Canada’s politicians and business leaders need to reform the pension system or the country could be staring into the “abyss” as a wave of workers retire, the country’s third-largest pension fund manager said.
“The worst case scenario is that we just keep digging ourselves into a bigger hole and when we hit that final crisis the pain will be significantly greater because you’ve got a shorter time frame to do it,” James Leech, chief executive officer of Ontario Teachers’ Pension Plan, said yesterday in Toronto.
Leech, 66, co-authored “The Third Rail: Confronting our Pension Failures”, in which he highlights problems facing the country: Canadians aren’t saving enough for retirement, they’re living longer, and generating lower investment returns.
Leech cited Nortel Networks Corp. and the city of Detroit as examples of what can go wrong when a crisis hits and pensions aren’t prepared.
Nortel, once North America’s largest telephone-equipment maker, filed for bankruptcy in January 2009, leaving an underfunded pension plan. Detroit filed the biggest U.S. municipal bankruptcy with about $18 billion in debt, and said it didn’t have enough to pay its retirees, bondholders, and employees.
“The guarantee’s only as good as the solvency of the guarantor, and in some cases that can be threatened,” Leech said.
The ratio of elderly to working-age citizens will probably rise 16 percent over the next two decades, Canada’s finance ministry said in a 2012 report.
Even without a financial downturn or company default, pension issues should be addressed now before it’s too late, Leech said. The government needs to work with companies and pensions to stem the decline of defined benefit plans such as the Ontario Teachers’ fund; enhance the Canada Pension Plan, and make it mandatory for the self-employed to invest for retirement, he said.
“Pensions are the third rail, the electrified rail on the subway system,” said Leech, who joined the fund in 2001 and became CEO in December 2007. “You touch it, you get killed. It’s so much easier for all leaders -- business, labor, political to say ’I’m going to let another generation worry about that and I’m just going to kick the can down the way.’”
Leech faces his own retirement soon, leaving the C$129.5 billion ($123 billion) Toronto-based fund on Jan. 1. Ron Mock, currently senior vice president of fixed income and alternative investments, will succeed him.
Ontario Teachers’ earned 13 percent on investments in 2012, according to its annual report. That beat the 9.4 percent median return of Canadian pension funds, according to a Jan. 29 report by Royal Bank of Canada’s RBC Investor Services unit.
Ontario Teachers’ fund had 97 percent of assets needed to meet liabilities as of Jan. 1, 2013. It’s been facing funding shortfalls since 2003 as future pension costs increase faster than plan assets due to low interest rates and increasing life expectancy, according to the annual report.
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