Monday, December 20, 2010

Pension meeting, many questions

As this pension issue heats up today, let's look first at Flaherty on CPP reform, a bit of then and now. Here's how it was in the summer:
Speaking in Charlottetown, P.E.I., where he’s meeting with his provincial counterparts, Finance Minister Jim Flaherty said the “substantive majority view” among his provincial colleagues was that the hikes were needed.

“We agreed to consider a modest, phased-in and fully funded enhancement to defined benefits under the CPP in order to increase coverage and adequacy,” said Flaherty. “We were not unanimous, but the substantive majority view was that we should proceed.”
A "substantive majority" was good enough then to go ahead with CPP reform. Those were pretty strong statements from Flaherty. Also:
"A couple of ministers need to go back to their governments to have further discussions on that option, but we are going to go ahead and mandate our senior officials to work collaboratively on technical and implementation issues … and to complete this work by the fall," Flaherty said.
More of the kind of statement that created expectations on the part of Flaherty and the federal government. Now, things have changed in terms of the required substantive majority:
...the finance ministers of B.C., P.E.I., Nova Scotia, New Brunswick, Manitoba and Ontario issued a joint statement Sunday asking Flaherty to keep CPP expansion on the table alongside the private-sector changes he's proposing.
...
"The letter, if it is a letter, from the six provinces just confirms what I said Thursday, that there is no consensus on the issue," Flaherty told reporters.
What a turnaround and abdication of leadership at the same time.

In terms of the substance, in the summer, the private version of pension reform was raised and made part of a three-pronged approach to pension reform that everyone was getting on board with (i.e., a private plan initiative, financial literacy plus enhanced CPP). Now, however, Flaherty's upset the balance and is essentially walking away from the CPP enhancement, focusing on the private plan option. All of the talk from the summer, about working well with the Finance Ministers, the sincere desire to work together, all gone. So that's where we are, with a credibility-challenged Finance Minister going into these meetings skewing all discussion towards a private option.

Flaherty is relying upon Alberta and Saskatchewan's opposition along with Quebec's. Here's the Quebec Finance Minister:
“This is not the year to add on to the burden of employees,” Quebec Finance Minister Raymond Bachand told The Globe and Mail in Calgary on Sunday, pointing to the continuing fragility of the Canadian economy. “These are the kinds of changes that you do once in a generation.”
Boy, there are all kinds of things we're prohibited from doing these days due to the great spectre of economic uncertainty. The Harper government likes to tell us most days that Canada is doing well, a model of stability in a sea of uncertainty. Yet when it comes to pension reform, or, say, elections, the no-fly zones suddenly appear. Exactly when the magic moment will be in coming years when the sea of financial calm sets upon us is anyone's guess. The baby boomer retiree generation isn't getting any smaller in the meantime.

Besides, doesn't the argument from the Quebec Finance Minister and Flaherty et al. cut both ways? These past few years of uncertainty are exactly why you consider big changes. Because we've seen that things that are too big to fail can in fact fail. In Canada, somehow we think we are exempt from that proposition and can put off big decisions to future happier times.

Why the big turnaround from Flaherty and Harper? The prospect of CPP premiums going up is a likely hitch for the Harper government with an eye on an election. Second, the choice to shift dollars into private institutions rather than expand the CPP is a natural ideological choice for these conservative striped governments.

Yet there will be questions. How will these private plans solve the problem with Canadians not saving enough? Voluntary private options are not likely to change that dynamic. Above all, is this the choice Canadians want to make with pension reform? Going the private route versus bolstering the trusted CPP? Could make for some interesting political debates going forward.

Here is the Draft "Framework for Pooled Registered Pension Plans." A few preliminary questions on it follow.
Framework for Pooled Registered Pension Plans

First off...9 pages? This seems surprisingly short. As for the details...

The administrator of the plan (p. 3-4) will owe a fiduciary duty to plan members. Do they mean in the same way that the Nortel trustee overseeing the disability funds owed a fiduciary duty to those employees? That didn't work out so well.

The requirements for plain language disclosure (and the choices members are to make upon enrolment) (both p. 4) seem to presume a level of investment sophistication that may be challenging to overcome. Yes, disclosure is necessary and good but some of the items there, including the rights to portable plans as people change jobs and the exercising of different options in that eventuality would require some sophistication. Then there are such routine disclosures as notice of amendments to the plan, for example. It doesn't really sit well following what we've seen with the sub-prime mortgage debacle in the U.S. where people just did not understand what deals they were getting into. Where are they going to get help? The employer? The bank? The insurance company?

The "Responsibilities of Employers" section (p. 5) will raise questions about employer contributions, which appear to be optional and employers' residual administration of these plans, including the very important task of "collecting and remitting contributions to the plan."

The "Individual Members" (p. 6) of these plans, i.e., the self-employed and those who work in companies not offering a plan but who individually opt into one, will have the burden of those administrative tasks an employer would otherwise bear, e.g., deciding on a level of contribution and remitting contributions. The highly disciplined among us would be fine with that. Many others, not so much.

An employer has the ability to move to a new plan at its discretion. Or, it can cease offering one altogether. (p. 7) There seem to be options in the draft for what happens with employees when an employer chooses a new plan. It doesn't seem to say what happens when the employer just ceases offering a plan. (?)

Just a few questions for starters, sure there are lots more to be asked arising out of that document.