Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 4 - Evidence - April 15, 2010
OTTAWA, Thursday, April 15, 2010
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:30 a.m. to study the extent to which Canadians are saving in Tax-Free Savings Accounts and Registered Retirement Savings Plans.
Senator Michael A. Meighen (Chair) in the chair.
[English]
The Chair: We have a quorum; it is after 10:30, so we will get started.
[Translation]
This morning, we will continue our study on Canada's pension systems. The pillars of Canada's pension system are the following: old age security, public pensions and private pensions, and personal savings.
We will focus on the tax incentives for personal retirement savings.
[English]
According to our terms of reference, we are studying the extent to which Canadians are saving in Tax-Free Savings Accounts and Registered Retirement Savings Plans, federal measures that might be taken to increase the use of these savings vehicles, as well as the fiscal cost of increased use and ways in which savings in these vehicles might be protected.
At this time, we are pleased to welcome from CIBC Private Wealth Management, Mr. Jamie Golombek, Managing Director, Tax and Estate Planning. He comes to us all the way from Saskatoon by the miracle of video conferencing, which technology has improved over the years. Welcome, and thank you for joining us.
We also have the president of the Canadian Life and Health Insurance Association, Mr. Frank Swedlove, who will be making the opening statement; Mr. Rick Rausch, Senior Vice-President, Individual Retirement and Investment Services, Great-West Life Assurance Company; Mr. Frank Laferriere, Chief Operating Officer, Manulife Securities Insurance Inc.; and Mr. Kevin Strain, Senior Vice-President, Individual Insurance and Investment, Sun Life Financial.
Thank you gentlemen for being with us. We appreciate you taking the time to come and talk to us about our mandate. Depending on how things go, we will hear presentations from our two groups of witnesses, and then we hope you will be available for questions at the end. Mr. Golombek, please proceed.
Jamie Golombek, Managing Director, Tax and Estate Planning, CIBC Private Wealth Management: I want to thank you for allowing me to appear before your esteemed committee this morning on the important topic of retirement savings. I will briefly give you background about myself and then talk about the issue of the day.
As mentioned, my name is Jamie Golombek. You might recognize my name from the weekly tax column that appears Saturdays in the National Post. It is also syndicated across various Canwest newspapers, including the Ottawa Citizen, but my real job is the managing director of tax and estate planning with CIBC Private Wealth Management in Toronto. As you may know, CIBC has been a huge promoter of Tax-Free Savings Accounts through extensive print, television and media campaigns.
As both a chartered accountant and financial planner, my role at CIBC is to provide our clients, either directly or through financial advisers, with the highest quality of financial advice on retirement tax and estate planning to ensure they can achieve their goals of living a comfortable life both now and into retirement.
Much of my work involves financial education, whether it is through the media, the Master of Business Administration course that I teach on personal finance at the Schulich School of Business at York University in Toronto or via the numerous seminars that I give on behalf of CIBC across Canada. In fact, the reason I am unable to join you today in Ottawa is I that I am presently in Saskatoon, having given a seminar last night to over 100 clients of CIBC on various tax issues. I am giving a similar seminar this afternoon to Saskatoon financial advisers so that they can better educate their clients about tax and retirement savings strategies.
At last night's seminar, I spent much of my time reminding Canadians of the various tax-deferred savings options available to them, including Registered Retirement Savings Plan, RRSP, for retirement savings accumulation; Registered Education Savings Plan, RESP, to save for post-secondary level education; Registered Disability Savings Plan, RDSP, in conjunction with the generous Canada Disability Savings Grant and Canada Disability Savings Bond to promote long-term savings for a loved one with a severe disability; and, of course, Canada's newest plan, the Tax- Free Savings Account, TFSA, to promote savings for pretty much anything.
I realize that to date, this committee has already heard testimony from several of my respected colleagues in the tax industry who have provided you with various statistics as to how much is being saved in each plan as well as the cost of such tax-assisted savings. Therefore, in the short time that I have, I would like to focus on providing the committee with a number of suggested federal measures that might be taken to increase the use of both RRSPs and TFSAs.
My feedback and recommendations come directly from both ordinary Canadians who respond to my tax columns and who pose questions at my seminars and from financial advisers with whom I deal each and every day.
I will begin with measures to improve the RRSP system. Many of these measures come from The Investment Funds Institute of Canada's, IFIC's, pre-budget submission that I was involved in drafting last summer as the immediate past chair of IFIC'S tax working group.
First, we believe changes should be made to the Income Tax Act to reduce the minimum pension income-splitting age with a spouse or partner from the age of 65 to 55 for RRSPs consistent with the rules governing pension plans. This discrimination based on age or plan type is the cause of tremendous perceived inequity among seniors who did not have the benefit of an employer-sponsored plan and have chosen to take an early retirement.
Second, as you know under the current rules, RRSPs must be converted to an annuity or a Registered Retired Income Fund, RRIF, by the end of the year in which the annuitant turns 71 years of age. Starting the following year, a minimum amount must be withdrawn annually. The government should look to reducing these minimum-withdrawal factors to reflect an older population, longer lifespans and today's low-interest-rate environment. The current RRIF minimum rates were last adjusted in 1992. Note that this recommendation was supported by the C.D. Howe Institute in its 2008 paper entitled A Better RRIF on Retirement: The Case for Lower Minimum Withdrawals from Registered Retirement Income Funds.
Third, on a similar theme, the $2,000 pension income amount should be available to RRIF recipients at an earlier retirement age, such as 55, as opposed to the current age of 65, to put RRSP and, ultimately, RRIF holders on an equal footing as recipients of annuities from registered pension plans, who, if they chose early retirement before 65, can begin collecting pension income credit immediately.
Also, there seems to be no logical reason — beyond cost of course — as to why the pension income amount is not indexed to inflation as nearly all federal non-refundable credits are.
Fourth, although you have heard from other witnesses about the amount of unused RRSP contribution room in Canada and the number of Canadians who have substantial amounts of personal unused room, there is still a problem for high-income Canadians who find they are unable to adequately save for retirement, given the current RRSP maximum contribution limits. This was also studied recently by the C.D. Howe Institute, which, earlier this year, recommended raising the RRSP contribution limit from 18 per cent to 34 per cent of earned income, as well as the maximum dollar amount proportionately, to meet the federal public service plan benchmark.
On the topic of TFSAs, it is clear that while awareness among Canadians is high, statistics have shown that only one in three Canadians has opened up a TFSA. Additionally, much of the money invested in TSFAs is sitting in low- interest savings vehicles as opposed to being invested for the long term.
Why is this? There are several reasons, but perhaps the biggest one might be that the average Canadian may still be unaware that a TSFA, similar to an RRSP, can hold numerous investment vehicles, including stocks, bonds and mutual funds, not merely act as a savings account. Perhaps the name itself — "Tax-Free Savings Account" — has been partially to blame for the misconception.
For Canadians to use TFSAs effectively as part of their retirement plans, they need to be better educated about these TSFA investment options, which may be better suited to a longer-term retirement savings approach as opposed to short-term emergency funds savings vehicle.
Finally, once Canadians fully comprehend the full value and flexibility of the TFSA, with its ability to withdraw and re- contribute in a following year, TFSAs will replace RRSPs as the retirement savings vehicle of choice for the majority of Canadians.
The number one question asked at seminars is where people should contribute first: TFSAs or RRSPs. While theoretically the plans are designed to produce the same after-tax amount at the end of day, that only holds true on the assumption that your tax rate the in year of contribution is the same as your tax rate in the year of withdrawal. For most Canadians, that is simply not the case.
Recent research from the C.D. Howe Institute authored by Mr. Laurin, who appeared before the committee last month, has focused on the marginal effective tax rate of Canadians, which takes into consideration various clawbacks such as the impact of the Guaranteed Income Supplement, GIS, or Old Age Security, OAS, or even the reduction of the age credit as income gets higher. This research concludes that the marginal effective tax rate for the majority of Canadians is actually higher upon retirement than when they are working, leading to a conclusion that is not necessarily intuitive that perhaps Canadians should be directing more of their savings into TSFAs as opposed to RRSPs. This message needs to get out there.
In conclusion, the government can support TFSA retirement savings both by considering increasing the annual TFSA contribution limits beyond the current legislated indexing, as budget expenditures permit, and also invest in a broad-based education plan to ensure that all Canadians are aware of their TFSA investment options.
Thank you. I welcome the committee's questions.
The Chair: Thank you very much, Mr. Golombek. I am sure one of the questions will be whether you favour a lifetime contribution rather than an annual contribution limit for RRSPs.
We will get to that. I do not want to pre-empt my colleagues. Now that everyone has arrived, I will introduce my colleagues here. We have a good turnout this morning. That underlines the expertise of the witnesses that we will hear and have heard.
Let me introduce first and foremost the deputy chair of the committee, Senator Hervieux-Payette from Quebec. On her right is Senator Gerstein from Ontario; Senator Mockler from New Brunswick; Senator Dickson from Nova Scotia; Senator Greene from Nova Scotia; and Senator Massicotte from Quebec. On my far left is Senator Kochhar from Ontario; Senator Moore from Nova Scotia; Senator Ringuette from New Brunswick; and Senator Harb from Ontario. I am Senator Meighen and the chair of the committee.
Mr. Swedlove, the floor is yours. I gather you have a presentation and that all of the witnesses will welcome our questions after.
Frank Swedlove, President, Canadian Life and Health Insurance Association: Thank you. I am pleased to have the opportunity to be here today on behalf of the Canadian Life and Health Insurance Association.
The Canadian Life and Health Insurance Association, CLHIA, is a voluntary association whose members companies account for 99 per cent of Canada's life and health insurance business. Our members administer over two thirds of Canada's pension plans, primarily to defined contribution — or DC — plans, and over 8.5 million retirement arrangements for individual Canadians.
[Translation]
The Canadian life and health insurance industry commends the standing committee for its focus on retirement savings mechanisms and income security. We very much share your interests. This is an area that is highly meaningful to our 26 million customers, who rely on us for financial security — whether it be through life and health insurance or lifetime income solutions that we offer through pensions, annuities, RRSPs and RRIFs.
Canada's retirement system is internationally recognized as a success. According to the recent Melbourne-Mercer Global Pension Index, Canada's retirement savings system has only three peers: Australia, the Netherlands and Sweden.
[English]
The gaps in retirement-focused savings remain for middle-income earners, and corresponding refinements of our private pension regime and other saving mechanisms to address these shortfalls are needed.
On March 31, the CLHIA released the position paper on saving for retirement. I believe copies have been provided to you. The paper lays out a number of proposals, and I urge all honourable senators to read it. I will summarize some of our recommendations as they relate to the mandate of the review established by this committee.
We believe RRSPs can be made more flexible to increase opportunities to save for retirement and to manage our retirement income in later years. For example, extending the age at which Canadians must start withdrawing from their RRSPs — from 71 to 73 years — would allow those who are still working to continue to build up their retirement savings. Some countries have gone even further: Pensions do not need to be taken until the age of 75 in the United Kingdom.
The U.K. has also adopted a lifetime pension contribution limit — something the chair just mentioned — in place of our annual RRSP contribution limit. This would allow for greater flexibility for those who leave the workforce, say, to go to school, or when income varies over the years.
Contributions to both RRSPs and pensions should reflect the same earned-income definition, expanding the employment income base currently used for pensions. It could include royalties, rent and other income from businesses, offices or property, not simply wages. This would provide greater savings opportunities, especially for the self-employed. Governments should consider broadening this base further.
Tax and pension legislation should also be amended to permit adoption of defined contribution multi-employer pension plans. We propose that every workplace with 20 or more workers be required to offer a group RRSP a DC multi-employer plan or some similar arrangement. This would expand access to cost-effective savings plans to about 80 per cent of all Canadian workers. Employment standards should facilitate automatic enrolment of employees and automatic escalation of employee contributions, with appropriate opt-out rights, to gently steer human behaviour to smart savings strategies.
For many employers, group RRSPs are an efficient alternative to pension plans, but employer contributions to group RRSPs can be withdrawn at any time by employees. Employers are more likely to contribute if those contributions are locked in, to ensure they are meeting the objectives of providing retirement savings. We recommend that tax law explicitly require such locking in.
Finally, we suggest permitting the crediting of unused RRSP contributions to DC pensions, since this would better target those savings to retirement income.
[Translation]
Tax-Free Savings Accounts (TFSAs) offer Canadians a flexible savings tool. Although they do not specifically target retirement savings, consumer surveys suggest retirement savings is a primary focus for TFSAs. And there is one area where TFSAs can be significantly enhanced to maximize retirement incomes.
The Income Tax Act requires that TFSAs be portable between financial institutions upon request. However, this portability may not always be to a consumer's advantage. For instance, if a consumer wished to use his or her TFSA room to invest in long-term products, insurance companies could offer guaranteed, lifelong incomes that significantly exceed the income payable under a liquid arrangement. By forgoing the right to transfer the plan between providers, and any right of a survivor to a residual payment, an individual could increase the guaranteed benefits payable during his or her life by as much as 35 per cent — a significant advantage.
[English]
Canada's life and health insurance companies believe that such non-commutable annuities should be permitted as both qualified arrangements and qualified investments for TFSA purposes. This would parallel existing rules for RRIFs and provide consumers with the potentially valuable means of maximizing retirement income.
These initiatives provide useful tools for consumers, but we need to better communicate the importance of saving for retirement, particularly to younger Canadians. We support the Task Force on Financial Literacy's objective of strengthening Canada's retirement planning skills. Governments can play a strong educational role.
In the view of the life and health insurance industry, we have a structure of savings for retirement that is sound and internationally recognized as such. However, we need to find mechanisms to allow more Canadians to take advantage of what is available. Our proposals to free up the RRSP and TFSA markets and to make workplace retirement plans more accessible to workers are the best way to achieve these objectives.
Thank you. Along with my colleagues, I would be pleased to respond to your questions.
The Chair: Thank you, Mr. Swedlove and Mr. Golombek, for targeting your remarks to the mandate this committee has been given by the Senate. It is appreciated that you have confined your remarks to the subject at hand.
With that little editorial, we will begin the questioning.
Senator Massicotte: We are trying to figure out if we should be making recommendations to the government to move on these savings plans and what form that should take.
We have seen a great deal of repetition from both of you and other experts on what should be done — how we should tinker with the RRSPs or RRIFs to make them more attractive for investors to put money into these plans. Obviously, all these amendments will cost something to the taxpayers because they are deferring tax collection. Before we ask taxpayers to subsidize savers to a high degree, I would like to understand a little more about the issues and problems, and do they merit a greater subsidy by taxpayers to save more for retirees.
As you are probably aware, the Minister of Finance put out a document asking for comments. Statistics Canada also put up life path simulations. Here is the summary of the information that I understood we received, but I want to test it because that is the starting point for all us to determine if there is a problem.
You are making arguments about equity; sometimes it is not equitable that a wife could not get the transfer. Issues of equity exist, but let us talk about the adequacy of savings and pension plans.
From what we saw from the Department of Finance Canada, all those people earning less than $125,000 a year when they retired were replacing at least 70 per cent of their income from RRSPs, defined pension plans and their savings, excluding their homes. For those making more than $125,000, all of them — from an average Canadian sense — were replacing at least 50 per cent of their income. We had a witness yesterday saying that 50 per cent should be adequate.
The other observation we were told about was that 70 per cent of people earning in excess of $125,000 are not even contributing the maximum to their RRSPs. The savings plans are there, but they are not just using them.
You made a comment about education, which I think is valuable; but if the information we are receiving is accurate, where is the problem? We are talking about averages and projections to the future. However, if your information is accurate, it appears to be an individual issue where some people are deciding not to save. It is not structural; it is not the adequacy of savings plans. Therefore, what is the problem, or is there a problem? If so, where is the problem and why?
Mr. Swedlove: This is a subject of much debate. I think Jack Mintz's work for the federal government was very helpful in defining the issue.
I note in my remarks, and I am sure that a number of people have noted the Melbourne Mercer Global Pension Index study that shows the system is a good one. We are believers in that. We are saying that we do not need to make major changes in the structure of the system. In our view, we need to deal with some gaps that exist, generally among middle-income people, in their access to savings.
Many of our recommendations relate to more access at the workplace because we think that is a very easy place for Canadians to save and also to free up the RRSP system — for example, for self-employed people, where the concept of basing it on the existing definition of earned income does not work as well for them as it could.
Also, it should recognize the changes over time and that people are starting to work later and potentially working longer. That is why we propose the focus on the possibility of a lifetime limit and moving the RRSP limit from 71 to 73 years of age.
What we are looking at is consistent with what has been said. We need to deal with some of the gaps that exist.
I will make one more point. We worry somewhat about the future. Much of data we see relates to existing retirees or those who retired in the last 10 years or so. Many of those people are still subject to the defined benefit plan, a trend of the 1970s and 1980s. We have seen a significant move to individual responsibility rather than defined benefit plans.
We wonder whether those same rates of saving for retirement will be there among the younger people in our population. That is why we focus on the need for education. They will have to, on their own, take on the responsibility of saving for retirement much more than perhaps the last generation did.
Mr. Golombek: I will add one point that I mentioned in my remarks. We do have a good system; people are saving. On certain replacement ratios, there is a debate of 50 per cent, 60 per cent or 70 per cent; some would say a 90-per-cent replacement ratio is needed, depending on what you want to do in retirement.
We are having an issue right now with our highest-income Canadians. There may not be much public sympathy for this, but, from an equity perspective, people who are highly educated and contributing enormously to productivity, Canadian society and the Canadian economy are capped on how much they can put into a tax-assisted system, such as an RRSP, because of the dollar contribution limit of about $22,000.
If you think about the philosophy, the theory behind an RRSP, it is that you should be able to put some of your working income aside now so that later on when you do not have that working income anymore, you can then use it for retirement. That is why we give a tax deduction. We say that we will not tax you today on all your income because we will allow you to pay tax later when you are not earning that income.
With income levels of $150,000 to $250,000, people are restricted by the amount of tax-assisted savings that we have right now in being able to fulfill their type of retirement income goals, which may be higher than others. That is the only thing I would add.
Senator Massicotte: In response to that, the statistics definitely show that individuals making over $125,000 are probably not saving enough to achieve replacement income. The fundamental issue is whether we should be asking the government and, more importantly, Canadians to subsidize those people to save more. They should save more, but why should they be tax-assisted by other Canadians? I think that is a fundamental equity issue.
More particularly, Mr. Swedlove, you encourage the passage of a law forcing employers to do multi-employer RRSP or savings programs. "Forcing" is a strong word. Also, you note it should be transferable. One of the arguments you raised is that it would provide a more cost-efficient way for people to save.
What you are not saying but which I presume you are saying is that individual RRSP programs, which are most often invested in mutual funds and so on, are very costly to individuals and often have a 2-per-cent management fee, if you actively manage your account. That is high compared to Americans. An article last week showed that it was very high compared to the management of pension funds across Canada.
Is that a big issue? Would we achieve those cost savings if we forced, as you suggested, those multi-employer RRSP programs?
Mr. Swedlove: I presume you are referencing the proposal that says that every employer who has more than 20 employees would be required to offer to their employees some type of workplace retirement opportunity.
Senator Massicotte: Yes.
Mr. Swedlove: A couple of things are key to that proposal. One is the establishment of multi-employer plans. With multi-employer plans, we believe you can reduce the cost to the employer of providing a pension opportunity to essentially a payroll deduction. If you take away the administrative costs and allow a multi-employer plan to be run by a financial institution, which essentially deals with the administrative side, the legal liability aspects, et cetera, then, for the employer, you can significantly reduce the burden, the red tape associated with operating a pension plan. Then businesses could take on joining a multi-employer plan at low or no cost.
Also, they could provide their own arrangements, such as access to a group RRSP. We make that recommendation because we think the workplace is a good place to save for retirement. When you have a payroll deduction, it comes right off the top; you do not see it as an individual. We think that is a very effective way to save. We think people should have greater access to that.
Right now, only about 50 per cent of people in the private sector have access to workplace retirement plans. We do not see why that number cannot be significantly increased.
Having said that, though, we also say in our proposal that individuals should be able to opt out if they wish. If they wish to have an individual plan that is tailored for them by an adviser, they would have the ability to do that. We think choice is an important part of an individual's ability to save. We are saying: Why not give more Canadians the choice of potentially joining a workplace plan than exists today?
The Chair: Would you like to comment perhaps on the question of fees, Mr. Golombek?
Mr. Golombek: The question comes up all the time. There is no doubt that the cost of managing mass institutionally managed money, whether pension funds or other, on a massive scale is certainly lower than it would be on a retail level.
I am not here to justify the entire industry. I am focusing on retirement savings here. However, if we consider the accessibility of professional management to a Canadian who can only afford to put in $100 a week and the administrative complexity of doing so, then I see a place for mutual funds and mass-market retail products to help people save for retirement. Due to the administrative fee, low dollar amounts involved, accounting, et cetera, they are more expensive to run. I do not know how much more I can say.
Senator Massicotte: Even for large investors, the fees are much higher in Canada.
Mr. Swedlove: I am sorry. I did not want to leave the impression that we were avoiding the question of fees. We would be pleased to respond about our views on the fees issue, if the senator would like.
Senator Massicotte: Why are they higher in Canada than in the United States?
Rick Rausch, Senior Vice-President, Individual Retirement and Investment Services, Great-West Life Assurance Company, Canadian Life and Health Insurance Association: Perhaps I could make a comment on that. We need to be sure to compare apples to apples. The statistics from the U.S. are from a different type of structure. They charge their advisory services outside the cost of the actual investment.
In Canada, most of the cost for the advisory service — the individual adviser who is providing advice and personal recommendations to the client — is included in the expense component you see and which is reported on in Canada. That is different from the United States, where often the cost of the advice component is outside and is charged separately to the account of the individual. That is where you will see a difference when comparing the actual cost.
On the cost structure itself in Canada, certainly the cost is higher for an individual. However, that is normally what we experience with anything that has personalized special services where we have to pay for advice.
We talk about the importance of education and guiding people in their particular retirements. Everyone is a specific individual with separate circumstances and individual financial planning. That is where a personal financial adviser can bring value to people to help them understand what their circumstances are relative to their financial wealth, what their objectives are, what they are trying to accomplish, how to set that up, and what should be put aside personally for their future income requirements.
It is that value that should be recognized in what is given to an individual. Back to Mr. Golombek's comments around the cost of a small individual plan versus a larger one — the economies of scale for administration and reporting, and so on — certainly, they would add increased costs.
Senator Massicotte: Thank you for the polite answer.
In your report, you talk about a significant diminishment of defined pension benefits, and you are moving more to a defined contribution. You highlight that it is a major issue where it provides less certainty for retirees. What would you do with that? Do you recommend something whereby the law or regulation should be changed? How would you encourage a reversal of that trend?
Mr. Swedlove: Are you asking how I would encourage a move from defined benefit plans to defined contribution?
Senator Massicotte: No, from defined contribution to defined benefits.
Mr. Swedlove: As an industry, we provide services to defined benefit and defined contribution plans, so we are pleased to administer either one. It is entirely up to businesses to choose whether they establish defined benefit or defined contribution plans.
The reality is that the market is moving to defined contribution and companies are less willing to take on the risks associated with this activity. With accounting changes that will be seen over the next couple of years, that will become even greater than it is today.
Mr. Rausch: I mentioned the amount of 2.5 per cent. That normally includes GST now. The increased HST will probably add another 8 or 10 basis points.
Senator Ringuette: That is on a yearly basis, year after year, for 25 or 30 years.
The Chair: It is until you die.
Senator Ringuette: Yes. When a person puts, let us say, $10,000 into an RRSP in a given year, out of that, they might get a tax break of 15 per cent?
Mr. Rausch: It probably would be more than that. I look to my accountants here for the average tax rate, but I think it would be more than 15 per cent on most of those contributions made to RRSPs.
Mr. Strain: I do not know the average off the top of my head, but it would be closer to 30 per cent.
Senator Ringuette: You indicated, with respect to group RRSPs, that we should recommend legislation that these contributions be locked in. That has serious consequences for an employee because the tendency is that one employee may be working for four, five or six different employers during his or her work life. Every time that he or she has to leave the money in there, over five or six different employers, it is pretty complicated at the end of a work life to manage a pension. There is also the added risk of bankruptcy from the employer and insufficient funds in the pension plan, and the entire pension for that portion of time not being available at all at the end of one's work life.
The Chair: Can we have your comments, Mr. Swedlove?
Mr. Swedlove: The recommendation relates to group RRSPs. If you are talking about pension plans, that already has lock-in provisions to it. In a sense, we are suggesting that contributions by an employer to group RRSP should have an equivalent situation as already exists with pension plans because those contributions are essentially locked in also. We are saying that the employer will be inclined to offer more opportunity to contribute to a group RRSP plan if he or she knows that, at the end of the day, that money will be used for retirement. There is a large amount of leakage with RRSPs. In other words, that money is not ending up being used for retirement. People sometimes use it for other purposes. They may need it in times of need, but they may also choose to have discretionary expenditures.
From our discussions with employers, which we have on a regular basis, they are saying that they are not so inclined to establish a group RRSP plan because they do not know whether, at the end of the day, it will be used for its intent, and that is for retirement. Therefore, we feel this is a way of promoting savings for retirement.
Senator Ringuette: As I was saying, there is also the issue of the employer going bankrupt and the employee losing everything.
Mr. Swedlove: That does not change. In a group RRSP situation, the money is provided by the employer up front and there is no continued liability, so it actually does not matter whether the employer goes bankrupt or not.
The Chair: Is there any portability on that? The point Senator Ringuette was making is that it is locked in, and I can see it being locked in, not being able to be taken out for other purposes, but what happens if I change from employer A to employer B? What happens to that money under your proposal?
Mr. Swedlove: Absolutely, there is portability.
Mr. Rausch: It operates no differently than a defined contribution pension plan today, where the ownership of that money belongs to the individual; they take that portability with a locked-in RRSP with them, have it invested and it becomes an individual plan where they can get advice on what they should be doing. They can move to another employer and be part of another pension program or group RRSP and have another account set up.
The Chair: They would not leave it behind?
Mr. Rausch: No, they take it with them. Again, in terms of concern with the employer going bankrupt, it is not in the employer's hands as it is in a defined benefit program to which, I believe, the senator was alluding. This is a defined contribution plan where the individual becomes the owner of that money. It is in their account, essentially. It is just being administered on a group basis.
Senator Ringuette: To clarify the situation: The issue is also that the portion that is mobile with the employee does not, most of the time, include the portion contributed by the employer for that employee. Most of the time, five years of continuous employment is required before the employee can have access to the employer portion.
Mr. Rausch: Sometimes you see contingencies up to two years, but sometimes it is immediate. Rarely do you see a five-year contingency employment to get vesting, which I think is what you are referring to, of the employer contribution. It is normally, in many cases, immediate, or a maximum of two years in some cases. I do not think we have often seen five years.
Senator Moore: Mr. Swedlove, I want to ask you about your creative comments on the TFSAs. You say that the Income Tax Act requires that these accounts be portable between financial institutions upon request. However, this portability may not always be to a consumer's advantage. For instance, if a consumer wished to use his or her account room to invest in long-term products, insurance companies could offer guaranteed life-long incomes that significantly exceed the income payable under a liquid arrangement. You conclude that the benefits could be as much as 35 per cent higher.
Liquid arrangement is where you put the money in an account, and it sits there as a deposit without doing anything with it. Is that what the "liquid" means?
Mr. Swedlove: I think it is more general than that, but I will ask Mr. Rausch to give a fuller answer.
Mr. Rausch: The current TFSA requirements are that the savings vehicle be liquid; in other words, the individual can access that money at any point in time. One of the suggestions that we are making from the CLHIA's perspective, from an industry perspective, is investment or product vehicles, which we have, that allow individuals to improve their actual income that they would derive from TFSAs if they were using it for retirement income. For example, if you wanted to draw income from it, you would just be drawing money out of it, and if you want to guarantee yourself a period of time of 20 years, you would buy a term certain, let us say, of 20 years, which gives you the money from that.
However, you could increase the actual income you receive from that particular savings account if you were to put it into a lifetime payout annuity. That lifetime payout annuity would guarantee you for life, in fact, a higher income because we take mortality into account when we set the price for a payout annuity situation. That is the 35-per-cent value, roughly, that you would increase versus not having that particular element.
If you buy a lifetime income annuity, you do not have the flexibility to access the money again. You made a decision to utilize that money for a lifetime income, and it is locked up with other individuals' money.
Senator Moore: When you say that by foregoing the right to transfer the plan between providers, who are the providers?
Mr. Rausch: It would be another manufacturer, another individual carrier of a TFSA product.
Senator Moore: Does a survivor have any right to a residual payment?
Mr. Rausch: It would depend on what you had in terms of the guarantee on the lifetime annuity, which would determine whether any residual was left over to go to the beneficiary if the person were to die prematurely. Just as today, if you buy a lifetime annuity, you put your money in and are guaranteed for life. However, if you were to die in the next two years, unless you have a ten- or twenty-year guaranteed income on that, there would be no residual value to your beneficiary.
Senator Moore: With respect to room, the maximum is now $5,000 a year. If you contribute for 20 years, will you have a product valued at $100,000, or is it year by year?
Mr. Rausch: We are suggesting the ability to utilize a vehicle that we offer in the insurance industry — namely, lifetime annuities — that is not an option in the current TFSA regulations. If you have only $5,000 in your TFSA, you would convert that $5,000 to a 20-year term.
Senator Moore: Are you proposing a new one each year?
Mr. Rausch: Otherwise you could wait for 20 years until you have accumulated $100,000, and do it at that time. It is a longer-term objective and one that would be beneficial to individuals.
Mr. Swedlove: It is interesting that when people are asked what they are using TFSAs for, over half are say that they are using them for retirement. If you have 20 years until you retire, why not provide an opportunity to get a higher rate of return with products that are essentially locked in so that a better return can be earned over that 20-year period. We are not asking for an increase in limits or anything such as that, but we could increase the flexibility of the TFSA as a function of the purpose of having it.
Mr. Golombek: We certainly support flexibility. It sounds like a good option. I do not know if I would restrict portability, but allowing an annuity investment would be another good option for Canadians.
Senator Greene: I came to this issue believing that pensions were a real problem in this country, almost to the extent of becoming a social problem. Now, after listening to experts, which one should always do, I am convinced that my thinking was a result of the global recession, which wrecked pension plans, including my own, and all of the attention on other large media issues such as Nortel, et cetera.
Would you all agree that the perception that many people have that pensions in this country have become a social problem is incorrect?
Mr. Swedlove: I can only refer to the data that has been made available by government sources and others, which clearly shows that for the lowest-income earners in Canada the replacement rate is fairly high. That does not discount in any way some of the difficulties that lower-income people face, but the reality is that the replacement rate tends to be very high.
We have defined the problem for those on the middle-income side as getting access to some of the things that are already available. To the extent that people do not have access, I would say that it is a social issue, but we do believe it is something that can be dealt with by some directed changes to our existing system rather than a major overhaul.
Senator Greene: I think we can assume that over the course of an individual's pension plan, the market will have a couple of corrections, and maybe even more than a couple of serious problems.
Have you begun to look at any tools or programs that would enable you to offer shock absorbers on those issues?
Mr. Swedlove: That is an excellent question, senator. I will turn to my colleagues after answering in a general way.
We think that our real opportunity, as people move closer to retirement, to deal with uncertainties at the moment of retirement, particularly in defined contribution plans, is to smooth out the impact. We are in the business of reducing risks to individuals, and through smoothing mechanisms such as annuities, we think there is the ability to deal with some of the concerns about the impact of low markets at retirement.
Frank Laferriere, Chief Operating Officer, Manulife Securities Insurance Inc., Canadian Life and Health Insurance Association: The industry at large has been extremely innovative in providing products and services to absorb market shocks. Guaranteed investment or segregated funds are a primary example of something that is available to lock in market appreciation at particular times. I believe that the real issue is the ability of Canadians to receive qualified advice coupled with financial literacy and learning.
The message we could leave is the promotion of financial advice and literacy as a policy going forward. However, the manufacturers already have a number of products that a well-seasoned, well-educated adviser can take advantage of to align with their clients' risk tolerances and objectives.
Mr. Golombek: I agree wholeheartedly. Advice is important.
I will tell one quick story to conclude. During the heart of the crash when the markets were decimated and we saw a 40 per cent reduction in equity, I was speaking to a couple who were in their seventies and already into retirement. They were terrified about visiting their adviser because they had read in the newspaper that everything was down 40 per cent, and they had just regular RRSPs. When they went to their adviser they found that because they had a balanced portfolio, they were drawing on the money and had received the proper advice; their loss was 11 per cent, and they were delighted. They did not have 100 per cent in equities but rather had approximately 60 per cent in fixed income and some cash.
No one wants to lose 11 per cent, but at the end of the day, because they had an adviser who was monitoring their portfolio and taking into account their age, risk tolerance, longevity, et cetera, they were able to withstand a much lower drop in the markets. I have checked back with that couple and learned that they fully recovered their loss by sticking to the plan.
The Chair: One of our guest senators today, Senator Dickson, has a short question, to which he will be happy to receive a written answer.
Senator Dickson: If I understood correctly, a point is reached in earnings where the preferred option is the TFSA versus the RRSP. Which product do you try to sell to people in the income category of up to $60,000, the RRSP or the TFSA? Why would you promote that product and what are the fees?
The Chair: Since we have gone 10 minutes over our time, I will invite you to answer that question in writing to the clerk.
Thank you all very much for your succinct presentations.
The same applies to you, Mr. Golombek. I know it is difficult to do it from a distance, but you have made a significant contribution this morning. It will help our deliberations.
Our final witness today is Mr. Keith Ambachtsheer from The Rotman International Centre for Pension Management. Mr. Ambachtsheer is Adjunct Professor of Finance at the Rotman School of Management at the University of Toronto. He is also an author and researcher on investment and retirement. He appeared before us a more than a decade ago when we were studying the CPP Investment Board.
Welcome back. This is a fairly narrow study on RRSPs and TFSAs. I realize that they cannot be considered in total isolation from the whole context of retirement and investment programs; nevertheless, that is what we have been asked to examine. We have been asked to try to come up with some recommendations, if appropriate, as to how they might be enhanced.
We are very pleased that you could join us today. It is nice to see you again. If you could proceed now, we are all ears, and we welcome your testimony.
Keith Ambachtsheer, Director, The Rotman International Centre for Pension Management: Thank you very much. In recognizing the specific topic, let me try to create some context for the discussion. As you well know, a very wide- ranging debate and discussion has been happening on the general topic of pension reform for five years now.
We are now getting down to the "short strokes" of actually figuring out what it all means. Much research has been done, and I think the recognition is that Canada has a very good retirement-income system. However, it also has some ways in which it can get better.
I characterize them into three areas of possible improvement. One relates to the coverage and adequacy of pensions. The second is maybe closest to the topic at hand, and I call it the pension system cost-effectiveness. In other words, how much does it cost to turn a dollar's worth of retirement savings into a pension, ultimately, and what are the intermediation costs in between? I refer to this as the elephant in the pension reform room in the sense that it gets the least amount of discussion, yet it may be the most important issue in the retirement-income system discussion.
The third area, which is not relevant directly to your discussion, relates to the sustainability of the defined benefit plans. However, I believe that falls outside of the ambit of this discussion.
I would say that the most relevant area to where your discussion lies relates to the degree to which retirement savings vehicles, such as RRSPs, TFSAs, RRIFs, et cetera, fit into the retirement-income system, what role they play and whether they could be repositioned in some way so that they could play a better role. I believe that is the case. However, rather than laying it all on you, I prefer to be guided by your questions.
The Chair: That would raise the question of what your suggestions are for improvement.
Mr. Ambachtsheer: I am happy to lay them out briefly for you.
We have approximately 5 million Canadian workers who are not covered by a retirement pension plan who could use one.
A whole other group of lower-income workers and part-time workers exists, but that is another discussion.
However, if you consider our full-time workforce of 10 million workers, half of them have a pension plan and half do not. Obviously, the question of retirement income savings vehicles is most relevant to the half who do not. It is a significant number of workers.
We are leaving these people on their own more often than not to figure out how much they should save and what vehicles they should use for those savings. Should they buy retail mutual funds? Should they trade ETFs — exchange- traded funds? Those are huge decisions. The reality is that most of those 5 million workers do not have a clue. The reality then becomes, as a public-policy issue, the degree to which we should create frameworks for those people so that they can turn dollars of retirement savings into, ultimately, pensions as cost-effectively and as sensibly as possible. What is missing is a structure that would help them tremendously, that would allow them to do that.
I wrote a paper for the C.D. Howe Institute a couple of years ago called The Canada Supplementary Pension Plan. The idea is to create a framework for the 5 million workers to be able to save on an ongoing basis using their contribution room — whether it is in a TFSA or a RRSP does not matter as they are all retirement savings — and basically have a mechanism that pools those retirement savings, manages them in a expert manner at low cost so that they can turn those retirement savings into pensions at a reasonable transformation cost. I will give you a rule of thumb: For every 1 per cent per year of additional expense that they have to incur over a lifetime, it will ultimately reduce their pension by 20 per cent.
Now, I will give you another piece of information. I work largely with large-scale pension plans. Their average operating cost is approximately 0.4 per cent per annum, all in — that is the investment side and the administration side.
At the other extreme, if they, as many Canadian workers do, turn to the retail mutual fund industry to look after their RRSP needs, they will pay 2 per cent plus as an annual fee. The difference between 0.4 per cent on one hand and the 2 per cent on the other hand is a differential of 1.6 per cent per annum. That turns into an additional cost for them of 30 per cent more retirement savings that they have to contribute to get the same pension as the worker who has the benefit that a large-scale, expertly managed pension plan has. That is the biggest public policy issue in this space.
Senator Massicotte: Your presentation is very useful, and it is very pointed. If I were to summarize your recommendations — and we are not even talking about the tax structure — you are saying that 5 million people are not saving at all. We must find a structure to incite and encourage them to save and, also, if possible, find a way to reduce the costs to manage those funds that are as high as 2 per cent but range from 0.4 per cent. That is the issue. You are not suggesting an amendment or tinkering with the existing tax-assisted savings plans at all. Is that correct?
Mr. Ambachtsheer: The reality is that we focus on 5 million workers. Most of them are not anywhere near the current limit. Some could use a higher limit, and that is a separate discussion. There are interesting recommendations, as I am sure you have heard, around the notion of having a lifetime limit rather than an annual one, for example. There are interesting innovative ideas that have to do with the amount of contribution room that you have on a tax-deferred basis. That is not the major issue.
The major issue is to get more workers to use the tax deferral room they already have and to use that room sensibly and cost-effectively so that they can turn their retirement savings into pensions. That is the biggest challenge.
Senator Massicotte: Having said that, I think the testimony we are hearing is that that is the important issue, namely, how to get people to save more cost-effectively.
However, if you went backwards, is the issue not education? In other words, even those with high incomes who may suffer shortfalls may not appreciate that they are not saving enough. Somehow, we have to get the information to incite them to place importance on the issue of the cost-saving way of saving.
Does the marketplace already have a mechanism that is much cheaper that people would use if they were more informed, for example, ETFs, which have an annual fee of 0.1 per cent to maybe 0.4 per cent? Studies also indicate that ETFs consistently outperform all managed funds, with rare exceptions.
Mr. Ambachtsheer: I can use an example that is graphic and funny but makes an important point. I was at a conference board pension summit yesterday. One of the speakers there was a fee-only financial adviser who is hired by corporations to teach workers about savings and investing, and the way that he put it is that in many cases, "it is like watching dogs watch television." What he meant by that was, if you sort of get the image of your dog watching television, they do not have a clue what is happening.
You can steer people in the direction of understanding the concept of savings and compound interest, but if you push it too far, you will lose them because it is technically too difficult, and, frankly, many of them are not interested.
There is a whole area now of economics and finance called behavioural economics and behavioural finance. The psychologists and economists who look at that area tell us that their research shows that, in most cases, people say: This is too complex for me, and, anyway, I have too many short-term issues I need to worry about, so when someone tells me that when I am 40 years old, I need to save this amount of money for something that will not happen to me for another 25 years, I tune out. That is just a reality. That is not teachable.
Senator Massicotte: Because of human nature, if you wish, you are saying that we must muzzle the dogs, force laws and force them to save and put a regimen in place to get them to go where they should go, even though they do not know where they want to go. Are you saying that?
Mr. Ambachtsheer: A wonderful intermediate way of doing this exists. It is all captured in a bestselling book called Nudge: Improving Decision About Health, Wealth, and Happiness. It is written by a couple of U.S. economists, Richard H. Thaler and Cass R. Sunstein. It is the notion that you can guide people toward better outcomes without forcing them to do it. The way it relates to a retirement income is to design something that people automatically become enrolled into, that automatically sets a default contribution rate that makes sense and automatically sets an age-based investment policy that makes sense. You say to people: Congratulations, you are enrolled in a system that will get you way down the road to a level of retirement savings that will allow you to live reasonably well when you stop working. Now, if you do not want this, you can get out.
In the U.S., the research shows that with 401(k) plans where auto enrolment has become a standard feature, it takes the uptake of the number of workers who enrol in the plan from 50 per cent to 60 per cent to well over 90 per cent. The difference between asking people to come in only if they fill out a bunch of documents and telling people, "Congratulations, you are in, but you can get out if you fill out a few documents," is that the uptake is between 50 per cent to 60 per cent and 95 per cent.
We can do things that do not involve absolute mandatory requirements that you must do this. We can guide people toward better outcomes.
Senator Massicotte: You are the director of The Rotman International Centre for Pension Management. I would appreciate your comments on the observation we are hearing about where companies are increasingly moving to defined contribution as opposed to defined benefit because they do not want the risk of market; and why should they?
Last week, I read an interview of Mr. Lamoureux, the manager of the teachers' pension, and of David Dodge, the former Governor of the Bank of Canada. They say that this change is important to Canada. It obviously diminishes immensely the amount of certainty those retirees will get from their pension funds. Maybe their savings will go up, but our economy may suffer from that structural change in the way people are saving.
Do you agree that that is a serious change in the form of pension funds? If so, what should we do to change that trend?
Mr. Ambachtsheer: We are talking about a design question here. We frame this debate of a pension design as either defined benefit, DB, or defined contribution, DC. Some of us are saying that that is framing it incorrectly. It is all about what type of mechanisms can get people to where they want to go way down the road in many cases. The research shows, in fact, that both an element where people have a personal pension account and an element that, if you like, is a lifetime annuity both have a role to play in an optimal retirement-income system.
I will give you several examples. Through OAS and CPP or QPP — Quebec Pension Plan — people in fact get a base annuity. If they do the full uptake of $16,000 a year, a couple gets $32,000. That is a lifetime inflation indexed annuity. That is what you start with. The question is what you put on top of that. It could well be more annuities, but if people have a bequest motive, if they have some ideas as to what they want to do post-work that is lumpy in terms of the amount of money it takes to do it, it makes sense to have some of the money in a personal pension account. It is not either or; it is both.
Let me give you another example. Probably the largest success in the U.S. in terms of running a retirement-income system is the TIAA-CREF. It is a funny acronym, but it is basically the college-level teacher system in the U.S. It has multi-million participants. It has about $350 billion in assets. It is not either or; it is both. The TIAA part, the Teachers Insurance and Annuity Association, is an annuity corporation that was started by Andrew Carnegie in 1917. In 1952, they also started a CREF side, the College Retirement Equities Fund, where people have personal pension accounts largely invested in risky assets.
This system has been operating with these two elements side by side since 1952. The rule has been, until relatively recently, that half of your money goes into the annuity and the other half goes into the CREF, the personal pension account. U.S. university teachers, for many decades, including the social security piece, have been generating through this program income replacement rates ranging between, at the low end, 65 per cent, and at the high end, 110 per cent. This is with roughly an 18 per cent of pay base over their working lives.
It is not either or; it is in fact both. We can design these things if we step back from these, to me, somewhat useless DB versus DC debates and ask how we can collectively design a path that meets both the reality that corporations cannot underwrite the types of risks that they could decades ago because their business has changed, on the one hand, and changing capital markets on the other hand.
We had this wonderful run in the markets in the 1980s and 1990s that created such a wind at your back that you could become a genius just by being in the stock market. That time has gone. We have to think about how to redesign systems so that they are sustainable in the 21st century. We can do that.
Senator Hervieux-Payette: Thank you for your enlightening comments. I suppose we can have access to the documents you have produced. For me, safety is an important element of a pension plan. I suppose the cost of administration fees would not be too high for them. Would you consider that to be administered by the same entity that is administering the QPP or the CPP?
Mr. Ambachtsheer: This debate is interesting. It is an important question. If you look around Canada as to what is happening now, a large amount of lobbying is happening by different industry groups saying that they want to run the system. At the conference board yesterday, for example, we had some good presentations from John Crocker, the CEO of HOOPP, which is the health organization's pension plan in Ontario, and Jim Leech, who is the CEO of Ontario Teachers' Pension Plan, about the concept of their structure, which are effectively arm's-length pension organizations that act similar to co-ops.
Then we had a presentation from the life insurance industry saying that they want to run the system because they know how to do it better than anyone else. We had David Denison the day before, not arguing that the CPP Investment Board should run all the money, but at least opening up people's minds to the fact that there are different avenues that we can take and that we need to think about this as a two-stage process.
In other words, if we can collectively decide that we want this middle way, that we want some mechanism for these 5 million workers without a pension plan, to give them a boost, if you like, in terms of creating a structure, then that is a huge decision; and we can collectively make that decision.
Then there is the question of, if we will do this, how we should do it. That is where I think we should not jump to immediate conclusions. Where the insurance industry says that no, we have the best way, where the pension people say that no, we have the best way, this is a classic area where we could strike a task force, as we did in the 1990s to redesign the Quebec Pension Plan. We should then look at the question of structure. If we want to move in this direction, what is the best way to do it?
It is wrong for people to say today that they have absolutely the right answer as to how this should be done. This is an area where we can collectively, if we are willing to look at some data and studies, have a debate about governance and legal structures, and come up with a world-class solution that maybe has not even been thought of before, in the same way that we reformed the Canada Pension Plan and Quebec Pension Plan in the 1990s, which the world says is sort of a miracle because very few other countries have actually been able to accomplish what we did.
Senator Hervieux-Payette: I have a question to confirm what the other witnesses have said. Do you feel that capping the age at 71 for the contribution to the various plans is the optimum age, or, with the aging population, would you put it at a higher level?
Mr. Ambachtsheer: That is a tough question. In a world of free choice, you would not have any limit at all. Why do we have one? It has to do with recouping all that tax deferral and starting to collect the taxes on those deferred wages back into the tax system. The reality is that a number of factors come into play in the economics, including public finance, as to where that level is set.
To me, one of the major issues is not whether it is age 71 or 72. I decided not to take my pension at age 65, so I have some personal interest in this question, but it is not one that I think is a deal breaker of any type.
Senator Hervieux-Payette: Thank you for telling us that. We are in a conflict of interest on this matter as well, so we need some outside advice.
What about the lifetime amount that could be awarded? I am thinking of inheritance, for example. People who have been receiving the average salary of Canadians, which is $44,000 a year, do not set aside any money. It is not taxable, but the in year that they have inherited, and if they sell their mother's house, they might have a few hundred thousand dollars. However, they can save only 18 per cent of their salary, which is $44,000. For them, if they were earning more money, normally they would be able to set aside more.
Mr. Ambachtsheer: That is an important equity area. I am sure you have already heard this, but let me say it again. The reality is that in defined benefit plans, there is this ability to catch up. You run a collective risk-based program. If the risks go against you and you end up with a deficit, then you have time to catch up.
Currently, that concept does not exist in the individual pension account world. You have one group of Canadian workers who can benefit from this averaging deferral catch-up process and you have another group that cannot. That is clearly unfair.
Senator Hervieux-Payette: Can I conclude that you would not be against having a lifetime amount, depending on the source of the money? For those who are, as I say, earning $50,000 or less a year, they could at least put that money aside. They may not even reach that amount over their lifetime, but at least this could set aside a certain amount of money.
Let us say I inherit $200,000. Maybe I am willing to put $100,000 in my pension plan, and perhaps make some other investment with the remaining $100,000.
Mr. Ambachtsheer: I am clear on this. The idea of moving to a lifetime concept rather than an annual concept is sound and should be seriously examined.
The Chair: As a supplementary on that, Mr. Ambachtsheer, other than public policy in terms of the government finances and recuperating the tax, what other elements would come into arriving at an appropriate figure for a lifetime amount?
Mr. Ambachtsheer: The one that gets mentioned most often is longevity, the fact that we are living longer and that we may have to work longer. Wherever we set these triggered ages should be dynamic rather than static. The idea of maybe tying this age of 71 to some type of longevity index, for example, would be interesting to explore.
The Chair: What about the amount of the lifetime contribution? What are the factors to lead one to come to the conclusion it should be $300,000 or $500,000 or $100,000? What should we consider in coming to a figure on that?
It is probably a premature question. First we have to decide whether we want a lifetime concept or not.
Mr. Ambachtsheer: This is an interesting broad discussion around what it means to maintain a post-work standard of living. Once you pose the question, immediately you can think of a list of factors that come into how you might answer the question. It relates to health, your accumulation pattern for savings and whether you want to work or not. Many things come into play.
Your income level is very important in the sense that if you are a modest-income worker, the reality is that most of your post-work income will come from the public part of the pension system. The question there of a lifetime income is moot.
This is really a discussion more for the higher-income workers. If you look at some of the implicit retirement savings levels that can be accumulated through a public service plan, for example — which, based on today's interest rates go well into the multi-millions — then you end up with this question of the private-sector worker currently not being able to come close to that accumulation number because the system works differently under DB and DC plans.
For all of those reasons, you would end up with a number that, if it is to be meaningful, needs to be a multi-million dollar limit rather than something that does not come close to what the implicit savings accumulations are in a public service plan.
Senator Mockler: To the presenter, I think Canadians are fortunate when we look at the experience that you have; we are benefiting from your experience this morning.
With your "dog" approach, watching TV, there is no doubt you bring me to the next step, which is the horse. We can bring the horse to water, but he will choose if he drinks or not.
You also touched on an important subject matter, the fee side. For those 5 million Canadians, we can direct legislators to recommend to governments, we can legislate or we can educate. What would be the least cost to the public purse, the taxpayers of Canada?
Mr. Ambachtsheer: To restate what I said earlier, we must not overestimate the potential of the financial education campaign. It is nice to put some money into that; it cannot hurt. However, research on behavioural finance tells us it will not make a huge difference for most people.
We are still left with this question of whether it is a dog or a horse — or we can come up with another animal; the question still remains of how you lead people into a pattern of habitual retirement savings in a way that is low cost. Again, the reality is younger people can take more financial risk than retirees. Those are some of the elements that have to go into the mix of the design. I am encouraging all of us to think about coming up with a solution that has those attributes built into it.
I did something quite specific in the Canada Supplementary Pension Plan, the C.D. Howe Institute paper from a couple of years ago, where I laid out some specific measures of how it could work. However, I also added the caveat that this is not the only way that this collection of attributes can be put together.
I say to my friends in the insurance industry that there is no reason why you cannot play some role in this solution that we want to fashion. However, it has to be done in a way that whatever you offer meets certain standards, not only in terms of the quality of the service but also in the cost of delivery.
Within that type of framework, it is almost the same as a utility concept, where you say that if you want access to this pool of Canadians who do not have a pension plan — for which we have now created, call it, for lack of a better term currently, the Canada supplementary pension plan — if you want to be a service provider to that system, you have to be able to meet certain criteria of service quality and cost. If you do, you can be a participant.
In that way, maybe we can get some of these large pension funds to come in and be players. We can get the insurance industry to come in and be a player, and we can invent some new mix of a sort of public framework with private delivery that would meet the criteria that we want this system to have.
In Canada, we have a good track record of thinking outside the box on some of these issues. Our global reputation in the retirement-income system is that we have some good, world-class elements. I am telling people not to not shut our minds. There is another challenge around these 5 million Canadians. Let us figure out how to help them in a way that it is win-win-win, rather than win-lose situation. I think we can do it.
Senator Hervieux-Payette: I will come back to my usual question about protecting people's savings and ensuring that, whatever great plan they have, they will have access to it. You ought to know that we live in an era now where we receive emails on a daily basis from people in the North. We know that people are afraid. We have to propose something that will secure their savings.
You propose that the stakeholders, under government leadership, would meet and find ways of securing these amounts. Rules would apply to them, as well as some type of supervision, such as when life insurance is purchased criteria must be met.
Is it possible to have an insurance fund, as is talked about by different countries, for instance, so if one player goes down, then we have a place to save those who have failed? Even in the private sector, the supervision of the government has not prevented some failures. Some banks in Canada went bankrupt in the past, and some insurance companies also had serious trouble.
How do we ensure the people who are not knowledgeable — whether dogs or horses — will finally, when they retire, have access to what they have saved, with the accrued value over time?
It would be useful if we could have access to your proposal. Perhaps your thoughts have evolved over time, and you have added some reflections to that. How can we ensure that, with government oversight, people have access to their pensions without being afraid of losing them through bad management or another financial crisis?
Mr. Ambachtsheer: Let me go international for a minute. I have my Canadian passport. My other passport is Dutch. The Dutch figured out the answer to your question almost 10 years ago. The regulator of the Dutch pension system is De Nederlandsche Bank, which is the central bank of the Netherlands. They are also the prudential supervisor for insurance companies and banks.
After the financial crisis of 2000, 2001, 2002, when the Dutch pension plans went into deficit and there were questions about sustainability in some cases, the regulator asked why it is regulating pension plans differently from the way it regulates banks and insurance companies. That is a good question.
The rule for banks and insurance companies is simple: When you make a promise, you have to keep it. The way you keep it is that you have enough assets on the balance sheet to secure the promise. That can be done in two ways. You can do it on an immunized basis, where the assets look exactly the same as the liabilities, or you can put risk on the balance sheet. However, if you put risk on the balance sheet, you need enough of a risk buffer to be able to withstand bad times.
When we take that principle and apply it to Canadian regulation, the reality is that we came through the most recent financial storm very well, especially compared to most of the rest of the world. That happened because the Office of the Superintendent of Financial Institutions Canada, OSFI, followed the rules. It told the banks and insurance companies that they needed to have enough capital on their balance sheets to ensure that we could ride this through.
It did not happen with defined benefit plans. DB plans are allowed to run deficits. In some cases, when companies such Nortel or Air Canada — which is still a concern, but we all know it has a significant hold on its pension plan balance sheet — run these deficits, we say that that is okay; we will give companies 10 years to make it up. Significant security issues exist with the way we are currently running these defined benefit plans, especially in the private sector.
In another part of my proposal, the way to deal with solvency problems with respect to pension promises is to regulate defined benefit plans the same way we do banks and insurance companies. Is it a radical idea? Yes, but it is a simple idea.
When the central bank in the Netherlands proposed that to the pension community, they all fell out of their chairs and said that they cannot do that. The central bank, backed by the government, said that they can and, in fact, are doing this. They gave them two years to figure out how to create sustainability in their pension plans. In the Netherlands, the level of benefit promise went down to be consistent with the amount of capital that the plans had.
That is the answer. It is radical, but the only way we can create security for pension promises is to start applying the same prudential rules that we apply to insurance companies and banks.
Senator Hervieux-Payette: I am sure if we took a poll today asking people if they wanted that secure plan, they would support the politicians in the range of 95 per cent.
The Chair: I have had a request from Senator Moore for a final question. We have a couple of minutes left on the clock, if you are all right, Mr. Ambachtsheer, to stay with us for a moment.
Mr. Ambachtsheer: Absolutely.
Senator Moore: Thank you for being here. In your remarks a few moments ago, you spoke about how to get these 5 million Canadians included in some type of a plan that would provide them with retirement income.
Yesterday, we heard from Malcolm Hamilton, a senior partner with Mercer. We spoke about that. I expressed my concern about the 66 per cent of Canadians who do not participate in any type of a retirement pension plan. He did not think that was a problem. He said that the low-income earners do not have the money to invest, and even if we got them to invest 18 per cent, the existing rule, they could not afford it; it would suppress the whole system.
How do we view that comment with your interest and suggestion of getting something in place to provide for those low-income earners?
Mr. Ambachtsheer: Let me first go on the record saying that I respect Malcolm Hamilton tremendously. He is truly one of Canada's gifted actuaries. Not only can he do the math, but he can explain it.
Senator Moore: We agree. He was very good.
Mr. Ambachtsheer: He is a very articulate individual, and he is usually right.
In this particular case, it may partially be a question of interpretation. Mr. Hamilton and I totally agree about the people who, for whatever reason, have annual income levels below $30,000 a year. The public part of our system and its various components — CPP, QPP, OAS, GIS — provides very high income replacement at that low level.
Therefore, immediately, we are not talking about quite as large a number of people. The 5 million Canadians who I spoke of are those who actually need to save more. We need to focus and segment our discussion around the group that really could use some help.
I will go on the record as quoting Mr. Hamilton quite accurately.
His focus has mostly been around the question of whether our target replacement for earnings should be 70 per cent. I think he makes a very strong point that 70 per cent is too high for most people.
Senator Moore: He said that yesterday.
Mr. Ambachtsheer: If you are a modest-income couple, if you do not have a mortgage on your house or if you are empty-nesters because the kids are gone, then you are trying in many cases to save for an income replacement of 70 per cent but are giving up too much while you are working. You should be spending more money while you are working.
He is absolutely right, and I agree with him. Regardless of it being 70 per cent or 50 per cent, he would agree with me that those people who do need to save for retirement, over and above what they will receive out of the public pensions, will need a hand. If they are not a member of some collective scheme that does this for them, it is perfectly sensible public policy to give them a hand.
We are just creating a framework where these people will be better off than they would be without it.
Senator Moore: I agree.
Mr. Ambachtsheer: We are not talking about some massive government expenditure to give people money. We are talking about being a catalyst to create a structure to help people where they want to go. I think he would agree with me that that is a sensible thing to do.
Senator Moore: To whom are your comments directed? Are they for those who are beyond the $30,000-income earners who are not participating?
Mr. Ambachtsheer: My 5 million Canadians are middle-income workers in the private sector, more than not.
The Chair: Much as we could continue the discussion for quite a while, I think we must draw it to a close. We have taken much of your time, Mr. Ambachtsheer, and we appreciate your insights. You and the other witnesses who have appeared before us have been very patient and very articulate in explaining a complex matter to people who are not well versed, except through personal experience; in the larger picture, it is somewhat unfamiliar terrain to many of us. Thanks to you and others, we have a clearer idea of what the problems are and what they are not.
Thank you once again for helping us. I hope you will be before us in person next time, but teleconferencing is a good second best.
Mr. Ambachtsheer: It is a good second best. Thank you very much.
The Chair: Thank you.
(The committee adjourned.)