• Dear readers: Your humble scribe has been producing content on what is being called an imminent pension crisis, for the the Alliance for Retirement Income Adequacy (ARIA), a site designed to foster an informed discussion about retirement issues. It has been quite an education, and I thought I’d share some of the stories with you. A category has been created, ‘Not so golden years,’ where this content will be archived. This story originally ran in late 2014.
“Municipalities are capital hungry, with long lists of infrastructure that have to be rehabilitated or built. Those needs are not going away, and without raising taxes substantially municipalities are going to be very stretched to try and make those investments. It looks like you have got money on the sidelines that wants in, and you have people who have an appetite for that investment.” – Jeff Lehman
By John Devine
Ontario municipalities need capital for infrastructure projects, big and small, while Canada’s big pension plans have an appetite for investing in such projects. It could be the perfect union of need and opportunity, says the chair of the Large Urban Mayors’ Caucus of Ontario (LUMCO).
Jeff Lehman, mayor of Barrie and chair of LUMCO, recently wrote an opinion piece for the Globe and Mail in which he talked about harnessing the financial clout of pension plans, which he said are “eager to invest in infrastructure.” It’s a situation “crying out for some entrepreneurship,” he opined.
ARIA contacted Lehman to hear more about his vision of how municipalities could work with pension plans on infrastructure projects, from the largest to the smallest, subways in Toronto to playground equipment in a rural township.
“Municipalities are capital hungry, with long lists of infrastructure that have to be rehabilitated or built. Those needs are not going away, and without raising taxes substantially municipalities are going to be very stretched to try and make those investments. It looks like you have got money on the sidelines that wants in, and you have people who have an appetite for that investment.”
What’s missing, he continues, is a vehicle to facilitate the process. When municipal regulations were developed in the late 19th and early 20th centuries, this type of investment arrangement between municipalities and pension plans could not have been imagined, says Lehman, adding that some type of regulatory changes might be required, but creative thinking most certainly is.
“I wrote the (Globe) piece because I am hoping to stimulate some of that thinking as this is a problem that can be solved and it’s a big opportunity.”
Lehman is not the only one to see the investment potential of Canada’s large pension funds. In an interview with ARIA, Janet Ecker, former Ontario finance minister and current president of the Toronto Financial Services Alliance, spoke of the investment potential of the plans and the overall benefit of that investment to Canadians.
The case for Canada’s defined benefit plans has been made in a number of reports, including a 2013 analysis by the Boston Consulting Group which found the provision of adequate retirement income meant that retirees were able to remain consumers, buying goods and services and paying taxes.
In particular, local economies benefit from retiree spending the report noted – in Cobourg, for instance, retiree dollars accounted for 15 per cent of total consumer spending. Lehman says that for a community like Barrie, “regardless of whether you are retired or working, the economy is better if people have an adequate income.”
With adequate retirement income being so vital to local communities, Lehman says he worries about the erosion of retirement savings, and people’s inability to put enough away during their working years. He follows the discussion on the issue, being particularly impressed with Jim Leech’s book The Third Rail: Confronting Our Pension Failures, which the former president and CEO of the Ontario Teachers’ Pension Plan co-wrote with Globe and Mail business writer Jacquie McNish.
In an interview with ARIA, Leech argues that defined benefit plans must acknowledge and address risks such as longevity, moving “towards a more sustainable position by finding ways to more equitably share risk between the three main players: the employer, the employee and the pensioner.”
Leo de Bever, CEO of the Alberta Investment Management Corporation, said something similar when he told ARIA that pension plans must manage risk if they are to keep the money flowing to retirees. Many plans have already taken such steps, increasing contribution rates, making the deliver of some benefits conditional on financial performance of the plan, and raising retirement ages.
“Many of the concerns result from a very good thing – that we are living a lot longer,” says Lehman. “I do agree with those warnings and I buy into the argument that says we can’t stick our heads in the sand and that there needs to be changes to address this mathematical reality.”
Those changes, however, shouldn’t include making the deliver of Canada Pension Plan (CPP) benefits conditional, he continues, saying that at some level, retirees need to be able to count on some sort of stable income.
Pensions were supposed to be on the agenda at LUMCO’s June meeting, but got shelved because of the provincial election. Lehman says mayors will likely talk about pensions at their December meeting, saying, “we don’t have a position yet, but I expect we will.”
His own view is that the vision articulated by Leech and others “makes the most sense.”
Ontario municipalities, he continues, are not overly stressed by the cost of employee pensions, mostly because the plans are being effectively managed. “I think the reason for me to say that as mayor of Barrie is that the Ontario Municipal Employees Retirement System (OMERS) is in good shape.”
Pointing to the value of economies of scale and access to internal management and investment skills, Lehman says that for a community like Barrie to go it alone with its own pension plan would present too much risk.
“That’s why places like Detroit got into trouble. OMERS is sector-wide and is very well managed, and doesn’t give me that degree of concern. Ontario is in better shape than a lot of other places, both the municipalities and the status of the funds. The major pension funds are in pretty good shape.”
Traditionally, to raise money for projects municipalities have issued debentures, but for an investment arrangement with pension plans a more direct process would be useful. The province, he adds, has an interest in facilitating this type of exchange, and could perhaps employ the services of Infrastructure Ontario to that end.
“What we are talking about here is the actual investment, construction or purchase of assets funded by these pension funds. There isn’t a ready-made structure for that, and that’s one of the reasons I’m anxious to talk about this.”
There is a benefit to society about this that shouldn’t be overlooked, says Lehman, when looking at infrastructure investment by pension funds.
“They are investing back into their communities. There is a broader benefit to society which comes from them making those investments, and that’s a good thing.”