a fraction of the amount stated in his pro forma claim.

A shame he wasn't at that Queen's Park rally. His standing might have improved at least a bit if he'd been photographed alongside fellow victims of a once-proud and sadly mismanaged enterprise.

It doesn't surprise me that Mr. Zafirovski didn't show up at the Queen's Park rally. Back in June, he appeared before the Standing Committee on Finance and defended the decision to pay court-approved bonuses to "key" executives and employees while Nortel denied severance payments to workers the insolvent company let go.

But the Canadian press has been all over this story on "solid pension system". The Globe and Mail reports that Canada's pension system gets solid ranking:

Canada's retirement system has been ranked fourth in the world in a new study that compares public and private pension systems in 11 countries.

The study by pension consulting firm Mercer concluded the Netherlands, Australia and Sweden had the world's best pension systems, while Canada ranked a close fourth, followed by Britain and the United States. Germany, China and Japan were at the bottom of the list.

The review looked at 40 factors relating to the countries' pension systems, including the adequacy of private and public pension payments for retirees, and the level of pension incomes compared to pre-retirement incomes. It also looked at the rate of participation in private sector pension plans, the level of pension assets in plans, and factors affecting the “integrity” of private sector pension plans, such as regulation and risk-protection.

Scott Clausen, professional leader for Mercer's Canadian retirement consulting business, said that while Canada's public and private pension pillars appear strong compared to many other countries, they could still be improved.

Mercer, for example, says Canada needs to increase the percentage of its work force covered by company pension plans. According to Statistics Canada, about 38 per cent of Canadian workers had a company pension plan in 2007. Excluding public sector employees, about 25 per cent of workers in the private sector had a company pension plan.

“The prevalence of private pension plans in Canada continues to decrease for employees working in the private sector,” Mr. Clausen said in a statement.

“Simplifying pension regulations to provide uniform pension rules across the country has been proposed by the pension industry for years, and would greatly increase the efficiency of the pension system.”

Mercer also recommends introducing controls to ensure Canadians' personal retirement savings are not withdrawn early and are preserved for retirement years, and recommends increasing the age of eligibility for pensions as life expectancy increases.

No country received an “A” in the study, Mercer said, with top-ranked Netherlands earning a score of 76.1 out of 100. Canada received a mark of 73.2, while Japan ranked worst with a score of 41.5.

After reading all about our "solid Canadian pension system" in the mainstream media, I decided to quit Pension Pulse. What's the point? If Mercer says we are among the best pension systems in the world, then there is nothing to worry about, right?

Wrong. While Canada does have one of the better pension systems in the world, on many levels, it is among the worst. Importantly, there are serious governance gaps that undermine the integrity of our large public pension plans. I am not spending my time writing about pension issues because I've got nothing better to do. I am worried about the future, and articles like these serve no purpose but to minimize serious flaws in our pension system.

[Note: Go back to read my testimony to the Standing Committee on Finance to get an insider's view on some of the glaring governance gaps in our public pension system.]

And for Pete's sake, whenever you read something from Mercer or any other pension consultant, take it with a grain of salt. It is in their interest to talk up our pension system and that of other countries where they make a good chunk of their consulting fees. Always read these articles with a healthy dose of skepticism.