An Insider’s View of Canada's Pension Debate?
Amid growing concerns some Canadians won’t have enough money saved for a comfortable retirement, the government of Ontario has announced plans to launch its own Canada Pension Plan-style program within two years.Indeed, the Canadian Life and Health Insurance Association is hopping mad and expressed its disappointment on its website.
Designed to cover the three million Ontarians who don’t have a workplace pension plan, it promises to top up CPP benefits by thousands of dollars a year.
The mandatory program is opposed by some employers, who say they can’t afford what amounts to another payroll tax at a time when the economy is still recovering from the 2008 financial crisis.
Ontario’s plan also has implications for the insurance industry that sells defined contribution (DC) pension plans to employers. Indeed, the province dropped a bombshell on the industry a week before Christmas, when it released a consultation paper that suggested defined contribution plans would not be recognized by the new Ontario pension plan.
In other words, employers with those plans would still have to join the Ontario pension plan. Some 600,000 Ontarians are currently enrolled in this type of workplace pension scheme.
Those are the kind of plans sold by large insurance firms, like Sun Life Financial Canada.
The Star asked Tom Reid, senior vice-president group retirement services at Sun Life, for his views on the current state of Canada’s pension system and the various proposals for fixing it.
The Star: Do we have a pension crisis in Canada?
Reid: When I look at what’s going on in the pension landscape … we’ve got around 7 per cent senior poverty levels, which is third best among the OECD countries. It’s not perfect. And there are concerns for the future. But as we sit, right now, we’re not in crisis mode.
The Star: Why is there so much discussion now about adequate retirement savings?
Reid: It started, really, in 2007-08 with the financial crisis. People saw 30 per cent of their retirement savings wiped out. If you were planning to retire in 2009, you really probably couldn’t retire or you had to adjust your plans significantly. That started the discussion.
The Star: Most workplace retirement plans have since recovered from the financial meltdown. But fewer employers are offering defined benefit plans, considered the gold standard by employees because they provide a guaranteed payout at retirement, regardless of how the underlying assets perform. What’s going on there?
Reid: Defined benefit plans really got punished; the sponsors (employers) got punished, by volatile equity markets. The plans are healthier now in 2014 than they were in 2009. But we also have really low interest rates and people are living longer. It’s the convergence of those three factors. Chief financial officers are saying, ‘I’m fully funded now. But I don’t want to have to go through that again.’
The Star: Who is most at risk of having too little saved for retirement?
Reid: There are pockets of under-saving but it’s not at low income levels. Right now, below $50,000 or maybe $40,000 a year, between CPP, OAS and GIS, after-tax incomes levels will be broadly comparable or in some cases even better than they were in pre-retirement.
And I don’t think anybody’s going to spend a lot of time worrying about people earning more than $200,000.
So, let’s say, it’s in the $50,000 to $150,000 range where people are not saving enough. How do we target them? A modest increase in CPP might help. But it won’t be enough. If you’re making $125,000 a year …. you need other forms of savings.
The Star: One of the solutions proposed at a meeting of federal and provincial finance ministers in Charlottetown in 2010 was an expansion of the Canada Pension Plan, the mandatory program that covers all working Canadians. That hasn’t happened.
Reid: I don’t think it (a modest expansion of the CPP) is off the table even with this (the Harper) government. They’re waiting for better economic conditions. There’s a lot of reasons it hasn’t happened.
The Star: In the meantime, we’ve seen Ottawa move forward on the Pooled Registered Pension Plan, which is supposed to make it cheaper and easier for small and medium-sized employers to offer a workplace plan. Participation is voluntary. What’s your view of that?
Reid: It’s primarily targeted at small employers who have nothing in place
If you don’t make it mandatory I’m not sure you’re going to move the needle significantly. Because we’re out having conversations with small employers all the time, ‘You should have a savings plan at work.’ And they say, ‘You know what, I’m too busy. Not now.’
The Star: More employers are switching to defined contribution plans like the type Sun Life offers, which don’t offer a guaranteed payout. Rather they rely on the performance of the underlying assets. How big is that market now and how fast is it growing?
Reid: The size of the defined contribution plan market, assets under management, is roughly $150 billion in Canada. Sun Life has about $60 billion of that.
The market overall is growing somewhere between 5 and 10 per cent a year in terms of members. It’s been pretty steady.
Canada is very low for defined contribution penetration, compared to the U.S. or Australia. As a percentage of retirement assets, defined contribution would be 5 per cent in Canada. In the U.S. it would be closer to 60 per cent. And their assets would be more than 20 times what we have in DC plans in Canada.
There’s lots of reasons why that’s the case, such as the proportion of public services is higher in our labour force. (Public servants generally have defined benefit plans.)
The Star: Defined contribution plans have also been criticized for being too costly. How high are the fees?
Reid: The fees have dropped dramatically in the last five to seven years. The average fee for a plan that we administer, with over 1,000 members, is 40 basis points (0.40 of a per cent). That’s lower than the average defined benefit plan.
I can’t tell you what it (the fee) is for a plan with two or three members. It depends. If they each have fairly large balances, they’ll actually pay a pretty low fee.
The Star: The federal government has been placing a growing emphasis on financial literacy. Most people feel they don’t have the time or expertise to make the right choices about their retirement savings. Is financial literacy a bit of a cop out? ‘We’ve taught you how to do it. So if you don’t save enough or put it in the right vehicle, that’s your responsibility?’
Reid: You can’t rely exclusively on financial literacy. I think where we’ll succeed is through combining financial literacy with ‘choice architecture’ to borrow one of the behavioral finance phrases. You could make it an active decision. I’m either in the plan or I’m out, but I don’t start my employment until I make an active decision.
So, great, then you’re in the plan, but you don’t know how to invest. We’re actually in the middle of creating something we plan to release in 2015 that will effectively look like ‘Do you want it built for you or built by you.’ Built for you is a professionally managed ‘target date’ fund, which will gradually reduce your risk the closer you get to retirement.
The Star: The Ontario government is planning to launch its own CPP-style pension plan by January 2017. The Ontario Retirement Pension Plan will require employees and employers to each contribute 1.9 per cent of earnings up to a maximum of $90,000 a year. Many of the details have yet to be worked out. What impact do you think this will have on your business?
Reid: I’m confident we’ll co-exist with whatever Ontario builds. If Ontario recognizes the strength of the plans that our plan sponsors, that employers across Ontario, are already managing, then they would exempt them from the ORPP. A lot will depend on what they determine is a comparable plan.
The Star: Given the uncertainty around the future rules governing the Ontario pension plan, is it tougher now to sell employers on the idea of joining a Sun Life pension plan?
Reid: In fact, we’re having discussions with many advisors on exactly this topic. We think we can create a plan that will exempt you from the ORPP.
If DC plans are exempted, as they should be, I think quite a few advisors will do a lot of business with their clients to ensure they’re exempt from the ORPP.
Advisors are a pretty entrepreneurial lot. They’ll find opportunity in something like that. At the end of the day, I think the Ontario government is interested in getting more people to save for retirement and so are we.
Note to readers
The province issued its position on defined contribution plans after this interview took place. The Canadian Health and Life Insurance Association said it was “extremely disappointment” in the government’s position.
The Star asked Reid for an updated comment.
Reid replied in an email: “While we appreciate that the province is working hard to get all Ontarians saving for retirement, we welcome the opportunity to continue to demonstrate the strength of the Defined Contribution (DC) model.
“Currently, 600,000 Ontarians are in DC plans. By not including DC as a comparable plan, Ontarians holding DC assets are being asked to contribute an additional 2 per cent of their income to a provincial plan and, let’s face it, some of them can’t afford to do this. We hope to see DC plans included in the definition of a comparable plan in the future.”
The problem is that the CLHIA is spreading misinformation and outright lies on the so-called benefits of defined-contribution (DC) plans. They are nowhere near as safe and secure as defined-benefit (DB) plans and they're a lot more costly, regardless of what Reid claims. They also don't perform as well over long investment horizons because they don't invest in private investments.
Go back to carefully read my comment on the brutal truth on DC plans, it's a real eye-opener. We have become so ill-informed on this debate that we accept the lies and misinformation being spread out there.
As I've long argued on this blog, there is a case for boosting DB plans in Canada and elsewhere. The benefits of DB plans are well-known and under-appreciated.
Importantly, boosting DB plans, especially now that Canada's crisis is just beginning (if you wait for "better economic conditions" you will never enhance the CPP!), makes for good retirement and economic policy. Why? Because if you do it properly, adopting world class governance standards, you will enhance economic activity, increase the revenue from sales taxes and reduce the overall debt of the country.
Of course, the insurance and banking industry don't agree and will keep pushing the Conservatives to peddle PRPPs as the solution but they're wrong and they know it. They're petrified of Canada's top ten and for good reason, when you look at the evidence, our large DB plans are doing an outstanding job providing their members with safe and secure retirement benefits. No DC plan can compete with our large DB plans.
Are Canada's top ten perfect? Of course not. If they were, this blog would never exist. But take it from this insider, given a choice between anything Prudential, Sun Life, Manulife or Canada's big banks have to offer and having your retirement money managed by our large DB plans, you should always opt for the latter. Period.
Does this mean that banks and insurance companies should get out of the retirement business altogether and just leave it up to our large DB plans? No, I believe there is a market for what they're doing and they can certainly compete with the internal portfolio managers at our large DB plans but they're going to have to lower their fees and change their angle.
In fact, if banks and insurance companies in Canada were smart (they're hopelessly myopic!) and realized the bigger picture, they would be forcing the federal government to enhance the CPP for all Canadians and boost our DB plans.
I leave you with a comment Bruce Rogers wrote to the Toronto Star in regards to the interview above:
Thanks for devoting space to Ontario’s plans for a pension to supplement the Canada Pension Plan. Too bad your effort gave the platform to an interviewee who has a financial interest in the inadequate, defined contribution approach to the problem.This is an informed reader who understands what's at stake. When it comes to retirement policy, we need to go Dutch on pensions and not take lessons from Down Under or worse, the United States of pension poverty.
Our society clearly needs to take action to ensure that retirees and seniors generally enjoy financial security and a modicum of dignity. To argue against a more generous defined benefit approach is to ignore a serious problem.
Of course, the Harper government has made its decision and Bay Street will agree with that course. Let’s hope the business pages of the Star will balance the debate in future, perhaps by exposing the growing threat to defined benefit pensions where they exist.
Lastly, I wish the media in Canada would start interviewing real pension experts like Jim Leech, Leo de Bever, John Crocker and others who truly understand what is at stake and why we need to boost defined-benefit plans for all Canadians.
Below, New Democratic Party Member of Parliament and Official Opposition Industry Critic, Peggy Nash, calls on the government to support the NDP plan to strengthen pensions and address the issue of poverty among women seniors. She rightly notes: "70% of seniors in poverty are women and women are twice as likely to live in poverty during their retirement."
I'm not a member of the NDP, Liberals or Conservatives. I am too independent and see holes in the retirement policies of all three parties. All I know is that we Canadians need to drastically improve our retirement system now more than ever. If we don't, we will be doing a great disservice to our citizens and our country's economic future.