Proceedings of the Standing Senate Committee on
Issue 15 - Evidence - Meeting of October 27, 2009
OTTAWA, Tuesday, October 27, 2009
The Standing Senate Committee on National Finance met this day at 9:30 a.m.
to examine the Estimates laid before Parliament for the fiscal year ending March
31, 2010 (topic: Pensions).
Senator Joseph A. Day (Chair) in the chair.
The Chair: I call this meeting of the Standing Senate Committee on
National Finance to order. Thank you for being here. This morning we will
continue our preliminary consideration of the pension issue. In the first panel,
we will hear from Human Resources and Skills Development Canada and Statistics
Representing Statistics Canada, we welcome Grant Schellenberg, Senior
Analyst, Social Analysis Division; and Ted Wannell, Assistant Director, Labour
and Household Surveys Analysis Division.
From Human Resources and Skills Development Canada, Dominique La Salle,
Acting Senior Assistant Deputy Minister, Income Security and Social Development
Branch, and Philip Clarke, Acting Assistant Deputy Minister, Operations Branch,
Welcome to you all. The floor is yours, Mr. Schellenberg.
Grant Schellenberg, Senior Analyst, Social Analysis Division, Statistics
Canada: Good morning. Thank you very much for having us here. We presented
before the House of Commons Standing Committee on the Status of Women last
Wednesday, and we are presenting much the same material as we did it to that
committee. Hence, there is quite a focus on women in this morning's
presentation. However, the key themes that echo through the retirement income
system are certainly captured here.
The presentation is organized into two broad sections, and you all have the
deck in front of you. In the first few slides, we focus on working-age men and
women in the paid labour force and the proportion of them who belong to an
employer-sponsored pension plan, or a registered pension plan.
No single data source provides comprehensive information on this issue, so we
will consider data from three different sources, focusing on trends in coverage
drawn from each of them in order to piece together as complete a picture as we
In the second portion of our short presentation, we will turn our attention
from working-age individuals, who may or may not have a pension plan, to the
elderly, those aged 65 and older, and the income they receive.
The key story here is that the past 25 years have seen a profound shift in
the workings lives, particularly of women, as evidenced in increasing
participation in the labour force and their contributions to retirement savings
programs, and that these changes are evident in the amount and sources of income
they receive in old age.
Please turn to the first slide, entitled "Percent of paid workers age 17 to
64 with pension coverage." Data on pension coverage can be drawn from several
sources, each of which has strengths and limitations, so it is worthwhile
considering all the sources we can. This chart is based on administrative data
compiled on all registered pension plans in Canada and shows the share of paid
workers, aged 17 to 64, who have pension coverage. Among men, there has been an
ongoing decline in pension coverage rates over the last 15 to 20 years. It has
gone from around 47 per cent to 48 per cent in the late 1980s to about 38 per
cent in 2007.
Among women, there was an increase in pension coverage rates between the
mid-1980s and the early to mid-1990s, and the data presented here indicate that
the coverage rate for women has remained fairly stable at around 39 per cent
over the last decade.
Turning to the next table, we can consider two other data sources that offer
insights on trends and pension coverage. These are taxation data and household
survey data. I want to focus your attention on the trends in coverage rates
within each age group, as evidenced by the percentage point changes between 1997
and 2006-07. Considering men on the right-hand side of the table, the data from
taxation and survey data confirm the trends on the previous slide. More
specifically, among men aged 35 to 44 and 45 to 54, we see there has been a
decline in pension coverage in the range of four to six percentage points over
the last decade. Data from both of these sources — again, taxation data and
survey data — shows the coverage rate among younger men, those 25 to 34, has
stabilized or perhaps increased slightly.
If we consider women on the left-hand side of the table, the taxation data
shows stability in pension coverage rates among women 35 to 44 and 45 to 54. The
survey data also shows stability over that period among those 35 to 44, although
the survey data shows somewhat of an increase among women 45 to 54. That could
be due to how survey respondents report group RRSPs, which are normally included
in other types of pension data. Finally, women 25 to 34 show an increase in
pension coverage in the range of four to six percentage points when we consider
these taxation and household survey data.
Therefore, broadly speaking, we see declining coverage rates among men,
increasing rates among women, some stability among those in older age groups
and, perhaps, some increase among younger age groups.
In the next table, in addition to trends in pension coverage rates, trends in
the characteristics of pension plans themselves have received considerable
attention and public discussion. The shift from defined benefit plans to defined
contribution plans is central here. In a nutshell, in defined benefit plans,
retirement benefits are established by a formula that is stipulated in the plan,
such as 2 per cent per year of service, based on some bracket of earnings.
Employer contributions to defined benefit, DB, plans are not predetermined
but are based on actuarial valuations. In contrast, defined contribution plans
are those in which contributions to the pension plan are based on a fixed amount
or a percentage of earnings. While the contribution amounts are known, the
benefit amounts are known only at retirement and depend on things such as
returns on investments.
Between 1991 and 2007, the number of pension plan members in defined
contribution plans more than doubled, from 466,000 to 935,000. That does not
include paid employees who have group RRSPs. Evidence from the 2005 Workplace
and Employee Survey showed that about 18 per cent of employees reported a
group RRSP, which are somewhat akin to defined contribution, DC, plans.
There are two other points I would note from this table. The first, on the
top line, is that pension coverage rates vary significantly between the private
sector and the public sector. Among employees in the public sector, 83 per cent
of women and 85 per cent of men have an employer-sponsored pension plan. In the
private sector, those figures are 22 per cent and 29 per cent.
The second point is that, for those employees who have a pension plan, the
type of plan they have differs quite significantly between the public and
private sectors. As we see, 93 per cent to 94 per cent of public sector
employees who have a pension plan have a defined benefit plan. Of private sector
employees who have a registered pension plan, about 60 per cent have a defined
benefit plan, 26 per cent have a defined contribution plan, and we are seeing an
increase in the shares in mixed plans.
We will move to the next slide. I want now to shift our focus away from
working-age women and men and their pension coverage towards Canadian seniors,
those 65 and over, and the retirement income they receive. Over the past three
decades, the median income of the elderly in Canada has increased significantly.
Between 1980 and 2007, the median incomes of elderly couples increased from
about $30,000 to about $47,000; those are inflation-adjusted dollars.
Among elderly women who do not live with other family members, the median
income increased from just under $15,000 in 1980 to about $22,000 in 2007. The
median income of elderly men not living with family was about $25,000 in 2007.
Women's increasing participation in the paid labour force and their
contributions to retirement savings programs like the Canada and Quebec pension
plans, RRSPs and employer-sponsored pensions is one of the factors underlying
the rising income of seniors. Here we consider the role played by Canada and
Quebec pension plans in this chart.
On this chart, the black line shows the percentage of women aged 65 or older
receiving income from the Canada and Quebec pension plans as measured against
the percentage axis on the left of the chart. Between 1980 and 2006, the
proportion of elderly women receiving CPP benefits more than doubled from 35 per
cent to 84 per cent; and as shown on the red line, the median income received
from the Canada and Quebec pension plans increased from about $3,100 to $5,500,
as shown on the axis on the right-hand side of the chart.
Similar trends are shown for men. The proportion receiving CPP and QPP
increased from 69 per cent to 96 per cent over this period, and median benefits
increased by almost $3,000.
The same trends are evident when we consider income from RRSPs, pensions and
superannuations. This chart shows women. On the black line, we see that the
share of women receiving retirement income from these sources increased from 20
per cent to 55 per cent between 1980 and 2006; and for those who did receive
income from this source, the median amount received increased from $4,600 to
Among men, the proportion receiving retirement income from these sources
increased from 40 per cent to 72 per cent, and the median amount increased from
about $8,000 to $11,500.
Overall, the income that Canadian women and men receive in old age reflects
changes in their working lives and participation in the retirement savings
programs, both publicly and privately administered. The overall effects of these
changes are shown on the next chart, which shows the total aggregate income
received by all women aged 65 and over in Canada. In 2006, women aged 65-plus
received about $54 billion, up from about $20 billion in 1980. This reflects
both the average increases in the average income received and the fact that in
absolute terms, there are more elderly women in Canada today.
What is most striking about this chart is the growing proportion of total
aggregate income received from the Canada and Quebec pension plans, as shown by
the yellow area, and the growing proportion received from RRSPs, pensions and
superannuations, as shown by the red area.
To conclude, I want to highlight two final points regarding the composition
of income received by seniors. On the next chart, the first point pertains to
how the composition of income received by seniors varies across the income
distribution. This slide was taken from a recent Statistics Canada study that
looked at seniors who had significant labour force attachment when they were
younger — that is, those who had earnings of at least $10,000 when they were
The key point to be made here is that in the first column, we see individuals
who are at the bottom of the income distribution at age 55. By the time those
same individuals were 75 to 77 years of age, they received 62 per cent of their
income from the Old Age Security, the Guaranteed Income Supplement and the
Canada and Quebec pension plans — that is the 35 per cent plus the 27 per cent —
with the remainder received from other sources.
Considering those who were at the middle of the income distribution at age
55, at age 75 to 77, those individuals received about 43 per cent of their
income from OAS, GIS and the Canada and Quebec pension plans, and about half of
their income from pensions and superannuations, investments and capital gains.
Finally, individuals who were at the top of the income distribution when they
were 55 received the majority of their income from pensions, superannuations and
other investment sources. OAS, GIS and CPP and QPP accounted for less than 20
The final point I want to make in this morning's presentation is that in
spite of the growing share of seniors who receive income from retirement savings
programs, as we saw in the previous chart, many also receive income from the
Guaranteed Income Supplement. In 1981, 55 per cent of women aged 65 or older
received the GIS, while in 2008, about 40 per cent did so. We can also see from
this chart that the likelihood of receiving the GIS is higher among those in
their 70s and 80s than it is for those between 65 and 69.
That is the overview I would like to present this morning.
The Chair: Thank you, Mr. Schellenberg. There are a couple of points I
would like to you clarify for us so we understand the documents you have gone
over. In a slide, you referred to the Canada and Quebec pension plan income
received by women and the RRSP pension and superannuation income by women. Then
you referred to the men, but we did not have the slide. Could you make that
available to our clerk for distribution?
Mr. Schellenberg: Absolutely.
The Chair: The third slide from the end is the total aggregate income
received by women aged 65 and older by source.
Mr. Schellenberg: Yes.
The Chair: At the top, it says multiplied by $1 million. When you
looked at these figures on the left-hand column, you said that was $20 billion?
Is that correct?
Mr. Schellenberg: It is billion, yes. If we look at 2006, there was
$54 billion received by women aged 65-plus. There were approximately 2.5 million
women in 2006, and if you divide the $54 billion by the 2.5 million, it yields
an average income of just over $22,000 per person. I could provide that slide
for men as well.
The Chair: Thank you; one of my colleagues was just asking if you
could do that.
Senator Gerstein: Did you say these slides are inflation-adjusted?
Mr. Schellenberg: Yes.
The Chair: On the second slide — "Percent of paid workers with
pension coverage, by sex" — group RRSPs are not included.
Mr. Schellenberg: That is correct.
The Chair: What kind of impact would it have if you included group
RRSPs, and why are RRSPs not included?
Mr. Schellenberg: This data source comes from the Pension Plans in
Canada administrative database. That database is compiled by Statistics Canada,
with input from the federal and provincial pension supervisory authorities, as
well as the Canada Revenue Agency; all of the regulated pensions, plus the
public sector pensions, are included in that database. The group RRSPs are
outside the mandate of the Pension Plans in Canada database because they are not
regulated under the same supervisory authorities.
The emergence of group RRSPs poses new challenges to data collection in a
comprehensive way to get a single, complete picture of retirement income savings
among Canadians. That is why it is not included there.
Senator Mitchell: It does include defined contribution pension plans,
which are essentially RRSPs, does it not?
Mr. Schellenberg: It includes the defined contribution pensions; that
The Chair: I would like you to clarify the next slide — "Paid workers
aged 17 to 64: Pension characteristics by sector and sex."
Mr. Schellenberg: Yes.
The Chair: We have "defined benefit" — I am looking in the left-hand
column — "defined contribution" and then "mixed." Does mixed include RRSPs?
Mr. Schellenberg: No, it does not. What is emerging is that some
employers offer a pension plan in which some employees in the firm may have
defined benefit plans and others may have defined contribution plans. Those
would be one type of mixed plan, a single plan by an employer.
Also, there is the emergence of the pure DB, or defined benefit plan, or a
pure DC plan. We are seeing plans that have elements of risk shared by both
employees and employers. That is not a pure defined benefit plan or a defined
contribution plan but somewhat of a hybrid plan. Therefore, beginning in 2005,
Statistics Canada began classifying those as a mixed plan, not because the
employees are differentiated into two distinct plans but because of the
characteristics of the plan itself; it is somewhat of a mix.
The Chair: Anything else on the clarification before we go to Mr. La
Dominique La Salle, Acting Senior Assistant Deputy Minister, Income
Security and Social Development Branch, Human Resources and Skills Development
Canada: Thank you, Mr. Chair, and, first of all, thank you for your
invitation. I am Acting Senior Assistant Deputy Minister in the Department of
Human Resources and Skills Development.
My colleague, Phillip Clarke, joins me. Mr. Clarke is Acting Assistant Deputy
Minister, Operations Branch, at Service Canada.
My area of responsibility is income security and social development, which is
the focal point for social policy and programs that are designed for families,
seniors, and people with disabilities who are facing social challenges.
The Department of Human Resources and Skills Development is a department that
directly touches the lives of Canadians. Our programs, policies and partnerships
support individuals in difficult times, help Canadians create their own
opportunities, and deliver social benefits to people across the country. Simply
stated, we enable Canadians to make choices that will allow them to live
productive and rewarding lives. Obviously, this is an ongoing endeavour. We
recognize that we must constantly adapt our approaches to meet the changing
needs of Canadians.
I have been asked to talk to you about Canada's pension system.
I will be speaking to the public part of our system, which is administered by
the department where I work. I will leave to my colleagues at the Department of
Finance to discuss —
... matters beyond our existing programs. Let me first provide you with a
brief overview of the overall Canadian retirement income system.
The primary role of Canada's retirement income system is to provide older
Canadians with an adequate and stable income in retirement. The system aims to
accomplish two key objectives. The first is to prevent and alleviate low income
among Canadians 65 years of age and over. The second is to help Canadians avoid
a significant decline in their standard of living when they retire.
Canada's retirement income system is made up of three pillars. The first
pillar, Old Age Security, is a virtually universal, non-contributory public
pension provided to 98 per cent of Canadians 65 and over. In 2008, 4.4 million
seniors received the OAS benefit. OAS pensioners with little or no other income
are also eligible for the Guaranteed Income Supplement. In 2008, there were 1.6
million recipients of GIS. The current monthly benefit of OAS is $517 per month,
and the maximum monthly benefit of GIS for a single individual is $652.
More specifically, OAS benefits are intended to provide partial income
security for senior Canadians in recognition of the contribution they have made
to Canadian society and the economy. As employment history is not a factor in
determining eligibility, those who have had limited or no engagement in paid
work can receive such benefits. All benefits are indexed quarterly to ensure
that the value of the OAS benefit is maintained over time.
The Canada Pension Plan and the Quebec Pension Plan make up the second pillar
of our retirement income system. These plans are mandatory, employment-based
contributory pensions for workers, funded in equal parts by the employer and the
employees. They cover workers in all sectors of the economy, including those
working in non- standard arrangements and the self-employed, in which case they
pay both the employer's and employee's portion.
The CPP provides contributors and their families with basic income
replacement upon retirement, disability or death of a wage earner. Last year,
total expenditures were $28.9 billion. There are 3.6 million retirement
recipients and almost 800,000 survivor pensions paid to seniors. The number of
workers contributing to CPP is over 12 million.
In providing coverage to contributors, several CPP provisions recognize the
needs of families. They include a general dropout provision, the child-rearing
provision, credit splitting, pension sharing and the surviving spouse's pension.
These two pillars of the retirement system, the OAS and the CPP, constitute a
modest income base to build upon. When combined, at most, the CPP and OAS
replace up to 40 per cent of the average industrial wage. Canadians are expected
to supplement this with other measures.
The voluntary third pillar of Canada's retirement income system consists
mainly of registered pension plans and RRSPs. My comments today relate solely to
Canada's public pension system.
There are five features of our system that have worked well for us. Our
public system is diversified, responsive, sustainable, accountable and, finally,
With respect to diversification, there are many players involved in the
retirement income system, including roles for individuals and families,
government and employers. The role of the federal government is primarily in
delivering the public system and overseeing the federally regulated private
system of support, but others have a large part to play as well.
With respect to responsiveness, over the years, policies under the OAS and
CPP programs have evolved to respond to seniors' needs. Where necessary, we have
worked to ensure that we broaden and change eligibility to reflect societal
For example, Canada changed pension legislation to allow spouses receiving
their retirement pension to save income tax by sharing a portion of the pension
benefit. We have amended the CPP so as not to reduce the benefits of parents who
stayed home to raise children under the age of seven. We introduced credit
splitting between spouses in the event of divorce or separation, in recognition
that couples share in the building of their assets during the time they are
together. We have extended survivors benefits to same-sex, common-law and
married partners. We increased benefits through income-tested programs, such as
the GIS, to raise the income of most recipients to levels above the threshold of
The finances of the CPP are on a sustainable footing, largely because the
federal and provincial steward of the plan took appropriate and timely action
for the benefit of future generations. The combined employer-employee
contribution rate increased to the steady rate of 9.9 per cent in 2003 and
beyond. The Reserve Fund, overseen by an independent investment board, was
created to get us through the wave of baby boomers in retirement. Thus, the CPP
moved from a purely pass-as-you-go plan to one that is partially funded.
The CPP Investment Board has a mandate to invest the Reserve Fund to meet the
best interests of contributors and beneficiaries — to maximize investment return
without undue risk of loss. As of June 2009, the net value of the Reserve Fund
was $116 billion, which represents three full years of benefits.
In comparison to most other countries, Canada is in an enviable position, as
CPP investments will not be needed to help pay benefits for another decade,
providing time for the investments to recover and grow. You will be pleased to
know that our pension plan is reviewed every year by the Chief Actuary, who has,
for the last three such reviews, deemed it sustainable for the next 75 years.
The fourth feature of our retirement income system relates to its rigorous
accountability to all Canadians. Having federal and provincial governments
jointly manage the CPP is an important safeguard against short-term changes that
could jeopardize the integrity and sustainability of the plan.
In addition, the CPP Investment Board is a governance model that balances
independence and accountability. On one hand, the board operates at arm's length
from the government, and an independent board of directors oversees its
management. On the other hand, the board remains accountable to the federal and
provincial finance ministers. In short, we have achieved a good balance between
due diligence and the flexibility required to meet the needs of Canadians, both
now and in the future.
Last, but certainly not least, we have learned that we need to stay ahead of
the curve by monitoring societal trends and responding to them as quickly as
possible. Flexibility is built right into our retirement income system. For
example, it is a legislated requirement for pensions to be indexed for inflation
once a year for CPP and four times a year for OAS benefits. Moreover, Canadians
have flexibility in choosing when to retire and receive their CPP retirement
pension. As I mentioned, the CPP is reviewed every three years to ensure it
remains on solid financial footing and to adapt its features to societal change.
Low-income seniors told the government that rules governing the GIS were a
barrier to those who want to work. In response, the Government of Canada
increased last year the annual GIS earning exemption from $500 to $3,500
annually. This means that low-income seniors who choose to work can now keep
more of their GIS benefits.
Also, HRSDC continues to secure international social security agreements with
other countries. Fifty such agreements in force make it easier for seniors,
people with disabilities and survivors to receive pensions in Canada and the
partner country. We pursue these agreements with an eye on immigration patterns,
which have evolved considerably. In past years, most of our agreements were
focused on Western European countries. Today, they encompass the Caribbean,
Eastern Europe, South America and Asia. We are now exploring agreements with
additional countries in Asia and Africa, which reflects our current immigrant
In conclusion, by most socio-economic indicators, Canada is doing well.
Compared with previous generations in our country, Canadians are living longer
and are better educated. More women are working and earning their own pension
rights. Low-income has declined significantly among seniors. Our public
retirement system has delivered impressive results in lowering the incidence of
low-income among seniors since 1980.
In 1980, the percentage of seniors living below the LICO, the low-income
cut-off, was 21.4 per cent. In 2007, it was 4.8 per cent, a dramatic drop, and
one of the best records in the world.
To date, Canada's retirement income system has done very well in achieving
its key objectives and in increasing pension security among all seniors. Over
the past 20 years, and especially since the last major reforms in 1998, these
qualities have helped the system meet the needs of the 4.5 million Canadians who
are 65 or older. They will help us prepare for the next generation of
pensioners, a number that will nearly double to 9 million over the next 25
years, a full quarter of our population. And they will help us keep an eye on
what is happening with younger Canadians, and how that will affect policy down
Mr. Chair, members of the committee, this concludes my opening remarks.
I would be happy to take questions in both official languages.
The Chair: Thank you very much, Mr. La Salle. We will start the
question period with a senator from Alberta, Senator Mitchell.
Senator Mitchell: Thank you, gentlemen. I am quite interested in the
comparison between those who have pensions of one kind or another and what seems
to me to be millions of Canadians who literally have no pension at all.
Mr. Schellenberg, your first slide points out that fewer than 40 per cent of
Canadians aged 17 to 64 have pension coverage and, let us say, 39 per cent on
average. Of those, if you go to the next page, between men and women it looks
like approximately 20 per cent have defined contribution plans, which really are
RRSPs; there is no guaranteed pay out. Therefore, it creates some greater risk
to some extent. Some of the benefit-driven pensions obviously are corporate, and
so there is risk in some of them, as well.
You could say that barely over 30 per cent of Canadians actually have a
defined benefit pension; is that right?
Mr. Schellenberg: If you look on the chart that is broken out by the
private sector and the public sector, there are telling numbers there. Let us
consider women in the private sector in the 17-to-64 age bracket. Please keep in
mind we have teenagers and people in the young 20s within the denominators, as
well as people from 65 to 74, many of them with pensions, who may have already
retired. It would be nice to have this chart for, say, ages 25 to 64. However,
we do not have that data.
The point I would like to underscore is that, if we consider women in the
private sector, we have a coverage rate of 22 per cent, and, of those, 59 per
cent have a defined benefit plan. If we multiply those two figures together, it
tells us that 13 per cent of women in the private sector have a defined plan. Of
the 29 per cent of men in the private sector who have a pension, 63 per cent
have a DB plan. Doing the multiplication, we get a DB coverage rate of 18 per
Senator Mitchell: That is in the private sector. Therefore, it is even
more pronounced than the first point I was making.
Mr. Schellenberg: Yes, sir. When we look at the aggregate figures from
the point of view of financial security of all Canadians, it is important to
consider the public sector, the high degree of coverage and the nature of
pension plans within the public sector. Stepping back and looking at trends
within the private sector, those figures of 13 per cent and 18 per cent of DB
coverage stand out.
Senator Mitchell: They do. The disadvantage of women is even more
pronounced. When you get out of defined benefit coverage, the problems become
even greater, I would argue, on RSP coverage with respect to men versus women.
I want to pursue something quickly. I think that, therefore, a huge portion —
well over the majority, or over 50 per cent, of Canadians — will have to rely
upon RRSPs and other personal savings to retire. I have a sense that people do
not really understand how much money you need to do that. If you had $500,000 in
your RRSP — which is a lot of money — at today's interest rates, you would be
lucky to get a $20,000-a-year income stream.
Do you know what percentage of Canadians have RRSPs? Do you know what the
average RRSP savings accumulation is? Is there some way you can rate that for
distance to the age of retirement, if you see what I mean? Do you know what the
average RRSP contribution is, annually?
Mr. Schellenberg: We know several of those things but not all of those
things. Our primary source of information on this issue would be the tax files
that people file with the Canada Revenue Agency each year. On the tax file data,
we have, on an annual basis, tax filers who do or do not contribute to their
RRSP. For those who do, we know how much they did contribute.
We cannot differentiate between those in group RRSPs and those who are not.
However, those numbers are reflected in the RRSP contribution, as well as with
We could add up year over year over year the annual contribution that someone
made to their RRSP and we could also subtract out any incomes they withdrew from
RRSPs and paid tax on. However, as they accrue those RRSP savings, they get
returns on investment and their nest egg grows, but we do not have data on the
current value of RRSP wealth at a specific point in time.
In 1999 and in 2005, Statistics Canada did a wealth survey and asked people
for that information. In 2005, our sample size was around 6,000 or 7,000
respondents. From a survey standpoint, that is a not a very deep sample. If you
wanted to look at 45- to 60-year-olds in Alberta, you might have a few hundred
of them in the sample, and you cannot generate reliable estimates based on that
depth of data. Therefore, the wealth data you are talking about remains a data
Senator Mitchell: I have a lot of questions but I know we do not have
a lot of time.
The Chair: I remind each of us that this is an attempt to have an
overview to understand all of the issues — or as many of the issues as we can —
to determine where we might want to go forward with a study in the committee, if
we decide to proceed further.
Senator Eggleton: The second chart indicates that the numbers in the
younger age group, 25 to 34, are moving up, as opposed to the others — both for
men and women, but more pronounced for women. What do you attribute this to?
Mr. Schellenberg: Our analyst at Statistics Canada has been looking at
the changes in pension coverage over time — between 1987, 1997 and 2007 — and
trying to explain what would account for the declines in men as well as the
increases among women and in the different age groups.
When we look at men over those three points in time, we see there has been
shift from industries in which there were traditionally high coverage rates —
particularly in manufacturing, but I think more so in education and public
administration; there are fewer men employed there. We have also seen
de-unionization over the last 20 years, and pension coverage tends to be highest
in unionized establishments. That has accounted for the largest share of the
decline among men.
There have been many changes in the characteristics of women. They have moved
further up the earnings distribution, which is positively correlated with
pension coverage. They have higher levels of education than they did 10 or 20
years ago, and that is positively correlated with pension coverage.
Regarding the specifics around the 25-to-34 age group, a shift up the
earnings distribution accounts for part of that. They have better jobs than they
did 10 or 20 years ago.
Senator Eggleton: The prime purpose of our exercise at this point is
looking at adequacy. Do you have statistics you can provide us with respect to
adequacy of pensions? Here again, we are public and private.
Mr. Schellenberg: It is a difficult issue. We have one study completed
at Statistics Canada that looked explicitly at replacement rates, defined in
broad terms. That study compared the total after-tax income that people had at
age 55 with the total after-tax income they had at age 70 or 75, focusing
primarily on people who had fairly significant attachment to the paid workforce
in their 50s.
A key finding from that study was that for individuals who were from the
middle of the income distribution at age 55, the median replacement rate was
around 70 per cent to 75 per cent. One of the findings there, though, is that of
those seniors from the middle of the income distribution, approximately one in
four had a replacement rate below 60 per cent. We do not take the position that
that is enough; that is inadequate but that was an arbitrary benchmark. One in
four was below that benchmark.
Senator Eggleton: Mr. La Salle, you were talking about investments.
You said that in comparison to most other countries, Canada is in an enviable
position; yet I understand that the average gross replacement rate in the
countries in the Organisation for Economic Co-operation and Development, OECD,
is 58.7 per cent compared to approximately 40 per cent in Canada. Why are we so
Mr. La Salle: We have to look at sustainability of these replacement
rates. Many OECD countries have targeted higher replacement rates, but they find
themselves in a tough bind where they have to review the age of retirement, for
Therefore, it is important to look at the sustainability of the covenant, if
you like, with the people. There may be a methodology issue; that is beyond my
area of expertise, although I would be happy to look into that.
Some countries do promise their retirees quite a generous package, but you
have to read the fine print. For example, France provides a full pension in
theory at age 60. No one else does that. That is very generous. When you read
the fine print, you see it requires X number of years, and at the end of the
day, very few actually get the full pension at 60.
Senator Eggleton: Do you have any other examples of what countries
have had to do to get to the 58.7 per cent point, which is far more realistic as
a replacement? I realize this is the public plans as opposed to the private
plans, but we are finding out there is not much in the private plans for some 5
Do you have any examples of any other countries where getting to the figure
has maybe cost the taxpayers a lot?
Mr. La Salle: Every country has a different system. Some have very
complex systems, such as the U.K. You could write a PhD thesis on that system
alone. It changes every four or five years and it is complex. I could not begin
to explain each system, senator.
Senator Ringuette: Mr. Schellenberg, regarding your slide on page 2
and the different explanation you gave to the gender issue, would you not have
to include the labour market issue that has been happening in the last decade —
of self-employment being higher for men than for women — in the fact that your
men, as they grow older, have less pension coverage?
When you are self-employed, I think that you probably want to invest your
savings in capital investment and grow your business, rather than grow a pension
Mr. Schellenberg: Yes, absolutely. You have raised a very important
issue here. All of the data I have shown on pension coverage pertains to paid
I think there are many specific characteristics and aspects of the
self-employed that set them apart. One is that the incidence of self-employment
and the likelihood of entering into self-employment tends to happen among people
in their 40s and 50s, once they have acquired the human and financial capital to
start their businesses. One would assume they have low rates of pension
coverage, although we do see in the pension plans in Canada quite a striking
growth in the number of defined benefit plans with two or three plan members;
that has grown remarkably in the last while. That could account for some of the
incorporated self-employed, but that would probably be a small subset of the
total population of self-employed workers.
Senator Ringuette: Are you saying that we really have no data in
regard to pensions for self-employed?
Mr. Schellenberg: We could explore that issue further and mine the
data that we have. That work has not been undertaken at this point.
The other point is that the self-employed, as a proportion of the total
labour force, have generally ranged between 12 per cent and 15 per cent over the
last 10 or 15 years. It has not been increasing markedly; it has been fairly
To the extent that the self-employed do not have registered pension plan
coverage, that proportion has probably remained fairly stable over time. That
would be my working hypothesis at this point. We have not looked at the extent
to which they accrue capital in the form of buildings, investments and other
things that they could draw down in late life.
Senator Ringuette: Are you expecting to look at it?
Mr. Schellenberg: Yes, we are. We have a work plan, and that very
issue is on it.
Senator Ringuette: When you do have some results, could you make this
committee aware of them?
Mr. Schellenberg: Absolutely. Would it be the recommendation of this
committee to make that a priority?
The Chair: I would say so. We would be quite interested in the private
Ted Wannell, Assistant Director, Labour and Household Surveys Analysis
Division, Statistics Canada: I can give you one rough figure that comes out
of the wealth survey that Mr. Schellenberg mentioned before. When you look
across all families and total up the wealth for all of them, self-employed
families that have significant income from self-employment would comprise a
fairly small percentage of that, as Mr. Schellenberg mentioned, in the
neighbourhood of 15 per cent. However, equity in own business accounts for 30
per cent of the wealth, so it is not insubstantial; it comprises a fairly large
proportion of the wealth. If you got that down to the actual proportion that had
that own- business equity, it would be quite substantial.
Senator Ringuette: I have two questions for Mr. La Salle.
The Chair: We are running low on time. Please make them one question.
Senator Ringuette: No.
The Chair: Then you will be asking one question.
Senator Ringuette: Then, Mr. La Salle, I certainly would like to meet
with you for further information. If we could sit down together at my office, I
would be very appreciative of that.
Senator Carignan: I do not know whether you have this information.
What percentage of people have money left in their pension plans or RRSPs when
they die? And how much do they have left?
Mr. Schellenberg: I am not able to answer that question.
Senator Carignan: Is it possible to get that information? Could
surveys be done? The amount in our RRSPs that we use, for one thing. We set it
aside in a special way, specifically to be there when we need it, and then, one
day, we die. So what percentage is passed on to future generations? It would be
interesting to have that data so that we could see the potential.
Second, do you have statistics that show the percentage increase in
disposable income brought about by the recent changes in tax legislation? You
said that, in recent years, the government has provided tax benefits, among them
the ability to share the basic exemption with a spouse and also to exempt the
guaranteed income supplement for casual workers. Do you have the impact of these
new tax measures as a percentage of people's disposable income?
Mr. La Salle: No, I do not have those figures. The measures are quite
recent, I believe, so it may be difficult to see an impact. The impact comes
after people declare their income. That takes time. It is an interesting point
that we will bear in mind.
Senator Callbeck: Thank you. I have two or three brief questions.
Mr. La Salle, in your presentation you mentioned the percentage of seniors
living below the after-tax low-income cut- off and how this has been reduced
from 21 per cent to 4.8 per cent. A lot of progress has been made. For the 4.8
per cent, do you have a breakdown between men and women?
Mr. La Salle: I do not have a breakdown, but the incidence of low
income is higher for single women; there is no question about that.
Senator Callbeck: Could I get those figures?
Mr. La Salle: Absolutely.
Mr. Schellenberg: I have those figures, from I think 2006. For all
men, the LICO after tax was 4.4 per cent at 65 years plus; for all women it was
8.6 per cent. For men 65 plus who were not living with other family members,
unattached individuals, it was 13 per cent; and 18 per cent for women.
Senator Callbeck: For single women it is 18 per cent, then. Thank you.
Mr. La Salle, you mentioned the Quebec Pension Plan and the Canada Pension
Plan. Has any thought been given to making the two plans similar with regard to
retroactivity? As you know, in Canada, if you apply when you are 72, you can
only go back one year, whereas in Quebec you can back to age 70. The
retroactivity period in Quebec is much longer.
Mr. La Salle: Yes, it is, in certain circumstances that are very
narrow, in fact. I could get back to you with that information. The issue of
retroactivity is of great interest to you; I know that. We have looked at this
issue. We provide for unlimited retroactivity if there is an issue of
administrative error or erroneous advice. With the amounts of dollars at play,
it would be extremely costly to extend the retroactivity provision.
As for the Quebec Pension Plan, I have looked into that, and the
retroactivity provision applies on a very narrow basis. I could provide you more
information on that, but you will find in looking at the fine print of this
measure that it is not exactly as it sounds, so to speak.
Senator Callbeck: I would appreciate having that information.
I have one more question. On the last chart, you talk about the Guaranteed
Income Supplement. That is going down, insofar as the amount of people receiving
it. It used to be that they had to apply every year for that. Has that been
Mr. La Salle: Yes, it has.
Senator Callbeck: I know that there are people who have paid into the
Canada Pension Plan and who are not receiving it simply because they do not know
they should apply for it. This applies particularly to women who worked in the
workforce when they were younger, paid into the Canada Pension Plan, got
married, raised a family and never went back to work. When they get to age 65,
they never think of applying for the Canada Pension Plan.
Does the government know how many people are actually eligible for the
Guaranteed Income Supplement?
Mr. La Salle: The government has a good idea. To be eligible for the
Guaranteed Income Supplement, you have to be eligible for OAS. To be eligible
for OAS, there is an issue of residency, and that is not captured by CRA, which
provides the data.
However, one's level of income determines whether one is eligible for the
Guaranteed Income Supplement, so we can estimate the number of people. We have
automated the process somewhat. Annual application for GIS is no longer
required. You apply once in a lifetime. As long as you submit your income tax,
you receive the payment.
We do not have at this moment all the information available to fully automate
that process. In other words, if we could get to the point where we have access
to certain databases in the government where residency information exists, we
probably could automate for the vast majority of people. We are actively looking
at this, because the number of seniors will increase dramatically and the
workloads will also increase dramatically. We need to be more efficient in that
The CPP is a little bit different because people have a decision to make.
They have to decide whether to take the pension at 60, 61, 62, 69, 70, et
cetera. Therefore, that is a little different. There are people who are not
taking their CPP entitlements after 70. You are absolutely right on that,
We make every effort to contact those people and tell them. For a large
number, the amount would be very small; only worth a couple of years. Many may
have forgotten about it, or want to forget. However, Service Canada does a lot
to reach these people.
Senator Callbeck: I wish to be clear: Regarding the Guaranteed Income
Supplement, you know the number of thousands of people who are eligible for
that, and you know the number of people who are getting it.
Mr. La Salle: I do not have the number here, but I can tell you the
trends are good. There will always be people who simply do not want to access
the benefits because it does require them to fill out a tax form. I do not think
we will ever get 100 per cent coverage.
The trend is from Statistics Canada, so it must be good. The take-up for GIS
was 87 per cent in 2000, and 89.9 per cent in 2006. That would be the percentage
of people eligible who are taking the benefit. You have mentioned that we have
automated things and the once-in-a-lifetime application, so I would suspect
those numbers will continue to improve. We are doing a lot with Service Canada
to remind people to apply for those benefits.
We also do a lot of outreach with community organizations. They are what we
call a priority population. They include people like the homeless, Aboriginal
peoples, new immigrants. They are people who may not be on the radar screen in
the databases of our friends at Service Canada but who may be reaching out to
service providers at the community level. Therefore, we do a lot of work with
these community organizations. That is in addition to the efforts of mailing,
advertising and so on.
The Chair: I am sorry. We have run out of time. If senators have any
other questions that perhaps either HRSDC or Statistics Canada could obtain for
us and provide, then perhaps they could seek those. The intention here, again,
is for us to understand an overview as opposed to getting into the woods on the
Thank you very much for being here and helping us understand your role in
this very complex area. Assuming we decide to proceed further with the study, we
may well ask you to come back with more details.
We are continuing our study on pensions. It is a preliminary look at the
issue of pensions that is occupying a lot of time these days. The Minister of
Finance announced recently that before Christmas he will be introducing some
legislation. We are just not certain what. However, we will be ready for it now
that we have had some preliminary work done on this.
I am pleased to welcome the second panel this morning to the Standing Senate
Committee on National Finance. From Towers Perrin, we have James Pierlot, Senior
Consultant; and Steve Bonnar, Principal.
And, from the C.D. Howe Institute, Alexandre Laurin, Senior Policy Analyst.
Could we start with Mr. Laurin?
Alexandre Laurin, Senior Policy Analyst, C.D. Howe Institute: Thank
you, Mr. Chair and honourable senators.
It is a pleasure to discuss pension issues, which, for the last three years,
have been a hot topic for us at the C.D. Howe Institute. I have a brief opening
statement in which I will present my own perspective of the broad issues facing
public and private sector pensions in Canada.
Simply stated, the driving issue is lack of adequate private sector pension
plan coverage and private pension savings, the so-called third pillar of
retirement income, leading to fears of inadequate income at retirement. For
instance, a recent Statistics Canada study showed that only one out of four
private sector employees in 2006 was covered by an employer-sponsored pension
What about those not covered by a pension plan? Someone earning the average
wage rate would have to save at least 10 per cent his or her earnings for 35
years in order to retire with a decent pension amount, replacing about 70 per
cent of working-life income. A quick glance at the personal savings rate these
past years should be enough to put serious doubt in the minds of policy-makers
as to whether people are saving enough for retirement.
In particular, key concerns relate to the erosion of the traditional model of
single-employer defined benefits — DB pension plans. A significant change is
occurring in private sector thinking about DB plans. Just consider a few names:
AbitibiBowater, Air Canada, Alcoa, Avon Canada, Banque Laurentienne, Bell,
Bombardier, CN, CP, Domtar, Falconbridge, Globe and Mail, Hewlett Packard,
Hudson Bay Company, IBM, Manulife, Noranda, Nortel, Pepsi, PetroCanada, RBC,
Quebecor, Sears, Standard Life, St-Lawrence Cement, SunLife, TELUS and Farm
Credit Corporation. All of these relatively large companies have, one way or
another, moved away from DB plans in recent years in favour of defined
contribution, DC, plans. Perhaps more importantly, very few new DB plans are
Looking at the statistics, the ratio of private sector employees covered by a
DB plan fell from 26 per cent in 1991 to 17 per cent in 2006, while the ratio of
private sector employees covered by a DC plan nearly doubled, from about 4 per
cent in 1991 to 7 per cent in 2006. This is before the recent financial market
crisis. The net result is more DB plans disappearing than new DC plans being
created. In a paper published last year by the C.D. Howe Institute, James
Pierlot highlighted many regulatory obstacles making the environment for DC
plans less congenial than for DB plans.
The drop in defined benefits plans has not gone unnoticed. Some provincial
governments — Ontario, Nova Scotia, Alberta and British Columbia — have recently
conducted reviews of their respective legislation governing pension plans while
we await the results of the federal review and those from the federal-provincial
working group that has just been formed to examine the degree to which pension
income is or will be adequate.
In general, these government reviews centred around making traditional DB
plans more attractive by recommending legislative and regulatory changes, such
as better protection of sponsor's access to surpluses; providing more flexible
investment limits and rules for funding shortfalls; raising the federal cap on
funding; and, in some cases, harmonization of provincial rules and regulations.
With respect to the federal government's review, issues around the rules for
funding solvency deficiencies and the solvency calculation itself are important.
However important these proposed regulatory changes, they are — in our view
and reading some of the papers the C.D. Howe Institute has recently published —
mostly short-term fixes to a more fundamental problem: DB plans have become
overly expensive to maintain.
Accounting standards moving closer to fair-value principles in the early
2000s — that is, valuing assets at their sale price and liabilities at what they
would cost to dispose of — along with declining long-term interest rates led to
financial troubles and rising costs for plan contributors. Above all, it led to
the realization that costs of guaranteeing pension promises do not come at a
discount. Valuing pension plan assets and liabilities at their fair value also
mean more volatility and more risk.
Clearly, DB pensions are less secure than participants were led to believe,
and costs are greater, leading to declining private sector DB coverage. This,
combined with inadequate private savings for retirement, risks fuelling an
important future policy problem: a world in which public sector employees enjoy
rich taxpayer-financed pensions alongside largely underserved private sector
The problem is one of accountability. Public sector pension plans do not
generally face the same funding requirements as private sector pensions and do
not have to follow the new fair-value accounting requirements. As a result, the
same evidence of riskiness and expense that has driven the private sector away
from DB plans has not, in general, affected perceptions of public sector plans.
It is only by valuing pension plan assets and liabilities at their fair value
that sponsors and participants understand the true costs and risks of their
How much would fair-value pension accounting affect the financial statements
of Canadian governments? Governments are major employers, and their pension
plans typically provide benefits that are rich by private sector standards —
full indexing for inflation and early retirement, for example — so the impact is
A recent study by the British-North American Committee, using standardized
assumptions for a large number of government worker plans, estimated that
discounting their obligations using yields on inflation index government bonds
would more than double the estimated net pension liabilities for Canada's public
sector. An appendix to the Chief Actuary's 2005 valuation of the federal public
service plan calculated that if its promises were backed by the federal real-
return bond rather than a portfolio with an assumed higher yield, it would cost
not the 18 per cent of annual pensionable earnings recorded, but nearly 33 per
cent of pensionable pay. That is about double. A draft paper I co-authored with
Bill Robson, which we are expecting to release in a few weeks, will show that
federal unfunded pension liabilities would be some $50 billion higher in 2007-08
than was recorded.
What should we do? Briefly, instead of trying to replicate the public sector
DB model in the private sector, policy- makers should concentrate on the
long-term challenges faced by traditional DB plans. We should facilitate the
development of existing or new innovative plan designs; but broad-based
innovation, such as the hybrid plans combining features of both DB and DC plans,
must be accompanied by legislative flexibility.
Also, in the absence of private-sector solutions that would be viable in the
long term, many are asking whether the solution may lie with government. It has
been suggested that CPP coverage be extended to even higher income levels.
Alternatively, Keith Ambachtsheer has written a paper for the C.D. Howe
Institute envisioning a new Canada supplementary pension plan, with pension
funds accumulating in individual accounts, that would become a voluntary default
option for anyone not covered by another arrangement. Both proposals would be
run and invested by governments.
I wonder if we should go that far. For example, the federal old age pension
plan and the guaranteed income supplement, provide, together with CPP income, a
reasonable level of support for people of modest means. We should not force them
to save more than a reasonable amount. In addition, we now have the TFSA that
allows tax-free savings from already taxed income. For a number of people, this
option is fiscally better than paying into a deferred tax plan such as RRSPs or
other registered plans.
That concludes my presentation, Mr. Chair. If you would like me to answer
questions, I am ready to do so.
The Chair: Thank you, Mr. Laurin. Would it be possible to have a copy
of your presentation in due course, please?
Mr. Laurin: Yes.
The Chair: Thank you.
James Pierlot, Senior Consultant, Towers Perrin: We would like to give
a brief overview of some of the issues we see as related to the primary issues
in pensions: coverage, who has pension coverage; adequacy, who has saved enough;
and also benefit security. I will talk briefly about coverage inadequacy, and my
colleague, Mr. Bonnar, will talk about benefit security. We will keep this short
so we can move into questions and answers.
Yesterday, at a pension forum on Parliament Hill I talked about the issues of
coverage adequacy and security. You have that presentation in front of you now.
I think you have all heard of the sources of pensions in Canada, the three
pillars: government unfunded pension plans, Old Age Security and the Guaranteed
Income Supplement; the partially funded government plans, such as the Canada
Pension Plan; and then the private sector pillar, which consists of
employer-sponsored pension plans and RRSPs.
We hear a lot about the Canada Pension Plan and how well it is funded.
However, people do not have a good understanding of what they will actually get
from government programs. If you get the maximum, it will be less than $20,000 a
year, and if you get the average, it will be in the range of $15,000 to $17,000
a year. By any reasonable measure, that is not enough retirement income. However
well our government programs may operate, a significant portion of them are at
risk because the GIS and the OAS are funded from general tax revenue. The Canada
Pension Plan, which is probably sustainable over a long period of time due to
the review that happened in the mid-1990s, does not pay a benefit today of more
than $11,000 a year. Government pensions will not be enough.
I think you have probably already heard about how pension coverage breaks
down: 85 per cent of public sector workers belong to what are generally
extremely good defined benefit plans that provide pension benefits at or close
to the maximums permitted under tax rules. That is about 2.8 million workers.
Twenty-five per cent of private sector workers are covered. However, fewer than
20 per cent of private sector workers are members of a defined benefit pension
In the private sector, not all defined benefit pension plans are created
equal, and most provide benefits that are much less generous than public sector
plans — in many cases, significantly less so. About 11 million workers in the
private sector have no pension coverage, have no opportunity to belong to a
defined benefit pension plan or have the benefits of asset pooling or risk
pooling that defined benefit plans offer. A University of Waterloo study points
to the probability that, by 2030, about two thirds of Canadian retirees will not
have enough retirement savings to live adequately. That is the coverage issue.
Most Canadians probably do not have a good sense of how much they will need
to retire at the typical retirement age of 60 or 65. In the private sector, the
median retirement age is about 62. It is quite a bit higher than that for self-
employed people. In the public sector, it is age 58. The retirement question is
how much do you need to have saved for a decent retirement, and how much will
that cost you as a percentage of your earnings.
Mr. Laurin referred to a contribution rate of 10 per cent over 35 years.
Certainly, Canadians are not saving 10 per cent of their salary every year for
If you want to know how much a retirement income costs, you have to look at
an annuity factor: If I go to an insurance company and I want to buy a pension,
how much will that pension cost me? For example, if I retired at age 60 and I
wanted a pension that is non-indexed and pays a survivor benefit, I will have to
give the insurance company $15.63 for $1 of pension. If I want it indexed, it
will cost $21.
Please flip to slide 8 in the presentation you received. These are the
lump-sum values that you need in your RRSP or your pension plan to have a decent
retirement income at age 60. If you want an annual pension of $20,000 and you
want it indexed, you will need to save $422,000 in your RRSP. If you want an
$80,000 pension, it will be $1.7 million. I think we can all agree that people
have not saved that much.
We do not have very good data on what people have saved. The best Statistics
Canada data I have been able to find — and maybe you have heard better data — is
that Canadian families where the major income recipient is age 55 to 64 have
saved about $250,000 in their pension plans and RRSPs. That is family retirement
savings. In a public sector pension plan, a person who retires at the median age
of 58 with 30 years of service will have, individually, about $550,000 saved in
his or her pension plan. We are looking at accumulations in the public sector
that can be four, five, six or seven times as much as what you see in the
I have never really seen the question as being about taking away public
sector pension benefits. It is about how we can make those opportunities
available to the private sector. We have a tax system that effectively makes it
impossible for people in the private sector, especially people who save in RRSPs
and DC pension plans, to accumulate the same levels of benefits that routinely
accumulate in public sector pension plans.
This is an institutionalized inequity that has been in the tax system since
the 1990s, and it has to do with the way savings are equalized between defined
benefit plans and capital accumulation plans, such as RRSPs and DC plans. If you
want to have better coverage in the private sector, that inequity has to be
taken care of. Getting rid of that inequity alone will not be enough, because
people are not saving as much as they should. There is an education problem out
there. There is a lack of opportunity to join large pooled pension arrangements,
which generally give you economies of scale to have unbiased financial advice so
you get better investment outcomes than people are typically getting.
In the private sector, people are paying a lot of money for funds within
defined contribution plans or RRSPs that are very expensive: 2.8 per cent, 2.5
per cent or 1.4 per cent a year. In the large majority of cases, those
investment fees are being charged for investment outcomes that cannot even beat
the market indices.
On the other hand, if you take a large defined benefit pension plan, such as
a public sector plan, which is generally very well managed, you get all-in
operating costs of 0.25 per cent, 0.3 per cent or 0.35 per cent. The problem in
the private sector is that people cannot join large pooled pension arrangements.
The conclusions I draw from this are that, if you rely on public pension
benefits, you will be poor. Most Canadians are not well prepared for retirement.
They do not understand how much they need to save. They do not know how to
invest, and who can blame them, because good investing is difficult. Also, more
Canadians need to have access to good pension arrangements and have enough tax
deferred retirement savings room to accumulate decent pensions.
I will turn it over to Mr. Bonnar.
Steve Bonnar, Principal, Towers Perrin: So far we have talked about
the coverage of pension benefits and adequacy. I want to spend a few moments on
the security of existing pension benefits.
We have a pension system in Canada that, depending on what measurement basis
is used, is roughly 80 per cent funded. We can debate whether it is 75 per cent
or 85 per cent, but it is seriously underfunded, currently.
This year was the second year in this decade where the federal government
made special arrangements to relieve contribution requirements for pension
plans. It seems to me that, if you need to do that twice in one decade, maybe
the rules are broken.
I will argue that what we have in the current financing of pension plans is a
structure that provides an incentive for sponsors to fund at minimal levels. We
have an environment where, from a plan sponsor's perspective, they view
themselves as owning the deficits. Deficits emerge and they need to pay for it.
If surpluses emerge, they do not get necessarily get the advantage of that.
Yes, they can take contribution holidays, and there are other things that can be
used with that surplus, but it is clearly not viewed as being worth 100 cents on
the dollar. I do a lot of this work with plan sponsors, and we have debates
about whether it is worth 80 cents, 50 cents or 20 cents on the dollar. However,
there is no debate that it is worth less than 100 cents on the dollar.
That does not help anyone in the long term. It does not help plan
participants to have an environment where sponsors are encouraged to fund at
minimum levels. It does not help sponsors to fund at minimum levels in the long
term either, because while minimum levels of contributions defer contributions
to the maximum extent possible, it also creates the most volatile pattern of
With that in mind, Towers Perrin sat back a year and a half ago and put
together that paper you all have in front of you, which is a white paper. I will
not go through it in detail, but I would like to talk conceptually about a
potential approach to dealing with the issue of removing disincentives for
additional contributions to pension plans.
At a very high level, when minimum contributions are determined for pension
plans, two different valuations are done. One is if the plan is ongoing in
nature, and one is if the plan is wound up in nature. In essence, you need to
fund to the stronger of those two measures. That change was made in the
legislative requirements for minimum funding in the late 1980s. There were
different times in different provinces, but largely in the late 1980s. Before
that, the plan termination valuation was not required, at least for funding
This proposal or example suggests that contributions required on this
going-concern basis be made to the current existing pension trust; that
additional contributions required under that plan termination valuation be made
to a side trust, still separate and apart from the employer; and that to the
extent that that money proves in the future not to be necessary to provide for
the benefits, it be available subject to approval processes, because we have
supervisory authorities in the federal and the various provincial jurisdictions,
to come back to the sponsor, assuming it is the sponsor who paid the money in
the first place. Again, there should be an ability for governance structures to
be set up that might make access to that surplus more restrictive, but to have
that kind of an environment where sponsors are no longer concerned about
contributing more than minimum levels, because they know that they actually get
the symmetric benefit from surpluses as well as the pain that arises from
That is a very high-level description, but I will leave it at that. You have
a fairly detailed description in the paper in front of you. I would be happy to
respond to questions.
The Chair: A number of senators who would like to engage in a
discussion with you.
Senator Ringuette: Thank you both for being here. My first question is
to both organizations. Have you done any study on the impact of the loss in
regard to the income trust fund? I notice you are talking about a perfect storm,
and that issue is not in this paper.
Mr. Pierlot: No, it is not.
Senator Ringuette: Have you done any study regarding the impact to the
income trust fund?
Mr. Bonnar: No. To be quite honest, the issue around income trust was
not specific to pensions.
Senator Ringuette: They were all pensioners.
Mr. Bonnar: Yes, but the effect on pension plans, as we are thinking
about it, was more a question of the return on the income trust fund. That
obviously was affected in the short term by the announcement of the tax changes,
but we have not done any more specific analysis than that.
Mr. Pierlot: Its greatest impact was on people who had income trust as
a primary investment in their registered retirement income funds.
Senator Ringuette: That is as a retirement fund.
Mr. Pierlot: Yes. The short answer is no, we have not done a study on
Mr. Laurin: This is a problem of investment returns that did not show
up, that were not in there because of all the losses. The main point to the
perceived problem of relying on defined contribution plans or relying on private
savings is that you will never know what you get until you get it. You do not
really know what you will get until you get it, until the returns are realized.
That is one of the problems that have been identified in the past, the main
problem of defined contribution plans. That could be my answer; but there were
losses, and it is the major investment retirement plan.
Senator Ringuette: The second question is to both of you. The previous
witnesses mentioned the words "pension fund superintendents." That is a
federal entity, and the provinces have a superintendent doing the same thing.
How do you see that they are currently playing their role in regard to the
issues of coverage, adequacy, security and so forth? What would your
recommendation be regarding the future role?
Mr. Bonnar: At a very high level, the mandate almost uniformly across
the country — not exactly uniformly but almost uniformly — is that the
superintendents of pensions and their organizations are charged with providing
for the security of benefits. We did not touch on this very much, but to a
certain extent, coverage and security are competing objectives. If you want a
secure benefit, you put as much money in as possible. That discourages people
from offering a benefit in the first place. You have these competing objectives.
I realize it is not in the federal jurisdiction, but in the Ontario
jurisdiction, where I do most of my work, the superintendent and the then
Pension Commission of Ontario had a joint mandate or joint responsibility both
to provide for security of benefits and — these are probably not the right words
— to provide for the flourishing of pension plans. That clearly was not the
right word, but it is the best one I can come up with at this time. That got
dropped when the Pension Commission of Ontario was merged into the Financial
Services Commission of Ontario.
The question is how are they doing their job today. I think they are doing
their job well in terms of providing for security of benefits, but what I would
like their role to be going forward is a more balanced role between security of
benefits and encouraging the growth of pension plans. That is perhaps a
difficult role, but that is my view.
Senator Ringuette: They have not yet come before us. Do they have the
mandate to flag underfunded pension plans?
Mr. Pierlot: The mandate and job of all the superintendents — and
there are 10 across Canada, one for each of the provinces except P.E.I. and one
federally — are to monitor the funded status of pension plans and make sure that
adequate contributions are being made to keep the benefit security of the plans
high. Some regulators are more interventionist than others. The federal
regulator, the Office of the Superintendent of Financial Institutions, OSFI, is
probably one of the most interventionist, as is the Quebec regulator.
They do have a specific mandate to do that. In Canada pensions are regulated
at two levels. We have the tax rules under the federal Income Tax Act, which
preceded any of the provincial pension laws. In the 1960s and 1970s, we started
to see the provincial pension laws being implemented to protect employee
interests. The tax rules are like a ceiling; they limit the amount of tax
benefit you get from a pension plan. The pension standards rules are the floor
that is there to protect the employees.
The problem of having all of these provincial statutes is similar to the
problem of securities regulation in each province, rather than federally.
You have a multiplicity of regulatory jurisdictions, so if you are operating
in more than one, you have to comply with each one of these individual laws,
which have small differences between them. Their differences are in form, not
substance, so there are quite a few costs of complying with the individual
rules, which is negative for pension coverage.
Mr. Laurin: I mentioned in my presentation that a few provinces did
reviews of their own legislation, namely Ontario, Alberta and B.C., and Nova
Scotia. They published the result of their review a year ago, I believe. They
are doing something, and the focus is to tackle the erosion of defined pension
plans. They have identified the issue, done their reviews and made their
recommendations. Their recommendations varied, but one could say that while they
are not necessarily on top of the issue, they are doing something.
Senator Ringuette: Could we have a copy of those provincial reports?
The Chair: We are just inquiring here whether we can obtain these
reports and reviews internally, and we can, so we do not ask you to make them
available for us, but thank you for bringing them to our attention.
Mr. Laurin: The C.D. Howe Institute will publish a paper soon
regarding these reviews. It will summarize the three reviews; there are three of
them because Alberta and B.C. did a joint review.
The Chair: If you could put us on your distribution list, that would
Senator Ringuette: If pension funds are being used by some companies
to invest in capital, then would that pension fund not own capital, for
instance, in the case of Nortel?
Mr. Bonnar: The pension funds typically own equities and bonds; those
are the financial capital for these organizations. Other than the very large
pension plans — for example, in Ontario, the Ontario Teachers' Pension Plan,
OMERS and the like — which might own physical assets, most pension plans will
own only securities, equities, bonds and different things. I am not sure I have
answered your question.
Senator Ringuette: Maybe my question is too bizarre to be answered,
but I will give it another try. We have heard from some people, for instance in
the case of Nortel, that funds that should have been put into the pension plan
on a yearly basis were used to buy capital for the corporation; that is where my
question lies. If the money was put into capital investment for the company
instead of into the pension plan, would the pension plan not own that capital?
Mr. Bonnar: I do not know the details of what happened at Nortel. It
seems surprising to me that at least statutory minimum contributions were not
remitted into the pension trust. I suspect the claim is that there were deficits
in the plan; they were being paid off over periods of time in accordance with
the legislation, but the deficit still existed. As a result, more money was left
in the company, and the capital existed there. Again, in a normal operation, the
pension plan does not own that capital. That is just money that did not end up
getting paid to the pension plan.
Senator Ringuette: Should it not have?
Mr. Bonnar: Now the question is whether the minimum contribution
requirements are appropriate, and why we have a backward set of incentives for
employers not to contribute to plans.
Senator Ringuette: We are doing that again this year, as you have
Mr. Bonnar: There is a separate question — an interesting one, I think
— that follows from your question: Where in the order of priority in bankruptcy
is it appropriate for pension deficits to exist? That is not a simple question
to answer. It is a big issue, but it is not a simple question to answer, in my
Mr. Pierlot: I want to add something here. A difficulty with pension
funding is that you have these minimum standards. For example, if the pension
fund has a deficit, provincial rules generally require you to pay off that
deficit over five years.
Within the rules, there is a little bit of flexibility for employers to pay
that deficit off over shorter periods of time, and certainly if they want to pay
it off more aggressively, in other words, more quickly, they can. Unfortunately
— this applies to Ontario — if you pay off a deficit and, all of the sudden,
asset values in your plan go up — for example, the stock market goes up and you
have stock investments — your pension plan suddenly has a surplus. Most people
would think that is a good thing. However, to a pension plan sponsor, the
surplus is a bad thing, because if the company is downsized or restructured such
that it has to lay off 20 per cent of the workforce, Ontario will force the
company to take a piece of surplus and distribute it out of the plan, probably
in most cases to employees. They put more money in the plan when times are good
because they have a deficit; then the surplus develops; then they have to give
away some of the surplus; then the stock market goes down or bond yields go
down, and then they have to put in more money which they would not have had to
put in if surplus had not been distributed. They are being asked under the
current funding regime to pay for the same pension benefits twice or maybe even
three times, and they do not like doing that.
Senator Eggleton: Thank you very much for your presentations. You have
given us many statistics, as we get from everybody, and analysis of the problem
as it is.
I want to focus more on the solutions. I want to hear your ideas for
solutions, but I also want to try three solutions in part on you here.
There was a report the other day in The Globe and Mail about the
government perhaps coming in with legislation, and one area the article
suggested might be focused on would be raising the threshold on pension
surpluses from the current 10 per cent to 20 per cent to encourage more
companies to fund their pension plans.
What do you think would be the benefits of this policy change? Would they be
immediate, or would they be somewhere further down the road in terms of whatever
benefits there are?
Second, I have not been able to read your white paper yet because I just got
it, and it may have some other thoughts in it apropos my questions about
solutions. One solution is the question of the expansion of the CPP or the QPP.
Some have suggested a second version of it: instead of expanding the base, you
keep the base going, but you have a secondary one. Does that make sense to you
as one of the solutions, and on what basis would you see it? Would it be the
same 50/ 50? Would it be mandatory or voluntary? I saw briefly some proposed
solutions mentioned in your charts.
Third, going back to Nortel — this issue is limited, of course, to companies
that go into bankruptcy proceedings — some of the pensioners have said they
should be one of the higher priorities as creditors, so that there can be
payouts to these people. In fact, Nortel does have a lot of scientific research
development credits and other tax benefits. They were suggesting these kinds of
things should go to the benefit of these employees who are now facing a
substantial reduction in their pensions.
That would be very specific to Nortel, or other companies going into
bankruptcy protection. However, I would like to get your thoughts about that.
Those are three ideas. Throw me your thoughts on them or on anything you think
Mr. Bonnar: Regarding the movement in the surplus limit, I will have
to divide that answer into two. One is sort of the typical single-employer
pension plan where a company, like Nortel or anyone else, promises pension
benefits for employees. For that kind of plan, this movement will not make a
difference, either now or into the future, absent any other changes. It is a
necessary change, in my view, but it is not sufficient, because in an
environment we both talked about where you have a disincentive for employers to
contribute beyond minimums, it does not matter what the maximum is.
A whole other range of pension plans have a different form of governance and
different form of risk sharing. For multi-employer plans like that, such as the
major Ontario pension plans — for example the Ontario Teachers' Pension Plan —
that increase is important because it prevents them from needing either to
reduce contributions or to increase benefits at a time when it would be nice to
preserve a cushion.
That will not matter today, because today their plans are under water just
like everybody else, but it is an important structural change. If you could get
for the typical single-employer plan a solution such as set out in the
whitepaper, then this is an important move.
However, as I said, it is necessary but not sufficient; you also need other
changes for single-employer plans.
I will just quickly go through the other two questions. The expansion of CPP
and QPP, again, is not a simple question or issue. If you expand the current
base of CPP and QPP, you will increase the burden on our children and
grandchildren to pay for our pensions. Within limits, I think that is
acceptable. However, we all have different views and perspectives on this. My
personal view is that we are at the limit of how much I can expect my children
to finance my pension.
The second layer — the defined contribution layer — would not have any of
that transfer. However, you now have other design questions. I would argue that
we, as a society, are not equipped to have a broad, all-encompassing arrangement
where we give people choices as to how to invest pension money. This is a
separate point, but I think we need changes to our education system. I will make
that point and move forward.
On the one hand, you could design this to give people lots of investment
choice, which I do not think we as a society are capable of deciding on, or you
could structure it to have directed investments. I think that directed
investments is the better route to go. However, whoever chooses what the
directed investment is will take heat from time to time, particularly in a year
like last year when capital markets went down. There is some political fallout
from that. Also, if you structure it on a defined contribution basis, where you
are just putting money in and whatever comes out is what comes out, you make it
more difficult for people to plan for retirement.
There is a further hybrid that could be structured. It looks, in essence,
like a defined benefit plan. It takes money in, just as this supplementary
arrangement would. You could have a board of some sort to direct the
investments. The design of the plan would have a benefit formula as an
aspiration but not as a commitment. A financial lever would be whether you
provide full inflation protection on the benefit.
If things work out better than you expect, people get higher levels of
inflation protection. If things work out worse than expected, they get lower
levels of inflation protection. By inflation protection I mean both during the
working years as well as in payment. You need everyone participating in the pain
if things go bad. Again, that is a thousand- foot description of that. I have
more detailed descriptions, but that is my thought.
Your Nortel question is difficult, because if you raise plan participants'
priority in bankruptcy for a bankrupt company, you will do it for the ongoing
companies, as well. There will be an increase in the cost of borrowing. The
question is to how much that is and how material it would be. That is the
I do not think it will be huge in terms of the impact on the cost of
borrowing. I suspect it is 10 to 25 basis points — 0.1 per cent to 0.25 per cent
— which sounds small, but on a large amount of debt, it is a large amount of
money. That is about it.
Mr. Pierlot: I will follow that up with a couple of points. On the tax
limits, one of the issues with pension benefit security is that, if you are to
have a secure pension benefit and have exposure to risky investments like
stocks, the asset values of the plan will go up and down. If you want to have
security with that volatility, you have to carry a reserve. You have to target a
funded level that is above 100 per cent.
Changing the tax limits is a good idea because right now you can carry a
reserve only to 10 per cent. To Mr. Bonnar's point, no one is even close to 100
per cent. Yes, it is a positive move. Mr. Bonnar and I have written an article
advocating that the surplus limit go up to at least 25 per cent, if not more.
Certainly, regarding the public sector plans — ones where employees and
employers contribute to them — the tax limits were actually raised to allow a
surplus limit of 25 per cent in plans that operate like many public sector plans
do. Most people do not know this. That change was made around 2004, but it
applies only to plans that are jointly sponsored, as many public sector plans
As many people here know regarding the CPP expansion, in the mid 1990s there
was a review of the plan, and contribution limits were increased and a fund
created. One problem the CPP faced at the time was that the contributions going
in were not enough to pay for the benefits. Therefore, they had to raise them.
If you expand the benefit guarantee under the CPP, as Mr. Bonnar says, you
potentially expose yourself to a situation of those kinds of intergenerational
subsidies continuing. I think there is a lot of merit in having RRSP-like
defined contribution accounts added to the CPP. There are many details to work
through there, but I think there is agreement amongst many people that that
could be part of the solution.
There are two sides to the coin in terms of priority creditor status for
pension liabilities on bankruptcy. If you talk to the employee side groups, they
will say, "If we have any risk at all, we should have a claim in bankruptcy
because we are taking on risk and are therefore financing the company.
Therefore, we should have a priority claim." As Mr. Bonnar pointed out, the
employer side will say that, "If you give that priority claim to the employees,
I will have to pay more to borrow money."
That is really the decision. I will leave it at that.
Mr. Laurin: The surplus amendment is a good thing in the short term,
but it does not address the long-term challenges. The participants in the
defined benefit pension plans expect their benefit to be secure. This is more
expensive to provide than was originally thought.
What we really need in the long term is a different risk-sharing formula so
that participants understand up front they do not have that kind of security,
but they are paying less. It is more affordable for employers and employees.
That is the distinction between the short term — many different things are
useful, such as raising the surplus — but in the long term, will this make a
difference in terms of defined benefit plans and the erosion of defined
benefits? That remains to be seen. I do not think so. If we do not address the
long-term challenges of affordability, that will not change. It will still be a
shift towards defined contribution.
With respect to the expansion of the CPP, that is the second pillar. It is a
government program. A lot of redistribution is built into the CPP. There are
intergenerational redistributions; we know that. There is also redistribution
within the CPP contributors. If you die before reaching age 60 there are death
benefits, but they are not as generous. It is not an individual account; it is a
government program, and many things are built into the CPP that are meant for
other public policy purposes, not only pensions. Expanding the CPP, it is more
than a third-pillar pension; it is just having a bigger second pillar. What
about the third pillar? What about the individual accounts, the private savings,
the private retirements? On the private side we have to work on the third
There are some proposals on the table, and they all have advantages and
disadvantages and are being studied now. Some are asking for a national summit
on pensions to review these questions.
Regarding the expansion of the CPP, maybe we should think about something
more related to the third pillar and leave the second pillar the way it is.
On bankruptcy, you got great answers there.
The Chair: Unfortunately we have run down on time. Senator Mitchell
has been on the list, patiently waiting. Could you get your question on, and
then if the witnesses could either undertake to provide us an answer later or
answer quickly now that would be fine.
Senator Mitchell: I have been very happy with your presentations.
While you are focused to some extent on DB pensions, what you have focused on
— which has not really been emerging — is the problem with the 70 per cent of
Canadians who do not have that at all. Your figures of $422,000 to get a $20,000
personal pension, as it were, are very powerful.
You said there is a bias in the way that pension room is calculated between
public pension, public service pensions and DB pensions maybe generally, and I
guess personal RRSP room. Does that speak to the problem of how pension
adjustment is calculated? The real pension value? That is to say, if I have a
public service pension I can only really contribute along with the employer up
to my RRSP contribution room, but there is much more value in addition to that.
Is that what happens?
Mr. Bonnar: An interesting way to think about it is this: we went
through 2008 and we had investments go down dramatically. If you are saving
solely through your RRSP, your pension went down. On the other hand, in a
defined benefit plan, including the federal civil servant plan, the investments
went down, and as taxpayers we also get the responsibility of paying that in to
supplement it back up.
An individual saving solely through an RRSP gets to pay a number of times,
unfortunately neither of which helps their pension benefit.
Mr. Pierlot: I would add to that.
Senator Mitchell: How do you fix that?
Mr. Pierlot: On page 7 of my presentation, those annuity factors —
15.63, 21.4, 14.18 and 18.49 — are the actual price of a pension at age 60 and
age 65. The Income Tax Act says that a defined benefit pension is always worth
$9. These figures are sometimes more than double $9.
What they say is that we will pretend that all DB pensions are worth $9 and
we will limit RRSP room based on that $9 number. It is not $9.
Senator Mitchell: For DB subscribers who do not even need an RRSP.
Mr. Pierlot: Right. People are getting a pension actually worth $21 to
the dollar; their pension is valued at $9 to the dollar, and then they get
additional RRSP room. It is a spectacularly unfair system.
Mr. Bonnar: You asked what the solution is. We can forward — I am not
sure what the process is — a paper that addresses that.
The Chair: If you have a paper on that, you send it to the clerk; he
will see it gets distributed to all members of the committee.
Mr. Bonnar: Mr. Pierlot authored a paper on that.
The Chair: That would be wonderful.
Mr. Bonnar: He authored it under the auspices of the C.D. Howe
The Chair: Thank you. On behalf of the Standing Senate Committee on
National Finance, we would like to thank all of you very much for being here.
You touched on a number of interesting points and it was a good overview.
The steering committee will try to take the input from these two meetings and
determine if and where we should go from here. It may well turn out that we will
go into some of this in more detail, in which event we would very much
appreciate hearing from you again. Thank you very much.
(The committee adjourned.)