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
Sunday, March 9, 2008
Posted by Fillibluster at 1:00 PM