Sunday, March 9, 2008

The self-dealing sovereign wealth funds known as OMERs, Teachers' and PSP

There is considerable angst these days about the emergence of sovereign wealth funds. The concern being that these large pools of capital are designed to achieve sovereign ends through commercial means.

The exact same thing is occurring in Canada’s back yard through the activities of various provincial and federal public sector pension plans. These entities are better known as OMERs, Teachers’, Caisse de depot, CPPIB, BCIMC, AIC and the PSP. The self-dealing arises from the fact that these plans are funded by government, who in turn are affording these funds with special treatment that puts them at a distinct advantage to the 75% of Canadians who do not belong to pension plans.

One of the favorite and misleading tactics of these domestic sovereign wealth funds is that they constantly falsely portray who it is they are acting for. They constantly invoke their plan members as if these plan members derive benefit from the special provisions that these funds seek form various levels of government, when in fact it is the governments themselves as the plan sponsors who benefit from the special provisions of government. This is called self dealing. It is also called grossly misleading and inherently unfair.

A good example of this tactic in play was the testimony of Teachers’ CEO Jim Leech before the CRTC, where Teachers’ is attempting to break its own 30% ownership limitation rules, to acquire 50+% of BCE:

“Teachers' is responsible for investing the fund and administer the retirement benefits of 278,000 active and retired participants in the field of education in Ontario.”

Notice that there’s no mention here about the Plan Sponsor, the Government of Ontario. Why the wolf in sheep’s clothing routine? Admit it, Teachers’ is a domestic sovereign wealth fund acting in the economic interest of the Government of Ontario. No one else, except the employees of OTPP who get paid performance based bonuses. Teachers’ is not some altruistic enterprise acting in the greater public interest.

By falsely invoking their plan members, rather than their plan sponsors, these funds are exploiting the perception of “in the public good” as they maneuver their way around government policies and gain concessions from government. The examples of these are numerous. None more hypocritical than the “carve-out” the pension plans were handed by Jim Flaherty when he implemented his income trust tax. Here was the comment of Teachers’ on November 1, 2006:

“The Ontario Teachers’ Pension Plan has advocated for a taxation policy on income trusts that does not discriminate against pension funds, and we are pleased to see that this is the case with the government’s announcement yesterday (October 31, 2006).”

This is as hypocritical a statement as ever there was. Teachers’ is no fan of discrimination, except when it is to their benefit and serves to discriminate against others, which is exactly what Flaherty’s income trust tax policy does, since it only applies to “public income trusts”. This provision was deliberately designed to afford the government sponsored pension plans with a bespoke tax carve out, since they can simply own these trusts as “private” trusts and be free of the 31.5% tax. As a practical matter, average Canadians can not own these businesses as “private trusts”, and are therefore grossly discriminated against.

The Canadian sovereign wealth funds rule. They can own trusts and average Canadians can not. How does this possibly address the problem of alleged tax leakage? It doesn’t. How does this possibly create a “level playing field”? It doesn’t. How does this possibly create "tax fairness"? It doesn’t. And how does Teachers’ derive comfort about “not discriminating”? They must be hypocrites or self dealing sovereign wealth funds to reach such a conclusion.

Wouldn't thay have been wiser to simply stay quiet on the matter?

This “carve out” for the pension plans on the income trust tax has been actively exploited by these sovereign wealth funds, with each of OMERs, Caisse, British Columbia Investment Management Corporation, Alberta and the Public Sector Pension Plan having acquired a public income trust to hold privately, since Halloween 2006. Meanwhile Teachers’ is acquiring BCE that was precluded from becoming a public income trust. It will now be held privately.

Teachers' and their US partners are taking $8 billion of their capital and displacing $32 billion of Canadians' investment and turning Canada's most widely held public company into a junk bond basket case.

OMERs’ CEO recently announced that their private equity strategy
will be focused on acquiring more of these undervalued income trusts and holding them privately and not be subject to the 31.5% tax, nor the arbitrary growth restrictions. These guys must be really great money managers. Just like shooting fish in a barrel.

Not satisfied with having the playing field tilted entirely in their favour by the income trust tax, these guys continue to want more in the name of their plan members. They keep crying to their plan sponsors, our very government to grant them ongoing benefits. Teachers’ is in effect arguing to its own plan sponsor, the Ontario government to turn a complete blind eye to the fact that acquiring more than 30% of BCE. Either directly or indirectly, is against its own governing regulations. So who does it got to for permission? The Financial Services Commission of Ontario.

To ameliorate the $35 billion loss sustained by income trust investors what does Flaherty do? He rubs salt in the wound, by granting income splitting. Foe whim you might ask? You guessed it. Pensioners. read: the 25% of Canadians who belong to pensions, namely those least likely to have been adversely affected by the income trust tax, however including all who belong to Canada's domestic sovereign wealth funds.

Meanwhile we have OMERs lobbying to have these restrictions removed. As the Toronto Star reported “the managers of the pension plan for the province’s police, fire and city workers want more power to push companies around. Managers want to assure a steady flow of cash from the $51.5 billion OMERs to supplement contributions from members and taxpayers.”

There we go again, falsely invoking the plan members to get special government dispensation. And invoking their retirement need as being of paramount importance.

Canadians need to awaken to the reality that the capital markets are a zero sum game. Whatever concessions are granted to these sovereign wealth funds are opportunities taken away from others. Why should sovereign wealth funds get to own income trusts and not pay the 31.5% tax. Why should sovereign wealth funds get to own more than 30% of a given corporation? After all, only 25% of Canadians belong to pension funds and 75% do not. Members of pension plans already have the better deal. Why would the 75% allow the 25% to have an even better deal than already exists.

These sovereign wealth funds that go by the names of Teachers’, OMERs, Caisse, BCMC, PSP and the rest of them have to go back to earning their money the old fashion way like the rest of us and not through special tax carve outs and wholesale freedoms to do for themselves and their government plan sponsors what they falsely portray to be doing in the name of their plan members.

Enough already. Teachers’ and the rest of them have to learn its not nice to be the capital market’s schoolyard bully and government’s teachers’ pet, all at the same time.

Meanwhile US legislators have awakened to the fact that these government sponsored pension plans from Canada are nothing more than sovereign wealth funds and have begun treating them as such as in the case of the CPP. The Globe reported that:

“In spite of the CPPIB's protestations, House subcommittee chairman Luis Gutierrez introduced the organization as a sovereign wealth fund.

Likewise, U.S. Federal Reserve Board general counsel Scott Alvarez told the subcommittee that, “broadly speaking,” a sovereign wealth fund is any investment fund owned by a national or state government.”

To wit: OMERs, Teachers',PSP. CPPIB. Caisse, BCIMC, AIC and whomever else that acts as sole agent for a provincial or federal government in Canada


Dr Mike said...

"in the public good".

What a sidesplitting comment.

Is this not the same reasoning Jim Flaherty used behind the Tax Fairness Plan??

Is this not the same reasoning they used when they dragged out women & burned them as witches or when they carried-out book burnings.

It is just a line to cover-up a multitude of sins & my oh my , these people are sinners.

Their crime is against the people , the very people who placed them in a position of power .

The problem is , as it always has been , who is there to help us.

The answer is , as it always has been , we are never sure who we can trust to help.

All we know right now it is not Jim Flaherty or Stephen Harper.


Truth in Trusts said...

Hypocritical bunch these people from the Ontario Teachers Pension Plan (OTPP).

On September 8, 2005 the OTPP fought to "continue to advocate on behalf of teachers and other working Canadians to ensure there is no discrimination against pension plans and RRSPs as participants in the Canadian capital markets." This statement was made with respect to income trusts when OTPP was going to be limited in their income trust investments.

On November 1, 2006 with no restrictions on their income trust investments they said "The Ontario Teachers’ Pension Plan has advocated for a taxation policy on income trusts that does not discriminate against pension funds, and we are pleased to see that this is the case with the government’s announcement yesterday (October 31, 2006)." Oops with no restrictions in place they have forgotten about "other working Canadians to ensure that there is no discrimination against ... RRSP's in the Canadian capital markets."

Mary the golfer said...

Jim Flaherty says :

Pension Funds GOOD.

Those useless old coupon clipping little guy on the street trust investors BAD.

Pension Funds 1

Little guys 0

Appears it sucks to be us!!!!!

Mary P.

Robert Gibbs said...

Just goes to show ya, once again, that people or groups with huge sums of money or power are able to suck and blow at the same time.

I'm sure O'Flaherty has his huge sinister leprechaun grin on his face as he looks at his buddy's pot 'o gold.

Ahhhh.... those lucky charms of his.

Robert Gibbs said...


Flaherty's fallacy on Ontario taxes

Mar 09, 2008 04:30 AM

When times are tough – and they certainly are getting tougher in Ontario right now – the first obligation of government is to sustain the services and programs on which people depend: health care, education, social assistance and job training, to name just a few.

When every dollar is stretched to the limit, as it is likely to be at Queen's Park in the coming year, the last thing the province can contemplate is any kind of tax cut. That is why federal Finance Minister Jim Flaherty's endless tirade about the level of business taxes levied by the Ontario government is so mendacious.

Flaherty's attack on Premier Dalton McGuinty's Liberal government is as partisan as it gets. He's using taxes to pin the blame on McGuinty for the slowdown that is hitting Ontario. The real culprits are a too-high dollar, soaring energy prices and recession in the U.S.

That said, it is true that business taxes are higher in Ontario than in many jurisdictions with which it has to compete. The province's general corporate tax rate is 14 per cent, compared, for example, with 11.4 per cent in Quebec and just 10 per cent in Alberta and British Columbia.

Ontario businesses also pay the 8 per cent provincial sales tax on the inputs they buy. Although most Ontarians think of the PST as a consumer tax, 40 per cent of its revenue comes from the business sector. In Quebec, where the provincial sales tax is harmonized with the GST, businesses aren't taxed on their inputs.

But if it is to cut business taxes and keep its budget balanced, the Ontario government will have only two options: raise other taxes, such as the personal income tax, or cut program spending.

Surely tax-fighter Flaherty doesn't endorse a hike in other taxes by Queen's Park. Nor does he favour budget deficits. So, he must believe the province should cut its spending.

But there's a major problem with that approach.

According to a 2006 study by the TD Financial Group, Ontario ranks dead last among provinces in per-capita government spending. It also stands 10th in spending on the all-important area of education.

But how can it be that the province with one of the highest taxes on business is the lowest when it comes to spending?

For the answer to that paradox, one need only look at Flaherty's own books. In addition to the taxes they collect, all provinces get revenue in the form of transfer payments from the federal government. This year, Ottawa will give the provinces and territories $46 billion.

In last year's budget, Flaherty provided details on the recipients of that money. Here's what the broken-down numbers say:

Although Ontario taxpayers contributed roughly 40 per cent of the cash Ottawa gave to the provinces and territories last year, Ottawa returned only about 25 per cent of that cash to Ontario.

And here's what those numbers mean:

Through their federal taxes Ontarians are either paying for the higher levels of per-capita spending in other provinces or they are paying for the lower provincial business taxes in other provinces – or both.

Flaherty has a lot of nerve telling McGuinty that he should lower business taxes in this province when Ottawa takes so much more money out of Ontario than it puts back in. For 2005, the most recent year for which numbers are available, the excess of Ottawa's take from Ontario over what it pumps back in was equivalent to 4 per cent of the province's GDP. With that 4 per cent drag on its economy, it is hard to see how Ontario is supposed to compete with jurisdictions that do not experience anywhere near that kind of burden.

Flaherty could have made it much easier for Ontario either to lower its corporate income tax or to harmonize its sales tax with the GST had he transferred to the provinces one percentage point of the GST last fall. Instead, Flaherty simply cut the GST by a percentage point, which did nothing for the competitiveness of Ontario or Canada.

Given his role in Ontario's predicament, he is in no position to lecture McGuinty now.

Dr Mike said...

Flaherty was a poor Provincial Finance Minister.

Flaherty is a poor Federal Finance Minister.

Obviously , the Conservatives picked the best of the "lot" for the job.

Sure does not say much about the rest of the "lot".

1 + 1 = 3.

Dr Mike.

Anonymous said...

Wall Street Journal cites Teachers' as a sovereign wealth fund

March 20, 2008, 9:15 am
Sovereign Wealth Funds and The Problem of Self-Interest
Posted by Deal Journal
Are sovereign wealth funds a help to private equity investors, or a growing threat?

In these tight-fisted times, private equity firms have learned to love the rich flows of capital that come through sovereign wealth funds; many SWFs are big investors in private equity funds and have helped drive the fundraising boom of recent years. But those same sovereign wealth funds are putting their own money into deals, which means they could also be growing competitors to private equity firms.What few people know is that SWFs including the Government of Singapore Investment Corp. and Dubai Holdings, also have their own private equity arms that put money directly into deals. Singapore has GIC Special Investments, and Dubai Holdings has Dubai International Capital. More SWFs are expected to launch their own buyout units to get more profits directly without funneling rich management fees to private equity firms.

Which raises the question: Who will the SWFs first shop the deal to when they come across a buying opportunity? Their own private equity arms, or the outside funds they have long invested in?

A lot of money is at stake on the answer. Sovereign wealth funds are huge - $3 trillion in total assets by some estimates - and they’re setting their sights increasingly overseas. Of the $106 billion in cross-border investments made by SWFs since 1998, $99.3 billion were made after 2005, according to research firm Dealogic.

When the SWFs directly invest money in companies, they do some sizeable deals — though most of the larger transactions were done outside the U.S. Dubai International Capital, for instance, acquired health care services company Alliance Medical Ltd. of the United Kingdom for about $1.2 billion last year, and bought U.K. hotel chain Travelodge Ltd. for roughly $1.3 billion a year earlier.

Of course, it’s not the first time that we’ve seen these kinds of potential conflicts. Some Canadian pension funds have launched direct buyout arms. The $106 billion Ontario Teachers’ Pension Plan, for instance, is leading the $48.5 billion deal for BCE Inc., the largest buyout to date ever announced.

“PE funds and their investors are quite adept at handling potential conflicts,” said Yash A. Rana, a partner with Goodwin Procter LLP. They can co-invest in deals, he added, just as Ontario Teachers are teaming with Madison Dearborn Partners and Providence Equity Partners in BCE deal. “They recognize that nobody would win if they just bid up the price against one another,” Rana said.

Of course, given the backlash that has already materialized in some quarters against foreign investors in the U.S., the sovereign wealth funds are unlikely to act aggressively. “They consider all kinds of collateral consequences very very seriously,” said Bob Profusek, head of M&A at law firm Jones Day.

Anonymous said...

Teachers is a sovereign wealth fund. What does it say about us when our state sponsored funds gain control of the media?

Anonymous said...

Yes, Teachers’ is a sovereign wealth fund representing the financial interests of the Gov’t of Ontario and invoking its 271,000 plan members at every bleeding heart opportunity to vacuum up all the investment opportunities that are otherwise available to schmucks who aren’t plan members. Teachers’ took $8 billion of capital, half from the US to vacuum up $32 billion of average Canadians, and widows and orphans investment in BCE. Meanwhile they can buy public income trusts and hold them privately and not pay tax under the Flaherty Carve Out Rules devised solely to buy the pension plans silence on the oppression of the millennium. They need to learn what a level playing field is, and stop being the capital markets schoolyard bullies. I am not buying their sugar and spice and all things nice, self interested nonsense.

JC said...

The pension sham