Thursday, 3 April 2014

Sense and insight from Ontario Health sector pension fund CEO

This Financial Post interview with HOOPP CEO Jim Keohane just nails it in so many ways on pensions in Canada, it is worth printing and glueing to the wall. What does he say about pensions that makes such good sense?

  • Governance under fiduciary duty, by un-conflicted boards and managers for the single purpose of providing a pension, succeeds best
  • Risk sharing by companies and employees, who have different objectives, causes trouble; quote - "Shareholders have put on a lot of pressure to get out of that business because if I want to invest in a car company, I want to see the results of the car company, not its pension plan"
  • Pooling and portability across many employers and sectors is what is needed for today's work world of multiple job changes in a career
  • People want, and should be provided, a PENSION, a target steady stream of income during retirement, (i.e. not a savings plan with a big accumulated lump sum after 40 years that must somehow be turned into income). What he doesn't say, but which is an integral part of HOOPP, is that the assurance of a lifetime pension comes from pooling individual risk so that how long you live is no longer a big issue - they know on average how long people will live and plan on that basis. An individual with a DC plan can only deal with their own unknown life expectancy that through buying an annuity, which entails a higher cost structure than what HOOPP can do internally (HOOPP has none of the annuity-selling insurance company's profit margin to pay for). Peter Benedek at Retirement Action has looked at annuity pricing and found it not very close to fair value. In contrast to a HOOPP-like DB plan, the proposal recently made by Keith Ambachtsheer for a supplementary retirement plan, though it has desirable features of low cost and aligned governance, still appears to (it's not explicit in his paper but the cited example of the UK's new National Employment Savings Trust (NEST) plan does it that way) maintain individual account ownership and thus no automatic, integral promised pension payout i.e. there's no longevity risk pooling. 
  • Failure to enact pension improvement today will create social problems down the road as Canadians will not want "grandmothers eating dogfood". This to me is the problem with the argument that people should be free and responsible to save or not - are we really going to let them drown in old age poverty when they fail, as they will since they do not save enough unless coerced or "nudged" into it?
  • Costs matter a lot, and DC plans with typical mutual fund fees will inevitably leave people an order of magnitude worse off than a good DB plan like HOOPP (or, not as he says, but as I have said, than the CPP)
There are also some thoughts useful to individual investors:
  • Matching the investment portfolio's structure to control the risks - so-called liability hedging - is a key principle. Unexpected inflation is one of their three big risks - something which applies especially to individual retirees as well. HOOPP responds by holding real estate and real return bonds. 
In short, revived Defined Benefit plans along the lines Keohane is advocating, could work as an effective alternative to enhanced CPP. 

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