Submission: Submission

Police Pensioners Association of Ontario Submission

February 24, 2009

The Honourable Dwight Duncan
Minister of Finance
Attention: Comments on Report of the Expert Commission on Pensions
c/o Pension and Income Security Policy Branch
5th Floor, Frost Building South
7 Queen’s Park Cresent
Toronto, ON M7A 1Y7

Dear Mr. Duncan:

Thank you for being given the opportunity to express our comments on the “A Fine Balance: SafePensions, Affordable Plans, Fair Rules Report” prepared by Mr. Harry W. Arthurs. It is evident from the end document that Mr. Arthurs and his colleagues on the Expert Commission put considerable time and energy in coming forward with a roadmap for the future of pensions in Ontario.

Regrettably the final report was completed before the recent financial crisis erupted around the world. Canada and countries around the world have been pushed to the brink of financial ruin because of a number of factors including poor decisions by governments and corporate entities. We may not know for many years whether Mr. Arthurs report can address the problems pension plans face given the difficult times ahead. Time and positive action by government and all citizens will determine the final outcome of pension reform.

The Police Pensioners Association of Ontario (PPAO) represents over 6,000 retired police personnel from Toronto, Peel, York, Durham, Halton, Hamilton, Niagara, Ottawa, London, Chatham-Kent, Windsor, Sudbury, Sault St. Marie, Lindsay, Sarnial, Strathroy, St. Thomas, Alymer, Brantford and Tillsonburg.

The PPAO supports many of the comments and recommendations provided in the final report however the report failed to address some of the concerns we identified to Mr. Arthurs in our letter of October 11, 2007.

In our opinion the Commission failed/ignored our simple request for a definition of a retiree/pensioner. We want to make it very clear; we are not former members who have terminated membership in our pension plan.

The PPAO also supported the fair representation by all stakeholders on pension boards. Mr. Authurs report recommendations found under 8.2 & 8.3, do not go far enough to ensure pensioners have mandated rights to retain voting privileges based upon representation.

We have commented in our short brief support for the Joint Sponsorship model as proposed by the Expert Panel.

The PPAO also provided some insightful comments on solvency issues, which we believe could provide large public sector plans with some financial relief. We believe any changes in solvency legislation should be subject to openness and accountability.

The PPAO has commented on the issue of a National Security Regulator. You will note in our comments that we support this issue. Currently the federal government and Ontario support this position but over the next months it is anticipated others will ‘buy in’ to this important initiative.

We have attached to this letter our position on a number of issues being contemplated as a result of the Expert Commission study. Once you have developed legislation the PPAO intend to be at the forefront of discussions involving pension legislation. The PPAO looks forward to participating in the next stage of the process, which will be the introduction of legislation later this year to address the serious issues facing the pension industry.

Yours truly,

Original signed by

Terry Sullivan



The Police Pensioners Association of Ontario (PPAO) strongly encourages the provincial government to develop an appropriate definition of a retiree.

This is not the first time we have made this request. The PPAO made a formal request for a definition of a retiree during Bill 206-OMERS autonomy. Our request was ignored. We again made the request for a change in definition during our presentation to the Expert Commission on Pensions. Again, we were ignored. As you know the new OMERS Act, 2006 does not provide a definition of a retiree and relies on the Pension Benefit Act to provide a definition.

The current definition of a retiree is found in the Pension Benefit Act (PBA) which has remained largely unchanged for the past 25 years. The PBA defines a ‘former member’ of the plan;

“Former member means a person who has terminated employment or membership in a pension plan, and,

  1. is entitled to a deferred pension payable from the pension fund,
  2. is in receipt of a pension payable from the pension fund,
  3. is entitled to commence receiving a payment from the pension benefits from the pension fund within one year after termination of employment or membership.

The PPAO has stated clearly and consistently over the past couple of years that we have never agreed to or supported the notion that we have never terminated our membership in our pension plan. We find this definition to be out of date and discriminatory. We respectfully request the provincial government develop and implement a meaningful definition that properly reflects our status within the pension plan.

We suggest a simple wording like “A retiree is a retired member of a pension plan”.

The PPAO rationale for wanting this change has never wavered. We hope you will understand that the members of the PPAO are proud of the service and commitment they have made in every community in Ontario. Many have continued this dedication by volunteering within their respective communities helping the less fortunate. Others have returned to work in the police profession as part-time civilians. We believe very strongly we have earned the right to be equal partners with the other stakeholders within the various pension plans.

We would also respectfully point out the commitment retiree/pensioners make to the overall financial health of the province. Retiree’s pay property taxes, sales tax both provincially and federally, they spend money and buy products to support the economy, and they vote on issues in local, provincial, and federal elections.


The PPAO’s consistent position on Board Representation has never changed. Our members expect to be treated fairly and be given the opportunity to vote on all issues affecting our plan, including investments and plan design.

During the Expert Panel discussions the PPAO provided compelling evidence of the importance of involving retirees on pension boards. In our brief to the Expert Panel we outlined the following information that supports our view of being a voting stakeholder on pension boards.

A Statistics Canada census in 2006 reports that the nation’s aging population is growing due to a low birth rate and people living longer. Life expectancy numbers:

  • 82.5 years for women
  • 77.5 years for men

People aged 65 and older surpassed the 4 million mark and increased from 13% in 2001 to 13.7% in 2006. Over the years this will increase exponentially.

The over-80 age group was the second fastest growing group, increasing by more than 25% to 1.2 million over 5 years.

A record one in seven Canadians are now 65 and older.

The PPAO also reviewed many large pension plans to confirm our position that retirees are an important part of all pension plans.

OMERSActive236,900(as of Dec 31/06)
  Retirees 36,900  
OPT Active 44,568 (as of Dec 31/06)
  Retirees 21,439  
HOOPP Active 150,000 (as of Dec 31/06)
  Retirees 75,000  
OTPPB Active 167,000  
  Retirees 104,000  
CAAT Active 17,371  
  Retirees 10,021  

The PPAO would also bring to the attention of the government the serious issues facing the Teachers pension plan. Notwithstanding the fund’s 2007 investment growth, the preliminary funding valuation conducted as of January 1, 2008, showed a $12.7 billion shortfall between the plan’s assets and its liabilities (the cost of future pensions).

When the Teachers looked at this shortfall they had several decisions to make. The Teachers and the government could increase contributions, reduce future benefits, or use a combination to bring the plan back to health.

The Teachers made a decision! They did two things. First, they conducted a member survey on contributions and benefits; and 2) they commissioned an expert panel to independently review the assumptions used for the plan’s funding valuations.

The survey resulted in the members saying they would be willing to pay an average of 12.3% of their base earnings to preserve their current pension package. Of the three options offered, making cost-of-living increases conditional on the plan’s financial health (with the understanding that inflation protection would resume when the plan could afford it) was their preferred option to address funding shortfalls if contributions were already at their maximum preferred levels.

The end result of the Teachers $12.7 billion shortfall! In a recent agreement the union representing teachers and the government agreed to a new plan that will limit cost-of-living increases on a go-forward basis. For years of service before 2010, the pension benefits will be fully protected from inflation. But for years of service after 2010, cost-of-living increases will be limited to as much as one half of inflation, depending on what the plan can afford.

The PPAO supports common sense solutions to pension shortfalls and we acknowledge the serious economic situation of the world economy. We understand tough decisions must be made to protect the pension promise but we also know that future retirees within the Teachers plan will have their inflation protection diminished for an unspecified time, perhaps as much as ten years. This should serve as a reminder that retirees are not immune to tough economic times and, like other stakeholders, can be significantly impacted by uncertain times.

Another reminder of how vulnerable retirees can be to serious economic problems is the stimulus package involving the automotive sector. On February 18, 2009 General Motors Canada(GM) announced it would ask both the federal and provincial governments to help relieve it of pension and retiree health care costs that are crippling its competitiveness within the industry.

GM stated its ratio of retirees to active workers is more than two-to-one with 34,000 retirees and about 14,000 active employees and they do approximately $32 billion business in terms of revenues. GM’s defined benefit plan for Canadian hourly workers has a $3.9 billion short fall while its salaried workers plan has a $500 million deficit according to statements made in December 2008. As of April 2008, GM, Ford, and Chrysler had a liability worth over $7 billion for retired Canadian workers. Unionized workers do not contribute to their pensions. The auto industry blame this significant problem on the collapse in stock values and falling interest rates, like many other pension plans.

Joint Sponsorship Model

The PPAO supports the Joint Sponsorship model of managing large pension funds like OMERS and other public sector plans. During Bill 206 the PPAO supported this model and made a presentation before the Standing Committee of General Government in January 2006. We also supported this position in our submissions to the Expert Commission.

In Mr. Authurs’ November 2008 report he noted that Ontario should encourage the creation of large pension plans such as multiemployer plans because research has shown these plans typically have higher returns, pay lower fees on their investments, and manage risk better to provide a more stable funding for workers.

One of our conditions for supporting this model was the inclusion of retirees with full representation and voting rights on the Administration and Sponsors Corporation. The PPAO was disappointed and outraged that we had to appear before our provincial government to enforce this principle. The reason was simple, the draft legislation of Bill 206 prohibited retirees from having voting rights on the two Corporations. This past view was unacceptable to the PPAO and we hope that government takes this position into account when drafting the new legislation regarding the Pension Benefit Act.


In its discussion paper the Expert Panel asked stakeholders a very pointed and topical question in relation to solvency issues. The question;

“Should different rules apply to different kinds of plans and different kinds of employers? If so, what distinctions would be appropriate and why”?

The PPAO understands and recognizes that solvency valuations provide information to determine whether a defined benefit plan is sufficiently funded to meet its liabilities on wind-up of the date of valuation. In our case, OMERS is unlikely to be forced to wind-up but its solvency obligations become even more paramount as investments plummet. ($8 billion net loss in 2008)

In the case of private plans the issue is even more important. They are faced with the risk that the company may have serious funding problems and go under. In today’s economic market that is the reality. Already in February 2009 we see bankruptcies skyrocketing and major companies laying off or closing their doors.

In our position to the Expert Panel on solvency issues we recognized that large defined benefit plans, such as OMERS are seeking an exemption in its Primary Plan from the solvency funding requirements of the PBA. Typically, Canadian pension legislation provides for a five-year period of funding any solvency deficiencies under defined benefit plans. Given the very significant problems facing large investment groups like pension plans our position remains unchanged however we urge the government in drafting new pension legislation to ensure safe guards are placed in the legislation to ensure openness and transparency. The following measures should be included in the legislation:

  • Filing a detailed report of the solvency exemption or solvency deficit with the appropriate regulators.
  • A formal Board/Corporation policy on the how to deal with solvency issues.
  • An updated and concise actuarial report.
  • Clear and concise communications/consultation with all stakeholders regarding solvency issues.

The PPAO recognizes that in such difficult financial times the possibility of a solvency deficit exists and the PPAO would support legislation that provides for transparency and accountability. The last thing we want to learn is our plan is in trouble and nobody was legally obligated to advise the stakeholders. Some may say this can not happen in Canada, but it does, all the time. We just have to look at the large Caisse plan in Quebec.

Example - Caisse de Depot et Placement du Quebec (Caisse)

In December 2008 Caisse, Canada’s largest pension plan had assets of $155 billion but had recently sold $10 billion in equities. Why did they do this? Well apparently the Caisse used the Lehman Brothers as their trader of choice, however when the equity market collapsed Lehman’s filed for bankruptcy meaning some of the Caisse assets were tied up in lengthy and costly litigation.

Almost immediately the Caisse issue flared in the media. Questions about governance and investment risks came to the forefront.

  • Under the leadership of Henri-Paul Rousseau, from 2003 to 2007, Caisse’s assets increased 60%, mostly from market appreciation. But operating costs increased by 61%, or $205 million, to $330 million, over the same period. The question then became, why an extra $125 million a year to manage assets, which increased mainly through market appreciation as well as through new contributions by clients?
  • It was learned through investigative reporting that Caisse’s risks are not evaluated on a real-time basis because of outdated IT technology. In 1996 Caisse outsourced its IT functions to another company. By 2003 problems and inefficiencies led Caisse to bring IT in-house once again. Regrettably there was no cutback from this company’s contract costs even though an internal IT department was created. The result was IT costs were duplicated. Was this poor management and board governance?
  • The Caisse also had to explain why external management fees increased. Between 2006 and 2007 these fees increased from $54 million to $61 million. The question that requires explanation is, were these increased fees also experienced by other pension plan?
  • Another issue that played a significant role in the deterioration of the Caisse was the asset-backed commercial paper holdings (ABCP). In 2007 the Caisse wrote down only 15% of the value of its ABCP holdings or about $1.9 billion of the $12.6 billion invested. Compare this 15% to other entities who reported 30-70% losses?
  • The other issue that played a major role was the involvement of the provincial government in the plan. The Quebec government became increasingly more involved in the overall management of the Caisse. The involvement (dispute) centered on the fact that since Henri-Paul Rousseau stepped down in May 2008 the government became increasingly more concerned about the way the fund was being managed. Why? The Caisse posted a staggering loss in 2008 of approximately $38 billion mainly because of falling stock prices.

This mismanagement and poor governance accountability would never had happened if effective language existed in legislation to make Caisse accountable and transparent.

  • A reserve fund should established (i.e. assets of the plan exceed solvency liabilities) equal to the lesser of the surplus and an amount to be calculated in accordance with regulations.
  • A restriction on benefit improvements in underfunded plans. If the actuarial valuation prepared in connection with an amendment shows the solvency ratio of the plan is less than 90%, there must be immediate funding to bring the solvency ratio to at least 90%, or funding equal to the cost of the amendments, whichever is less.
  • Filing a detailed report of the solvency exemption or solvency deficit with the appropriate regulators.
  • Boards/Corporations should have clear and concise policies on how they intend to deal with solvency issue and not make them on the fly as the crisis unfolds. These policies should be developed in conjunction with stakeholders including employer, employee and retirees. The policies, once approved, should be effectively communicated to the regulator for approval. By doing this as we propose it is our belief that significant litigation and acrimony will be mitigated.
  • Effectively communicate on a regular basis (quarterly) the status of solvency deficit to all stakeholders to prevent any surprises, especially in light of the Caisse debacle.

National Security Regulator

Currently in Canada the Office of the Superintendent of Financial Institutions regulates pension plans of companies that fall under federal jurisdiction. This would include the huge transportation and telecommunication companies along with big banks. The provinces set the rules governing all other pension plans. In Ontario, the regulatory body is the Financial Services Commission of Ontario.

In recent years there has been significant dialogue regarding the creation of a single security regulator which would replace the current patchwork of provincial and territorial commissions. Some professionals believe that a single national regulator is less likely to let a bad situation fall through the cracks than 13 provincial and territorial ones. This in part can be reflected in the fact that Canada is the only industrial nation without a federal stock market regulator. High profile cases like Bre-X Minerals Ltd, YBM Magnex, and the more recent Livent Inc. scandal have rocked the Toronto Stock Market in previous years.

This was also supported in January 2008 when the International Monetary Fund released an assessment of securities regulation in Canada. Criminal enforcement appears to be particularly weak and needs immediate improvement. The report outlined the common perception that few cases have faced criminal prosecution and even fewer have resulted in criminal sanctions. Canada did establish the Integrated Market Enforcement Team to respond to criminal conduct but the unit is woefully under staffed and under-funded.

The PPAO supports the creation of a National Security Regulator and would be pleased to expand on this issue during public consultation later this spring.