Published by The Ottawa Citizen, October 11, 1999
Copied verbatim.

Pension war becomes a battle of 'control'

Unions ponder government offer to jointly manage new plan

(The Ottawa Citizen, Monday October 11, 1999, page A3)

By Kathryn May

The war over Canada's largest pension plan has moved to a new front ­ control of the multimillion-dollar fund and how it will be invested.

Public servants and pensioners lost their battle with the Chrétien government for a share of the $30-billion surplus in their pension plan. Still stinging from that defeat, unions and pensioners are in a "cooling-off period" preparing for the next round ­ whether to accept the government's offer to jointly manage their new pension plan.

"I think we'd be foolish to go for joint management in a plan that has no safety net," said Bill Krause, president of the Social Services Employees Association.

"One could be a bigger fan of joint management if part of the surplus was left in the plan as a cushion to protect against adverse market moves, major demographic changes and the normal cycles of the market."

Last month, the government passed Bill C-78, sweeping legislation that will phase out the existing $125-billion pension plan of public servants, the military and the RCMP and replace it with one to be invested in the financial markets. The bill also gave the government the right to use the surplus to help pay down the debt.

The new plan, to be created by April 1, will receive about $2 - 5 billion annually in contributions from 330,000 federal employees and the government.

It will be one of the biggest pension plans in Canada, making it a key player in the Canadian marketplace. It will eventually be bigger than the giant Ontario teachers' pension plan, which has $65 billion in assets, and even the Canada Pension Plan Investment Board, which by 2008 Will manage $88 billion of Canadians' retirement money.

"I shudder to think how big the public service plan will be in 25 years," said Mick Cohen of pension specialists William M. Mercer Ltd. "It will be the biggest investment pool in the country." What to do with that money has yet to be decided. But the critical decision ­ how that fund will be managed ­ must be quickly resolved first. The new plan also raises questions about the federal government's influence on the plan and what impact the fund's billions will have on bond yields and a stock market that already has too much capital chasing too few quality stocks.

Under the bill, the government has complete control of the plan, including the right to all surpluses. For the first time, it will have the power to change premiums or benefits without seeking the approval of Parliament.

The legislation creates a Public Sector Pension Investment Board (PIB), which will operate at arm's length from the government and plan members, similar to the 12-member CPP investment board.

It calls for a pension advisory committee, which will include employee and pensioner representatives. One of its tasks is to come up with a list for the board of qualified candidates with investment experience.

The government, however, has the final decision on appointments to the board, which will invest the fund "with the view to achieving maximum rates of return without undue risk." The government will also select the board's chairman.

The politically appointed board will set investment policies, standards and procedures, and will establish investment and audit committees and appoint an auditor. It will set conflict-of interest rules for directors and code of conduct for employees.

All of this has left the unions and pensioners in an unpalatable position. Joint management will give them a say in the appointment of the board and shaping investment policies, level of risk and the expected rates of return.

But it also means they must share all risks and gains in the plan with the government.

"We're at sea" said Steve Hindle, president of the Professional Institute of the Public Service. "Are we better off being on an advisory committee to influence who is on that board, but then is that like we are saying 'it's OK you passed a law and took away $30 billion from us?' "

Mr. Hindle said it's also difficult for unions to accept joint management on one hand and then proceed with their plans to sue the government over the surplus. They also worry about taking on the risk without the "cushion of the surplus" at a time when many predict a volatile market.

"This fund is starting off at a time when the prospects for ever-increasing exuberance of equity returns are rather poor," said Mr. Cohen. "There is a growing consensus we may be reaching the peak of the cycle and there is more downside risk than upside potential.... It's a tragedy this wasn't done a decade ago."

The unions began pressing the government more than a decade ago for a jointly managed fund that would be invested in the financial markets to earn higher returns. The two sides negotiated a joint management agreement last year that collapsed when the unions and pensioners demanded a share of the surplus.

But many argue the unions should swallow their "principles" and become a joint manager of the fund.

"If the unions boycott, they will be cutting off their nose to spite their face ... and losing an opportunity of getting people on that board who are sympathetic to union investment philosophy, including social and ethical investments," said Mr. Cohen. "They would end up with a unilateral board that does its liking with no counterweights from unions and pensioners."

Joint management was the critical issue the Senate wanted sorted out. Conservative Senator David Tkachuk worries the investment board is being given carte blanche, which could be "dangerous and corrupting" because it doesn't "answer to Canadians, plan members or Parliament." He argues the unions will bring a "self interest that will ensure proper management of that board."

"As unhappy as they are about the surplus, they have to live with it ... go to the table and get a say. They have no other choice," he said.

"You will never stop political interference," Mr. Tkachuk said. "The government gets elected to run the country, so they will put their people (on the board). The only way to make sure the right people are appointed, is to make it an open selection and review process.... I'm not saying they will, but they could be helpful to a Liberal friend by buying his stock."