Wednesday, September 16, 2009

CPPIB Chief Calls for Expanded CPP

Karen Mazurkewich of the Financial Post writes that CPPIB chief calls for expanded, mandatory CPP:

The head of the Canada Pension Plan Investment Board says the national pension system is in need of reform and Wednesday threw his weight behind proposals to create a supplemental CPP.

The Canadian system "is not broken but the design is not [ensuring] that we have sufficient retirement savings that will carry people though their non-working years," said David Denison, president and chief executive of CPPIB.

Speaking Wednesday at the International Conference of Social Security Actuaries and Statisticians in Ottawa, Mr. Denison called for an expanded, mandatory CPP that would sit on top of the existing federal one. Although the current CPPIB team could run such a fund, he said it could also be managed by another organization in the public or private sector.

The federal and provincial governments are already rethinking the pension issue and others including the Canadian Association of Retired People have already called for an mandatory and expanded CPP.

Ted Menzies, parliamentary secretary to the Minister of Finance, is chairing a steering committee examining Canada's national retirement income system, and some of the provinces have also teamed up to explore options for reform.

According to a 2007 study by the Canadian Institute of Actuaries, only one-third of Canadian households are currently saving at levels that will generate sufficient income in retirement, and about 11 million Canadian workers have no access to a workplace pension at all.

Mr. Denison said the question of sufficiency in Canada has taken on greater importance this year, not only because it's clear that people haven't saved enough for retirement but because "private sector pension benefits are in decline as plan sponsors have cut back on defined benefit plans and markets have cut into defined contribution plans."

He also argued for uniformity of federal and provincial pension regulation to increase participation rates and contribution levels for defined contribution plans and individual RRSPs.

In addition, he made the case for an accessible set of regional or national defined contribution plans that would also help Canadians accumulate retirement savings.

In his speech, Mr. Denison was careful to point out that his proposal would not affect existing public and private sector plans, both of which are already providing significant retirement funds for millions of Canadians.

"In this hybrid approach, there would still be flexibility for individual companies to create pension arrangements tailored to their specific objectives as well as for individuals to make choices according to their own goals and preferences," he said.

In making the case for a supplemental CPP, Mr. Denison argued that it remains the best cost-effective way to provide a relatively predictable stream of retirement income.

Still, the current CPP fund is designed to provide a replacement income of only 25% of the average industrial wage, or just under $11,000.

Mr. Denison did not say what percentage of income replacement he is proposing for an expanded CPP plan, but he did say that while it was theoretically possible to create a plan with a 50%-70% income replacement rate, such a plan could crowd out other workplace pension arrangements.

You can read the Mr. Denison's entire speech by clicking here. I think it is worth reading it carefully to understand the nuances of his proposal.

Elsewhere, the Associated Press reports that pension boss says Canadians are not saving enough for retirement:

The pension system needs to be reformed quickly because Canadians aren't saving enough to maintain their standard of living in retirement, says the head of the Canada Pension Plan Investment Board.

"Clearly the current system isn't working as anticipated," said David Denison, president and chief executive officer of the board, in a speech that broke his silence on the need for reform.

The Canada Pension Plan is on solid footing, he said, but it only provides retirees with about 25 per cent of their pre-retirement income, or about $11,000 a year in today's terms.

Retirees rely on government benefits, company pensions and their own personal savings to make up the rest of their income, but those are no longer sufficient, Denison said.

"They're just not creating the amount of retirement savings which will lead to sufficient income across Canada's population in their retirement years," he told reporters. "That's why we think a fundamental re-thinking of how those operate is important."

RRSP and corporate pension plans have been badly damaged by the financial crisis, he noted. And 11 million Canadians don't have any company pension coverage at all.

He suggested that federal and provincial policy makers consider developing a new pension regime that would require all companies and employees with no company plan to pay into a fund.

The fund could be regional or national, but national would be preferable since it would make the pension benefits more mobile. Employees could opt out if they want.

Policy makers should also consider using the existing CPP structure to add a supplemental fund for those who want to boost their government pension benefits, Mr. Denison said.

While several experts have already proposed these two options, Denison suggests that a hybrid of the two would be better than either solution alone. Companies would still have the flexibility to tailor their own pension funds, but at the same time, contributors could take advantage of the federal investment board's huge staff, low administration costs and widely respected minimal-risk model.

Provincial and federal finance ministers are to meet in Whitehorse in December in the hopes of agreeing on a plan that would improve the minimum level of retirement benefits for all. The federal government has also established a group to study options.

Joel Harden, the Canadian Labour Congress's pension expert, said it's a relief to see Denison, one of the country's most important pension players, get involved and stress the urgency of the debate.

"I think everyone agrees now that the floor 1/8 of retirement benefits 3/8 is way too low," he said.

He thinks Denison's proposals needlessly complicate the issue, however, and that the most effective solution to pension reform is to increase both benefits and premiums for everyone involved in the Canada Pension Plan.

The CLC's proposes doubling CPP benefits, improving the guaranteed income supplement for low-income seniors, and setting up a federal pension insurance system.

I agree with Joel Harden that Mr. Denison's proposal needlessly complicates the issue and that the most effective solution to pension reform is to increase both benefits and premiums for everyone involved in the Canada Pension Plan. I would also add that we need to bolster the governance at these large public pension funds as it remains woefully inadequate.

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