Monday, April 23, 2018

OPTrust's Innovative New Pension Initiative?

Martha Porado of Benefits Canada reports, OPTrust launching new defined benefit pension plan:
The OPSEU Pension Trust is launching a new defined benefit plan for employers in the broader public sector, charitable and not-for-profit industries.

OPTrust Select will target employers that currently don’t have a defined benefit plan but may provide a capital accumulation program. With employers and employees contributing three per cent each, the plan will provide for an annual pension accrual rate of 0.6 per cent of earnings. Earnings upgrades and cost-of-living increases will be dependent on the plan’s funded status and annual board approval.

“We believe that there is a retirement income crisis in Canada and it is growing,” says Hugh O’Reilly, president and chief executive officer of OPTrust. “What we have and what our members have, we want others to have.”

For the first two years of the plan, employers will also have to contribute an additional 0.2 per cent. “If an employer were to become insolvent, we want to make sure there is security for the benefits they are providing,” says O’Reilly.

O’Reilly notes the move will also benefit the Ontario Public Service Employees Union pension plan because having risk and operational costs spread out over a broader membership base over the long term will provide enhanced sustainability. “We have a demographic issue; we have one active member for every inactive member,” says O’Reilly. Spreading that demographic issue across a broader number of members will be a significant benefit to both plans, he says.

The guaranteed income a defined benefit plan provides has a real effect on the quality of life for retirees, O’Reilly added. “Perceptions govern behaviours. People worry, they fear they are going to outlive their money. So then what happens? They don’t eat as well. They worry more and then they don’t do things like fill their prescriptions,” he says.

While no employers have joined the new defined benefit plan yet, OPTrust has been in conversations with different organizations, according to O’Reilly. “We would expect, over the next several months, to have several employers and organizations on board.”

Combined with the Canada Pension Plan and old-age security benefits, the plan aims to provide a 50 to 60 per cent income replacement rate for someone who makes between $50,000 and $60,000 a year. “The critical thing is if people know they have some guarantee, they will have a better retirement experience,” says O’Reilly.
OPTrust put out a press release on Friday, OPTrust Select marks the first new jointly sponsored, defined benefit (DB) product offering for modest income earners in a generation:
OPTrust, one of Canada’s largest defined benefit pension plans today announced the launch of OPTrust Select, which will offer a secure retirement solution at a moderate cost for both employers and employees.

“Research shows that people with a defined benefit pension lead a more fulfilling retirement and in doing so, make greater economic contributions to their communities,” said Hugh O’Reilly, President and CEO of OPTrust. “OPTrust Select brings the advantages of our large scale and investment expertise to more Ontarians who otherwise wouldn’t have access to a DB plan and a secure retirement.”

OPTrust Select will provide members with a steady stream of secure, reliable retirement income and includes the following features:
  • Members contribute 3% of earnings and employers match the contributions *see backgrounder for more information;
  • An annual pension accrual rate of 0.6% of earnings;
  • Earnings upgrades and cost of living increases, dependent on the Plan’s funded status and annual Board approval.
OPTrust Select is targeted to Ontario workplaces in the broader public sector, charitable and not-for-profit groups that do not have a workplace DB pension plan but may have a defined contribution (DC) plan, a group RRSP or no retirement savings arrangement at all.

OPTrust Select will also benefit the OPSEU Pension Plan by creating greater sustainability over the long term through the allocation of risk and operational costs over a broader membership base.

About OPTrust

With net assets of over $20 billion, OPTrust invests and manages one of Canada's largest pension funds and administers the OPSEU Pension Plan, a defined benefit plan with over 92,000 members and retirees. OPTrust was established to give plan members and the Government of Ontario an equal voice in the administration of the Plan and the investment of its assets through joint trusteeship. OPTrust is governed by a 10-member Board of Trustees, five of whom are appointed by OPSEU and five by the Government of Ontario.

BACKGROUNDER (click on image)


Membership Eligibility
  • Membership is limited to workplaces in the broader public service (BPS) and Ontario not-for-profit sector
  • Employers can participate in only one schedule of benefits at OPTrust
  • Employees can participate in only one schedule of benefits at any given time
  • Employers and employees participating in the pre-existing schedule of benefits of OPTrust are not eligible to join OPTrust Select.
For more information about OPTrust Select, please visit our Questions and Answers page.
On Friday, I had a chance to speak with Hugh O'Reilly, OPTrust's CEO, on this exciting new initiative the organization is undertaking to expand coverage of DB pensions to Ontario workplaces in the broader public sector, charitable and not-for-profit groups that do not have a workplace DB pension plan but may have a defined contribution (DC) plan, a group RRSP or no retirement savings arrangement at all.

Hugh began the conversation by telling me he is a lawyer who worked at Bob Rae's government on pension policy. From the minute he arrived at OPTrust in 2015, one of his strategic goals was to expand coverage of defined-benefit (DB) pensions to Ontario' broader public sector and non-profit organizations.

Hugh began by citing the HOOPP - Gandalf Group study on the emerging retirement crisis in Canada as supporting the case to fill a much-needed void.

Now, it should be noted that not everyone agrees with the HOOPP - Gandalf Group study and its implications. I know a few smart actuaries that think this study distorts the reality that there isn't a retirement crisis in Canada and the poor aren't starving in their golden years because of guaranteed income supplements.

They might be right but there is a crisis going on in the sense that most Canadians aren't saving enough for retirement, when they do save they don't have a clue about how to properly manage their savings so they can earn a decent yield and not outlive their savings, and many are falling through the cracks, adding to their retirement angst.

Rob Carrick recently asked a question on Twitter to which I replied somewhat seriously and jokingly:



Look at shares of Bell Canada which trade in Toronto and the NYSE. They have been sliding  since December as rates backed up, clobbering 'safe' dividend stocks (click on image):


Someone looking for income might love Bell's 5% dividend yield but if they bought shares in December, they're hurting from the capital loss and receive less in dividend payments.

That's the problem with dividend stocks, nothing guarantees shares won't slide or tank and nothing can guarantee the company won't cut the dividend if things get really bad.

In the case of Bell, I think it's safe to assume there will be no cut in the dividend, it has a virtual monopoly in Canada, the company is well run (not perfect by any stretch), so maybe you should be using any big sell-off to load up on its shares.

Still, there's NAFTA overhang, we don't know if US telecoms will come in to compete head on, rates might continue climbing higher and Bell's shares can continue sliding, just like those of Enbridge (ENB) and other Canadian dividend stalwarts. They've all been hit hard since rates backed up.

Now, as I told you on Friday, the market is worried about oil and rates, which is why I see opportunities in US long bonds (TLT) and overweighting consumer staples (XLP) and interest-rate sensitive sectors like utilities (XLU), telecoms (IYZ) and REITs (IYR) and underweighting cyclical sectors like energy (XLE), financials (XLF), metals and mining (XME), industrials (XLI) and emerging market shares (EEM).

But I'm not God, nobody knows what's going to happen in markets, which is why I stick to my recommendation to that 19-year old to put 60% into the S&P 500 (SPY) and 40% into US long bonds (TLT) over the long run, meaning over the next 40 years, avoid most mutual funds because they lag the market and fees eat up most of the return, and just rebalance their portfolio every year.

If it was a 55-year old or older individual, I'd recommend 60% to 70 % in US long bonds right now and try to ride out the storm ahead as best as possible but chances are they will not make a lot of money over the next decade, nowhere near what they made over the last 20 years.

Go back to carefully read my comment on why CPP is a great deal for Canadians where I stated all the advantages it offers:
  • The CPP pools assets and pools longevity and investment risk. This means individuals won’t outlive their savings like they risk doing with their RRSP or be unable to retire if a financial crisis like 2008 strikes and it clobbers their portfolio.
  • Also, CPPIB operates at arm's length from the government and is looking to maximize returns without taking undue risks. It can use its huge size to lower costs and hire smart people to manage assets internally across public and private markets all over the world as well as build solid relationships with world-class asset managers in public and private markets.
  • What this means, in effect, is that CPPIB’s long-term strategy to invest in a globally diversified portfolio across public and private markets ensures higher risk-adjusted returns over a traditional 60/40 stock bond portfolio. The value-added is significant over a long period and so is the lower volatility.
  • Importantly, the brutal truth on RRSPs and defined-contribution plans is they're not real pensions, they do not guarantee a secure pension payment for life because they are too beholden to the whims and fancies of public equity markets which are very volatile and will remain very volatile in a low-rate, low-return world. 
  • Lastly, the authors fail to acknowledge the benefits of Canada's large defined-benefit plans. They are directly and indirectly responsible for creating well-paid jobs and they ensure more people can retire securely, lowering social welfare costs and increasing revenues for governments. None of this is mentioned above.
This is why I have been a vocal proponent of enhancing the CPP for all Canadians, but even that's not enough.

Hugh O'Reilly, OPTrust's CEO, told me he's in favor of enhancing the CPP which is universal but over and above that, there is a need to offer DB pensions to people who are working and want to retire with peace of mind.

He told me he announced this initiative to OPTrust's employees on Friday and was greeted with "great enthusiasm and support".

For Hugh, it's a simple question: "Can we make the world a better place?". His answer is an unequivocal "yes" and it reminds a bit of that 60 Minutes clip going inside MIT's future factory where the professor who lost both legs from frostbite and invented amazing artificial limbs stated: "The best way to predict the future is to invent it."

OPTrust is rewriting the future of pensions. It sees a significant need for workplace defined-benefit pensions which companies have shed and it wants to offer its member service and investment expertise to address this need.

I spoke to Hugh about execution risk. He told me OPTrust's member service team consistently ranks among the best in peer reviews and there should be no problem onboarding and delivering great service, emphasizing "the success of this initiative depends on our continued investment success and ability to service new members and existing members to the highest level."

Hugh told me that OPTrust is the only large pension plan in Canada that is fully-funded and offers guaranteed inflation protection (OMERS also offers GIP but isn't fully-funded yet, close to it).

But the plan is suffering from a demographic shift as there is now one active member for each retired member and the burden of guaranteed inflation protection falls entirely on to active members.

This is where I interjected and asked Hugh: "Why not just do what Ontario Teachers' is doing, making the plan younger again by adopting conditional inflation-protection and more evenly spreading the risk across active and retired workers? HOOPP and others are doing the same thing."

Hugh read my comment and said this: "Toronto is the Silicon Valley of pensions, we all have demographic challenges, some more than others, but we have different ways of tackling these challenges. In our case, we want to maintain guaranteed inflation protection so we decided to get out and offer our services to new clients, broadening the base of the plan, increasing the ratio of active to retired members."

Will it work? That remains to be seen but my discussion with Hugh left me with the impression he's optimistic it will work and there is an interest in this initiative.

So being the consummate pension provocateur, I asked Hugh: "What if you are successful and others like OMERS who also want to maintain guaranteed inflation protection decide to compete with you, offering DB pensions to public and private sector organizations that don't offer adequate pension coverage?".

Hugh replied: "That's terrific, the more competition, the better, it means we're doing something right and more Ontarians will eventually retire with the peace of mind that goes with knowing they will have secure pension payments for life."

He's absolutely right, the more competition the better. I saw a need for this when I was working as a senior economist at the Business Development Bank of Canada (BDC) in 2008-2010 and told senior managers to create a defined-benefit pension plan for Canada's small and medium-sized businesses.

My call fell on deaf ears but to be fair, there were other more pressing needs at the time and pensions for all wasn't one of them (and the BDC doesn't have the expertise and infrastructure to offer DB pensions to its members).

But I do envision a future where Desjardins, the largest cooperative financial group in Canada, will be offering defined-benefit plans to its members (not variable benefit plans but real, DB plans).

And that's not all. Over the last year, I've noticed the big gorilla disruptor, Amazon, has taken a keen interest in my blog comments.

Oh would I love to sit down with Jeff Bezos and sell him on the idea that Amazon can totally and irrevocably disrupt financial services by offering millions of Americans and people around the world the retirement security they so desperately need (Amazon can set up pension offices n Toronto and Montreal and I would hire the best of the best at a moment's notice to manage assets across private and pubic markets).

Over the weekend I read an eye-opening comment on how Paul Ryan could get a pension of $84,930 a year—here's how that compares to most Americans.

We all know how politicians get the Cadillac of pensions but why not democratize this and offer it to everyone else and introduce some basic risk sharing or rules to ensure these pensions are sustainable over the long run?

OPTrust is taking the initiative on this need and I for one wish them great success in this endeavor.

I thank Hugh O'Reilly for taking the time to speak with me and think he's onto something big here, reinventing the future of workplace pensions. Others will surely follow.

Remember, the best way to predict the future is to invent it. If you build it, they will come.

In the case of DB pensions, if you make them accessible, people will jump on the opportunity to be part of a well-governed plan.

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