Bill Morneau's Pension Conflict?

Steven Chase and Robert Fife of the Globe and Mail report, Liberals defeat NDP motion to close conflict-of-interest loophole:
The Trudeau Liberals used their parliamentary majority Tuesday to defeat an NDP motion on closing a loophole that allowed Finance Minister Bill Morneau to retain close control over a significant stake in his family company even as he ran a department with power to affect the fortunes of Morneau Shepell.

The Liberals also continued to dodge questions on whether Mr. Morneau recused himself from internal discussions on Bill C-27, legislation that opposition parties say could be expected to benefit Morneau Shepell, one of four major firms in Canada's human-resources and pension-management sector.

As The Globe and Mail first reported last week, Mr. Morneau ran the Finance Department for nearly two years without putting his substantial assets into a blind trust – as Justin Trudeau did for his family fortune, a move that the Prime Minister holds up as the gold standard for avoiding conflicts of interest in federal politics. After days of defending his conduct, the Finance Minister last Thursday reversed course and pledged to sell his remaining one million shares in Morneau Shepell and put all other assets in a blind trust.
Read the rest of this article here. I think NDP ethics critic Nathan Cullen who sponsored this motion is spot on: "Every single Liberal voted against closing the ethics loophole," Mr. Cullen said. "Either they don't get it or they don't care."

Conveniently, Mr. Morneau was not in the Commons for Question Period but it's highly inappropriate for Canada's Finance Minister to take part in any discussions on Bill C-27 given he still has controlling interest in Morneau Shepell, one of four major firms in Canada's human-resources and pension-management sector.

Those of you who know me know that I'm a stickler for good governance and transparency. It's highly inappropriate for the CEO or senior manager of a major US or Canadian pension fund to invest in an outside fund and then magically get hired by that fund a few years later, especially if that officer had direct say in the investment decision.

Has it ever happened before? You bet. Lots of shady things have happened in the past that would never happen nowadays. Like what? Well, that is a topic for another day but let's just say I can write an interesting chapter on shady activity that used to take place at all of Canada's pensions including front-running F/X orders for personal accounts just like that HSBC currency trader who was just convicted of fraud and front-running.

Now, I'm not implying Bill Morneau is doing anything fraudulent or shady but the optics look terrible. This is the type of nonsense I would routinely see in Greece growing up, but we live in Canada, not Greece, Lebanon or Turkey.

All that Bill Morneau needed to do is follow Justin Trudeau (or Paul Martin, Jim Flaherty, etc.) and just put his assets in a blind trust from the get-go. The fact that he finally reversed course and pledged to sell his remaining one million shares in Morneau Shepell and put all other assets in a blind trust shows he understood the optics were all wrong.

And for the life of me, I simply cannot understand why the Liberals would quash a sensible NDP-sponsored motion which was fully supported by the Conservatives. And then people wonder why we call them limousine Liberals who are nothing but blatant hypocrites that love spending other people's hard-earned money.

I think our Prime Minister needs to take a break, come to Montreal now that the weather is nice and grab a coffee with me and my brother who was his high school classmate at Brébeuf and we'll talk some sense into him because Gerald Butts and the cronies in Ottawa are giving him terrible advice. Truly terrible advice.

And just for the record, I'm not impressed with Bill Morneau. Paul Martin impressed me, Jim Flaherty, God rest his soul, impressed me even though he was working under an authoritarian and arrogant leader peddling to Canada's powerful financial services industry every chance he got. Bill Morneau is weak and his newly unveiled economic plan will end up costing us dearly down the road.

Anyway, I'm extremely worried about Canada's economic future, I'm glad the Bank of Canada came back to its senses today after flirting with disaster earlier this year. Canada's growing debt risks are growing to the point where 4 in 10 Canadians cannot cover basic expenses without going deeper in debt.

Yesterday, I warned of America's dangerous dual economy. The situation is far worse in Canada and when the next global deflationary shock hits us, watch out, deficits are going to mushroom, it will get very ugly, very quickly.

I've said it before and I'll say it again: Canada is one global deflationary shock away from a great depression which might last a decade and maybe even longer.

All you delusional Canucks buying the Canadian housing dream nonsense are cruising for a bruising because when the next crisis hits, it's game over for a long, long time.

Now, what about Bill C-27 and target benefit plans? Morneau Shepell does a good job comparing Defined Contribution (DC) plans versus Target Benefit Plans (TBPs) in this comment, Target benefit plans - Game-changer or non-starter?.

I will let you read the entire comment but the key passage is this:

The TBP concept is not new. It has existed for many years in the form of negotiated contribution Multi-Employer Pension Plans (MEPPs), which are especially popular in certain industries. What is new is the notion of TBPs in the single-employer environment.

In its most basic form, a TBP is a pension plan that aims to provide a defined benefit (DB), but with fixed contributions. To plan members, it is virtually indistinguishable from a regular DB plan except that accrued benefits are subject to reduction if the funding level falls below a given threshold. To avoid a reduction, TBPs are governed by more formal funding and benefit policies than one typically finds in defined benefit plans. In addition, conservative assumptions can be used in the setting of the target benefit with benefit improvements granted only if there is a significant funding surplus.

TBP assets are pooled for investment purposes and are managed in much the same way as in a DB plan although the TBP fund might be invested a little more conservatively to reduce the chances of a funding deficit.

One variation on the basic TBP allows for contributions to vary within a narrow range rather than being completely fixed. This is the idea behind the Shared Risk Pension Plan that was adopted recently by the New Brunswick Government (see the sidebar “The New Brunswick SRPP”).


TBPs are promising because they eliminate the risk of rising costs inherent in DB plans while offering a better solution for most employees than most DC plans.

DB plans have long fallen out of favour in the private sector and are now under increasing attack in the public sector. Much has been written to explain why this is the case but for our purposes it suffices to say that the decline of DB plans is unlikely to be reversed. In the long run, the only DB plans that may survive are those sponsored by organizations with very deep pockets.

For their part, DC plans suffer from two fundamental defects. The first is the uncertainty of the benefits they generate, which complicates retirement planning (see Figure 1 for example). The second is that the members bear the risk, but all too often are not qualified to make their own investment decisions.

TBPs minimize many of these shortcomings. From the employer’s perspective, the following characteristics of a TBP are significant inducements to switch away from DB:
  • The contribution level is fixed, with no obligation to contribute more even if funding proves inadequate.
  • Accounting (in the ideal case) is based on contributions made, the same as in DC plans. Accounting in DB plans is an elaborate exercise that has produced some unpleasant surprises for employers in recent years. Pension expense has skyrocketed as bond yields have fallen and the situation has been exacerbated by investment losses during the financial crisis. This is the main reason DB plans became so unpalatable to the shareholders of private sector companies. The DC-type accounting that the accounting profession might decide to apply to TBP plans eliminates any such pension expense shocks.
  • Pension Adjustment (PA) calculations under a TBP should be easy, being simply the contribution made (assuming the Canada Revenue Agency (CRA) agrees with this treatment). This simplifies plan administration and may also provide more Registered Retirement Savings Plan (RRSP) contribution room for employees.
  • The target benefit in TBPs is monitored by means of going-concern funding valuations. Solvency valuations, which have been the source of such volatile funding in recent years as to threaten the very solvency of some companies, would not be required.
The sponsors of DC plans may also want to consider TBPs. The one big advantage they have over DC plans is that the assets are pooled and invested in much the same way as for DB plans. This means the TBP sponsor does not have to offer individual investment choice thus eliminating the onerous and sometimes futile task of trying to educate an entire workforce on investment basics.

While employees are unlikely to prefer TBPs over traditional DB plans, they will probably find them a better alternative than DC plans. There are some good reasons for employees to prefer TBPs:
  • While the target benefit is less certain than in a DB plan, it is more certain than the income one can derive from a DC plan.
  • The target benefit is paid for life so retirees do not have to worry about outliving their assets. They do have to worry about a potential benefit cut under a TBP but good funding and benefit policies reduce both the chances and the severity of such a cut.
  • Various studies indicate that plan administrators, with the advice of investment professionals, make better investment decisions than individual employees. TBPs therefore promise to stretch a dollar of contribution further than it would go in a DC plan.
  • For a DC retiree to secure a stable monthly income, she would have to buy a life annuity. The insurance company expenses and anti-selection charges, as well as the very conservative investments underlying the annuity reserves tend to reduce the amount of payout. TBPs avoid all of those problems.
  • Unions should appreciate the fact that TBPs promote solidarity. Unlike DC plans, all members in a TBP accrue the same pension for a given year of service.

The biggest drawback to a TBP is that the payout can be reduced if the target benefit is less than 100% funded. This problem is more than theoretical as an estimated 25% of MEPPs have had to reduce benefits in the past decade.

As we will see, benefit reductions should be less likely in single-employer TBPs with the help of intelligent plan design features and the adoption of conservative investment, benefit and funding policies. The downside to conservatism, however, is lower target benefits and a greater transfer of wealth to the next generation, so some compromise is necessary. Hence, the prospect of benefit reductions in a TBP can never be entirely eliminated.

To appreciate the challenge of deriving a stable income from fixed contributions, consider Figure 1,1 which is taken from our last Vision. It shows that historically, a fixed rate of contributions would have generated retirement income that varies from a low of 15% of final average pay to as much as 55% depending on the year of retirement.

For the plan in Figure 1, the plan sponsor could have set the target benefit at 30% of final average pay and could probably have paid out the full basic pension consistently though there would have been some years when post-retirement indexing could not have been paid. Had the target been set at 40%, it certainly looks more attractive but it would mean forgoing indexing for prolonged periods and even basic benefits would have to be reduced in some years. Neither situation is perfect. The 30% target provides better security but in good times it may frustrate some retirees who feel they could have done better in a DC plan and who have no wish to be building up a reserve for the benefit of the next generation of plan members. On the other hand, a 40% target would lead to frequent disappointment.

Another challenge with TBPs is that employers may have to forgo plan provisions that incent certain behaviour, such as retiring earlier. Incentives come at a cost and members in a TBP will resent subsidizing others. Of course, subsidies exist in virtually every DB plan as well, but they do not tend to create problems there because the extra cost is perceived to be borne by the employer rather than coming at the expense of fellow plan members.
I'm not going to go over the pros and cons of target benefit plans (TBPs) here. They're a step in the right direction but far inferior to a large well-governed defined-benefit plan which is what Bill Morneau, Justin Trudeau and Canada's pension overlords enjoy.

My biggest beef with TBPs is just like DC plans which are just brutal, they invest only in public markets, not private markets. Over the long run, this makes a huge difference to a well-run plan.

If it were up to me, CPPIB and other large, well-governed Canadian pensions would be managing the pensions of all Canadians. Period. No more issues with companies going bankrupt and taking pensions down with them. No more conflicts of interests with Morneau Shepell, Mercer or any other organization. There would be no need for them or a marginal one to consult and advise.

We waste so much valuable time and energy trying to get our pension policy right but we have everything we need right under our nose. The world's best defined-benefit pensions and a shared-risk model which shares the risk of the plan equally if the funded status deteriorates.

Below, Finance Minister Bill Morneau says he is meeting with the ethics commissioner Thursday to discuss how he can reassure Canadians about his personal wealth. Morneau is taking steps to end the controversy regarding his business assets.

My former colleague from my days at PSP, Fred Lecoq, recently emailed me to tell me I should get into politics. I told him I'm too honest and harsh for politics. He said "that's why they'd love you."

I’ll leave the politics to others but if Bill Morneau and Justin Trudeau ever want to meet me, I'll treat them to a coffee here in Montreal and bring Fred, my brother and others along so we can talk some sense into them and they can get back on track, dropping all the foolish nonsense that has derailed them. Everything off the record, of course. :)