Ontario's New Pension Plan Raising Questions?
A lot of questions surround Ontario's plans to create a supplemental pension fund to the Canada Pension Plan, not the least of which is who will manage plan assets that could potentially reach as much as C$80 billion (US$74.7 billion).
Among the potential options for the plan promoted by Ontario Premier Kathleen Wynne and Finance Minister Charles Sousa include: hiring third-party managers to run the plan assets; create an in-house money management business similar to what runs the assets for the C$192.8 billion CPP; or outsource money management to one of Ontario's defined benefit plans with existing in-house money management capabilities, like the C$129.5 billion Ontario Teachers Pension Plan or the C$60.9 billion Ontario Municipal Employees Retirement System, both of Toronto.
“Determining who would get this business will create some interesting dynamics in the market,” said Paul Forestell, senior partner, market retirement leader for Canada and a member of the Canadian leadership team at Mercer LLC, Toronto.
The decisions about who would manage the assets are going to be influenced by what kind of plan eventually is created: a traditional DB plan modeled after the existing public pension giants in Canada or other options under consideration, chiefly a defined contribution plan modeled after the U.K.'s £42 million ($69 million) National Employment Savings Trust, London.
The supplemental plan for Canada's most populous province could be sizable. While sources wouldn't specify how much in assets could ultimately be in the plan, they said it could reach as high as Ontario's current share of the CPP — estimated around C$80 billion.
Ms. Wynne and Mr. Sousa are following through on their earlier pledge to create a provincial plan supplemental to the Canada Pension Plan, Ottawa, after provincial finance ministers, Canada Finance Minister Jim Flaherty and Kevin Sorenson, Canadian minister of state-finance, couldn't agree on a national plan that was proposed by Wes Sheridan, Prince Edward Island finance minister, and backed by Mr. Sousa. Scott Blodgett, spokesman for the Ontario finance ministry, said provincial officials continue to work on the supplemental plan proposal.
Middle-income help
Proponents said a supplemental plan is needed to help middle-income Canadians save for retirement; the Sheridan plan would have increased individual earnings that qualify for CPP benefits to around C$100,000 from the current C$51,000.
Alan White, the Peter L. Mitchelson/Sit Investment Associates Foundation chair in investment strategy and a professor of finance at the Rotman School of Management at the University of Toronto, said he thinks Ontario leaders' push ahead with a provincial plan is an attempt to force the federal government's hand after provincial finance ministers last monthfailed to reach agreement on creating a national supplemental plan.
“Such a (provincial) plan, if created, could be a huge evolution going forward. It could be a supplement, but it theoretically could eventually replace the CPP in Ontario. And if Ontario would leave the CPP, (the province) would want its assets from CPP,” Mr. White said.
Assisting in crafting the details of a new Ontario plan are members of an advisory panel that includes Keith Ambachtsheer, director of the Rotman International Center for Pension Management at the University of Toronto; William Morneau, executive chairman of human resources firm Morneau Shepell; Susan Eng, vice president of advocacy for the Canadian Association of Retired Persons; and Hassan Yussuff, secretary-treasurer of the Canadian Labor Congress.
Ms. Wynne said at a news conference on Dec. 18 that details of the plan would be announced in spring.
If the supplemental plan started with no assets, said Mr. Forestell, “they'd almost have to go with third-party managers. It would take a while for a new plan to reach critical mass, to have enough assets to manage internally. The cost of internal management in the short term would be too high.” He also said recruiting a staff to manage a diversified portfolio would be difficult.
“I think a startup plan would have trouble hiring a top infrastructure portfolio manager when it would not have significant assets to invest for a number of years,” Mr. Forestell said. “If you look at the startup of the CPPIB, they started with public markets and external managers and shifted to in-house management as their assets grew. I would expect a similar pattern with this plan.”
Other options, Mr. Forestell said, could be “to leverage” the internal investment operations of OMERS and Ontario Teachers; or create a single provincial investment management entity, similar to the C$189.5 billion Caisse de Depot et Placement du Quebec, the C$102.8 billion British Columbia Investment Management Co. and the C$70 billion Alberta Investment Management Co. Each of the three manages all of its province's retirement and other assets.
Outsourcing to OTPP and OMERS “might be something that the new plan could use,” he said. “But you'd have to see (which plan) wants to do this. OTPP may say they're big enough right now. OMERS has been the most vocal in saying they would like to manage outside money.”
Michael Nobrega, OMERS president and CEO, said in an e-mailed statement, “While OMERS has not taken a position on any single solution to improve retirement security for Ontarians, OMERS is uniquely well-placed to contribute to the government's discussion of options.”
Deborah Allan, Ontario Teachers spokeswoman, could not be reached for comment.
Such money management options would be applicable whether the traditional DB plan model or one mirroring NEST was adopted, added Mr. White of the Rotman School. “It's hard to say for sure, but whether it's DB or DC, it'd be run like OTPP and CPP,” he said. “If it's DB, (the OTPP/CPP model) would be how they manage their assets, but with DC, they'd use the same kind of structure and take the investment decisions away from individuals. I'm guessing it would be like this.”
Viable modelLet me give you a few of my thoughts on this new pension plan being proposed by Ontario. First, as I previously stated, it's high time Ontario sticks it to the feds and goes it alone.
Mr. Ambachtsheer pointed to the NEST management structure as a viable model for a supplemental provincial plan. While Mr. Ambachtsheer would not comment for this story while serving on the provincial advisory team, he wrote in a Dec. 20 op-ed in the Toronto Globe and Mail newspaper, “Ontario's recently announced resolve to lead a provincial effort to break through the current federal-provincial impasse on pension reform offers a new window of opportunity for Canada to address its looming pension challenges. A blueprint for a "middle way' supplementary pension plan (whether provincial, multiprovincial, or national) already exists. Also, many of its inevitable startup challenges have already been identified and addressed in the design and implementation phases of NEST in the U.K.”
In NEST, participants do not choose investment options as most do in a U.S. 401(k) plan; instead, contributions are managed by NEST Corp. through an in-house investment team.
However, Mr. Ambachtsheer wrote, such a proposal “was explicitly rejected by Finance Minister Jim Flaherty at the conclusion of the Federal-Provincial Finance Ministers' Conference held in PEI in June 2010.”
“There's no debate, with the decline in private DB plans, everyone agrees something needs to be done. Those middle-income workers have no discretionary income to save,” Mr. Forestell said.
Mr. Sorenson said in early December that he opposed expanding the CPP and the separate C$38 billion Quebec Pension Plan, Quebec City, saying he did not think the economy is strong enough to support a national supplemental plan.
“The tug-of-war is really between the federal government and the provinces, mainly Ontario,” Mr. Forestell said. “The federal government, I think, is more opposed to the timing of this. They think the economy right now is not ready to handle this.”
Second, Ontario already has two of the best defined-benefit plans in the world, the Ontario Teachers' Pension Plan (OTPP) and the Healthcare of Ontario Pension Plan (HOOPP). Both plans manage assets and liabilities but they have different approaches.
Fully funded HOOPP is private and manages almost all its assets in-house, effectively running an internal multi-strategy hedge fund without those huge hedge fund fees. It had the best performance in 2012, gaining 17%, engaging in some great risk reward trades, like their long-term option strategy which was a major contributor to their overall results.
OTPP is a public pension plan which delivered equally impressive returns, gaining 13% in 2012, but its approach is somewhat different. OTPP also engages in a lot of the same internal arbitrage trades that HOOPP does (basically, they do a lot of variance swaps and sell volatility), but unlike HOOPP, Teachers allocates a lot of money to outside money managers in hedge funds and private equity. Also, unlike HOOPP, Teachers isn't fully funded but for all effective purposes it's close enough (they use the lowest discount rate among public plans, some say way too low).
You'll notice I didn't mention OMERS in my accolades even though it was mentioned in the article above as one of the plans that would like to manage this new supplementary pension. There is a reason for this. OMERS doesn't impress me. Its 2012 returns were decent and it is a leader in infrastructure but my contacts tell me it's a god awful place to work at and turnover is high.
Hopefully the new incoming CEO, Michael Latimer, will change the culture at OMERS but he has a lot of work and is basically inheriting a cultural mess (their PR team still hasn't got back to me as I am looking for a full interview with Mr. Latimer).
A few more thoughts on the article above. I know the Mercers of this world are licking their chops trying to get a cut of the big fat public pension pie but I warn Ontario's government to get the governance right and steer clear of useless investment consultants. There are a few exceptions but most of these investment consultants are financial parasites that make the worst recommendations at the worst possible time.
This new pension plan needs to adopt the same governance model that has allowed CPPIB and most of the other large public pension funds in Canada to thrive. That means nominating an independent and qualified investment board that operates at arms-length from the government, and paying pension fund managers properly. Just make sure you're paying them for real alpha, not leveraged beta.
I personally would poach some senior pension fund managers from Ontario's existing public pension plans to staff this new pension plan. In fact, I will go a step further and recommend Julie Cays, CAAT's CIO, heads up this new pension plan. She has delivered excellent returns and she impresses me on a professional and personal level (think a lot of the pension penises in Canada are full of themselves and insanely overpaid for the results they're claiming to deliver).
As you can see, I'm back to my old self. I started training hard again and my New Year's resolution is to focus on my physical and financial health and keep doing what I do best, analyzing pensions and investments, giving credit where credit is due and ripping into these "powerful" public pension funds when they take stupid risks and lose billions in the process. In fact, while the media covers up scandals, I guarantee you that I won't hold back. I kind of like being an arrogant pension prick and it's the reason you all love reading me.
And on that note, I'm going to share some trading insights with you. You might have noticed the crooks on Wall Street came out swinging today. Morgan Stanley downgraded Twitter (TWTR) and Goldman Sachs downgraded First Solar (FSLR). These crooks are acting on the orders of their big hedge fund clients who read my outlook 2014 and desperately want to ride the big beta wave higher. Keep buying the dips on these high beta darlings, they will soar in 2014! (Prediction: Twitter will leave Facebook in the dust over the next five years and most people do not understand the risks).
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