Are We Ready to Fix Our Pension System?

The Toronto Star reports, Lowering costs a vital objective for lifting retirement incomes:

A leading pension expert has priced what is now at stake in Canada’s national debate over how to boost future retirement income.

Keith Ambachtsheer estimates fees on $700 billion held in individuals’ retirement savings plans are sapping about $8.4 billion more than contributors would pay if they could save inside a type of large-scale pension or savings plan.

The cost of fees is about 1.2 per cent of their total savings, enough to cut future retirement income by nearly a quarter.

That constant drag on investment returns only compounds the problem of poor investment decisions and too little savings, he says.

The director of the Rotman International Centre for Pension Management expressed optimism yesterday that, despite a discouraging turn of events this week, there is still a chance that more middle and upper-income Canadians will get a chance to join a low-cost savings plan.

“Those who are impatient to get things done, hang in there, we’ll get there,” Ambactsheeer told a Conference Board of Canada pension conference held in Toronto Wednesday.

The conference is one of several being staged as part of national consultation process aimed at finding agreement on a saleable proposal for ramping up Canadians’ retirement savings.

Until late last year, British Columbia and Alberta seemed prepared to set up a large-scale savings plan for citizens. But they hold off for a potential agreement on a national strategy, including the possibility of a expansion of the Canada Pension Plan. Now Alberta seems to want a go-slow approach.

At another conference in Calgary Tuesday, Alberta Finance Minister Ted Morton said the province would rather see an “incremental” approach — a few regulatory changes to give financial institutions more leeway to encourage people to save.

He said financial institutions should be given about ten years to show what they can do, before governments step in with a heavy-handed approach.

“I think trying to get an expansion of the CPP would be a very hard sell to Albertans,” Morton told reporters.

It’s estimated it would cost workers and employers a total of nearly 16 per cent of pay, instead of the current 9.95 per cent, to double the current maximum CPP pension to 50 per cent of pay. CPP now only about $11,200 a year to someone who has earned more the equivalent of $46,300 a year over about 40 years.

Ontario Finance Minister Dwight Duncan said Wednesday that “Alberta has clearly done a 180 (degree turn).

“Frankly, I wasn’t all that surprised because their initial position — and I don’t want to sound partisan with this — seemed out of character with the general view of government and the private sector.

“British Columbia moved back from its position. I think they went out without looking at all of the economic and political fault lines around this issue, and didn’t really address issues of who would pay.

“That’s why we have taken what I consider a prudent approach, kept a number of options alive and facilitated discussion, and we will continue to do that.”

Duncan said it may be the case that some Canadians would like to save money at a lower costs, but “there are some $900 billion of unused RRSP contribution room. So people may want that, but they are just not doing it.”

He concedes the losses on the stock market in 2008 may have been a wake-up call when it comes to retirement saving.

Indeed, a poll of Ontario adults commissioned by the Healthcare of Ontario Pension Plan, suggests most adults would like a pension that paid about two-thirds of pre-retirement earnings.

“Our survey found that 67 per cent—that’s over two thirds — of respondents were interested in being part of a defined-benefit plan,” HOOPP President John Crocker told the conference.

Of course Canadians want the security of a defined-benefit (DB) plan. Why should DB plans only be reserved for public sector workers, teachers, firemen, policemen and MPs? Don't we all have a right to retire in dignity and security?

I am starting to ask myself a lot of questions about what is best for Canada and how we can rectify some of the serious problems plaguing our pension system. Of course, to rectify the problems, you first have to admit there IS a problem.

If you're a fat cat banker or insurance executive collecting huge fees while you underperform the market, you don't want to change a thing. You're calling Finance Minister Flaherty and Prime Minister Harper, lobbying MPs, telling them to let the private sector deal with our pension ills.

But Keith Ambachtsheer is right, the fees are sapping savings plans because most mutual funds charge outrageous fees and most underperform the market (you're better off investing in a low cost index fund).

But are public DB plans doing any better? Not necessarily, but they do manage to bring down the fees and if they tighten their governance - something which Mr. Ambachtsheer conveniently sidesteps - then they would be better than what the private sector is offering.

Feeling the threat from DB plans, the private sector is stuffing as many industry hacks as possible on the board of directors at public funds. This is part of the governance problem at these large funds and why so many of them are paying ridiculous compensation packages to senior pension fund managers.

Anyways, back on topic. This afternoon, I had an interesting conversation with Susan Eng, VP Advocacy at CARP. Susan isn't a pension expert but she gets it, and she is a quick learner. We talked a little about what needs to get done.

I mentioned that automatic RRIF withdrawals should be abolished and that people working past the age of 71 - people like my dad and many others - should be allowed to shove money back into their RRIFs. Instead, the Government of Canada penalizes these individuals by forcing them to take money out of their RRIFs so they can tax them. This is ludicrous!

But that only helps solve part of the problem because even if they are able to build up their savings, they still need to make wise investment decisions or risk losing it the next time markets get whacked.

Again, we need to offer all Canadians the peace of mind that comes with a defined-benefit (DB) pension plan - not just those that work at public sector jobs. I told Susan that it's sad but more and more younger folks are looking around, seeing private sectors jobs and pensions disappear, and they're opting to work for the government.

I am deeply concerned for the Canadian economy if younger workers are opting for the safety of government jobs instead of working in the private sector. Let's not forget, it's the private sector that generates jobs and tax revenues to pay for public sector jobs and pensions.

But all this tells me that we need to rethink capitalism and the social contract. It simply isn't working. Sure, the financial elite love it as they profit off the misfortune of others, but for the great majority living with constant stress and fear that they will one day face pension poverty, something has to be done.

So what needs to be done? There are many great ideas out there but there is an equal amount of disinformation and fear mongering. For example, I forwarded Susan Eng and Bernard Dussault, the former Chief Actuary of Canada, an article from the Toronto Sun, Expand CPP to meet pension needs:

Expanding the Canada Pension Plan would be the most effective way to ensure Canadians have enough income to support themselves in retirement, a report from an independent think tank said on Wednesday.

Canada’s public pensions replace a relatively low percentage of pre-retirement income compared with other industrialized nations, the Canadian Centre for Policy Alternatives said. The CPP and OAS replace about 40% of the income of someone earning the average wage, compared with estimated needs of about 70% of pre-retirement income, it said.

"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," CCPA Research Associate Monica Townson said.

"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," she said.

Federal, provincial and territorial finance ministers are scheduled to hold a second major summit on pension reform in May, amid concern that private retirement savings are not high enough to support basic living expenses once many Canadians retire.

The rapidly ageing population will make the problem worse, with the baby boomer generation leaving the workforce.

Alberta’s Finance Minister Ted Morton on Tuesday said he would not back efforts to expand the CPP, saying instead changes should be made to encourage people to save more.

He said expanding the CPP, which would mean greater contributions for those remaining in the workforce, would mean the younger generation is shouldering the burden.

"Certainly the unfairness to young Canadians is a serious issue to the current CPP. I don't see why we would expand a system that's unfair to such an important group," he said.

Several options have been put forward for expanding the CPP at various costs to the worker.

The Canadian Labour Congress for example proposes doubling the replacement rate from 25% of covered earnings to 50%. That would take the worker contribution rate from 4.95% to 7.7% by 2016.

A separate proposal put forward by the Federal Superannuates National Association would push the replacement rate to 70%. That would take contributions up to between 15.4% and 19.8% depending on the earnings bracket.

Mr. Dussault was quick to point out that Mr. Morton's argument was totally inaccurate:

Alberta Finance Minister Ted Morton is seriously misinterpreting the impact of a CPP expansion by saying "expanding the CPP would mean greater contributions for those remaining in the workforce, would mean the younger generation is shouldering the burden."
This is totally inaccurate. Indeed, as required by the CPP Act, any improvement to CPP benefits shall be fully funded, whereby each generation is paying for its own benefits.

And as far as expanding the CPP, I told Susan Eng that we need to take the opportunity to create several large DB plans spread throughout our country. We can implement best standards incorporating the best governance rules from around the world, focusing on delivering a safe retirement income for as many Canadians as possible.

I also think the CPPIB should be cut in half. I am against concentrating power in any one big fund. In fact, I think after $100 billion, most public pension funds become too big, too bureaucratic and way too arrogant. Chop them up, and spread them out in different regions.

What else would I love to see? Let's amalgamate all these city pension funds - many of which are terribly managed and chronically underfunded - and roll them up into these new large DB plans. I would also like to offer private companies who are looking to scale back their DB plans or cut them the option of rolling them over into these larger public DB plans.

In my ideal world, private companies would not be in the pension business at all. They can offer to top up CPP contributions, but pensions would fall under the public domain, much like health care does. If you truly think about productivity, this makes perfect sense for the long-run economic health of our nation. But I know I'm dreaming because there are powerful vested interests who want to maintain the status quo.

Finally, Luc Vallée of the Sceptical Market Observer sent me Blake Sutherland's thoughts on the demise of defined-benefit pension plans. This is an absolute must read, exposing some harsh truths that many people are completely unaware of.

I am all for bolstering DB plans. In fact, we have a golden opportunity to fix the pension system, offering all workers the opportunity to retire in dignity. Let's not squander yet another opportunity to revamp our pension system. If done right, we can provide millions of Canadians a better future, one which offers them the peace of mind that comes with a secure retirement.