The disaster story of the week (at least for me, an ex employee with almost 30 years of service and now an underfunded pension plan) was that Nortel filed for bankruptcy protection. You can read the take of the Globe and Mail in “Nortel files for bankruptcy protection” and that of the WSJ in “Nortel files for bankruptcy protection” . The National Post was quick to try to summarize where we go from here in “What happens next? A Nortel Q&A” .
Past week was a sad and painful not just for pensioners, but for all current and past employees of the company, though pensioners tend to be older and mostly out of the work-force and would likely be especially hard hit by any potential reduction in their pensions. For many it would be an irreversible change in retirement “lifestyle”. In Globe and Mail’s “Battle looms over tech giant’s pensions” Middlemiss and George-Cosh report the upcoming battle to protect ex-Nortel employees’ pensions. In the related Globe and Mail article “Quebec promises to guarantee pension plans” Rheal Seguin writes that the province of Quebec announced that it “will take over the management of insolvent pension plans and guarantee retirement income for five years to those who are entitled”. (It is not clear from the article if they will top up pension shortfalls for the first five years or will make sure that pensions can be paid for at least five years.) The Star’s James Daw in “Nortel pension fears mount” reports on some of the potential implications on the pension plan. Also see my separate blog on Nortel Pensions .
Another pension story is by James Salt in the International Herald Tribune reports that “Expectations for pension plans forced to shift”. The market swoon not only hit pension plan assets but together with lower capital market expectations can result in higher required corporate pension contributions and therefore lower earnings. (Lower earnings can lead to lower equity prices, which is not what we need now.)
In Globe and Mail’s “Battle erupts over securities watchdog” the authors report the looming battle to try to prevent creation of a single Canada-wide securities regulator. The unnecessary duplication/expense associated with multiple provincial regulators, together with their repeatedly demonstrated failure to protect Canadians’ investments/pensions, should indicate to most that the time for debate is over. A properly staffed, single national regulatory agency must be able to do a better job than the dozen or so underpowered current agencies…it better, because the protection we are getting now is totally inadequate….just do it!
Barry Critchley in Financial Post’s “End of shameful episode” reports that “IIROC, an industry regulator said in a 100-plus page report last October: “This study and the compliance sweep found that the majority of dealer members that acted in the distribution of third-party ABCP to retail investors did not understand the underlying asset composition, liquidity risks and distinct rating methodology used for the structured financial assets underlying the ABCP.” He also mentioned how much better the U.S. regulators performed on similar recent problems there. In short the dealers didn’t do their due diligence or understand what they were selling; so much for relying on your expert advisor or the OSC. Caveat emptor!
In the Financial Post’s “Retiring alone challenge for single boomers” Jonathan Chevreau reviews some of the findings of a recent BMO survey on the challenges of retiring single and some steps that they may take to improve their odds. In addition to the obvious items like plan early, wealth building, understanding income and expenses, he also mentions: potential housing changes, health strategy and social and emotional wellbeing.
WSJ interviews Yale’s Chief Investment Officer David Swensen in “Yale’s investor keeps playbook” . Swensen “pioneered an approach that de-emphasized stocks and bonds while embracing less-traditional fare like hedge funds, private equity, and oil and gas. During his tenure, Yale has had an average annual return of 16% for the past 10 years through June, compared with a 2% average for the Standard & Poor’s 500-stock index.” Yet even Yale took a 25% hit since June. Swensen credits Yale’s superior returns, relative to other endowments and foundations, to difficult-to-replicate in-house expertise on alternative asset classes. In a related WSJ story “Smart money takes a dive on alternative assets” Jason Zweig discusses the additional bind that many foundations and endowments find themselves now in due to inadequate liquidity which will lead to program cutbacks at colleges and charities. Having allocated a large portion of portfolios to alternative assets, they are now facing liquidity issues as some hedge funds limit withdrawals and while some private equity firms have the right to make “capital calls” (i.e. demand more funds from the investor). We are certainly in an age where liquidity is driving everything, and Zweig advises investors of all sizes (including individuals) to make an inventory of assets and then determine “what it would cost, and how long it would take, to turn each of them into cash. (For those interested in institutional investment lessons, not the lack of liquidity type, you can read my recent book review of Foundation and Endowment Investing )
WSJ’s Victoria Knight writes that (in the U.S.) “Relatives can be paid to look after elderly” . If formal “caregiver agreement” contracts are drawn up in advance then “financial transfers made under a caregiver agreement generally aren’t considered gifts, an important consideration if an elderly person later hopes to qualify for Medicaid, the joint federal/state program that covers nursing-home care. The contracts can also provide assurances to other family members about the cost and quality of care being delivered and reward caregivers for the long hours they put in. The agreements need to be carefully crafted, and there are tax consequences.” (Check with your Canadian accountant if similar approach is permissible and/or of value in you circumstances before you do it.)
Haggerty and Simon report in the WSJ that “Rates fall, but refinancing are limited” . Even though average 30 year (U.S.) mortgage rates have fallen to 4.89% and refinancing interest is high from borrowers, there are numerous obstacles to refinancing your mortgage. Some of the problems are: credit hurdles or insufficient home equity (not just maximum loan-to-value ratios have been reduced, but likely the property values have fallen since mortgage origination.)
And finally, The federal government is seeking consultation on “Strengthening the Legislative and Regulatory Framework for Private Pension Plans subject to the Pension Benefits Act” Here is another opportunity to provide input, this time to the Feds, after similar consultations and recommendations were done in the past year at least in Ontario, B.C. and Alberta. I certainly encourage you to take the time to read the proposals and comment on them, but with the this week’s bankruptcy protection sought by Nortel and the resulting expected impact of pensioners, you’ll have to excuse me for envisioning the legislators a little like Nero playing the violin while Rome is burning. Years of inaction, followed by years of consultation will not solve the problem. Canada’s retirement income system may be affordable and sustainable, but certainly not adequate compared to other developed countries and pensioners do not have adequate legislative or regulatory protection. In particular the tier 3 part of the system is crumbling, while tier 1 and 2 are lower than in other developed countries. There is no more time for studies; it is now time for urgent action! The proposals still don’t fix significant shortfalls in current pension system: (1) no requirement for annual solvency valuation (three years is an eternity in volatile economic times, when both company and pension plan can irreparably deteriorate, (2) no pension benefit guarantee system (if government run insurance program would be in place, the resulting incentive for more stringent regulations and enforcement would have a better chance to prevent the current underfunding crisis and the disastrous out come for pensioners if bankruptcy ensues), (3) no protection of funding shortfall in case bankruptcy (pensions are deferred wages and in case of bankruptcy must be given equal protection to current wages), (4) urgent need to implement a new national tier 3 pension system (a good place to start would be the recent proposal from C.D. Howe for a Canada Supplementary Pension Plan enhanced with Longevity Insurance option as described in my proposalto the Ontario Expert Commission on Pensions in November 2007, (5) implement legislative changes to permit and facilitate creation of Longevity Insurance products (delayed payout annuity insurance products). I encourage all of you to respond to this call for comments and take opportunity to urge immediate actions on to help Canadians prepare for and be better protected in retirement.