Finance Minister Goodale does a pension flip-flop
The pre-election announcement by Finance Minister Ralph Goodale that the pension plan limit on income trust investments is being placed on hold came as something of a surprise, albeit a welcome one. The original announcement had been contained in the March budget and it is rare, although not unprecedented, for a government to back down on budget policies.
In this case, the climb-down was especially unusual because this is hardly a hot button issue with the public (although it should have been for those with pension plans). On the eve of an election it’s not surprising if a government defers action on unpopular positions if they are likely to have a negative impact on voters. But this hardly seemed to be the case here.
Yes, the big pension funds had made angry noises. But they really don’t have the clout required to force such an abrupt about-face by Ottawa. Even Keith Douglas, general manager of the Pension Investment Association of Canada, seemed to be taken aback.
“I knew we were getting somewhere but I just didn’t know we were getting that far,” he told The Globe and Mail.
In making his announcement, Goodale said that he had acted too hastily d that more consultation was needed on this complex issue. That doesn’t exactly inspire confidence in the way our Finance Minister goes about budget-building.
But what really was behind the decision to act now? I may have a suspicious mind, but I think that Goodale’s hand was forced by the revelation of the fact that all the pension plans managed by Quebec’s Caisse de Depot ($140 billion worth) were to be exempt from the rules.
Some people I have spoken to since that news came out have expressed a fear that it could be used to “bash Quebec”. Certainly, had Goodale gone ahead, there is a possibility that pension plan members in the rest of Canada might think they were getting a raw deal at the hands of the feds and react negatively.
According to all the polls, the Liberals are trailing the Bloc Quebecois by a wide margin in Quebec. They didn’t need an issue like this to pop up to exacerbate matters in the midst of a campaign.
It’s possible, of course, that Goodale will reinstate his plan once the election is over, if the Liberals win. But I suspect that it’s dead and that any future attempt to put a brake on the burgeoning income trusts sector will take a different direction.
So what could this mean for income trust investors? Potentially, a lot. Recently, Paul Bloom, who runs several exchange-traded income trusts funds, held a conference call with investors and analysts to discuss the state of the sector. Bloom has been warning for some time that income trusts had become too expensive and that a correction was coming. As a result, he has been taking profits and building cash reserves in the Citadel funds he manages. So the April correction came as no surprise to him.
What was interesting, however, was the degree of blame he attached to the budget for making matters worse. He said that the cap on pension plan investments made it highly unlikely that income trusts, with the exception of exempted REITS and energy trusts, would eventually be included in the S&P/TSX Composite Index, despite the fact the sector now accounts for about 9 per cent of the total market.
“Now that there is a doubt about inclusion in the index, some investors are exiting,” he noted. “Also, pension plans are not buying any more.”
The net result, he suggested, was to add to the selling pressure that was driving prices down in the face of higher interest rates.
Goodale’s announcement won’t change this situation overnight. All he has done is to put everything on hold pending further study. As long as the uncertainty remains, there will be a cloud over the sector. But perhaps the worst of the correction is over, at least for now. Certainly, the Finance Minister’s retreat won’t hurt.
Adapted from an article that originally appeared in the Internet Wealth Builder.