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Benefits and Pensions MonitorA Conversation With… Tony Gage BPM: About two years ago, I was at a PH&N conference and I heard you give an excellent speech on saving Defined Benefit pension plans. Do you hold out hope for them? TG: There are still huge benefits to providing a Defined Benefit pension plan. Unfortunately, as I see it today, the differentiation between being in the public sector versus the private sector has only grown. That’s not to say that the workers in the public sector don’t contribute. If you look at the contribution rates of an Ontario teacher or a B.C. civil servant, they’re quite significant. Clearly, to have a good pension plan, you do have to put money away. However, in the private sector, there are many plans which are now being closed and replaced with Defi ned Contribution plans. The Defined Benefit component is a mature plan which will run off over a period of time. The question is how do you manage that. So we’re seeing a lot more emphasis on liability driven investment where people are saying ‘how much am I willing to put into a risk budget to achieve a higher rate of return?’ If interest rates back up some more from these levels, you’ll see plans that have not gone to the liability-driven side move to it, particularly if the equity markets hold up. If plans can stay on the surplus side of the equation, there will be a window of opportunity for plans to quasi-immunize their mature liabilities. In my speech I noted a number of weaknesses as it related to 401(k) plans. Since that time, we have seen improvements. There is a requirement of automatic enrolment and there is the growing use of life cycle funds, rather than money market funds, as the default option. BPM: There are some who say the return to fully funded positions for these DB plans will also give plan sponsors a window of opportunity to close plans to new entrants or shut them down and move to DC plans. TG: I think there will always be pressure in that way. Consider the U.S. which obviously has a large majority of DC plans now. I think they now have more assets on the DC side than on the DB. In the UK experience, legislation has had the impact of accelerating the closing of DBs, and opening up DCs. The potential impact on the financial statements and the uncertainty surrounding assumptions are a nightmare for chief financial officers so I think the shift from DB to the DC side will continue. BPM: And yet, it seems to be taking place at a snail’s pace in Canada. We’re still in a situation where there are only about 10 per cent of assets in DC compared to DB. TG: You’re talking stock versus flow and you’ve always got to be a little wary of those comparisons because the stock of DBs, particularly in the private sector, will start to shrink as those plans start to wind down. On the other side of the equation, in the DB sector, there are these big public sector pension plans, some of which are mature, but some of which are not. They’re looking at ways of diversifying and trying to find markets in which there is informational advantage or inefficiencies in the marketplace. They’re also looking at their liabilities and they’re becoming more aggressive. They’re using more leverage. They buy a real estate property and put a mortgage on it, that’s leverage. If they go into a private equity fund, they’re using leverage. Hedge funds are certainly using leverage. Measuring risk has improved, but we are being naïve if we think that a ‘Value at Risk’ calculation captures the actual risk we are taking. ---------------------------------------------------------------------------------------
Tony Gage is former chairman, president, and chief executive officer of Phillips, Hager & North Investment Management Ltd. His career at PH&N spanned more than 20 years. Prior to that, he was an assistant vicepresident at Confederation Investment Counselling, the pension fund management arm of Confederation Life. In fact, he contends his career is a classic example of the ‘Peter Principle.’ Now retired, he remains active in the industry as a director of PSP Investments and Sky Investment Counsel and as head of the management committee of JEA Pension System Solutions. --------------------------------------------------------------------------------------- BPM: Just going back to LDI for a minute, one of the concerns I hear is there may not be enough fixed income product. As a fixed income manager, what is your view? TG: I’m not as inclined to worry about the ‘shortage side’ of the equation. First of all, if there is demand, investment bankers will find the supply. With the ability now to hedge currencies, it seems to me that you could basically, albeit with some tracking error, buy fixed income securities on a global basis and hedge it back. BPM: Has the rise of the Canada Pension Plan Investment Board had any impact on the pension fund industry in this country? I ask that because when I started with the magazine 10 years ago, the CPPIB was just being launched. At that time, unlike today, you didn’t hear much about private equity or infrastructure. TG: I think the CPPIB is following other people. If you look at Ontario Teachers’ Pension Plan or the Caisse de dépôt et placement du Québec, they’ve been using these assets for a long period of time. The BCE auction has merely raised the profile of large public sector pension funds. ■ < previous |
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