Yves Fortin comments on the recent bizarre article by Jack Mintz, he of forked tongue amd hypocritical logic:
Mintz now laments the low return on pension fund investment and fears this will threaten their ability to pay adequate pension to retirees. But this is the same guy who pushed Harper and Flaherty to destroy the sole high yield investment vehicle in Canada under the still unproven pretense of tax leakage, namely the income trusts. The destruction of income trusts has dealt a very severe blow to retirees and pension funds. The economic crisis is amplifying the destructive effect.
Moreover while Mintz often decries (correctly) the gross unfairness of double taxation of dividends, the Harper tax on income trusts that he encouraged, is making the problem even worse as it extends double taxation to trust distributions received by pension funds and RRSP/RRIF. In a similar manner, Harper and Flaherty often say (correctly) that we are paying too much tax. But their tax on income trust distributions constitutes a net tax increase and is making the problem of excessive taxation and unfair double taxation worse. Pensions funds and retirees are getting a double whammy.
The attack on income trusts is a total disaster for retirees and people nearing the age of retirement. Moreover , it could not have been introduced at a worse time for the Alberta oil patch where the oil and gas trusts are playing a very significant economic and financial role And then you have a hord of "analysts", "experts", "journalists", "professors" and politicians who regularly express deep concern about the rapid aging of the population and the financing of retirement, and in the same breath applaud Harper's destruction of income trusts. Are we hellbent on self destruction in this country?
Jack Mintz: The unbearable heaviness of pensions
Posted: January 23, 2009,
The average return on investments in bonds and equity is not sufficient to fund overly generous defined pension plan benefits paid to retirees By Jack M. Mintz
An issue quietly making it to the front burner as this global recession takes its toll on the Canadian economy is the viability of company defined benefit plans. These plans, providing workers with an annual pension — typically 2% of the average salary in their last five years times years of service — are becoming an albatross for many cash-constrained companies that are now facing a large funding shortfall.Some businesses might be pushed towards bankruptcy since financial institutions would be hard pressed to lend money to cover pension deficits. Federal and provincial governments are clearly worried since jobs could be lost, aggravating an already bad economy.
Recent financial distress is the current source of the problem. As one test, a defined benefit plan is in deficit on a solvency basis when its liabilities — the discounted (time) value of pension benefits paid to workers — are more than the market value of its assets.
This year’s market has blown up deficits to new highs. Not only have asset values declined sharply but the government bond rate used to discount future pension liabilities to today’s values has dramatically fallen as the Bank of Canada makes every effort to bolster the economy.
To soften the impact of pension plan deficits on contribution requirements, Jim Flaherty, federal finance minister, announced in his beleaguered December economic statement the extension of solvency funding payments from five to 10 years as well as some other proposals.
And just this month, a new federal study of pension plan solvency has been announced. Several provincial governments are expecting to take action. Quebec has been first with its promise to take over the management of insolvent private pension plans with a five-year guarantee of payments to pensioners.
An underlying question is whether defined benefit plans are needed. After all, a company’s promise to provide a pension at the end of a person’s life seems a bit odd these days with employees frequently quitting one firm to go elsewhere for new opportunities. Pension plans may be transferable to other plans or rolled over into a locked-in RRSP but the terms for withdrawals are less flexible compared to an ordinary RRSP.
Where defined benefit plans become important to workers is with respect to risk. Fully funded defined-benefit pensions paid to employees generally do not depend on the investment experience of the fund. Instead, employers, who are in better position, absorb investment risks inherent with pension funding. Risks could be avoided substantially if all retirement assets are invested in safe bonds but contributions to retirement savings would then need to be much bigger. The fact that employers are willing to take on risks through defined benefit plans is the main benefit to workers.
However, in recent years, legal and regulatory decisions have resulted in extra risk costs imposed on employers who became responsible for the deficits but not the surpluses that could be given to employees upon partial windups. These surpluses could arguably be used to fund future pension benefits, given the uncertainty inherent with actuarial valuation. Many defined benefit plans have therefore operated with small deficits for this reason.
Thus, with the recent economic shock to the Canadian economy, defined benefits typically running at small deficits are now in the tank. To solve the problem, only three actions can be taken – increase contributions, raise the interest rate to discount future pension liabilities or reduce benefits.
Employers and employees are pushing to relax regulations, such as by extending periods taken to fund the pension plan, reducing the solvency ratio (assets to liabilities) to a level such as 85%, or using a higher interest rate to discount future liabilities to avoid triggering payments to make up pension plan shortfalls.
These measures to relieve businesses from making larger contributions simply shift risks to the future without really solving the funding problem. The real message in all this: The average long-run return on investments in bonds and equity, net of transaction costs, is not sufficient to fund overly-generous defined pension plan benefits paid to retirees.
Other approaches have been considered. In the past decade or so, businesses have shifted from providing defined benefit pensions to other forms of retirement savings such as defined contribution pension plans and RRSPs held by workers. In both cases, the pension received by workers is based on the risky investment performance of the plan. Unless the assets are held in relatively safe bonds — thereby making them more expensive to fund retirement income — employees face significant risk depending on investment performance.
Unfortunately, new retirees are discovering how important risk is with current market conditions. It is not fun to find accumulated wealth being hammered by today’s stock and bond markets.
Some are also calling for government pension fund guarantees, government sponsorship of new funds or hikes in Canada/Quebec pension fund payments and payroll taxes.
These solutions only offload risk onto someone else. Of course, this has been the problem in financial markets in the past 15 years, with people thinking that risk could be avoided by spreading it through global financial markets. Instead, today we look at measures to pass risk to governments and taxpayers.
The one solution that could help defined benefit plans has escaped debate — lower pie-in-sky benefits. There is no free lunch.
Jack M. Mintz is the Palmer Chair of Public Policy, School of Policy Studies, University of Calgary.
Saturday, January 24, 2009
Posted by Fillibluster at 10:51 AM