HOOPP's Steve McCormick on Canadian Retirement Security

HOOPP just published its latest research showing that amid the financial hit of COVID-19, three out of four Canadians would choose greater retirement security over more money now:

As Canadians feel the financial impact of COVID-19, their desire for pensions – and their willingness to pay for them – remains strong, according to new research from the Healthcare of Ontario Pension Plan (HOOPP) and Abacus Data.

In May and June of 2020, HOOPP commissioned Abacus Data to conduct a public opinion survey of 3,500 Canadians gauging their views on retirement preparedness, workplace pensions and the implications of decreasing pension coverage. A comparable survey in 2019 found Canadians are thinking of the future, want to be prepared for it, and know a pension is the solution.

“This year's findings reaffirm Canadians’ personal and societal concerns around retirement security,” said Steven McCormick, SVP, Plan Operations, HOOPP. “Immediate public health and financial considerations stemming from COVID-19 have not changed Canadians’ commitment to pensions, and their willingness to pay for them to ensure a better future for themselves and for everyone.”

This includes a continued willingness to do their part and forgo money today in exchange for a better future with the help of a pension.

Key findings include:

• More than half (57%) report their own financial situation has been harmed since March, and 62% are concerned about the value of their investments/savings as a result of COVID-19.
• More Canadians are concerned about their retirement security (55%) than their job security (44%).

Despite these immediate and personal concerns, Canadians take a long-term view:

• Almost three quarters (72%) of Canadians agree there is an emerging retirement income crisis.
• 84% believe it is in everyone’s best interest for more people to have better retirement savings. This view spans high- and low-income earners, political affiliations, and those with and without a pension.
• 77% believe that without good pensions, the economy will suffer.
• 76% are concerned that if workers are unable to access good workplace pensions and contribute during their working lives, they will eventually become a burden on the taxpayer.

Canadians also agree on what kind of pension they think is most effective:

• 78% said reasonable pay cheque deductions are an effective way of helping Canadians pay for retirement.
• 82% said all workers should have a pension that guarantees a percentage of their working income in retirement.
• 86% said all workers should have access to efficient retirement savings arrangements.

Other recent research from HOOPP, the Value of a Good Pension, looked at how to make saving for retirement more efficient; and highlights the five value drivers that help savers optimize their retirement income: automatic contributions, lower fees and costs, professional investment management, fiduciary governance, and risk pooling.

“Canadians have observed the erosion of workplace pension plans, and they are concerned about the impacts – for individuals, for the economy and on public funds,” said Abacus Data CEO David Coletto. “And they have an expectation that their employers will help, as 76% said companies have a responsibility to offer pensions that provide adequate retirement income.”

Coletto added: “While Canadians recognize that businesses have also been negatively affected by COVID, they still believe that good retirement savings programs can be made more widely available.”

Canadians are willing to do their part:

• 79% would rather their employer make pension contributions than receive that money as salary. Remarkably, this percentage was the same, even for Canadians who said their finances were negatively impacted by COVID-19 “a great deal.”
• 74% would accept a slightly lower salary in exchange for a better (or any) pension plan.

McCormick said: “Canadians are saying, as a country, we need to do more and we know what works. There needs to be ongoing dialogue between government, business and the retirement security community on how we can provide more efficient, affordable and sustainable retirement savings vehicles for all Canadians.”

He added: “At HOOPP we have expanded access where we can – within Ontario’s healthcare sector. It is an honour to support those who support all of us, especially during these difficult times. We have added more than 125,000 members and almost 250 employers in the past 10 years. Also, more than 30% of our members work part-time. This is a segment of the working population that often doesn’t have access to pensions and, despite limited disposable income, have voluntarily chosen to join HOOPP. This is yet another sign that Canadians know what works and appreciate the value of a good pension.”

More details of the research can be found on HOOPP’s website.

These findings are based on a survey conducted online with 3,500 Canadians, ages 18 and older, from May 27 to June 5, 2020. The margin of error for a comparable probability-based random sample of the same size is +/- 1.63%, 19 times out of 20. The data were weighted according to census data to ensure that the sample matched Canada’s population according to age, gender, educational attainment and region.

About the Healthcare of Ontario Pension Plan

HOOPP serves Ontario’s hospital and community-based healthcare sector, with more than 590 participating employers. Its membership includes nurses, medical technicians , food services staff, housekeeping staff, and many others who provide valued healthcare services. In total, HOOPP has more than 380,000 active, deferred and retired members.

HOOPP operates as a private independent trust, and is governed by a Board of Trustees with a sole fiduciary duty to deliver the pension promise. The Board has representation from the Ontario Hospital Association (OHA) and four unions: the Ontario Nurses' Association (ONA), the Canadian Union of Public Employees (CUPE), the Ontario Public Service Employees' Union (OPSEU), and the Service Employees International Union (SEIU).

About Abacus Data

Abacus Data is a market research and public opinion firm based in Ottawa. We conduct research for and provide strategic counsel to some of North America’s leading corporations and advocacy groups by delivering global research capacities with the attention to detail and focus of a boutique firm. Our team has over 45 years combined research and consulting experience working with associations, using public opinion research to inform internal strategies and raise issues on the public and government agenda.

Earlier today, I spoke with Steven McCormick, SVP, Plan Operations at HOOPP, about this latest research. 

I would first like to thank him for taking the time to talk to me and also thank James Geuzebroek
Senior Manager, Media and Public Affairs, for setting this Microsoft Teams web meeting up (it worked today, I figured out what went wrong yesterday).

Anyway, I hope Steve doesn't mind, snapped a quick picture of him and thoroughly enjoyed our conversation. He's a super nice guy who really understands plan design and why DB pensions are now more important than ever to millions of Canadians looking to retire in dignity and security.

Now, before I delve into my conversation with Steve, please take the time to go to HOOPP's research page and download some important documents, like the Executive Summary and the full presentation of the results.

James was kind enough to send this information ahead of time (on an embargoed basis) so I can prepare for my discussion with Steve.

Now, on to my conversation with Steve. I began by asking him about his background:

Interestingly, he previously worked in the US for a large retail bank and handle 401(k) plans.

When I heard that, I immediately brought to his attention a comment I wrote six years ago on the brutal truth on DC plans.

At HOOPP, Steve oversees areas that cover member/ employer services, plan design and benefit administration. 

And since HOOPP always puts its members first, I'd say he has huge responsibilities and HOOPP couldn't have picked a better person for this job.

He works closely with HOOPP's Board of Trustees which governs the Plan and Fund. The Board is made up of 16 voting members, who have a fiduciary duty to act in the best interests of Plan members.

Eight trustees are appointed by the Ontario Hospital Association (OHA) and four unions each appoint two trustees. The unions are:

• The Ontario Nurses' Association (ONA)
• The Canadian Union of Public Employees (CUPE)
• The Ontario Public Service Employees Union (OPSEU)
• The Service Employees International Union (SEIU)

There can be two non-voting pension observers on the Board. One observer representing retired members is appointed by the OHA and one is appointed by the Settlor Unions.

Anyway, Steve told me HOOPP now has over 380,000 members coming from 590 employers across Ontario's healthcare industry (these are the latest figures). It added more than 125,000 members and almost 250 employers in the past 10 years.

HOOPP covers the pensions of all of Ontario's salaried workers at hospitals (including some doctors that are on salary), and is increasingly attracting new members from family health teams, community health centers, and other healthcare organizations (see full list here but it's not up-to-date as more employers have joined the Plan).

Steve told me since HOOPP is a multi-employer pension plan, it is easy for members to build their pension as they move from one HOOPP employer to another. 

This portability with HOOPP is a critical feature because it allows employees to move from one employer to another without worrying about losing their defined-benefit pension.

Results of the Research Study

We obviously talked at length about the results of this research study.

I can't say the results surprised me. Just like in the US where retirement angst is gripping millions of Americans, more and more Canadians are worried about how they will retire in dignity and security.

And the massive bull market since 2009 hasn't done much to ease their concerns.

In fact, Steve told me last year's research findings showed similar concerns. 

Obviously, the pandemic has heightened retirement angst and you see it from the key findings:

• More than half (57%) report their own financial situation has been harmed since March, and 62% are concerned about the value of their investments/savings as a result of COVID-19.
• More Canadians are concerned about their retirement security (55%) than their job security (44%).

Still, despite these immediate and personal concerns, Canadians take a long-term view:

• Almost three quarters (72%) of Canadians agree there is an emerging retirement income crisis.
• 84% believe it is in everyone’s best interest for more people to have better retirement savings. This view spans high- and low-income earners, political affiliations, and those with and without a pension.
• 77% believe that without good pensions, the economy will suffer.
• 76% are concerned that if workers are unable to access good workplace pensions and contribute during their working lives, they will eventually become a burden on the taxpayer.

Canadians also agree on what kind of pension they think is most effective:

• 78% said reasonable pay cheque deductions are an effective way of helping Canadians pay for retirement.
• 82% said all workers should have a pension that guarantees a percentage of their working income in retirement.
• 86% said all workers should have access to efficient retirement savings arrangements.

What this tells me is Canadians overwhelmingly see the value of a good pension, something HOOPP has been harping on for quite some time. 

And while Canadians recognize that businesses have also been negatively affected by COVID, they still believe that good retirement savings programs can be made more widely available and they are willing to do their part:

• 79% would rather their employer make pension contributions than receive that money as salary. Remarkably, this percentage was the same, even for Canadians who said their finances were negatively impacted by COVID-19 “a great deal.”
• 74% would accept a slightly lower salary in exchange for a better (or any) pension plan.

Keep in mind, these are Canadians from all sides of the political spectrum and they are right to be concerned.

Steve McCormick is right: “Canadians are saying, as a country, we need to do more and we know what works. There needs to be ongoing dialogue between government, business and the retirement security community on how we can provide more efficient, affordable and sustainable retirement savings vehicles for all Canadians.”

I told him that I get emails from retired Canadians with $100,000 to $300,000 in savings and they are petrified of outliving their savings, and quite honestly, don't have a clue of what to do.

What am I going to tell them? Buy Bell Canada shares (BCE) and collect 5% dividend and pray the dividend won't be cut or shares don't get slammed over the next decade or decades?

These are legitimate concerns people have.

That's the majority of Canadians who have worked years to amass these savings.

Then I have affluent, sophisticated blog readers. One of them, a retired securities lawyer out in Vancouver who is approaching 60-years of age told me he had enough worrying about markets and bought himself an annuity for $2.3 million guaranteeing him $10,000 a month over the next 25 years.

As he explained it to me: 

In the event of my untimely death prior to the 25 year term, my wife will get the principal. I paid a little more for that option. I basically paid for a DB plan with no inflation hedge but it cost me a lot to do this whereas in a DB plan, payments (contributions) are spread over many years and even decades. I realized that I can very well live to be 100 years old so longevity risk is a big risk for me.

An annuity is very tax efficient. I’m being taxed on 24% of the income received, so the taxable portion of $100,000 is $24,000. Based on advice from my accountant relative to my annuity income, I’m guessing that would result in tax of $2200 per year, assuming that is the sole source of income. In BC the personal exemption is about $13,000 and the tax rate on the remaining $11,000 is 20% (the marginal rate on the first $42,000 of income). You can see how trivial the taxes payable is relative to the “income”. (Even though we refer to it as income, the payments aren’t really income until the purchase price has been returned.)

Regarding your question on taxation of principal, I think you are probably correct. The payout rate on the annuity in my case is 4% of the annuity price. That is not a yield until I have received my purchase price back on an after-tax basis. In my case, my pre-tax breakeven is about 23 years and my post-tax breakeven is about 23.5 years. Once I reach that point, what has been substantively (though not from a taxation perspective) a return of capital becomes a very high yield relative to rates today, resulting in a potentially decent IRR over the entire term if I or my wife live long enough.

My guess is that if you live long enough the total taxes paid under the annuity could very well be less than the bond approach because although 100% of payments received after break-even constitute yield in the conventional sense, only 24% of it is treated as taxable income. This contingent tax benefit supplements the non-contingent tax benefit deriving from the way the annuity reduces taxes in the early years of ownership, benefiting the annuitant by virtue of the time value of money, not to mention improved quality of life in the early years of retirement, when the higher after-tax income is most likely to be spent. 

He added:

Once I reach breakeven, every dollar thereafter received under the annuity is profit, true income. Based on current tax rates in B.C., that sort of income would ordinarily attract a tax rate of between 33 and 38%. Yet the annuity income is still subject only to the 24% inclusion. In the US I believe annuities are taxed on an accrual basis, so taxable income is higher in earlier years (much like it would be with a bond portfolio approach), declining in later years; and approximately after breakeven the income becomes fully taxable. US taxation would appear to be much less favourable to annuitants than Canadian.

So, if prior to breakeven the annuity was tax unfair to annuitant to the tune of $2200 per month, an aggregate $51,000 to breakeven 23 years from now, after breakeven would appear to be tax unfair to treasury to the tune of probably about $33,000 per annum. What would be fair all around is no taxation until breakeven and fully taxable thereafter, but under that regime I would do substantially worse if I live past breakeven.

Of course, all of this is subject to a change in tax rules. But we can only work with what we’ve got. 

Now, I don't want to bore you with details of annuities as they're not all the same (stay away from variable annuities), but it's obvious this person put in a great deal of thought and research before buying an annuity for $2.3 million.

In a world of zero or negative rates, having some component of your wealth in an annuity makes sense. It provides certain cash flow which allows this person to take added risk in other parts of his portfolio should he choose to do so (he has other money which he invests to give away to charities). 

And from a tax perspective, the annuity is neutral at the beginning but beneficial past the breakeven date.  

So why don't all Canadians buy annuities? Well, most Canadians don't have $2.3 million lying around which is why the most cost efficient way to invest is through a defined-benefit pension.

Also, as Steve pointed out, even the most sophisticated investors can struggle in these markets, so it's not surprising many regular investors find it difficult and emotionally taxing to invest in highly volatile markets. 

Again, this is why we need to expand coverage of DB pensions to more Canadians.

It's all laid out in HOOPP's prior research paper, the Value of a Good Pension, which  looked at how to make saving for retirement more efficient; and highlights the five value drivers that help savers optimize their retirement income: automatic contributions, lower fees and costs, professional investment management, fiduciary governance, and risk pooling.

The irony of all this is while Canada has the world's best pensions, we are falling short covering all Canadians with a gold plated DB plan, which is why our retirement system isn't the best in the world. 

Quite honestly, this irks me a lot. It's why is a recent comment of mine, I said we don't need a second Caisse but "if we are to create a new public pension in Quebec and Canada, it's my recommendation to create a second CPP Investments of sorts which focuses solely on amalgamating and managing badly managed corporate DB pensions in this country, backed by the full faith and credit of the Canadian government but with a shared risk model (jointly sponsored plan)."  

My own political and economic views are right of center, just like some of my friends, but I am and will always remain an ardent defender of large, well-governed defined-benefit plans with a shared risk model. 

In a flourishing democracy, I believe in the primacy of the private sector but I also believe in equality of opportunity and think we absolutely need to provide free healthcare, education and address the retirement needs of our aging population. 

It's not just good policy, it's the right thing to do for our economy over the long run.

And by reading the results of HOOPP's latest study, I'd say Canadians from all political stripes are in agreement with me.

We have a great country but we need to build on what works and stop pandering to the powerful financial services industry which quite honestly, has done an abysmal job addressing the retirement needs of millions of Canadians.

That's all from me. Once again, I thank Steve McCormick for taking the time to speak with me earlier today and also thank James Geuzebroek for setting this up.

I'd also like to thank HOOPP for referencing my blog in a recent update of theirs which you can read here.

In fact, concerning my recent discussion with HOOPP's CEO Jeff Wendling on LDI 2.0 in a zero bound world, you can also read this article in the Canadian Investment Review and watch a video of the interview between Yaelle Gang, Editor of the Canadian Investment Review and Jeff Wendling. 

Below, back in February, HOOPP's former CEO Jim Keohane sat down with Real Vision's Ed Harrisson to discuss HOOPP. In the first clip below, he evaluates the various merits (and shortcomings) of defined-benefit plans as compared to defined-contribution plans.

In the second clip, Jim explains how pension funds can pool risk across generations, allowing them to invest a greater percentage of their portfolio in stocks. Take the time to watch both clips, full interview is available here.