And why would Bank of Canada Governor David Dodge say such nice things about Defined Benefit Pension Plans? After years of the right wing attacking these plans in favour of defined contribution plans; RRSP's. Because they are the real source of capital investment for P3's
Because they generate more capital, faster, and thus can be used for investment purposes. In other words because OMERS, Ontario Teachers Pension Fund, CPP, the new Alberta AIM fund, all of them are now major contributors to the economy as investment funds, which are creating a new form of P3; public pension partnerships.
Once these public sector pension funds were freed from state restrictions in investing they have created a trillion dollar investment market. Further this has allowed the state to benefit by not paying its share. Thus giving the government of Canada more surpluses, along with their looting of EI.
While the private sector imitated the Government in failing to invest their required amount in their defined pension funds, leading them to funding crisis much as the Alberta Government faced a decade ago with its public sector pension funds. Which it attempted to privatize (put it under self governance) but once they discovered that allowing them to invest in the market made them profitable and they paid off their debt they gave that idea up. Today a decade later they finally discover what OMERS and the Ontario Teachers Fund have been so successful doing, becoming private venture capital funds, and created the new AIM Fund.
In the private sector we have seen the same Peter Pocklington style use of workers pension funds to bail out the corporation. Pocklington purchased Gainers in Edmonton to access not only the business capital but the unionized workers pension funds to bail out his other businesses, like the Oilers, in a barely legal ponzi scheme that saw him bankrupt both and leave the city in disgrace.
When pension fund bail outs have been successful in the private sector it has been because the company was Canadian, unionized, and formerly a crown corporation like Air Canada.
Where they have failed has been in the U.S. such as in the case of Delphi, where the unionized workers pension funds are looted when the company uses their failure to invest in them as an excuse to declare bankruptcy and hand over their pension responsibilities to the U.S. government in a perverse appeal to state capitalism to bail them out.
This is the reason that both the Canadian and American governments want workers to work longer, so as to have more liquidity in the CPP in Canada and Social Security in the U.S. Conservatives Want You To Work Longer
I am reproducing these articles because they are the most informative and because they will eventually disappear behind locked subscription walls.
And while Dodge says nice things about Defined Benefit Plans he also wants to deregulate them, including allowing employers to retain their surpluses, which shortchanges worker, something a former Liberal PM benefited from.
Dodge says defined-benefit plans way to go, with changes to improve them
By JULIAN BELTRAME The Canadian PressBank of Canada calls for private pension plan reforms
Governor Dodge wants clarity. Suggests giving plan sponsors more flexibility to cover pension fund shortfallsERIC BEAUCHESNE,
CanWest News Service
Published: Friday, May 11, 2007
Bank of Canada governor David Dodge is calling for widespread reforms to deal with the country's private pension fund crisis, including the elimination of tax penalties and other rules that discourage employers from building up pension fund surpluses, as well as a greater awareness among employees of the risks and costs of enriching their retirement benefits.
"First, we should reduce the disincentives for sponsors to run actuarial surpluses in good times that will offset actuarial deficits in other periods," Dodge told a pension conference in Toronto yesterday. "More clarity regarding legal ownership of surpluses is needed, so that the sponsor that owns the risks also owns the benefits from taking those risks."
Dodge focused on measures that would make defined benefit plans - seen as superior to defined contribution plans but which employers have been abandoning as too risky - more viable.
Generally, in defined benefit plans, employers guarantee employees a pre-set level of benefits, while in defined contribution plans the employees bear the risk as the level of their benefits is based on the investment returns the plan earns.
"An effective defined benefit pension system is a tremendous asset for individuals, for employers and for our society as a whole," Dodge said. "Putting these plans on a sustainable footing involves strengthening the legal, regulatory, accounting, actuarial and economic frameworks."
Dodge suggested that defined benefit fund surpluses should belong to employers because they face the risk of having to cover any shortfall, and that existing tax penalties on fund surpluses should be eased.
"Given the significance of our pension system, policymakers in Canada need to keep working on improving its operation," Dodge told the pension conference.
His comments follow reports that the worst of the recent pension crisis has eased, thanks to healthy returns in the stock market and extra payments by employers to cover pension fund shortfalls.
Dodge suggested giving plan sponsors more flexibility to cover pension fund shortfalls, and letting smaller companies pool costs and risks to form multi-employer defined benefit pension plans.
The governor also called for greater sharing between employers and employees of the costs to pension funds from increases in longevity, and that the costs and risks of any enriching of plan benefits be made clear to both corporate shareholders and workers.
"These changes would give sponsors the appropriate degree of flexibility needed to manage risk effectively," Dodge said. "Ultimately, Canada can have a better-managed pension system that is good for members, good for employers, good for the economy and good for Canadian society."
While Dodge noted that the benefits of pension plans to workers are obvious, he said they also are good for employers and society.
© The Gazette (Montreal) 2007FULL TEXT-Speech by Bank of Canada Governor
TORONTO, May 10 (Reuters) - The following is the prepared text of a speech by Bank of Canada Governor David Dodge to be delivered on Thursday to the Conference Board of Canada's 2007 Pensions Summit.
A Sound Pension System - Handling Risk Appropriately Good afternoon. I'm happy to be here to talk about the importance of Canada's pension system. It goes without saying that a sound system of private pensions is important from the perspective of pensioners who rely on a given plan for their retirement income. For firms, a pension plan can help to attract and retain staff, and so the business community also counts on a sound pension system. And as a central banker, I know that a sound pension system is important from the perspective of economic and financial market efficiency. Given the significance of our pension system, policy-makers in Canada need to keep working on improving its operation. Ultimately, it is crucial for all Canadians that our pension system function as well as possible. But what is it that makes a system of private pensions function well, or not? As I see it, a key to answering this question is understanding how pension plans deal with risk, in all of its many forms. So today, I want to spend some time discussing private pensions and risk, and suggest what needs to be done to make sure that those who have to bear risk also have the right incentives to deal with it in the most appropriate manner. I will focus on who is best placed to bear risk, and on how risk management can be better supported. Risks and Challenges Let me start with a fundamental question: Why do people save for their old age? Essentially, people save during their working years so they can retire at some point and not suffer a precipitous drop in income and living standards. Economists might put it somewhat less elegantly, saying that people save in order to smooth their lifetime consumption. In the absence of any kind of pension system, individuals, businesses, and society as a whole would all face a number of challenges and risks. I want to spend a few minutes talking about the challenges and risks from these three perspectives, beginning with individuals. First, individuals without a pension plan would have their personal savings as their only source of retirement income, aside from income from the publicly funded Canada Pension Plan/Quebec Pension Plan and the Old Age Security/Guaranteed Income Supplement. And so, individuals would naturally be exceedingly cautious with their investments, particularly as they approached retirement age. In short, individuals without pensions would likely be too risk-averse with their savings to generate a sufficient rate of investment return. Second, individuals can recognize that they lack the expertise to handle their investments in the most effective way, and so will try to acquire this expertise. This could come by way of an investment adviser, or by investing their savings in managed, diversified retail investment vehicles such as mutual funds. The challenge posed by this approach is that it can be costly, since individuals outside a pension plan have to purchase investment advice and ongoing funds management retail, not wholesale. Third, individuals without a pension plan face market risk in a couple of ways. Market conditions could be such that at the time of retirement, the value of their assets could be abnormally low. Or interest rates could be abnormally low at the time of retirement. In either case, the person would need to spend a much greater amount to purchase an annuity or other guaranteed stream of income compared with a period when market conditions were more favourable. The fourth point is related to the third. Sellers of annuities have to deal with the risk that those individuals who expect to live much longer than actuarial tables would suggest are the ones who buy annuities. To deal with this adverse selection problem, sellers compensate for the risk by charging significantly more for the annuity. In other words, the cost of an annuity is much greater for an individual than it is for members of a group. Both of these last two points demonstrate that without a pension system, individuals would need significantly higher levels of savings to ensure adequate funding for their retirement. And all of these points I raised demonstrate that pensions generate enormous benefits by making it much simpler for individuals to successfully save for retirement. But while the benefits of pension plans are obvious for individuals, let's not lose sight of the benefits for businesses and for society as a whole. From the perspective of business, pension plans are typically thought of as a recruitment and retention tool. But historically, pensions were also the way that good employers helped workers to save so that they could avoid penury in old age. And with a pension plan, older workers had the ability to retire, and thus did not need to keep working well beyond the point of their greatest productivity. As for society as a whole, pensions provide a couple of important benefits. First, no society wants to see large numbers of its senior citizens relying entirely on government transfers, although there is fairly universal agreement across most countries that it is desirable to have some degree of public income support for people in their old age. Beyond that, however, a well-functioning pension system is an important source of the long-term risk capital that is essential to finance growth. Mitigating Risks: Defined-Contribution Plans Most of the challenges and risks I've mentioned can be mitigated, to a greater or lesser extent, through the pooling effect that a pension plan provides. Of course, different kinds of pension plans deal with risks in different ways. First, let me briefly discuss defined-contribution plans and the way they deal with risks. A defined-contribution plan mitigates, at least partially, many of the challenges and risks I mentioned for individuals. For example, the costs of funds management and investment advice are pooled. Further, pooling helps to mitigate the risk that individuals will not have saved enough to purchase an appropriate annuity.
Fewer fear it will be long lasting
ERIC BEAUCHESNE, CanWest News ServicePublished: Thursday, May 10, 2007
Nearly two-thirds of senior executives believe Canada still has a corporate pension funding crisis but a lot fewer fear it will be long-lasting, according to a survey to be released Thursday at a pension conference in Toronto.
The percentage of chief financial officers who feel the pension crisis will be long-lasting has slipped below half to 48 per cent this year from 61 per cent last year, and the proportion of senior human resource executives who see it as long-lasting has fallen to 40 per cent from 67 per cent, the survey found.
The results are being released at a Conference Board of Canada pensions summit in Toronto at which Bank of Canada governor David Dodge will give his perspective of how to manage pension risks.
"Compared to one year ago, the sense of crisis appears to be abating, but chief financial officers are still concerned about both the volatility and the current level of pension expense," said Gilles Rheaume, the board's vice-president public policy. "In an environment of labour shortages, pensions ... are considered a very valuable recruitment and retention tool." The lower level of concern likely reflects better investment returns and shrinking funding deficits, added Ian Markham, a pension specialist with Watson Wyatt, which conducted the survey of 141 employers.
However, he noted that employers are still pursuing reforms in both pension fund investment strategies and the design of pension plans.
Forty-one per cent of employers with a defined benefit plan, seen as the most attractive plan for attracting and retaining employees, indicated that they had made some reforms over the last two years or were planning to do so over the coming year.
Among private sector employers, the most common reform has been to convert to a defined contribution plan, under which the level of pension payments is determined by investment returns, from a defined benefit plan, under which an employer must make up any shortfall in a fund to cover the cost of paying an agreed upon level of benefits.
That's despite the fact that employers strongly agree that a defined benefit plan is more attractive when trying to recruit or keep employees, the report noted.Firms jettison defined-benefit pension plans
May 10, 2007 04:30 AM
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