Budget 2009: What pension problem?

In a budget aimed at creating jobs and kicking Canada’s ailing economy into gear, the federal government seems to be putting the country’s pension-related issues on the back burner, for now. However, there are some aspects of Canada’s Economic Plan that are pertinent to institutional investors, plan sponsors, and plan members.

Federally regulated pension plans were notified today that, upon passage of the Budget, the temporary solvency funding relief outlined in November’s Economic and Fiscal Statement will be put into place through the Office of the Superintendent of Financial Institutions (OSFI), with permanent changes planned for the end of 2009.

Federal Finance Minister Jim Flaherty expressed support for the recent Expert Panel on Securities Regulation, which recommends the establishment of a single securities regulator administering a single federal securities act for Canada. To facilitate the transition, the government proposes to establish an office which would be expected to deliver a transition plan within one year. Such a plan is expected to ensure that the securities regulators from participating provinces and territories are effectively integrated.

The Wage Earner Protection Program, which reimburses workers for unpaid wages and vacation pay they are owed when their employer declares bankruptcy or becomes subject to a receivership, will be extended to cover severance and termination pay.

Employment insurance premium rates will be frozen at $1.73 per $100 for both 2009 and 2010, which is the lowest level since 1982, according to the Ministry of Finance.

Infrastructure spending took up a large part of Minister Flaherty’s speech, as he promised $12 billion worth of projects over the next two years ranging from ports, roads, bridges, and even hockey rinks. And it is this aspect of the budget that may have the strongest implications for pension plans, according to Janet Rabovsky, Watson Wyatt’s Central Canada practice leader for investment consulting.

“I like the infrastructure for a lot of reasons,” she says. “We obviously need it, and it puts people to work. But it’s also good for pension funds because they have long-dated liabilities that are often inflation-linked, so it will create opportunities for pension funds to invest either in the infrastructure vehicles directly, or the longer-dated bonds that are a good match to the liabilities.”

Robovsky explains that one of the positive by-products of the recent economic crisis is that countries such as China, France, the U.K., and the U.S. have all announced infrastructure spending programs, which creates opportunities for the large Canadian pension plans.

“This allows the money that has been already raised to be spent, and it should encourage more money being raised for infrastructure,” says Robovsky. “Not just because it’s a good liability match for a pension plans, but also, the long-bond return is currently 2.5%-to-3%. Eight percent is looking pretty attractive. There are many collateral benefits here.”

Leona Fields, who manages York University’s pension fund, is less certain of the benefits that might be wrought by Canadian pension plans through increased infrastructure spending.

“It can’t be a bad thing, but I’m not sure how much new investment there will be by pension funds,” she says. Fields suggests that it will depend on how the various funds are currently investing. “It’s still a fairly young asset class for pension funds in Canada. Some of the mega-funds — such as Teachers’, OMERS, etc. — may have the opportunity to invest directly in some of the new projects identified in the budget.”

She believes the majority of smaller pension funds that are looking at investing in infrastructure at this point are likely to go with larger, more diversified, global funds in Europe, Australia, or the U.S.

“The scope of potential infrastructure projects around the world is mind-boggling, and this is one very tiny corner of that global market.”

A small item in the budget that was mentioned by Flaherty was the issue of a secretariat to explain financial concepts to Canadians in an effort to get workers more involved in their own retirement planning, something Robovsky is not optimistic about.

“Good luck,” she says. “Look at the experience the defined contribution providers have had. They don’t get very far.”

Robovsky feels the effort should focus on building financial literacy at a much earlier age, so when people get to a point where they’re earning money and can save it, they have some understanding of the implications.

“It’s the life skills that are not taught in school.”

As far as missed opportunities go, Greg Hurst, a principal and CAP practice leader with Morneau Sobeco in Vancouver, feels that some creative thinking might have served the government well in uncertain financial times such as these. He suggests providing incentives for companies to keep workers on the payroll who would otherwise be laid off.

“The government could say, we’ll pay you what we would pay them in E.I. benefits,” he explains. “That way, the company still bears much of the cost, but it gives them some relief instead of putting their employees into E.I.”

Ideas such as this are required, says Hurst, as it’s the fear of being laid off that’s keeping people from going out and spending their money.

For all the myriad aspects to the Budget, Hurst says he’s not surprised at the relative lack of attention on pensions. “I didn’t expect to find much in this budget regarding retirement and pensions,” he says. “The government’s objective in this budget is to get money into the economy, which is why they’re talking about shovel-ready infrastructure projects.”

(01/27/09)

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