The Pension Debate?

Terence Corcoran of the National Post reports on the pension debate:

In Whitehorse today, Canada’s finance ministers meet to discuss the future of Canada’s pension system. No agreements are expected on how to enhance Canadians’ retirement savings. A pension summit is expected to take place later this year.

Today, FP Comment launches the first in a series on The Pension Debate. Is Canada’s pension system a shambles, as some argue? Are Canadians ill prepared to meet their financial futures post-retirement? Is the private defined-benefit system permanently impaired? Are mutual funds and other savings vehicles, including RRSPs, up to the job of protecting Canadians?

Do we need a new, government-backed secondary pension regime to accompany the Canadian Pension Plan and associated government retirement relief?

The Canadian pension management industry, in today’s first commentary, argues against new government intervention and in favour of reforms to enhance the role of the private sector. Our second commentary, from the C.D. Howe Institute, raises another volatile issue: the high cost of federal pension plans for government employees.

Tomorrow: How bad is our pension system?

How bad is our pension system? It depends who you ask. If you're a senior pension officer at a large public pension fund, claiming to add value (alpha) over their policy portfolio by beating bogus benchmarks in private markets which you don't bother disclosing to the public, then you're doing very well for yourself.

But for the rest of society who is seeing more job insecurity and is facing pension poverty, things aren't so rosy. And even if stocks keep grinding higher, the situation isn't getting any better. Their pensions are at risk.

Let's go over a brief summary of some key proposals for national pension reform:

Finance ministers hope to come up with a shortlist of options to make Canadians save more for their retirements. Possibilities are many, but some key ideas have emerged:

The problem - Comfortable retirements for many Canadians are at risk. While the Canada Pension Plan, the Guaranteed Income Supplement and Old Age Security provide retirees with about $11,000 a year, that's not enough to live on. Company pension plans are becoming less generous, and coverage less widespread. Personal savings for many people are minimal. The financial crisis and an aging society mean it's getting harder for seniors to scrape together a decent income.

The debate - Alberta and British Columbia have been concerned about retirement income for long enough to study the issue and come up with a plan. They want national reform, but say they'll go their own way if Ottawa doesn't get up to speed fast. Labour groups, seniors' advocates and opposition parties want quick action that would build on the Canada Pension Plan.

Ottawa says there needs to be a better understanding of the facts before taking action. And it is emphasizing the need for the financial services sector to come up with solutions before governments twist themselves in knots to step in.

Probable Results - Ottawa and the provinces will likely agree to a time-table to study options, hold public hearings and make a decision for reform within a year. Options are likely to include:

-A private-sector solution. Possible changes to federal and provincial regulations so that banks and insurance companies can offer companies ways to pool their pension plans at lower costs; tweaking government taxes to encourage people to save more. But management fees in proposals put forward so far are still quite high.

-Supplementing the Canada Pension Plan or some other new federal agency. The plan would likely be voluntary, but enrolment would be automatic for all people with no corporate pension plans, with a choice to opt out. The supplement could be made up of individualized accounts, much like a giant defined contribution plan open to anyone. Management costs would be higher than today's CPP, but not as high as private-sector solutions.

-Expanding the CPP. Contributions would rise, but so would the benefits. Enrolment would be mandatory, keeping management costs to a minimum. The existing framework would stand, so set-up costs would be low. But not everyone in Canada needs more retirement income, so critics say one size does not fit all.

Quote - "The way to make it cheap is to deny choice.... But it's very difficult to have a scheme that mandates a sensible set of rules for everybody." - Pension consultant Malcolm Hamilton, Mercer Human Resource Consulting Ltd.

It's amazing seeing how politicized the pension debate has become. Arguing on behalf of private interests, you have the C.D. Howe Institute, a conservative think tank, which just published its study, Supersized Superannuation: The Startling Fair-Value Cost of Federal Government Pensions.

But I've already warned you that the insurance industry's pension fix is no fix at all. And you should be very weary of bankers claiming that they want to protect you. The private sector solution to our pension woes all boils down to one thing: profits. They're going to charge you outrageous fees - just like they've been doing for years - and provide you with a choice of products that deliver mediocre results (relative to low cost index funds).

When it comes to the pension debate, Norma Greenaway reports that the public is well ahead of politicians on need for pension reform:

As Canada's finance ministers gathered Thursday to talk about pension reform, a leading seniors group warned they are behind public sentiment on the need to bolster Canadians' retirement nest eggs.

"The public is way ahead of the politicians now," said Susan Eng, a spokeswoman for the seniors' advocacy group known as CARP. "What really matters is that the public discourse has moved away from whether there should be a new retirement-savings vehicle to what shape it should take and how much it would cost."

The call was echoed in a full-page advertisement in the Yukon News by the territory's Federation of Labour, which demanded action to give Canadians a chance to "retire with dignity."

Federal Finance Minister Jim Flaherty and his provincial and territorial counterparts were meeting for dinner Thursday in this wintry and picturesque Yukon capital before digging in at a formal meeting Friday to discuss everything from the state of the recession-plagued economy to the state of Canadians' retirement income.

A key item on the agenda is a report from economist Jack Mintz of the University of Calgary on the health of Canadians' retirement income and savings. Sources say his report will not paint as bleak a picture on the subject as some provinces, opposition politicians, unions and seniors' advocates have.

Such an analysis could help persuade provinces that they have some time to put together an effective package of reforms.

British Columbia and Alberta have been the most aggressive in pushing for pension reform. Although they say they would prefer a national approach, they also say they are prepared to go it alone with a voluntary supplemental pension plan above and beyond the Canada Pension Plan if there is not a national consensus soon.

They point to statistics in their own provinces that suggest as many as eight in 10 workers in the private sector have no company pension plan. Other studies have shown one-third of Canadian families have no retirement savings.

Flaherty told Canwest News Service on the eve of the meetings that "all options" would be on the table, and that the Harper government had not ruled anything in or out.

Among other things, the options being considered include increasing contributions to the CPP, which covers 93 per cent of workers, with the goal of doubling the annual pension, creating a new national pension plan for those who have no workplace pension, increasing tax breaks for Canadians who invest in RRSPs and Tax Free Savings Accounts, and beefing up efforts to educate Canadians about the importance of saving for retirement.

Banks and other financial-services companies are urging finance ministers to stay away from pursuing government-imposed pension options and to focus instead on building up private-sector choices for Canadians.

Flaherty and other finance ministers have said they hope to narrow the list of options during their discussions and set out a timeline for studying them and agreeing on action. Flaherty said the process could take up to a year.

Pressure on politicians has been mounting since the market meltdown of last year took a serious chunk out of many retirement nest eggs. The stubborn economic recession, complete with painful corporate bankruptcies, has also exposed gaps in the system and left many workers in the lurch over the value of what they once thought of as a secure pension.

Let me end this comment by urging the finance ministers to do what's right for Canadians. The pension debate permeates every facet of our democracy. It's crucial that we get this right. I have listened to proposals from all three federal parties and I think each party has something to contribute to this debate.

But I warn politicians not to succumb to petty politics, trying to assuage the concerns of your constituents in order to score political points. The pension debate is way too important and there are far too many gaps in the current system to keep the status quo. If inaction and indifference is all that comes out of Whitehorse, I am afraid that in the not too distant future, Canadian taxpayers will find out the true cost of pension reform complacency.