Saturday, November 1, 2008

Harper has zero credibility on this issue

Harper and Flaherty (Jack Layton too) have zero credibility if they attempt to champion the cause of pensioners and protecting their savings. After all, Harper’s rationale for nuking $35 billion in Canadians' retirement savings was a total and complete lie.

Maybe the solution for the pension funds in dealing with their unfunded liabilities is to follow Harper’s lead on income trusts, and simply issue statements to their pensioners that are all blacked out, as Harper did when “proving” his thesis that income trusts cause tax leakage. Who would know? The press would say nothing whatsoever. People like DeCloet of the Globe are big fans of blacked out documents when it comes to accountability on matters financial. Jim Stanford of the CAW too.

Meanwhile I thought we weren’t supposed to become a nation of coupon clippers? Better a nation of clip joint politicians and syncophant reporters.

Mr. Flaherty, it's time to fix pensions

Globe and Mail

November 1, 2008

Mike Zafirovski must rue the day he took the headhunters' call. In the three years since he took over - has it really been that long? - almost nothing has gone right at Nortel Networks. When he arrived, the accounting was broken. The business is still broken. And now, courtesy of the Great Meltdown, you can add pensions to the litany of financial wounds.

The crisis on Wall Street could hardly have come at a worse time for Nortel. Why? Because Sept. 30 is the date, every year, on which the company measures the health of its pension schemes. When this year's tallies are done, it's going to be ugly.

The bad news is that at the start of this year, Nortel's plans were already short by $1.2-billion (U.S.). The worse news is that 53 per cent of the assets were in stocks, which have been annihilated. So the pension hole has become a cavern - one that will have to be filled with cash that the distressed company would rather use for other things. Like surviving, for instance.

Is Canada's private pension system in crisis? If it wasn't before, it is now. Good. There's nothing like an unfolding catastrophe that hits the Boomer generation to get the politicians to wake up. They helped create this mess; now they can do something to solve it.

This week, Finance Minister Jim Flaherty promised some relief. Most likely, the feds will give companies more time to make up their pension shortfalls - 10 years instead of five, for example. That's fine, but it's a Band-Aid, a short-term answer. If they want pension plans to be strong enough to withstand a financial panic, they'd better start by asking: How did we get here in the first place?

Let's briefly consider Nortel, BCE and Bombardier, three old, large Canadian companies with monster defined-benefit plans. Today, each one surely faces a multibillion-dollar pension shortfall. But each one also had a deficit going into this year's meltdown. Remember, the S&P/TSX composite went up for five successive years between 2003 and 2007; the Dow Jones industrials rose in four of those five years. For most of that period, the bond markets were also healthy - low inflation, few defaults on corporate bonds.

So why were all three companies' pensions in the red at the end of this great bull market? In part because it makes sense for businesses in Canada to run chronically underfunded pension plans. Or, to put it another way, the federal and provincial governments practically punish companies that try to build a pension cushion during the boom years.

Mr. Flaherty's department is a big part of the problem. Supposed you owned a car parts factory that offered a defined-benefit pension for its workers (that's the kind of plan that promises a set payout when the employee retires). The actuaries calculate the plan's liabilities at $200-million. Once the pension fund gets to $220-million - a surplus of 10 per cent - you aren't allowed to put another dime into it. The federal Income Tax Act forbids it.

The rationale is that it prevents businesses using their pension plans to shelter their income. But the end result is stupid. When profits are high, companies stop contributing to their pensions, lest they breach the 10-per-cent rule; when the economy goes sour - like right now - and big deficits return, they're forced to come up with more cash when they can least afford it.

The C.D. Howe Institute, among others, has suggested raising the cap on surpluses to 25 per cent. But that won't accomplish much unless other changes are made to federal and provincial pension laws. Let's go back to our fictional car parts factory, with the $200-million pension liability and $220-million in assets. Who owns the surplus? The employees (in most instances). All right, suppose the stock market plunges and the assets shrink to $180-million. Who owns responsibility for the deficit? The company does.

One side gets all the risk, the other gets the benefits. Claude Lamoureux, the recently retired CEO of the Ontario Teachers' Pension Plan, calls this "the No. 1 issue" affecting the future of the private pension system. It's also why companies are ditching their defined-benefit schemes as quickly as they can, or at least preventing new employees from joining them. Too much risk, too expensive. Nortel, trying to stem the bleeding, kicked U.S. and Canadian employees out of its defined-benefit plan in January, replacing it with a cheaper fixed-contribution one. Roughly one-fifth of private sector workers enjoy defined-benefit plans; four-fifths of public sector workers do.

If the trend continues, before long the only people who will have guaranteed pensions from their employers will be civil servants, teachers and others who work for government. (That's not my opinion; the Canadian Institute of Actuaries said so last year.)

Pensions as an exclusive perk for bureaucrats: Is this really what Mr. Flaherty wants? How about the provincial finance ministers? If not, they should get to work on fixing it.

1 comment:

Dr Mike said...

The last guy I ever want is my corner is Jim Flaherty.

The second last is Mark Carney.

The third last is ...........

The last guy I want writing about it is Terry Corcoran.

The second last guy is Derek DeCloet.

The third last is .......

And as far as papers go ......

My corner is a lonely place!!!!!!