Ontario to Pensions: Go Big Or Go Home
Consolidation, benefits cuts part of budget.
BY Scot Blythe | March 27, 2012
Taking his cue from former TD Canada Trust chief economist Don Drummond’s report on reforming the public sector, Ontario Finance Minister Dwight Duncan has a presented a five-year budget plan that may see public pension benefits cut, civil servants paying more for their pension entitlements and a consolidation of small public sector pension plans into larger entities.
The proposals come on the heels of a report in The Economist noting the success of Canadian public sector plans – at least their investment prowess, particularly in non-traditional assets — which the Ontario budget cited. Despite that prowess, however, the world leader in the pension league tables, Ontario Teachers’ Pension Plan, faces a $17 billion shortfall.
To shore up public-sector plans, Ontario has proposed benefit cuts rather than higher contributions that would hit younger workers particularly hard. The budget notes that some jointly sponsored plans see civil servants paying 13% of wages for pension benefits. Rather than hiking that contribution, Duncan’s budget proposes that, in plans with a funding shortfall, future benefits be reduced, although in exceptional circumstances, contribution increases could be considered.
But the contribution increases come with a caveat. Public plans must move to a 50/50 split between employees and taxpayers. Duncan was emphatic on that point. “We do not think it is fair to ask a single mother who earns $14 an hour and who has no pension plan, to pay even more of her hard-earned tax dollars into the pension funds of others.”
He also wants to bring single-employer plans under the same umbrella as multi-employer pension plans, such as OMERS and HOOPP, with a single pension management organization rather than the separate investment entities employed mostly in the universities and the power-distribution sector.
The Drummond report noted:
“Most hospitals, colleges, municipalities and school boards now operate as separate employers but participate in a single pension plan. All Ontario colleges take part in the Colleges of Applied Arts and Technology (CAAT) Pension Plan, which is administered by an independent, arm’s-length board. The CAAT Pension Plan has assets of about $5.5 billion.
“In comparison, Ontario’s university sector has a very fragmented pension arrangement with more pension plans than institutions — 29 pension plans for 23 institutions, 17 defined benefit plans, four defined contribution plans and eight hybrid plans (a defined contribution plan with a defined benefit floor). These plans vary widely in the benefits they provide and the contributions made by employers and plan members. There is also wide variation in the size of these plans. The market value of assets ranges from about $15 million to about $2 billion. In total, the sector has about $10 billion in assets.”
In response, Duncan’s budget says:
“A strong pension system also means maximizing the effectiveness of asset management. Ontario’s large pension plans are internationally recognized for their cost-effective, professional approach to investment. The Ontario Teachers’ Pension Plan was an early adopter of the model wherein a fund invests directly and manages its portfolio internally. Over the past decade, the plan has had the highest total returns of the 330 largest public- and private-sector pension funds in the world.
“Many studies show the benefits of scale in pension plan management. Although most public-sector pensions in Ontario are held in larger funds, a large number of pension plans lack the scale that experts say is required to optimize investment returns. For example, the 20 publicly funded universities in Ontario have more than 25 pension plans.
“A recent study from the International Centre for Pension Management suggested that large plans outperform smaller plans by between 43 and 50 basis points per year.
“The government intends to introduce framework legislation in the fall of 2012 that would pool investment management functions of smaller public-sector pension plans in Ontario. Under this framework, management of assets could be transferred to a new entity or to an existing large public-sector fund. The government will appoint an adviser to develop the framework, working with affected stakeholders and building on Ontario’s internationally recognized model for pension plan management.”
Ontario’s universities may lose a bit of their much-vaunted autonomy. Their potential pensioners might welcome that.