As a gesture of thanks, three days after the election in which I was punted as an MP and cabinet minister, I asked the dozen senior staff in my office at Revenue Canada out for a meal. Nice restaurant overlooking the Rideau Canal. So long.
I sat and reflected on my path ahead. No job. No pension. No prospects. A house in the wrong city. No fortune. No offers. No security. No severance. Across from me, merrily munching on a Salisbury, sat the deputy minister. When I am pounding on doors in Toronto, looking for a break, I thought, he’ll still be here. Guaranteed job, government-paid car and driver, big bucks, long vacations, group benefits and a lifetime defined-benefit pension plan, indexed.
The contrast was stark, and dark. On one side the politician – elected on public whimsy, drenched in risk – and on the other the bureaucrat – paid richly by the public, yet strangely unaccountable.
This may help explain our current circumstances. There’s a huge overlord class of public sector workers in Canada. More than 3.5 million people, or 24% of the working population. For them, risk is foreign, benefits are assured, salaries are guaranteed, with the security of a life-long string of monthly payments after they retire. In comparison, two million plumbers, lawyers, farmers, doctors and hair salon owners have no wage security, no pensions and no paid holidays. Bureaucrats in the Department of Finance have been calling them tax cheats and loophole-abusers lately because the government wants to increase taxes, but not decrease spending.
Federal civil servant pensions cost a lot. The average retirement pay-out for a federal worker is $1.2 million after 35 years on the job. The current shortfall (called the unfunded liability) is $4.5 billion. So Ottawa has to find about $415 million in additional revenue every year for the next 14 years to meet its obligations to retiring workers. By whacking small business owners (who have no pensions) as the government is proposing, an estimated $250 million will be realized.
My former deputy minister, who made a very large salary, did not need to save for retirement. He knew he’d receive a monthly payment based on the five best (highest-paid) years of his career, as well as retain the benefits of the public service health plan. No need to worry about market conditions or fluctuating RRSP and TFSA assets, since all future payments were legislated and funded by the taxpayers. The car and driver he enjoyed daily were not taxable benefits, either. Nor did he ever have to stand for election and throw his fate into the hands of the deplorable masses.
Public workers with DB pensions can also split that income with a spouse as a mechanism to reduce the overall tax bill in retirement. If that constitutes their only income, it’s not hard to split it down to the 20% range – while private sector people cashing in RRSPs may face bills twice as steep. Ironically, the T2 gang are about to strip drywallers, family doctors and haulage contractors of the same benefit, even though none have guaranteed pensions.
In one week the short period of time the government allowed for debate on these major tax changes will be over. Small businesses retaining earnings to tide them over the lean years or to fund a retirement will face a tax rate of up to 73%. And while unrelated men and women who start companies can share income in the form of dividends, if they get married it’s called ‘income sprinkling’ and becomes illegal. Entrepreneurs and medical people who played by every rule in the book, living frugally so they could save for retirement within their corps, are now pilloried and demonized by the very crew who wrote the rules.
Are there some people who hide behind incorporations and manage to shelter money the government desperately needs to pay pensions of federal workers? You bet. But there may be better places to get it than whacking all the folks who, collectively, create half the jobs in Canada. Making the federal pension plan fairer would be a start. Or even taxing the windfall and unearned capital gains on residential real estate.
Most of the people about to be squished by Mr. Morneau are not, like him, 1%ers. Most have no job security, no paid time off, no maternity leave, no benefits, and they sure don’t have access to money for life.
Yes, let’s make the system fairer for the middle class. Now you know how.
Garth followed up with another comment, What were you thinking?, where he noted this:
Much of the hate oozing from the very pores of this pathetic blog yesterday was about pensions. These days it’s estimated 70% of all workers have no corporate plan with any kind of defined benefit (like government workers, teachers and the prime minister). Instead most people have crappy group RRSPs which are stuffed into even crappier mutual funds run by an oft-crappy insurance company. If you’re lucky, the boss kicks in some cash.I have to hand it to Garth, he nicely exposes the hypocrisy of the Liberals' new tax plan. Go after "rich" doctors, lawyers, self-employed professionals who like most people have no pension and their "evil" corporations while the PM, Finance Minister and Deputy and Assistant Deputy Ministers in Ottawa sit back and collect a nice, fat defined-benefit pension for the rest of their life. It's a complete and utter travesty.
And folks change jobs, of course. Sometimes they get to drag behind a portion of a pension as a locked-in retirement account (LIRA). Sometimes not. In any case, registered pension plans run by employers are, on whole, massively inadequate for a world in which people retire at 60 and croak at 90.
The CPP and OAS? Fine, if you live on Cape Breton and like mac & cheese. Every day.
The kids know this. Ask a Mill if she’ll get a pension at 65 and you can watch her tats jiggle in response. Even people on the public payroll who are under the age of 40 have serious doubts about the sustainability of the system. Already funding public pensions is a massive ongoing liability for Ottawa, and every year it augments. As mentioned here yesterday, the annual top-up alone to keep the system stable is more than $400 million. Meanwhile nobody’s topping up private sector pensions. In fact, Mr. Morneau is about to tax the poop out of small business earnings set aside for retirement. And his boss already gutted the TFSA. Seems like we have two sets of rules. No?
I recently noted the Bank of Canada is flirting with disaster but it looks like Mr. Poloz is coming back to his senses (for now). I can't say the same for the Liberal hypocrites running our country to the ground with their insane tax policies which they claim are fair but will set us back years.
This on top of cutting the maximum contribution amount to TFSAs, income splitting, and a lot of other smart policies. About the only smart thing the Liberals have done was to enhance the CPP for all Canadians and even there, I should give the credit to Ontario which threatened to go it alone, forcing all the provinces and the federal government to finally enhance the CPP.
Garth Turner is right, most Canadians don't have the luxury of a defined-benefit pension. They have "crappy group RRSPs which are stuffed into even crappier mutual funds run by an oft-crappy insurance company (and banks) and if they're lucky, the boss kicks in some cash.
This is why I've been ruthlessly exposing the brutal truth on defined-contribution plans on my blog. They don't work. RRSPs or 401(k)s in the US have been an abysmal failure as the de facto pension policy and if it weren't for a long bull market since the 2008 crisis, the situation would be a lot worse for millions retiring with little to no savings.
Importantly, unlike defined-benefit plans which pool investment and longevity risks, lower costs, and invest across public and private markets all over the world, and offer safe,secure benefits for life, defined-contribution plans shift retirement risk entirely onto workers, leaving them exposed to the vagaries of public markets and many of them will ultimately succumb to pension poverty.
I recently wrote two important comments on why deflation is headed for the US and why all of you, institutional and retail investors alike, need to prepare for the worst bear market ever.
I know, stocks soared on Tuesday to record highs as the Trump administration's proposed tax cuts leaked to the media, everybody is getting excited, there is a global bond rout going on, it seems Jeffrey Gundlach is right as yields on 30-year Treasuries are having their biggest two-day rise since December (click on image):
What is going on? Was Warren Buffett right earlier this year to ask who in their right mind would buy a 30-year bond? Was Beijing behind the whole move on US Treasuries to drive the US dollar lower and halt the yuan from appreciating (which exacerbates deflation in China)?
All a bunch of smoke and mirrors. I remain staunchly in the global deflation camp and note deflation is picking up everywhere and even in Germany, inflation failed to accelerate in September, reflecting the euro area’s continued struggle to restore price stability (click on image):
The appreciation of the euro since the beginning of the year didn't help stoke inflation in the Eurozone but there are structural factors at play here too.
Importantly, now is the time to be loading up on US long bonds (TLT), especially if you're a chronically underfunded pension. It's the best bang for your risk buck, bar none, and I would be viewing any selloff in US long bonds as a golden opportunity to load up before we suffer the worst bear market ever as deflation strikes the US.
Now, back to Canada's pension overlords. Someone from one of Canada's large pension plans recently contacted me to ask me if I updated my comment on the list of highest pension fund CEOs.
I told them I haven't but I have briefly discussed compensation at each of Canada's large pensions in each of my detailed comments going over their annual results:
- La Caisse Gains 7.6% in 2016 (calendar year results)
- OMERS Gains 10.3% in 2016 (calendar year results)
- HOOPP Gains 10.4% in 2016 (calendar year results)
- OPTrust Is Changing the Conversation (calendar year results)
- Ontario Teachers' Gains 4.2% in 2016 (calendar year results)
- CPPIB Gains 11.8% in Fiscal 2017 (fiscal year ends March 31st)
- PSP Investments Gains 12.8% in Fiscal 2017 (fiscal year ends March 31st)
- AIMCO Gains 5.8% in 2016 (calendar year results)
- bcIMC gains 12.4% in fiscal 2017 (fiscal year ends March 31st)
I updated information for the Caisse and OMERS because their annual reports don't come out at the same time as they release their results (this should be rectified by releasing everything all together like OTPP and others do). Click on images to enlarge.
Caisse (updated information from the 2016 Annual Report)
OMERS (updated information from the 2016 Annual Report)
OPTrust
Ontario Teachers' Pension Plan
CPPIB
PSP Investments
AIMCo
bcIMC
As you can clearly see, the big boys (and a few girls) at Canada's large pensions make big bucks. The compensation at HOOPP, while not public, is in line with the compensation at their large peer group (a bit less but not a lot less).
OMERS' CEO Michael Latimer and his senior CIOs in public and private markets enjoyed the biggest gains in compensation last year based on their 2016 and long-term results.
And these tables above only provide you with a glimpse of total compensation because the senior officers also get a defined-benefit pension for life and if they are fired for any reason other than performance or gross negligence, they are entitled to huge severance packages which run in the millions depending on how long they worked at these organizations.
Derek Murphy, the former Head of Private Equity at PSP, used to arrogantly tell me in private conversations: "Don't f@$k up, this is the best gig in the world." It most certainly was for him and other PSP senior officers who made multi-millions during their time there and then enjoyed a few more millions in severance (apparently, total severance packages PSP doled out in FY 2017 topped $30 million).
It's enough to make hard-working teachers, nurses, police officers, firefighters, municipal, provincial, and federal public-sector workers, and even doctors, lawyers, accountants with no pensions reading this comment wonder why in God's name are we doling out millions in compensation to public sector pension fund managers?
The short answer to this? You don't want your pension to end up like the ones in Kentucky, Illinois, New Jersey and other public-sector pensions in the US which are hanging on by a thread, and would be insolvent if they were using the discount rates Canada's large pensions use.
Importantly, the success at Canada's large pensions is built on a governance model that allows them to operate at arms' length from the government, allowing them to set compensation to attract and retain qualified staff to manage assets internally across public and private markets.
Are these guys paid extremely well? You bet, and my personal opinion is like many people in finance, they are grossly overpaid for the work they do and I base that on the work my 86-year old father who has no pension and still practices psychiatry three times a week does and gets compensated for (and taxed to death which he seems fine with and unlike me, thinks the Liberals are doing a great job).
But compensation cannot be based on what other professionals are making, it has to be based on compensation in a particular industry and in order to achieve stellar long-term results, Canada's large pensions need their compensation to aligned with their mission statement to attract and retain qualified individuals to manage billions across public and private markets to add value over benchmarks over the long run.
We can have another discussion on which benchmarks each pension uses or the fact that they are increasingly leveraging up their portfolio to juice their returns and whether this needs to be taken into account when determining compensation, but there is no doubt Canada's large defined-benefit pensions are delivering stellar long-term results and compensation is aligned with those long-term results (typically based on rolling four or five-year results).
Below, take the time to watch a great discussion on lessons from the Canadian pension fund model which took place last year featuring OTPP's CEO Ron Mock and the Caisse's CEO, Michael Sabia.
Also, CPPIB's President and CEO, Mark Machin, discusses how once a year, every CPPIB employee comes together to discuss what it means to truly live their Guiding Principles. I applaud CPPIB and others who have a dedicated YouTube channel and actually post clips regularly.
Lastly, take the time to watch this CTV News interview with Rick Hansen who along with Terry Fox, is a personal hero of mine and millions of others (watch this interview here if it doesn't load below).
The reason why I am including this interview is because Hansen brings up great points here and expresses concerns over how slow things are in Canada in terms of taking actions to include people with disabilities in our society.
I challenge all our leaders in the public and private sector to stop talking about diversity and start taking real, concrete and measurable actions to diversify your workplace at all levels of your organization. In particular, I'd like to see you target people with disabilities to hire them and include them at all levels of your organization.
Everyone deserves the dignity of work, especially people with disabilities who are treated inhumanely in our society, often marginalized and left fending for themselves in a brutal world.