The great debate on retirement – can Canadians save enough on their own – came to the University of Toronto’s Hart House May 30.Most of you know where I stand on the great pension debate. I side with pension experts like HOOPP's President & CEO Jim Keohane and his predecessor, John Crocker, both of which have made the case for boosting defined-benefit plans.
Before a packed crowd of experts featuring executives from financial institutions, pension plans, the provincial government, and noted pension bloggers Bill Tufts and Leo Kolivakis, HOOPP President & CEO Jim Keohane and David Herle of the Gandalf Group argued for the affirmative, while MoneySense editor Jon Chevreau and noted actuary Malcolm Hamilton argued for the negative.
The purpose of debate was to get both sides of the issue of retirement savings out to the public. Those who think Canadians save enough now for retirement feel pension plans are costly and not needed; those who think Canadians can’t save enough for retirement see pension plans as a necessity, and feel they should be expanded to cover more workers.
Keohane said moving away from defined benefit pension plans in the workplace over the past 30 years is a “a very troubling trend.” He said switching workers to defined contribution plans is “not about cost savings, it is about the transfer of risk.”
Leaving it up to individual Canadians to do the savings is a dangerous idea, as most have been “unable or unwilling to save for their retirement.” He noted that there is more than $600 billion in unused RRSP room in Canada, and the average Canadian’s RRSP totals just $60,000 at retirement – only enough to provide income for a few years.Jon Chevreau, editor of MoneySense, took the opposite point of view in the debate. “If it’s true working Canadians are incapable of providing for their own retirements, how do we explain the fact those already retired are for the most part doing fine,” he asked, adding that the OECD described Canada’s retirement system as “high performing,” and old-age poverty is comparatively low.
When those with inadequate pensions and savings start hitting retirement age, Keohane said, “it is likely to create a crisis in the social welfare system.” Defined benefit plans should be expanded, not eliminated, he said. “We don’t need to fix something that’s not broken.”
“Canadians may not know what they are doing … but they seem to be doing it remarkably well.”
He said low-income earners don’t need to save at all for retirement, and those making $20-$50,000 a year only need to save about $2,000 per year in Tax Free Savings Accounts to have adequate retirement income.
Chevreau concluded that most Canadians are “up to the challenge” of looking after their own retirements.
David Herle, Principal of the Gandalf Group, argued for the affirmative, noting that recent polling by Gandalf shows that having enough to retire is the top concern of more than 35 per cent of Ontarians.
He said 86 per cent of Ontarians believe there is an emerging retirement income crisis in Canada – and that only 29 per cent feel they have an good workplace program.
Eighty-five per cent of those surveyed feel employers have a responsibility to offer a good workplace pension plan, and 80 per cent were interested in being part of a defined benefit pension program.
The survey was conducted by the Gandalf Group between May 3 and May 16, 2012. For more information about the results of the survey, click here. The polling shows that Canadians are unprepared for retirement, he said. “We are careening towards a cliff.”
He said that while today’s retirees may be doing fine, those about to retire have substantially more debt than savings.
“The retirement dream is disappearing,” he warned, since for most people, the only savings they have is the equity in their home.
Actuary Malcolm Hamilton agreed that while Canadians may be financially illiterate, today’s retirees are living on retirement income equal to about 91 per cent of what they made at work. Both the Canada Pension Plan and the Old Age Security systems are well funded and sustainable.
And while other countries have debt to gross domestic product ratios of 85 per cent, Canada’s is only 40 per cent, meaning that if there was to be a future burden on social programs, Canada will be able to respond.
He said the cost of providing medicare is a bigger problem than retirement income.
John Tory of NewsTalk Radio 1010 in Toronto served as moderator, adding that it is important to have “a proper discourse in this country” about the need for retirement income adequacy.
There are others. In his response to Bill Tufts, Jim Leech, President & CEO at Ontario Teachers' Pension Plan, took on dangerous pension myths head on and raised several excellent arguments as to why we need to expand coverage of defined-benefit plans. There are many more presidents of large Canadian DB plans who have privately raised their concerns over the shift toward defined-contribution plans.
When it comes to pensions, there is no debate. Defined-benefit plans are vastly superior to defined-contribution plans and all those using 'debt' scare mongering tactics are presenting dangerous pension myths to promote private sector interests of banks, mutual funds and insurance companies.
There are hundred of billions of RRSPs being managed at Canadian banks, mutual funds and insurance companies. This represents an important source of profits as Canadians are literally getting raped on fees (we have some of the highest management expense ratios - MERs - in the world).
As you can read, I'm not one to mince my words. When I see nonsense, I viciously attack it. Doesn't matter whether it comes from unions, banks, insurance companies, hedge funds, private equity, pension funds or other bloggers. I'm fiercely independent and have little tolerance for half-baked measures to address our looming retirement crisis.
And make no mistake, Canada and the rest of the developed world are facing a whopper of a looming retirement crisis. With yield on the key 10-year Treasury note dropping to 1.54 percent Thursday morning, a record low, we simply can't expect individuals to manage their own money in these schizoid markets and save enough to retire in dignity and security.
That, by the way, was the opener to my question to the panelists. I fundamentally believe that the structural volatility in these markets is here to stay and that individuals are better off pooling their resources and having their money managed by professional pension fund managers who can allocate across public and private markets. I asked whether or not it's time to treat pensions the same way we treat education and healthcare in this country, ie. as a public good.
Malcolm Hamilton criticized my proposal saying this will "socialize losses" and "lead us down the path of Europe." He added that the average long-term performance of DB plans before expenses in Canada was 8.25%, not much better than the average performance of a balanced fund which stood at 8%.
Jim Keohane was quick to point out that there is a lot of dispersion around that average performance in Canadian DB plans and that 25 basis points compounded over many years is a significant difference. I also do not think it's useful to say we are going to suffer a debt crisis like Europe if we adopt expanded coverage of DB plans. This is pure nonsense.
It's time we get our act together on pensions. The more we wait, the worse it will get. I accept Malcolm Hamilton's argument that in the future, both employers and employees will need to share the risk of a pension plan, but let's make sure they all have a decent one.
Some of the best chats came after the debate was over. I met David Hart of Hart Actuarial Consulting and he shared many interesting insights. He explained in detail who the winners and losers are in Canada (the losers are those making between $40,000 and $100,000 without access to a well managed DB plan).
Then Jim Keohane and I discussed asset-liability management in a environment of record low interest rates. Jim was actually surprised that rates fell this low, but since HOOPP manages its assets and liabilities very tightly, they will benefit from this drop in yields. And if rates rise, they will underperform their peers but the present value of liabilities drops, so they will remain fully funded, which is how they measure success of any pension plan.
Jim also noted the following: "The move from 1.6% to 1% is much more detrimental to plans' liabilities because of convexity." Indeed, in an ultra-low rate environment, a small move in yields can spell disaster for the present value of liabilities. "This is why ALM still makes sense, even in a low rate environment."
Jim mentioned that HOOPP uses derivatives (swaps) to match assets and liabilities. He discussed this at length when I commented on HOOPP's 2011 results. I told him a few U.S. pensions aren't allowed to use swaps because it is prohibited in their investment policies and that the JP Morgan debacle has renewed concerns of counterparty risk. He thought that was crazy as "derivatives add value when used intelligently" and added "JP Morgan isn't going under." I agree.
Below, watch the entire debate and question period (also available on HOOPP's website here). I thank Anita Stanusic of the Walrus Foundation and HOOPP for inviting me to this luncheon debate. I hope there will be many more but what I really hope is that we stop talking about what's wrong with our retirement system and start fixing it by adopting radical new thinking on pensions.