Pensions funds buying …. Everything!!!

July 5, 2011

There was an excellent article letter today from Kelowna by a employment specialist, Robert Smithson . The article is called What is the state of our pension?

After a couple of rough investment years in 2008 and 2009, the CPPIB earned investment returns of almost 15 per cent in 2010 and almost 12 per cent  in 2011 (the 10 year annualized rate of return is presently 5.9 per cent). In those two fiscal years, total investment income of $31.7 billion was generated.

What kinds of assets does the CPPIB own? Would you have guessed it owns interests in (among many other things) two prime Manhattan office buildings; a new 1.9 million square foot retail and entertainment development next to the 2012 London Olympics site; the 407 Express Toll Route outside Toronto; a toll road in Sydney, Australia; an industrial facility in Hong Kong; and a shopping centre in Germany?

It appears that Canadian pension funds are owning all sorts of assets around the world. The biggest of these OMERS and the Ontario Teachers plan both own the majority of commercial real estate in Canada. Teachers owns the British Lottery system, a good portion of Chile’s water system and major power distribution in the UK.

Pensions love these investments because they provide far larger returns than equities in private sector companies. The main reason for this is that these are mainly monopoly investments. For example there is only one Vancouver Port and one Confederation Bridge. Now the unions are even starting to buy operation where their members work. See the history of OMERS investments.

Pensions Will Buy Up All

In 2009 Statscan reviewed the value of all provincial highways and roads, bridges and overpasses, water supply systems, wastewater treatment facilities and sanitary and storm sewers. It determined that the gross stock in these assets amounted to $286.2 billion in 2007. Considering the public sector employee pensions in Canad have in excess of $800 billion, the could buy the value of this public works several times over.

This is what a recent report from Ernst Young recommends. They call it PPP investment or private public partnership. Really one of the P’s stands for pensions, you choose which one. They are the only pools of capital big enough in Canada to buy these investments.

Smithson Article

The CPP seems to be fairly sustainable relative to most public sector pensions. Firstly, it only pays out 25% of the YMPE so this means that the benefits paid out of it are at a reasonable level. The contributions going into it are 9.9% of YMPE income. This is a health contribution level. Recently penalties have been substantially increased for early benefits. 

I hope the assertion about the stability of the CPP is correct. However, there are too many variables that have to be aligned positively in order for the CPP or QPP to remain viable — even at today’s relatively modest levels of contributions and benefits. They include fertility and mortality rates, labour participation rates, inflation, immigration, unemployment and job creation and rising health care costs.

The protests that occur over pensions in Canada will be over public sector employees pensions.

Smithson  mentioned the changes in retirement ages in Europe. The UK is in the process of implementing changes to its public sector retirement age to 66 from age 65. In Canada our public sector employees retire as early as age 50 in public safety employment and the rest follow suit at age 55. The pensions we pay to our public sector employees are identical to those paid in the UK.

Lets review our public sector employee plans.

They have accumulated over $800 billion, contrasting to $700 billion in RRSP’s and $148 billion in the CPP plan. The city employees in Kelowna contribute into their plan 8.49% of income, the will get a pension valued at 70% and start collecting at early as age 50. When they do retire early they get a bridge benefit that pays them the CPP equivalent from day one of retirement. If they have not accumulated enough service time they can complete a service buyback to boost their pension.

The CPP pension maybe secure but public sector employee pensions definitely are not. Pensions have become a third rail for politicians and they unable to deal with them. They are a disaster in waiting and it would be in the interests of both taxpayers and employees to deal with them now rather than later.

Not only are these pensions unsustainable they are hugely unfair for taxpayers. Last $30 flowed into PS employee pension about the same amount as into RRSP’s. The only problem is that only 20% of the workforce is PS and most of their contributions came from taxpayers.

Taxpayers are sitting on a future shortfall of over $300 billion for public sector employee pensions. The public sector unions expect them to be paid!

Pensions are creating problems everywhere you look. Look at an article from today. Is it fair for taxpayers to be funding $100,000 per year RCMP pensions at age 50?

Leave a Reply