Monday, June 27, 2005

Are Pension Plans Just Another Ponzi Scheme?

An article in today's Globe and Mail about a 19.4 billion dollar short fall at the Ontario Teachers' Pension Plan.

"Despite its stellar investment performance, Teachers expects the shortfall between its obligations for what it has to pay in pensions and what it will have on hand to hit $19.4-billion this year. At the same time, the plan will welcome its 100,000th retiree this summer.

Stellar Investment performance? I have heard of being an optimist and saying the glass is half full rather than half empty, but this is ridiculous! There is a 19 billion dollar hole.......somebody obviously didn't do their planning very well. I think I used this excuse on my parents when I was in school........."I didn't get a C, I got an A+ on the first half of the test."

Mr. Lamoureux, an actuary by training, readily admits to being
conservative, but insists that's the prudent course. "As an actuary, you have to
think long term," he said. "I think that our job is to make sure there is a
pension plan in 35 years and that it is not too onerous on the young

Isn't it an acutary's job to make sure this situation doesn't happen to begin with. This shift in demographics is nothing new and is not unexpected. Isn't this part of what pension managers get paid to deal with? I'm lost.

So how did the Teachers plan get into trouble? The Ontario Teachers scheme has set the gold standard since Mr. Lamoureux took the top job 15 years ago and started running the fund like a business. Performance has been nothing short of spectacular, averaging an 11.3-per-cent return since 1990, and the fund seemed awash in cash, running multibillion-dollar surpluses through the 1990s.

But Ontario's teachers and the provincial government, the two parties that
fund the plan, decided to raid the cookie jar. The government used its share of
the surplus to pay debts it owed from past contribution shortfalls. The teachers
got a sweeter deal on early retirement. Their inflation-indexed pension kicks in
when their age and years of service add up to 85. Teachers and their survivors
now, on average, spend more years collecting retirement benefits than they spend
in the classroom.

So then what this article is saying is that the "surplus" was really imagined? I wish I had an imaginary surplus in my bank account that I could monetize.

I know what you will say, Josh it's easy to be a critic. Josh says, no way, I run my own business and take responsibility for the risks. Why should a giant pension fund manager be any different. Trying to shift the blame to the teachers by saying their contributions haven't increased in 15 years, is like blaming a back seat driver when you get into an accident (and it's you that is driving). Well, okay maybe the teachers aren't completely blameless as demonstrated by this quote"

OTF president Jim McQueen fully expects some increases will have to come, but he says if the plan were a little less conservative in its assumptions and embraced a rosier scenario for future performance, part of its funding shortfall would go away.

So just put on the rose coloured glasses and everything will go away? Cute!


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