Right now, if you could, would you choose to have $1,000,000 in your bank account that you could access as soon as you retire, to spend as you see fit? Or would you rather have that money in equal payments over the course of 30 year period? Well, being part of a pension doesn’t give you a choice in the matter. Or does it?
I have questions. And the answers I’m looking for aren’t going to be pretty. So come along with me for the ride! We’re going to investigate all the reasons as to why I hate pensions! Because where we’re going, we don’t need roads! We’ll need a shovel. That’s right, a shovel! Because we’re going to do a whole lot of digging, through heaps of shite!
We’re about to go down a rabbit hole of unknown depths… Will we find strange and bizarre things? … Perhaps rabbits.. Maybe chipmunks… Possibly coyotes… Maybe even a hippopotamus or two if we get deep enough… and if we dig too deep… A Balrog even? Do you have any idea what a Balrog is? It’s quite frightening, that’s what!
But at the very least, we’ll hopefully discover truth…
A Preface
I wasn’t sure exactly how to approach this topic. It’s something I’ve wanted to dig into for a long time. I had thought that I would maybe be able to tackle this in one article, perhaps two. Was I vastly mistaken. To be frank, there is a LOT of stuff not only that I had to research, but also wanted to discuss. Case in point, my collective draft for the material is currently at 43 pages in length and slowly growing. HOLY SMOKES! I quickly realized there was absolutely no way to fit that much into one article. Even with massive editing, everything wouldn’t fit, and more importantly, the topics wouldn’t receive proper justice. So, “Why I Hate Pensions” will be divided into a number of parts; I’m liking it more to “episodes”. How many? I’m not sure. I’ll keep going until I feel it’s done.
But I will aim to group each article with the most related topics. It will be almost like one giant story, perhaps even a saga. It’s important to note, that some of the things I’ll be looking at (numbers and calculations specifically), are more general in some areas, and more specific in others. This is due to various ways of estimating, as well as recent changes in certain pension information factors, causing me to adjust slightly the way I tackled some parts.
But bear in mind that regardless of some of these minor discrepancies, I believe they are accurate enough overall to get the point across, with numerous surprising revelations. Even while I was writing and researching, there were more and more interesting things I kept finding. So while some of the episodes in this series may be published, the entire arc is not finished until it’s finished, and I consider it to be a work in progress.
I hope you enjoy it for what it is, and find it at least somewhat useful, if not enlightening as well as entertaining. I definitely have!
In The Beginning…
When I first started my career over a decade ago, I remember having lunch break with several of my co-workers at the time. I was just a young buck, and they were mature mares getting closer to retirement age. The conversation topic happened to be retirement and pensions. I vividly remember the one co-worker stating the following, “I don’t know what I’d do without my pension.” It was said in a tone of moderate exasperation as well as relief. I’m sure she was glad to be part of our work place pension plan. I was part of it too.
When we first got hired, we were given the option to join the plan. I think most people would have done the same. After all, isn’t that considered one of the most valuable parts of employment? The security of knowing you’ll have a good pension for retirement? Depending on which sources you read, it has been said that a good pension could be worth upwards of $1,000,000 or more by the time you retire. Sounds pretty good right?
My coworkers and I were/are all part of the Healthcare of Ontario Pension Plan (HOOPP). HOOPP is widely known in Ontario and often praised as one of the best pension plans out there, even internationally. It boasts not only excellent financially responsibility, but also great market returns, good pension payouts, and an astounding employer match of $1.26 for every $1.00 contributed by the employee (typical matches are $1 for $1). I compared HOOPP versus the Ontario Teacher’s Pension Plan (OTPP), here, and what I wrote about it included various praises on its value compared to other plans out there. Of course given all the good press, I wrote, you might be wondering about the naming of this series.
What’s In a Name
It’s been just over 10 years since I was part of that conversation about pensions. Over those years, as I learned more about financial planning and investing, I began to get this strange feeling about pension plans, almost like things didn’t seem to add up. I’d read the annual reports on the pension as a whole (because I’m cool like that), and had also been reviewing my own personal pension updates on a regular basis. But something didn’t quite feel right. It was sort of a “too good to be true” icky, greasy type of feeling.
Interestingly enough, there are not very many deep dives into the real nitty gritties of Canadian pensions. The Rich Moose had a couple of good Canadian articles comparing pensions to investing. Unfortunately, his site is down, and looks like it has been for a while. I did find a web-link to the archived version on his pension post here.
Most of the “planning for retirement” info out on the web recommends to have a good defined benefit pension plan in your pocket for retirement, or else you’ll relegated to poverty in your golden years. In many of those articles, investing by the average person is not supported as a viable or realistic idea, or as a complement to retirement planning because of scary words used like “market instability”, “crashes”, and “risk”. Pensions tend to have the opposite buzzwords associated with them, and thus are presented and perceived as much safer, secure, and thus you should be richer in retirement.
Then there’s the pension websites themselves, be it HOOPP, OPTrust, OTPP, etc. They are all designed in an eye pleasing way, with anxiety soothing quotes like, “Your pension is secure”, “As one of Canada’s Largest defined pension plans…”, “A plan for you”, “Fully Funded”, “Responsible investing”, “Maximizing your pension”, “Global, innovative investor”, “Deliver steady returns”. The list goes on and on.
The Realization
Then I finally realized what it was that was causing this uncomfortable feeling I had. I discussed something very similar in the first article of my PC Optimum Points series. It’s this idea where these pension companies have designed their websites and other sources in a way where your eyes and mind just slides through and rolls off any information of substance. It’s like they’ve designed it so that all the presented information is “slippery”, where it’s hard to fully get a grasp of what the actual facts are. It’s as if they’re diverting you from really knowing what pensions are all about. There’s all this flashy fluff and filler and it’s like they’re not actually telling you anything of merit on the surface, except only things like “We’re awesome! Pensions are awesome! You’re Awesome!”, blah blah blah.
And then, I started coming across what I thought were inconsistencies and other stuff like information gaps. Even some things akin to dishonesty and lack of transparency. I also found it quite difficult to find all the information I was looking for. You really have to dig into it and carefully read the fine print of these plans to get a proper understanding of what you should be expecting from your pension. And it really shouldn’t be that tricky to find these things out.
Now I’m not saying that pension plans are bad or evil or disreputable. It’s just that they seem to be designed for the average person who either has no idea about pensions, investing and personal finance, or for people who just don’t care to learn about that stuff anyway.
As for myself, I’ve found it quite frustrating the more I dig into the topic. And of course I’m going to tell you all about it! What I will be discussing will be mostly referencing the HOOPP pension, but almost all of the following discussions in this episode and future ones, can be generally applied to any other defined benefit pension plan.
The COVID-19 Market Crash
The COVID-19 pandemic first struck North America in early 2020. Coinciding with this was that the stock market had just hit an all time high by mid February of the same year. Case numbers were rapidly increasing, and the first deaths related to COVID started to begin. There was the subsequent extension(s) of March break, which shortly after was upgraded to a state of emergency, and the first lock-downs began. All of these events led to a full scale, societal panic buying (see the toilet paper shortage), and more importantly, panic selling due to this marked unprecedented uncertainty. As a result, the market quickly crashed and bottomed out by March 20. It lost upwards of 34% of its value. And this wasn’t just Canada or the US. It was a global crash. Canadian markets didn’t fully recover until almost a year later.
But bringing it back to the crash, and keeping a close eye on the dates, the wonderful people at HOOPP announced on March 23 that the fund’s 2019 investment return was +17.14%. They also sent an email out on March 27 that caught my eye. I still have this email by the way. Its contents validated that we were all going through a difficult time with the COVID-19 outbreak. It patted frontline workers on the backs and thanked them for their commitment and service. Then it followed by describing how HOOPP has a great track record for weathering market volatility and downturns, etc, etc. They also re-stated their 2019 return (17.14%), just in case anyone had missed that point.
What struck me immediately was that they completed avoided mentioning that the market had just crashed and lost over 1/3 of it’s total value, and they did not disclose what the plan’s current Year to Date return was, as affected by the crash. In fact, HOOPP had most likely obtained a double digit negative return by this point. But I can see why they didn’t speak to that, as it might insight panic and distrust with its members that HOOPP may not be as bulletproof as it claims to be. And I doubt it was in a “position of strength” as it had claimed in their email at the time of the crash.
But the fact that they didn’t disclose the real market effects on HOOPP, and instead chose to focus on a nice “pretty” numbers with fluffy speech, didn’t sit well with me. If the sky looks blue, don’t be telling me its green.
On that note, I’m going to end this episode here. There’s enough discrepancies so far to begin thinking about deeper issues and possible conundrums. We’ve begun chasing that rabbit and only entered the very beginning of the rabbit hole. No Balrog’s yet, but trust me… They are coming!
