Examining an Insider’s View of Canada’s Pension Debate

Canada

Last month, the Toronto Star interviewed Tom Reid of Sun Life to get an insider’s view of Canada’s pension debate. The interview can be read here.

This week, Leo Kolivakis of the Pension Pulse blog penned his own critical examination of the debate. The post can be read below.

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By Leo Kolivakis, Pension Pulse

Indeed, the Canadian Life and Health Insurance Association is hopping mad and expressed its disappointment on its website.

The problem is that the CLHIA is spreading misinformation and outright lies on the so-called benefits of defined-contribution (DC) plans. They are nowhere near as safe and secure as defined-benefit (DB) plans and they’re a lot more costly, regardless of what Reid claims. They also don’t perform as well over long investment horizons because they don’t invest in private investments.

Go back to carefully read my comment on the brutal truth on DC plans, it’s a real eye-opener. We have become so ill-informed on this debate that we accept the lies and misinformation being spread out there.

As I’ve long argued on this blog, there is a case for boosting DB plans in Canada and elsewhere. The benefits of DB plans are well-known and under-appreciated.

Importantly, boosting DB plans, especially now that Canada’s crisis is just beginning (if you wait for “better economic conditions” you will never enhance the CPP!), makes for good retirement and economic policy. Why? Because if you do it properly, adopting world class governance standards, you will enhance economic activity, increase the revenue from sales taxes and reduce the overall debt of the country.

Of course, the insurance and banking industry don’t agree and will keep pushing the Conservatives to peddle PRPPs as the solution but they’re wrong and they know it. They’re petrified of Canada’s top ten and for good reason, when you look at the evidence, our large DB plans are doing an outstanding job providing their members with safe and secure retirement benefits. No DC plan can compete with our large DB plans.

Are Canada’s top ten perfect? Of course not. If they were, this blog would never exist. But take it from this insider, given a choice between anything Prudential, Sun Life, Manulife or Canada’s big banks have to offer and having your retirement money managed by our large DB plans, you should always opt for the latter. Period.

Does this mean that banks and insurance companies should get out of the retirement business altogether and just leave it up to our large DB plans? No, I believe there is a market for what they’re doing and they can certainly compete with the internal portfolio managers at our large DB plans but they’re going to have to lower their fees and change their angle.

In fact, if banks and insurance companies in Canada were smart (they’re hopelessly myopic!) and realized the bigger picture, they would be forcing the federal government to enhance the CPP for all Canadians and boost our DB plans.

I leave you with a comment Bruce Rogers wrote to the Toronto Star in regards to the interview above:

Thanks for devoting space to Ontario’s plans for a pension to supplement the Canada Pension Plan. Too bad your effort gave the platform to an interviewee who has a financial interest in the inadequate, defined contribution approach to the problem.

Our society clearly needs to take action to ensure that retirees and seniors generally enjoy financial security and a modicum of dignity. To argue against a more generous defined benefit approach is to ignore a serious problem.

Of course, the Harper government has made its decision and Bay Street will agree with that course. Let’s hope the business pages of the Star will balance the debate in future, perhaps by exposing the growing threat to defined benefit pensions where they exist.

This is an informed reader who understands what’s at stake. When it comes to retirement policy, we need to go Dutch on pensions and not take lessons from Down Under or worse, the United States of pension poverty.

Lastly, I wish the media in Canada would start interviewing real pension experts like Jim Leech, Leo de Bever, John Crocker and others who truly understand what is at stake and why we need to boost defined-benefit plans for all Canadians.

 

Photo credit: “Canada blank map” by Lokal_Profil image cut to remove USA by Paul Robinson – Vector map BlankMap-USA-states-Canada-provinces.svg.Modified by Lokal_Profil. Licensed under CC BY-SA 2.5 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Canada_blank_map.svg#mediaviewer/File:Canada_blank_map.svg

Unions Speak Out Against Quebec’s Bill 3, Plan Next Moves

Canada mapQuebec’s controversial pension reform legislation, Bill 3, passed into law last week. The law divvies up responsibility for paying down governments $3.9 billion pension debt 50-50 between employers and employees. As a result, employees now shoulder more of the burden for paying down pension debt in the form of higher contributions.

Now, union leaders are speaking out against the law and planning their next moves. Union leaders say government officials have “started a fire”. From the Montreal Gazette:

“We’re more determined than ever,” Marc Ranger, spokesperson for the Coalition syndicale pour la libre négociation, told a press conference at the Crémazie Blvd. E. headquarters of the Quebec Federation of Labour.

“We will target municipal administrations, that’s for sure,” he said.

“Most of these mayors will not find this funny in the months to come.”

Ranger did not specify what the pressure tactics would be, but promised that after the Christmas break, municipal employees would take action that will make the public sit up and take notice.

However, he said the coalition, representing 65,000 firefighters, police officers, transport workers, blue-collar workers and white-collar employees, will steer clear of illegal actions like the Aug. 18 ransacking of city hall, which has resulted in criminal charges.

Bill 3, calling for negotiations with unions on underfunded pension plans and a 50-50 sharing of costs to refinance plans that are in the red, is the government’s response to a $3.9-billion pension shortfall.

[…]

He added that the union is prepared to take its legal challenge to the pension bill to the Supreme Court of Canada.

“They’ve started a fire. Now it’s up to them to put it out,” he said.

Read more coverage of Bill 3 here.

Canada Pension Eyes Corporate India

India The Canada Pension Plan Investment Board (CPPIB) – the entity that manages assets for Canada’s biggest pension plan – has made a flurry of investments in India-based corporations over the past few years. And the flow of pension money to India isn’t likely to slow down – the country is a “key” part of CPPIB’s long-term plan, according to a CPPIB official. More details from Bloomberg:

Toronto-based Canada Pension Plan Investment Board […] is planning to add to the $1.5 billion it has already poured into the South Asian country since 2010, said Mark Machin who oversees its international investments division. “India is a key long-term growth market for CPPIB,” Machin said in an e-mail. “We will continue to seek investment opportunities which may include direct investments,” and will seek “smart” local partners, he said, without elaborating. […] “I can see many pension and sovereign funds coming to India,” said Khushru Jijina, managing director of Mumbai-based Piramal Fund Management Pvt., which has a $500 million realty joint venture with CPPIB. “Basically, the big boys with patient money who want to play the 8-10 year game are coming.” The Canadian pension fund, which made its first India investment in 2010, followed that up with three more in the past year. It invested $200 million in an alliance with construction conglomerate Shapoorji Pallonji Group in November last year followed by $250 million in a venture with billionaire Ajay Piramal-owned Piramal Enterprises Ltd. (PIEL) for debt financing of residential projects in February. The third was $332 million in L&T Infrastructure Development Projects Ltd. in June.

CPPIB manages $206 billion in assets for the Canada Pension Plan.   Photo by sandeepachetan.com travel photography via Flickr CC License

Quebec Passes Controversial Pension Reform Into Law

Canada mapDespite the legal threats of unions and the protests of public workers, Quebec’s controversial pension reform measure passed into law Thursday.

The law, Bill 3, mandate that workers contribute a higher percentage of their paychecks to their pensions. In short, they split the bill 50-50 with municipalities.

More details from CBC:

The bill was passed on Thursday morning at the National Assembly by a vote of 85-28.

The law will force municipal workers and retirees to contribute more to their pensions to offset a $4-billion pension fund deficit.

[…]

Liberal Premier Philippe Couillard defended the reforms during question period in the National Assembly.

“In Quebec, we don’t spend more than what we have,” he said.

“The reality of catching up — there are millions of dollars to get back. We’re doing it with courage, we’re doing what was supposed to be done before. And why are we doing it? We’re doing it for today’s Quebecers and the next generations to whom we want to pass on a Quebec in good financial health,” Couillard said.

Members of the opposition parties groaned when Couillard said the move was to overcome a $5.8-billion deficit.

[…]

Municipal Affairs Minister Pierre Moreau’s reforms passed with just two amendments to the bill.

One was to take some of the burden off retirees when it comes to paying off the deficit.

The second gives municipal workers’ unions and the province more flexibility in contract negotiations.

Bill 3 can be read here.

Ontario Teachers’ Pension Chief Explains Why Fund Looks Outside of Canada For Direct Investment Opportunities

Canada blank map

The Ontario Teachers’ Pension Plan (OTPP) is among the growing number of pension funds making large direct investments in companies – buying stakes in companies directly as opposed to working with private equity firms.

But the vast majority of the OTPP’s direct investments are made in foreign companies, not Canada. Why is that?

OTPP chief executive Ron Mock explained on Wednesday the methodology that leads the fund to leave Canada behind when making direct investments. From the Financial Post:

The Ontario Teachers’ Pension Plan may prefer to make its direct investments outside of Canada, but don’t interpret that as a sign the institution isn’t confident in the country’s economy, chief executive Ron Mock said on Wednesday.

Mr. Mock made the remarks at The Canada Summit 2014, a conference hosted by The Economist magazine in Toronto. Mr. Mock discussed the biggest opportunities and challenges facing the pension fund.

In the early 2000s, the teachers’ pension plan shifted away from a traditional mix of bonds and equities into direct, private investments, a move Canada’s other major pension plans followed. Mr. Mock, who has been on the job for about a year, said the shift in strategy was necessary to generate the returns it needed to provide retirement income for 300,000 working and retired teachers.

Today, about 70% of the pension fund’s direct, private investments are outside Canada, Mr. Mock said.

[…]

The strategy has come with challenges. Mr. Mock said one of the biggest difficulties is navigating the legal systems and governance requirements of foreign countries when buying large stakes in their companies.

Mr. Mock cited Asian companies that have not yet gone public among investment opportunities he’s keeping an eye on. He said the pension fund doesn’t typically make venture capital investments in Canadian companies because those types of investments are generally in the tens of thousands of dollars, while he’s looking to invest hundreds of millions at a time.

“As a fiduciary, we really do have to focus on earning the returns on behalf of the teachers,” he said.

Another opportunity he’s keeping his eye on is infrastructure investments in Europe and Canada. He said pension funds have a role to play in helping Canada address its crumbling infrastructure problem over the next 10 years.

“I think that is a vital opportunity in Canada,” he said.

The OTPP manages $140 billion in assets.

Ontario Teachers’ Pension Names New Director of Europe, Middle East and Africa Investments

Canada blank mapThe Ontario Teachers’ Pension Plan has appointed private equity veteran Jo Taylor to the post of Managing Director for Europe, Middle East and Africa (EMEA). Taylor will also head the pension fund’s London office.

From an OTPP release:

In his new role, Mr. Taylor retains primary responsibility for Teachers’ Private Capital and private equity investments in the region while assuming oversight for the full cycle of opportunity origination, analysis, value creation and execution of investment activities across asset classes.

In addition to setting the tone and direction of Teachers’ investment activities in the EMEA market, Mr. Taylor, who joined the organization in 2012, will guide all advisory relationships within the region and becomes a member of Teachers’ Investment Committee.

“Jo’s expanded role reflects our commitment to growing our global presence and deepening our long-term relationships with our partners in key markets. His experience, relationship-building skills and his deal and market knowledge make him the ideal person for this new position,” said Neil Petroff, Teachers’ Executive Vice-President and Chief Investment Officer.

Teachers’ will be opening an expanded London office at Portman Square in 2015 to accommodate a larger, multi-asset-class team. Teachers’ established its London office in 2007. It has a diverse portfolio of assets in the region valued at approximately $21 billion as of December 31, 2013.

The Ontario Teachers’ Pension Plan manages $140 billion in assets.

Canada Pension Funds In Talks To Buy Satellite Company

Canada blank mapCanada’s Public Sector Pension Investment Board and the Ontario Teachers’ Pension Plan are putting together a $7 billion deal to acquire Canadian satellite company Telesat Holdings Inc.

When all is said and done, each pension fund will have a 50 percent stake in the company.

More from Businessweek:

Under the terms being discussed, the funds will acquire Loral Space & Communications Inc. (LORL:US), a publicly traded shell company that owns 63 percent of Telesat, for about $85 a share (LORL:US), or $2.6 billion, said the people, who asked not to be named discussing private information. While a deal could be announced next month, talks may fall apart again given the parties’ inability to reach an agreement in the past, the people said.

The pension funds are planning to wind up with equal ownership and voting stakes in Telesat, the people said. PSP, which currently holds about 67 percent of the voting rights and 37 percent of the equity in Telesat, would increase its ownership to 50 percent and reduce its voting rights, while Ontario Teachers’ would control the other half of the company.

Telesat has been on and off the block for years. Loral and PSP, which already owns 37 percent of Telesat, called off a sale effort in 2011, after offers from bidders including EchoStar Corp. and Carlyle Group LP fell short of expectations. Talks started again this year before stalling in June because Mark Rachesky, Loral’s largest shareholder, couldn’t agree with PSP on a price to sell the company, failing to bridge an equity gap of about $100 million, people said then.

Three-way talks between Loral, PSP and Ontario Teachers’ restarted last month after Ontario Teachers’ and PSP raised their offer, the people said, leading to renewed negotiations.

The Public Sector Pension Investment Board manages about $97 billion in assets. The Ontario Teachers’ Pension Plan manages $138 billion in assets.

Canada Pension Eyes $1 Billion of Australian Timber

timber

Canada’s Public Sector Pension Investment Board (PSP) is in talks to buy $1 billion worth of Australian timber assets from Hancock Timber Resource Group.

More details from the Australian:

CANADA’S Public Sector Pension Investment Board could be about to swoop on one of Australia’s most valuable timber plantations, with sources saying about $1 billion worth of forests owned by Hancock Timber Resource Group are on its radar.

PSP executives have been in Sydney this week sounding out counterparties ahead of what some say is shaping up to be an aggressive acquisition spree by the Canadians focusing on Australian property, agriculture and billions of dollars’ worth of upcoming infrastructure assets for sale by federal and state governments.

It is understood a major Australian acquisition is on the cards by PSP and the seller it is engaged with is Hancocks.

Recent forestry portfolios placed up for sale have struggled to secure strong prices, but the industry is now shaking off pain from weaker industry demand and collapsed managed investment schemes, which could see some plantations sell for some more bullish prices, with an increasing appetite for timber from woodchip markets.

[…]

Across the Tasman, PSP is finalising the purchase of forest plantations from Harvard Management in conjunction with New Zealand Superannuation and local Iwi tribes worth $NZ2.35bn ($2.15bn), and recently outlaid more than $NZ1bn for the acquisition of AMP’s office portfolio.

PSP manages $97 billion in assets.

 

Photo by Rick Payette via Flickr CC License

Study: Public Pensions Gained Confidence in 2014

talk bubbles

A survey of 187 public pension plans across the U.S. and Canada suggests that funds are feeling more confident about their long-term sustainability and their “readiness to address future retirement issues.”

The survey, conducted by the National Conference on Public Employee Retirement Systems (NCPERS) and Cobalt Community Research, was released Monday.

The main findings of the survey:

– Confidence continues to grow about readiness to address future retirement trends and issues. Respondents’ overall confidence rating measured 7.9 on a 10-point scale, up from 7.8 in 2013 and 7.4 in 2011.

Funds experienced an increase in average funded level – 71.5 percent, up from 70.5 percent in 2013. Two factors contributed to the change: average one-year investment returns of 15 percent and lower amortization periods.

Funds continue to experience healthy investment returns: 14.5 percent for one-year investments (compared to 8.8 percent in 2013); 10.3 percent for three-year investments (up from 10.0 percent last year); 9.8 percent for five-year investments (up from 2.7 percent last year); 7.8 percent for 10-year investments (up from 7.0 percent), and 8.1 percent for 20-year investments (virtually unchanged from last year’s 8.2 percent). Funds continue to work toward offsetting sharp losses from the Great Recession in 2008 and 2009 by strengthening investment discipline. Signs point to long-term improvement in public retirement systems’ funded status.

– Public funds continue to be the most cost effective mechanism for retirement saving. The total average cost of administering funds and paying investment managers was 61 basis points. According to the Investment Company Institute’s 2014 Investment Company Fact Book, the expenses of most equity funds average 74 basis points and hybrid funds average 80 basis points.

Funds continue to tighten benefits, assumptions and governance practices. Examples include a continued trend toward increasing member contribution rates, lowering inflation assumptions, shortening amortization periods, holding actuarial assumed rates of return and lowering the number of retirees receiving health care benefits.

– Income used to fund public pension programs came from member contributions (8 percent); employer (government) contributions (19 percent) and investment returns (73 percent).

The full summary of the study, including comments by NCPERS’ Executive Director, can be found here.

Pension Funds Criticize Excessive Private Equity Fees; More Look To Direct Investing

broken piggy bank over pile of one dollar bills

Pension fund officials from Canada and the Netherlands expressed their frustration with private equity fees during a conference this week.

The chief investment officer of the Netherlands’ $220 billion healthcare pension fund said it needs “to think about” the fees it is paying, according to the Wall Street Journal.

Ruulke Bagijn, chief investment officer for private markets at Dutch pension manager PGGM, said a Dutch pension fund for nurses and social workers that she invests for, paid more than 400 million euros ($501.6 million) to private-equity firms in 2013. The amount accounted for half the fees paid by the PFZW pension fund, even though private-equity firms managed just 6% of its assets last year, she said.

“That is something we have to think about,” Ms. Bagijn said.

Among the things pension officials are thinking about: bypassing private equity firms and fees by investing directly in companies. From the Wall Street Journal:

Jane Rowe, the head of private equity at Ontario Teachers’ Pension Plan, is buying more companies directly rather than just through private-equity funds. Ms. Rowe told executives gathered in a hotel near Place Vendome in central Paris that she is motivated to make money to improve the retirement security of Canadian teachers rather than simply for herself and her partners.

“You’re not doing it to make the senior managing partner of a private-equity fund $200 million more this year,” she said, as she sat alongside Ms. Ruulke of the Netherlands and Derek Murphy of PSP Investments, which manages pensions for Canadian soldiers. “You’re making it for the teachers of Ontario. You know, Derek’s making it for the armed forces of Canada. Ruulke’s doing it for the social fabric of the Netherlands. These are very nice missions to have in life.”

But an investment firm executive pointed out that direct investing isn’t as cost-free as it sounds. From the WSJ:

[Carlyle Group co-founder David Rubenstein] warned that investors who do more acquisitions themselves rather than through private-equity funds will have to pay big salaries to hire and retain talented deal makers.

“Some public pension funds will just not pay, in the United States particularly, very high salaries and will not be able to hold on to people very long and get the most talented people,” Mr. Rubenstein said at the conference. “I don’t think there are that many people who will pay their employees at these sovereign-wealth funds and other pension funds the kind of compensation necessary to hold on to these people and get them.”

[…]

Mr. Rubenstein had a further warning for investors seeking to compete for deals with private-equity firms. “If you live by the sword you die by the sword,” he said. “If you are going to do disintermediation you can’t blame somebody else if something goes wrong.”

Pension360 has previously covered how pension funds are bypassing PE firms and investing directly in companies. One such fund is the Ontario Municipal Employees Retirement System. The fund’s Euporean head of Private Equity said last month:

“The amount of fees that we were paying out for a fund, 2 and 20 [percentage points] and everything that goes with that, was a huge amount of value that we were losing to the fund,” Mr. Redman said. “If we could deliver top quartile returns and we weren’t hemorrhaging quite so much in terms of fees and carry that would mean that we would be able to meet the pension promise.”

 

Photo by http://401kcalculator.org via Flickr CC License