Day of Reckoning Looms for Pensions?
Many Nova Scotians face the threat of not getting the pensions they have been promised, several experts warn.There is nothing that pisses me off more than a bunch of incompetent goofballs in Ottawa and idiots at right-wing think tanks spreading malicious lies on defined-benefit pensions and why we shouldn't enhance the CPP for all Canadians.
Nova Scotia may not be Detroit, but between the retiree bubble and a stagnant working-age population, those defined-benefit public pension plans are starting to look less solid.
Public-service pension plans across Nova Scotia are underfunded and, in many cases, steps are not quickly being taken to fix them.
The provincial Teachers’ Pension Plan is only 75 per cent funded, with an unfunded liability of $1.5 billion. This is at a time when the number of new teachers is dropping, and soon half of the people in the plan will be retired.
From municipalities to universities such as Dalhousie and Acadia, low interest rates are putting a huge strain on pension plans.
“To say that we have problems, yeah, where do you want to start?” said one expert who did not want to be named because he is involved with some plans.
“They’re all a mess.”
The good news is there’s no shortage of people offering solutions with a track record of success. Too many small plans are being managed by people without the proper expertise, said the expert. He recommends all smaller plans with under $1 billion in assets should be merged.
Then there’s the contentious issue of reforming benefits. Nova Scotia’s largest pension plan, the Public Service Superannuation Plan, is healthy. But it took painful changes in 2010, such as removing benefit indexing when the plan is underfunded.
Those changes were politically painful and sparked protests from retirees. But the plan is now almost 100 per cent funded.
“You have to do something. But, politically, the thing is nobody has to do anything right now,” said Graham Steele, the finance minister at the time.
“You can always put it off. It’s just that things are going to get a little bit worse every year. That’s why it’s so hard for politicians to deal with this stuff.”
Bill Black, who previously led a provincial advisory committee on private-sector pensions, agreed smaller funds should be merged. Black also said government will have to make the unpopular move of forcing civil servants to contribute more and work a bit longer.
“They’re going to have to swallow that pill and gradually raise the future retirement age and increase the contributions.”
The increased costs of these plans tend to draw the ire of people without such savings. It’s a phenomenon nicknamed “pension envy.”
New Brunswick tried to strike a balance by adopting a European-style of pension reform where the benefits and risk are shared between the government and the pensioners. They’ve now been singled out as an international model for reform.
For those without government pension plans, the crisis could be coming sooner than many think. In a groundbreaking 2011 paper, economist Michael Wolfson found that by the time the baby boomers retire, half of middle-income retirees will see a 25 per cent drop in their net living standard.
Wolfson said in an interview that the most frustrating thing for him is that this problem had been predicted since he was working as a federal Finance Department analyst in the 1980s.
Even those with private pension plans are in trouble. About 60 per cent of private defined-benefit plans are underfunded, according to the Office of the Superintendent of Financial Institutions. And those plans are increasingly rare.
For Wolfson and other experts, one big solution is obvious: increase the Canada Pension Plan. Private savings plans come with bank fees typically five to eight times higher than the CPP program.
It’s also universal. Decades of history shows that while people know they should save for retirement, many can’t or won’t, said Murray Gold of Koskie Minsky LLP in Toronto.
“This is something that is best done collectively. It’s like building a road, building a school, building a health-care system,” said Gold.
“You need to take a social approach to this.”
Despite all the provinces backing the plan, former finance minister Jim Flaherty shot down the idea of beefing up the CPP last year. He said the economy could not handle the extra payroll reductions.
Ontario has since decided to go it alone. The Liberals have made the provincial plan, which would provide 15 per cent of a retirees pre-retirement income, a key part of their re-election platform.
It is not universally loved. The right-leaning Fraser Institute argues the plan will cause people to lower their private savings as they struggle to maintain the same quality of life. They argue instead for targeted programs to assist low-income retirees.
Black said provincial plans work in theory, but he worries unethical premiers would be tempted to dip into the funds to spend on political promises. (Federal legislation prevents the CPP being used for political investments.)
But Black, Gold and Wolfson all say that as long as the federal government won’t take action, the provinces should consider joining together and forging a joint provincial plan as a CPP alternative.
“It’s second-best, but it’s a heck of a lot better than nothing,” said Wolfson.
But I also got a bone to pick with all these public sector unions who think gold plated pensions are their god given right. Think again. There is nothing written in stone that guarantees you a nice pension for life. Just ask the civil servants in Greece and Detroit what happens when the money runs out.
I worked at various jobs in the public and private sector. There are lazy, incompetent fools in both the private and public sector. It used to drive me nuts when I had some senior civil servant bureaucrat telling me they are counting the days to retire so they can collect their pension.
Let me be clear on something. I am all for defined-benefit pensions across the public and private sector but I am also for major reform including raising the retirement age and risk sharing.
Importantly, if it were up to me, I'd raise the retirement age to 70 because people are living a lot longer and I would pass laws where pension plan benefits are indexed to markets. I would also ensure much more transparency and better governance at all our pension plans, including our much touted large Canadian public pension funds where compensation is running amok.
I had a chat with someone last week who asked me: "How can the board of directors at PSP Investments justify paying Gordon Fyfe $5.3 million? That's as much as P.K. Subban makes and he is a star athlete!" I explained to him that compensation at PSP and elsewhere is based on performance but there is no question that PSP's tricky balancing act is a lot of nonsense and the board needs to review compensation policy for senior executives (also spread that money to the lower ranks since they are the ones who really work their asses off!).
And it's not just PSP. All the major Canadian public pension funds pay their senior executives extremely well and they all justify it with the same flimsy excuses. I blame Claude Lamoureux, Ontario Teachers's former CEO, for all this compensation run amok at Canada's large public pension funds. You see Teachers got their governance right, paid people well to attract and retain talent so everyone else followed them and implemented the same compensation policy based on beating the same bogus benchmarks over a rolling four-year period.
But at the end of the day, these are public pension funds. They're not private funds which have to worry about performance in order to raise assets. They have captive clients giving them billions to manage so I find it hard to swallow all this nonsense that they deserve these hefty payouts because they manage billions and beat some bogus benchmarks based on a four-year rolling return period.
Another thing that really irks me is all the claims that Canada's senior public pension fund managers need to be paid extremely well because they can get get paid better in the private sector. This is utter fantasy and pure rubbish. Not one of the senior pension fund managers at Canada's large public pension funds can ever make anything close to what they are making at these public pension funds. Not one.
I roll my eyes whenever some pension fund manager tells me they could have easily started or worked at a hedge fund or private equity fund and made a lot more money. I tell them flat out: "You're dreaming, stay where you are, you got the best gig in the world, you're making great money taking little to no risk" (of course, some previous pension fund managers bought themselves cushy jobs at funds they invested billions with, which is scandalous!).
On that note, it's a beautiful day in Montreal, so I am going to take my mom out for lunch and enjoy the weather. I remind all of you, even those who strongly disagree with me, to support this blog. If you're taking the time to read it, it's because there is value, so please take the time to subscribe or donate by clicking on the PayPal buttons above (Mr. Fyfe can donate his FY2014 bonus, lol!).
Below, Thomas Piketty, "Capital in the Twenty-First Century" author, shares his thoughts on compensation transparency. I've already covered the 1% and Piketty but think he really needs to look at how public pensions gambling on alternatives are contributing to wealth inequality, making a bunch of overpaid hedge fund and private equity fund gurus fabulously rich. If you ask me, the alternatives gig is up.
Postscript: One pension expert shared this with me after reading this comment:
Retirement age for me would be: [Life expectancy at birth - 15 years]. No adjustment for men or women. This way, it would get adjusted every year before it gets out of control and becomes a political issue.Yes, don't get me started on all those useless investment consultants who don't know their head from their ass when it comes to making good recommendations and have no alignment of interests (in fact, they typically have conflicts of interest).
Very right about the compensation question. At the very top, it was necessary to bring compensation in line with banking and insurance industry pre-crisis when banks made blankets offers to anyone with at least 3 months of experience in a pseudo prop trading environment and no pension fund could compete with that but not true anymore. What's funny though is that the incentive compensation of non-investment executive is still very often tied to the rolling 4-yr performance of the plan but they take no part in investment decision making so that's kind of weird. Of course it is an undeniable metric but there must be a way around it.
Looking forward to read your plan on how to improve pension governance. It is not easy when half your board hasn't achieve financial markets literacy and that they need to have recourse to an 'external advisor' anyways.