A big day for pension debate

Speaking at the Conference Board of Canada’s Summit on the Future of Pensions, Healthcare of Ontario Pension Plan president John Crocker delivered a staunch defense of defined benefit (DB) plans, explaining that the emerging conventional wisdom of DB being too expensive and too risky is “dead wrong.”

Referring to DB as the best and most obvious solution to Canada’s retirement challenges, Crocker said DB is ultimately more affordable than defined contribution (DC). He cited a 2008 study by the U.S.-based National Institute on Retirement Security, which found that DB delivers a targeted benefit for 46% less than a DC plan, due to professional investment advice and pooled longevity risk.

Superfunds
Crocker called for the creation of large multi-employer pension plans to bring scale and low cost to a greater number of Canadian workers in the private sector. These funds, he explained, could be set up by sector, region or industry, and employees would contribute up to 10% of their salary with an employer match.

“The liability would not be carried by any one company’s balance sheet, which would make participation more attractive to corporations,” said Crocker. “No longer would the full weight of funding be on one set of corporate shoulders.”

Keith Ambachtsheer, director of the Rotman International Centre for Pension Management, told the audience that despite the lack of visible movement on pension reform, he is certain that the political will exists to bring about change. “Pension reform is never easy, never fast,” he said. “We’ll get there.”

Reform options
Ambachtsheer believes that three issues form the crux of Canada’s retirement situation: pension adequacy, cost-effectiveness and DB plan sustainability. Referring to the second issue as the “elephant in the pension room,” he explained that Canada has both a wholesale and retail sector, the former of which is run effectively by large pension plans for low basis points while the latter can run upwards of 150 basis points. “It’s a dichotomy that needs to be addressed,” he said.

Ambachtsheer believes that the government has three reform options: giving the private sector more leeway to provide workers with retirement products, expanding the Canada Pension Plan (CPP) and creating a national supplemental pension plan.

“I think we should stop the DB versus DC thing,” he said. “To focus on just one or the other—it’s not very useful.”

Private sector role
The case for increased private sector access to the retirement system was made by Bill Kyle, senior vice-president, group retirement services, with Great-West Life. He asserted that the perception of a dearth of pension coverage is incorrect. “Contrary to what’s often reported, the vast majority of working Canadians do have access to employer-sponsored plans,” including RRSPs, tax-free savings accounts and other non-registered savings vehicles, he said. Given the relative success of our retirement system, Kyle isn’t surprised to hear that Federal Finance Minister Jim Flaherty’s main tenant of pension reform is to “do no harm.”

Kyle believes that the focus of reform debate should be on improving the adequacy of retirement income. Expanding the CPP, he explained, would only punish younger workers for the benefit of boomers. Furthermore, it would unfairly target low-income Canadians, who would face high contribution rates in addition to clawbacks on the guaranteed income supplement and limited individual discretionary savings. Employers would face a mandatory payroll tax, and a greater number of existing private plans would fold.

The CPP also lacks the infrastructure for individual member managed accounts, said Kyle, and the government would end up replicating what the private sector already has in place.

But Ambachtsheer was quick to point out that Australia went down the route described by Kyle five years ago and created the superannuation system, which ultimately resulted in higher costs.

Delivering the keynote speech of the day was Ontario Finance Minister Dwight Duncan, who outlined the challenges faced by the government on the retirement agenda and described the “exhaustive” behind-the-scenes efforts at reform. In addition to new rules on solvency funding relief, pension division due to divorce and the introduction of the 2009 Pension Benefits Amendment Act, he explained that further reforms will appear in stages, the next installment of which will be later this year.

On the $500 million injection into the Pension Benefits Guarantee Fund (PBGF) contained in the 2010 budget, Duncan was candid. “Putting a grant of public money of this magnitude into the PBGF was not ideal,” he said. “But the alternative…would have been worse.”

In terms of future reforms, options under consideration by the Ontario government fall under four themes: expansion of the CPP, a supplementary DC plan, pension innovation (such as target benefit plans) and reforms to tax assistance to facilitate higher savings.

New report
Wednesday’s conference coincided with the release of a report by the Canadian Centre for Policy Alternatives, which concluded that the expansion of the CPP would be the most effective path to adequate retirement income for all Canadians.

“There is now widespread concern that unless changes are made, a significant number of workers will reach retirement age without sufficient income to support themselves,” writes pension expert Monica Townson, author of the report. “Only 38% of workers have a workplace pension plan, and private savings through RRSPs are woefully inadequate.”

The study notes that Canada’s public pension programs provide relatively low replacement rates compared to other OECD countries, covering incomes up to the level of the average economy-wide wage. Comparable OECD programs cover income levels up to almost double the average wage in those countries.

“Expanding the CPP, whether by increasing the replacement rate or increasing the level of covered earnings or both, would address the issue of coverage, security of benefits and low cost of administration—all the key objectives of pension reform,” writes Townson.

However, Federal Finance Minister Flaherty suggested on April 12, 2010 that he favoured a private sector solution—a comment that was backed forcefully the following day by Ted Morton, Alberta’s new Finance Minister. Morton feels that a beefed-up CPP would be a “tough sell” to Albertans and would only burden young people to support the growing numbers of seniors.

Asked how this development squared with his view of pending reforms, Keith Ambachtsheer was nonplussed. “Ted Morton needs some coaching,” he said. “He just got into the job.”

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