Can you describe HOOPP’s governance model?
The structure of our board is such that we’re different from our peer plans—Teachers’ and OMERS—in that they’re corporations where the Ontario government is the sole shareholder. In our case, we’re a trust that is effectively owned by the members of the plan. Ultimately, [the trust is] funded by the government of Ontario, but the government of Ontario doesn’t have any direct stake in the plan.
Half of the board members are representatives of the Ontario Hospital Association, which is effectively the hospital management, and the other half of the board is representatives of the four unions: CUPE, OPSEU, ONA and the SEIU. The benefits and price are not determined by labour negotiations; they’re determined by our board. So it’s an interesting dynamic: members who would normally be sitting opposite each other at a bargaining table are sitting on the same side, making decisions in the best interests of the plan members.
I think the reason why Teachers’, for example, has gotten underfunded is that it’s been forced to take on more risk. If you go back to when it had a big surplus, that was effectively given away during labour negotiations. I think the funds have been managed extremely well, but [Teachers’] still found itself in an underfunded position because somebody else makes decisions on what the prices of the benefits are going to be, and it was handed a mandate to manage that. In our case, those decisions reside in-house. It’s more of an integrated approach.
What’s your view on large pension plans managing assets for small plans?
There are advantages to some of the smaller funds in that they get access to professional management, but I don’t see much advantage for the larger funds taking on that role.
When this issue came up, we did go through the exercise of trying to determine, does that make any sense for us? We’re not really set up to be in the business of managing third-party money. To do that requires investments in systems and people…and when you look at the cost of setting up for that, it’s fairly material.
The bigger question is, are you going to remove the focus from what you should be doing? We’re solely focused on delivering that pension promise. Everything we do is for the running of one account, one fund. When you’re running multiple mandates, it really does divert your attention away from that.
Michael Nobrega thinks we have to create these superfunds that are $100 to $200 billion in size. I don’t really agree with that. I think you can run your money much cheaper if you run it internally, and there are a lot of activities that you really can’t get involved in if you’re outsourcing the money.
There is a critical mass that you need to get to, but I think there’s a sweet spot somewhere between $25 and $50 billion—where you’re big enough that you can get involved in pretty much any activity you want to get involved in, but you’re not too big that you leave a huge footprint on the market every time you try to do something. We’re in that space; OMERS is in that space. Teachers’ is actually a bit bigger than that.
There are some disadvantages to large-scale as well. It does open up some new areas that you can invest in, but it also precludes others.
What are your thoughts on solvency funding?
Solvency funding tests are appropriate for corporations because there is the possibility that the corporation could fail. Effectively, you can think of the fund as being collateral against the promise of the pension being delivered by the corporation.
In our case, when you think of the nature of the business, the requirement for healthcare isn’t going away and the Ontario government isn’t going away. So there is really no need for solvency tests in a plan like ours, because you can assume the existence of the plan in perpetuity, whereas with corporate plans, you can’t really do that. I think the assumption of going concern is more realistic.
What about the various provincial pension panels? What changes would you like to see?
We would expect to see changes in the solvency rules. We’ve asked for some changes in regard to transferability of pensions.
There’s a lot of discussion right now at the government levels in terms of trying to broaden pension coverage. About 40% of the total working population in Ontario is covered by a plan, but if you look at the non-government sectors, it’s only about 30%. If that doesn’t change, I think there’s a potential policy disaster 20 years down the road, when all these people can’t afford to retire.
I think there’s some movement to what you see in Australia or in the Netherlands, where all citizens who are employed have to be in a pension plan. In Australia, for example, they take [approximately] 9% of your pre-tax income off and it goes into a pension plan. In the Netherlands, it’s a similar set-up.
The federal finance ministers have called a conference later in the year to deal with that issue—they’re trying to broaden pension coverage. It’s become much more of a front-burner item.
What are HOOPP’s main priorities?
We’re trying to create more Web-based services, so that members can interact with us much more easily, and provide information much more efficiently through electronic delivery services. In terms of the investment side, we want to make sure we get back to a fully funded status and stay there.
It really goes to focusing on the fact that we’re a pension delivery organization and securing the pension promise is our primary function. I think most pension funds regard themselves as money management organizations as opposed to pension fund delivery organizations. You need to make sure you can deliver on that promise regardless of the economic outcomes down the road.
What do you think will be the biggest pension issues going forward?
You’re going to see changes in the accounting rules when you go to the IFRS standards, because that effectively puts the defined benefit on [a company’s] balance sheet.
There’s the old joke that GM’s a pension fund that makes cars, and there’s a lot of truth to that. But even if you look at some of the larger Canadian corporate plans—Bell Canada, [for example,] its pension plan is about $10 billion, which is about half the market value of the company. As the markets move around, it has a huge impact on the earnings statement.
If you look at Britain and the U.S., most corporations have shut down their defined benefit (DB) plans and made them all defined contribution plans. Effectively, they shifted the risk of market movements to the employees. I’d be surprised if it doesn’t happen [here].
Moving more to these universal-type plans may take that burden away from the corporation and put it more on individuals and governments. I think it’s likely you’re going to see most corporate DB plans disappear.
So could DB die out in the private sector?
Yes, and I think it’s unfortunate. [DB is] the best model for most individuals. Most people, unless they’re put in some sort of forced savings plan, don’t save.
You can see the experience in the U.S., where they’ve had 401(k) plans for much longer. Most people don’t have [investment] expertise, so what tends to happen is, they choose the default option (which is money market) and leave the money there. As a result, they don’t end up with enough money at retirement age to retire.
In the U.S., the numbers are eye-openers. The average amount of money in these plans at retirement age—the mean is $120,000 but the median is [around] $66,000—it doesn’t even get you through the first year, really.
People don’t realize how much money you actually have to put aside. If you’re going to have a $50,000 income, you can multiply that by roughly 20 at current interest rates to give you the amount of money you have to put away: about $1 million.
A lot of it has to do with accounting and regulatory rules. If you really could take a long-term view of things, volatility is expected. The problem is that you have to file with regulators at least every three years—so your time horizon is not 50 years, it’s three years. It drives the thinking short term when it should be focused on the long term. I understand why it’s the way it is, but it’s certainly suboptimal from an investing point of view.
You’d like to see some changes on the regulatory front?
It’s certainly a challenge. Clearly, you have to make sure that these [plans] are run properly, and there has to be some regulatory framework around that. It looks like a lot of these plans are heading for a train wreck, so the regulators have to step in and do something about it. It’s a difficult challenge, and I don’t have a magic answer.
Alyssa Hodder is editor of Benefits Canada.
alyssa.hodder@rci.rogers.com
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© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the August 2009 edition of BENEFITS CANADA magazine.