Front Lines: Volatility Happens

Letter

Re: Report on Responsible Investing, July 2008

Not all Canadians—members of pension plans or not—buy into the most recent ecological concern that mankind is responsible for global warming and can do something about it. We also know that the benefit that a DC plan member gets at retirement is significantly affected by investment returns. (In the illustration below, there are two fund values shown. As a percentage of each fund investment, earnings represent 66% and 62%.)

It seems safe to assume that the new funds being discussed in the July articles are not expected to do as well as those funds not constrained by current ecological concerns. Is it appropriate for the plan sponsor or HR manager to make an investment decision that is expected to adversely impact all plan members and is based on the decision-maker’s beliefs?

Let’s agree that a “new fund” will underperform by 50 basis points. We can call this a “green fee.” Let’s also assume that the fund will earn 6% after all other charges (or 5.5% after all other charges and the green fee) and that we are looking at a person who starts at an annual contribution of $2,000, which increases at 2% every year for the 35 years in the plan.

After 35 years, this person will have $292,715. If the fund return is reduced by a green fee of 0.5%, this reduces by 9.5% to $264,940. I’m not sure that the ordinary plan member would be happy to think that his or her pension fund was reduced by $27,775 because of feel-good decisions taken on by the HR manager.

The purpose of a pension plan is to prefund our retirement needs. Surely, we should work to make sure we get the most possible for the dollars available. Whether we should make those who choose not to go green pay for their decisions or we should expect that going green has a price, a DC pension plan is not the place to start.

Were I a member of a DC plan, I know what I would demand as “good governance.” I would demand that the administrator keep my costs down, get the best possible investment return and let me make—and pay for—my own moral decisions.

— Fred Thompson, partner, Thompson Tomev Actuarial

ABCP Resolution in Sight

Cautious optimism is growing among participants and observers of the assetbacked commercial paper (ABCP) market saga after the Supreme Court of Canada refused to hear a challenge by a group of investors to the restructuring plan. However, not everyone is happy with the decision.

Howard Shapray, a lawyer for Ivanhoe Mines, which holds approximately US$66 million of ABCP, feels that pressure on the court regarding capital markets and the economy had an undue influence on the decision, and the court might have found differently had the case been brought forth in a time of economic stability. “I think the issue came to the court at the wrong time,” he says.

Daryl Ching, vice-president of Canadian Hedge Watch, says that while the restructuring plan is far from perfect, it’s the closest thing to fairness that the parties involved can hope for, and commends the Pan-Canadian Investors Committee for its work. “To get everyone at the table and to comply with the restructuring plan, especially in today’s credit environment, is incredible.”

The committee was expected to be in a position to start implementing the restructuring process by Sept. 30, 2008, or shortly thereafter, with a view to completing the implementation in October.

“The most significant hurdle is behind us now,” says Purdy Crawford, chair of the committee, adding that he is hopeful that the issuance of new notes will re-establish stability and liquidity in the market over time. — Jody White

For more on this story, go to www.benefitscanada.com/abcp.

BenefitsCanada.com in Brief

• When the housing market in the U.S. caught a cold, the rest of the world got the flu. Our online report, The Credit Crisis, has more information about the impact of Lehman Brothers’ bankruptcy, the near-collapse of insurer AIG and the shotgun weddings between some of the most well-known names on Wall Street. Go to www.benefitscanada.com/creditcrisis for more.

• Every month, World View brings you news from around the globe. Now, it’s available every day on our website. Along with Briefly, these two sections give you concise, up-to-date industry information.

• In November, we will be profiling the winners of the Benefits Canada Awards. Be sure to look for them online and in the magazine.

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