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Proceedings of the Standing Senate Committee on
National Finance

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 Canada.

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, Service Canada.

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 can.

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 $7,400.

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 aged 55.

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 per cent.

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 is correct.

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 Salle?


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, dynamic.

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 changes.

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 low income.

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 population.


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 the road.

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 cent.

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 their earnings.

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 gap.

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 much lower?

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 example.

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 million Canadians.

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 plan.

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 employees.

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 flat.

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 sector.

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 changed?

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 respect.

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, senator.

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 matter.

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 plan.

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 being created.

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 retirees.

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 plans.

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 potentially large.

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 plan.

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 35 years.

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 private sector.

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 contributions.

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 purposes.

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 deficits.

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 that.

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 be wonderful.

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 indicated.

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 view.

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 is better.

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 implication.

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 are.

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 pillar.

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 Institute.

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.)