The UFCW Pension Gurus Damned If They Did And Damned Again
What The Pension Regulator Really Said In The Addendum To Its May 2005 Report
The long-awaited addendum to the FSCO's May 2005 report on the Canadian Commercial Workers Industry Pension Plan has finally been released to CCWIPP members - almost a full month after CCWIPP trustees were given an advance copy for their review and comments and, evidently, spin doctoring.
Within hours of the addendum's release, the trustees (we'll call them the CCWIPP crew), released a wordy statement that implies that the regulator's addendum exonerates them in relation to their handling of investments involving hundreds of millions of dollars of pension plan members' money and that the FSCO's findings are relate to administrivia.
Considering what the FSCO actually said in the addendum, the CCWIPP crew's proclamations are brazen bullshitting that tops anything they've had to say about the regulator's findings to date. To spin their way past the most obvious condemnations, they've even resorted to positioning their compliance problems as akin to sports infractions:
"The plan was found to be previously offside with respect to pension regulations that restrict permissible quantitative investments in real estate and securities owned in any one company. In some cases, this occurred due to follow-on investments made by CCWIPP to protect the original investments. These breaches have been, or are in the process of being, corrected."
Being "offside with respect to the law", makes law-breaking sound sort of sportsmanlike as does follow-on (a cricket term) in reference to the practice of throwing good money after bad. The media release is so full of distortions and not-quite-truths that we're going subject it to the MFD bullshit detector in a separate piece. For the moment, we want to take a look at exactly what the FSCO really said in its follow-up addendum to its damning May 2005 report on the CCWIPP boys and their whacked-out investments.
Much like the original FSCO report that was released May 2005 (this report is sometimes referred to as the March 2005 report as it was finalized in March but not released until May), the addendum is written in confusing style that makes it difficult to for the average citizen to follow and lends itself well to the kind of misleading spin doctoring in which the CCWIPP crew has engaged.
But what the addendum actually does is confirm that the compliance problems (instances where the CCWIPP crew has not been in compliance with the law) identified in the May 05 report are real and that, with only two exceptions, they have not been fully addressed by the CCWIPP boys.
Before we begin our review of the addendum and what it actually said, a little background is in order.
The addendum was issued in response to the CCWIPP crew's protestations about the May 2005 report. In a number of petulant public statements, the CCWIPP crew denounced the report, angrily claiming that it was incomplete and riddled with inaccuracies. When questioned by a writer for a story that appeared in December issue of the Canadian Grocer, CCWIPP Trustee Bernie Christophe repeated these denunciations but could not identify a single inaccuracy. A glossy magazine mailed to all UFCW members across Canada in September 2005 contained further denunciations of the report and a stunning statement from Michael Fraser, UFCW Canadian Director and CCWIPP trustee, that:
"Recent reports have suggested that numerous pension plans are having "solvency" shortfalls. While this may be true for some pension plans, that is simply not the case with CCWIPP"
Seemingly oblivious of the whopping solvency deficiency that CCWIPP's financial statements and actuarial reports confirm (the actuarial report for 2004 puts CCWIPP's wind-up deficiency at about $700 million), Fraser was just warming up for another whopper -
"In fact, pension plan regulators the Financial Services Commission of Ontario (FSCO), in conjunction with the Alberta and Quebec regulators and the Canada Revenue Agency (CRA), have recently completed an exhaustive two-and-a-half year examination of the plan, reviewing virtually all of its investments made since inception. Conducted as a result of malicious, unsubstantiated allegations made by unnamed complainants, the examination involved CCWIPP's Board of Trustees working with the FSCO in compiling and providing over 100,000 pages of documentation relating to the plan's investments. The FSCO report concluded that while some minor administrative procedures may require updating, absolutely no instances exist (or ever have existed) to cause concern to any UFCW Canada members with regard to the ongoing viability of CCWIPP."
What did the May 2005 report really say?
Among the highlights:
- Non-compliance with Federal Regulations that set limits on pension investments in real estate, single or affiliated corporations and in corporations in which trustees have voting rights.
- Non-compliance with conflict of interest provisions.
- Financial statements and other documents not produced when requested by FSCO examiners.
- Significant lack of processes dealing with due diligence, reporting, follow-up for filings and monitoring which lead to the questions about the administrator meeting its fiduciary obligations under [the Ontario Pension Benefits] Act.
- Contraventions of the pension plan's own Statement of Investment Policies and Procedures.
- Lack of documentation (or no documentation at all) regarding due diligence, investment agreements and appraisals. In some cases, files contained draft documents only.
- No established procedures dealing with lending as a percentage of the underlying asset. In some cases, the amount of financing loaned by CCWIPP, when combined with prior encumbrances, exceeded 100% of the value of the properties.
- No documentation related to parties involved in certain investments. No documentation to indicate that related party issues or any potential conflicts of interest have been identified or addressed.
The report identified the following as "the most serious issues" that need to be addressed:
- There are a number of instances which appear to contravene the quantitative limits as set out in the Federal Regulation. We require those investments to be reviewed, and if they continue to contravene the legislative requirements, they are to be brought into compliance.
- We require the Board of Trustees to establish policies and procedures to ensure monitoring of the investments for legislative compliance.
- We require the Board of Trustees to address the plan governance findings especially the due diligence processes for the investments overseen by the lnvestment Committee.
- We require an explanation of the relationship of CCWlPP with Mr. Polley, Mr. Martini and Mr. Irvine.
- We require copies of the financial statements of PRK Holdings Ltd. and RHK.
- We require that the Board of Trustees complete and adopt the internal draft policy dealing with conflicts of interest and address the potential conflicts as disclosed in this examination report.
- We require the Board to address the due diligence deficiencies which have been identified in this examination report for the current investments overseen by the lnvestment Committee.
- We require the Board to establish processes to ensure that the provisions of the SIP&P are adhered to.
- We require the Board to undertake a complete independent due diligence review of the Caribbean Development including (but not limited to...
That's pretty sad for a bunch of high-flyers who have a legal obligation to prudently oversee the investment of a billion dollars worth of other peoples' money. It's hard to fathom how even the cranially-challenged Fraser could characterize this shameful indictment as "some minor administrative procedures that require updating".
In the opening paragraphs of the addendum, the normally trustee-friendly FSCO, slapped him down for his bald-faced bullshitting.
Some officers of the United Food and Commercial Workers (UFCW) also serve on the Board of Trustees of CCWIPP. In a recent article, published in the UFCW Canada Membership Magazine, Michael J. Fraser the National Director of the UFCW and a member of the Board of Trustees indicated that "the examination was undertaken as a result of malicious, unsubstantiated allegations made by unnamed complainants". The communication went on to state that "The FSCO report concluded that while some minor administrative procedures may require updating, absolutely no instances exist (or ever have existed) to cause concern to any UFCW members with regard to the ongoing viability of CCWIPP."
CCWIPP has stated that this communication represents the Union position and not CCWIPP's.
However, FSCO is concerned that at least some of the members of the CCWIPP Board seem to be down playing the seriousness of the situation. While Mr. Fraser may characterize the allegations as "malicious" and "unsubstantiated", the findings of the Report indicate that some of the allegations were not without merit. Some of the findings included contraventions under the Act and a lack of oversight leading to questions about the Board meeting their obligations under Section 22 of the Act. These are substantive findings. In addition, FSCO considers these findings to be more than "minor administrative procedures".
Apart from a few minor deletions and corrections, the addendum essentially confirms everything that was in the May 05 report.
While acknowledging that the trustees have started to put in place rules, policies and practices (that should have been in place all along), the addendum makes it clear that the trustees have failed to fully address seven out of nine key issues identified in the May 2005 report. Those include:
- Bringing investments into compliance with legislative requirements.
- Putting in place a policies and procedures for monitoring for legislative compliance.
- Addressing the May 2005 report's findings about plan governance deficiencies.
- Addressing due diligence deficiencies.
- Establishing procedures for complying with the plan's own internal Statement of Investment Policies and Procedures (SIP&P).
- Turning over financial statements related to Ron Kelly's RHK Holdings (now controlled by CCWIPP) which have not yet been provided.
- Conducting an independent review of the Caribbean investments.
Even the most loyal of apologists would have a hard time finding this to be an exoneration of the CCWIPP crew. In fact, as the further into the addendum, the regulator's assessment of the CCWIPP crew get even more damning.
Even where there was evidence of some progress on the part of the trustees, the news still seemed pretty bleak. For instance, while the percentage of the entire CCWIPP portfolio that was socked away in the loosey-goosey trustee-directed investments and weird Propco Investment Corporations had declined from 45% in to 26%, the regulator noted that:
Some of this decline has resulted from the write down and write off of some of the non performing assets. However, there has also been a decline as a result of the divestment of some of these investment vehicles.
Now there's something the members can cheer about.
Among the most damning of the findings in the addendum is the FSCO's statement that CCWIPP did not meet the statutory (legal) requirement to mandates pension plan trustees to use the "prudent person" standard in relation to their investment decisions. As damning findings go this one is the bomb as it relates directly to the CCWIPP crew's fiduciary duties. What's the "prudent person requirement"?
"The administrator of a pension plan must exercise care, diligence and skill in the administration of a pension fund that a person of ordinary prudence would exercise in dealing with the property of another person. This is known as the "prudent investor" rule. If the administrator has professional or specialized skills, then the administrator must apply the relevant knowledge that the administrator possesses or ought to possess by reason of his or her profession, business or calling to the management of pension funds."
These words are excerpted from a report called "Prudence, Patience and Jobs, Pension Investment in a Changing Canadian Economy", a publication of the Canadian Labour Market Productivity Centre (CLMPC), and describe the common law concept of the "prudent investor". This concept is at the foundation of pension regulation in Canada. Simply stated it means that persons responsible for pension funds must exercise a high standard of care with respect to those funds since they are, in fact, other people's money.
At page 5 and 6 of the Addendum, the FSCO sets out a long list of factors that the should be considered when deciding whether a given investment meets the prudent person requirement. It's such a thorough and informative list that we've reproduced it in its entirety:
When selecting the investment did CCWIPP:
- Undertake a thorough, complete and independent investigation of the advantages and disadvantages of the particular investment prior to making the investment?
- Investigate the merits of the investment/transaction with the view to satisfying prevailing industry standards?
- Employ appropriate methods to evaluate and structure the investment?
- Exercise due diligence in researching all aspects of the transaction?
- Obtain sufficient information to make an informed decision about the investment?
- Ensure that the information it relied on to make the decision to invest was complete and up-to-date?
- Seek the advice and counsel of independent qualified experts and consultants, where appropriate? Did it provide complete and accurate information to the expert/consultant?
- Exercise independent judgement and utilize acceptable standards in retaining and monitoring/supervising qualified experts and consultants?
- Exercise independent judgement in relying on the advice given? Did it review the investment/transaction in an arm's length fashion and compare it to other available options?
- Assess whether the investment was reasonably designed to further the purposes/objectives of the plan and the plan's funding policy?
After selecting the investment did CCWIPP:
- Monitor the investment on a regular basis with reasonable diligence, to ensure that investments continue(d) to meet plan objectives and comply with legislative restrictions and continue to be prudent and, if necessary, to dispose of improper investments?
- Monitor the performance of the persons to whom it delegated investment authority, including investment managers? Were adequate procedures implemented for the supervision of agents to whom fiduciary obligations were delegated? Did these procedures, among other things, measure progress in implementing the Plan's investment strategy, demonstrate management of the portfolio consistent with the Plan's objectives and funding policy and in ensuring that the financial position of the fund is sound?
- Have an exit strategy to divest themselves of any investment? If so, was it followed?
- Document all of the processes and decisions?
And how did the CCWIPP crew rate as "prudent persons"?
FSCO's findings indicate that CCWIPP did not meet these criteria in a number of investments reviewed.
As if expecting the spin doctoring that quickly followed the release of the Addendum, the FSCO assured the readership:
Finally, FSCO wishes to emphasize that the findings of the Report, except as noted in this Addendum, are not changed by this Addendum. The issues brought to the attention of FSCO are, for the most part, issues about certain administrative issues. The substantive findings of the Report including the non compliance issues remain.
And while the Administrator has taken steps to establish new procedures for the oversight of investments "This does not negate the findings resulting from the examination undertaken".
If as a result of the examination, the administrator changes a procedure to address an issue raised in the report or take steps to bring the plan into compliance with the Act, Regulation or sound business practices, this item is still written up in the report since at the time of the examination, the Trustees were not following this practice. These findings are not removed from the report. Also, items that were missing and located after the Report was issued are still included in the report.
The long back and forth consisting of the CCWIPP crew's Responses to the May 2005 report and the FSCO responses to the CCWIPP crew makes it very clear that as of January 2006 problems continue with regard to:
Oversight of investments:
FSCO's concern about this issue is not solely that the letter from RHK Capital Inc. was not in the file, but that there was no documentation to indicate that the Board or the Investment Committee had taken steps to obtain independent written confirmation from CIBC that they were not proceeding to realize the security against the loan. Moreover, FSCO is also concerned that there did not appear to be any process in place by which these types of issues would be routinely identified, followed up on and, if necessary, brought to the attention of the Board or the Investment Committee for action.
Investments in real estate:
We note, however, that CCWIPP is not in compliance with the 10% rule even on the basis of the calculation provided by the auditor. Moreover, FSCO is concerned that CCWIPP has not provided any documents to demonstrate that the Trustees had requested on a regular basis in the past the auditor or any other person provide similar calculations to confirm compliance with the applicable quantitative limits.
The Caribbean development:
In order to satisfy obligations under the Act to ensure that the fund is managed in a prudent manner, it is the responsibility of the administrator to undertake a full due diligence process before undertaking any investment/loan. The issue in this item is the RHK loans and the Caribbean Development. It appears that the persons (Mr. Clifford Evans and Sisu Onni Inc.) who issued most of the commitment letters for the RHK loans were aware of this need for due diligence since most letters stated that a condition precedent to advancing funds was that a due diligence review would be done and be satisfactory to CCWIPP. Since the examination CCWIPP has provided us with considerable information on the workout plans for these investments. However, the information on workout solutions occurred after the investment was undertaken rather than the required due diligence reviews that should have been done before the investments were approved and made.
FSCO continues to be of the opinion that no documentation demonstrating that the Board of Trustees had taken adequate steps to complete a proper due diligence review in respect of the Caribbean Development prior to undertaking the investment exists.
Limits on investments in real estate:
We remain, therefore, of the opinion that the Caribbean properties are real estate holdings and that the applicable quantitative limits have been exceeded. Such investments are to be included as part of the real estate holdings in the calculations for December 31, 2005 and future audited financial reports. If they have not already done so, the 2004 audited financial statements should be reviewed to determine if they include the Caribbean properties as referred to above. Finally, FSCO also requires a detailed list of all properties that comprise the Carribean [sic] properties.
Real estate corporations:
CCWIPP has taken the position that the investments are real estate corporations as well as investment corporations and have filed a number of undertakings with FSCO. The original investments undertaken by some of the Propcos involved the development of real estate. Subsequently, there were restructuring of some of the investments to move away from the direct real estate holding. FSCO has requested documentation to support the position that the investments are real estate corporations or investment corporations. FSCO has requested this information to independently verify the status of these investment vehicles initially and subsequently. To date FSCO has not received copies of the initial articles of incorporation, an analysis of how these investments met at the time of implementation and, continue to meet after restructure, the definition of an investment corporation or real estate corporation. The issue is one of FSCO coming to an independent conclusion that the required undertakings have been filed or each entity.
Finally, it should be noted that item #1 in each undertaking states that CCWIPP will file financial statements or audited financial statements as the Superintendent directs for each of the investments in question. In view of this, we ask that CCWIPP file these statements as a part of their audited financial statements as at December 31, 2005 and, thereafter, on an annual basis. We also require that FSCO be provided with copies of the documentation that has been requested to independently verify the status of the investment and real estate corporations.
Wayne Hanley (President of UFCW Local 175, CCWIPP Trustee and for several years, a Director of AFM Hospitality Corporation):
Mr. Hanley was on the Board of Directors of AFM prior to the investment by CCWIPP. Following that investment he was appointed as a trustee to the CCWIPP Board. Throughout his membership on the CCWIPP Board he retained his membership on the AFM Board. As opposed to Mr. Fraser, he was not sitting on the Board of AFM to represent the interests of CCWIPP. In addition, while CCWIPP has advised that Mr. Hanley was not present when matters relating to AFM were discussed by the CCWIPP Board of Trustees, FSCO has not been advised whether or not Mr. Hanley was present when the AFM Board of Directors discussed matters related to CCWIPP. FSCO requires that CCWIPP provide information concerning this point.
Eugene Fraser (CCWIPP investment committee member, CCIPP employee, believed to be Cliff Evan's nephew):
FSCO is not satisfied that Mr. Fraser is an agent of CCWIPP as the term is used in section 22 of the Act. Rather, Mr. Fraser is an employee, a status which is distinct from that of agent by virtue of the wording of Section 22(8) of the Act. As an employee, Mr. Fraser is entitled to receive his salary for services rendered. He should not be receiving other fees and entitlements other than his salary and his employment contract should reflect this.
When the restructuring took place in 2000, the lending Propco's replaced their outstanding loans to RHK Capital Inc., a Canadian Company, with shares in PRK Holdings, a Bahamian company. The original debentures clearly indicated the purpose for which the debentures were issued and now the structure of the loans have changed drastically, in fact, the loans with mortgage security have been replaced by preferred shares. We did not see any amendments to the debentures transferring these as security for preferred shares, if this type of transfer is allowed. We have also not seen a legal opinion from the Bahamas that clearly states that CCWIPP can realize on the prior security on the basis of the restructuring.
When FSCO visited Pension Benefits Administration Services, the body responsible the day to day operation of the CCWIPP, it was noted that new advances were being done. CCWIPP advised in the February meeting that these were shareholder loans and provided FSCO with copies of various promissory notes. At the time of FSCO's examination several requests were made that all material and documentation be made available. When FSCO arrived onsite it was confirmed that this was all of the material available; however, it appears from CCWIPP's comments that this was not correct. It appears that these promissory notes were not a part of the files nor was there any reference to indicate that they existed.
Compliance with CCWIPP's Statement of Investment Policies and Procedures:
In the Report FSCO indicated that the Investment Committee had made investments in the food industry contrary to the SIP&P. The SIP&P specifically prohibits the Investment Counsellors from making these investments. However, FSCO acknowledges that there is no reference in the SIP&P to the same standard applying to the Investment Committee. In addition, there is no reference to what investments the Investment Committee can or cannot make.
A SIP&P is designed to set overriding investment policies for the pension fund. Since it appears that there are two sets of policies related to investments, one for the Investment Counsellors and one for the internally supervised investments, the SIP&P should have reflected this. Therefore, FSCO acknowledges that the reference to the investment in food processing contrary to the SIP&P should not have been included. However, FSCO would have expected that where there are different standards for the professional investment counsellors that do not apply to the internal investment management group this difference would have been properly communicated in the SIP&P.
Valuations of property:
CCWIPP's SIP&P does not make it clear what type of appraisals/valuations will be required nor when formal appraisals will be required. In addition, FSCO was not provided with any documentation to indicate that formal valuation guidelines or rules (established by the Investment Committee in accordance with the SIP&P) did exist and were being followed. CCWIPP did indicate that the investment counsellors are responsible for the valuations in years where formal appraisals are not obtained, however, the onsite review indicated the appraisals/valuations were being done by the investment committee members. In addition, copies of any formal rules, policies and procedures related to the appraisals/valuations were not made available. It does raise a concern that CCWIPP appears to have been relying on valuations done by the investment committee members who were several thousand miles away from the properties in question.
When independent appraisals by professionals appraisers were undertaken the values of the assets were revised and some investments were written down or written off.
Signed documents missing from files:
FSCO acknowledges CCWIPP's comments that the signed documents were at the lawyer's office; however, FSCO's expectation was that they would be available for the onsite review or alternatively that the file would contain copies of the signed documents.
Legal opinion about restructuring of the Caribbean investments:
There were various issues surrounding the referred to transaction. FSCO has asked for copies of legal opinions related to these issues. CCWIPP provided legal opinions, indicating that the giving of various debentures/mortgages were legally binding however, the debentures clearly indicated the purposes of the debentures. For example, the debenture on British Colonial Hotel was issued in support of the guarantee given to CCWIPP to secure the loan(s) to RHK Capital, a Canadian company.
Under the restructuring, the loans to RHK Capital were repaid and the new evidence of debt was the shares held in PRK Holdings, a Bahamian company. When restructuring loans, it is normal practice to obtain new security or at least obtain an amendment to existing security to reflect the restructuring. FSCO has requested a copy of the legal opinion indicating that the security can be enforced in light of the fact that the original transaction has been restructured. Such an opinion has not been provided to date although indications were made that such an opinion exists.
In addition, FSCO is concerned that shares are equity and it is unclear how CCWIPP can obtain or act on security reportedly backing an equity issue. This matter needs to be fully explained and detailed, supported by legal opinion(s) that provide evidence that clearly addresses all the issues of equity versus loans supported by security to two different companies in two different countries.
Despite the CCWIPP crew's emphatic statements that they cooperated fully with the FSCO examiners, what is evident from this report is that a large number of documents were only provided in February 2005 after the FSCO's draft report was delivered to the CCWIPP offices and even more documentation was provided after the May 2005 report was released. It's clear from the FSCO responses to the CCWIPP crew's whining, that some documents have yet to be provided.
In light of the FSCO's damning confirmation of the majority of the findings in it's May 2005 report, the CCWIPP crew's pronouncements that most of the issues raised by the FSCO were "without substance" is particularly galling. It's also a strong indicator that the CCWIPP crew has learned nothing from the regulator's findings and will continue to thumb their noses at both the regulator and the law.
What's the regulator going to do about it? Thousands of members have been waiting a long time for an answer to that question. It's time the regulator gives them an answer. Monitoring the CCWIPP crew's half-assed efforts at policy development isn't enough.