Proceedings of the Standing Senate Committee on
Issue 30 - Evidence - November 28, 2012 (Afternoon meeting)
OTTAWA, Wednesday, November 28, 2012
The Standing Senate Committee on National Finance met this day at 2 p.m. to
examine the subject matter of all of Bill C-45, A second Act to implement
certain provisions of the budget tabled in Parliament on March 29, 2012, and
other measures introduced in the House of Commons on October 18, 2012 (topics:
Part 1 — proposed amendments regarding PRPPs, Pooled Registered Pension Plans;
and Part 4 — Division 23 — public sector pensions).
Senator Joseph A. Day (Chair) in the chair.
The Chair: This is our tenth meeting on the subject matter of Bill
C-45, A second Act to implement certain provisions of the budget tabled in
Parliament on March 29, 2012 and other measures.
In the next hour, we will consider the proposed amendments to the Income Tax
Act in regard to pooled registered pension plans.
The amendments concerning PRPPs, as they are often referred to, are found in
Part 1 of the act, clauses 8, 32, 34, 36, 43, 55 and 59.
Nobody has hollered out bingo yet.
They begin on page 13 of the bill and follow.
We are pleased to welcome James Pierlot, a pension lawyer and consultant with
Pierlot Pension Law. We are also pleased to welcome Mr. Ron Sanderson, Director
of Policyholder Taxation and Pensions with the Canadian Life and Health
Insurance Association Inc.
I understand that each of you have brief introductory remarks. We have
received your written submissions and thank you very much for that. We also
thank you for being here. I will start with Mr. Pierlot, unless you have worked
out a deal between you. Mr. Pierlot, you have the floor.
James Pierlot, Pension Lawyer and Consultant, Pierlot Pension Law:
Thank you, Mr. Chair, and thank you for the opportunity to be here.
I have about five or six minutes of comments, and then I will turn it over to
Bill C-45 proposes amendments to the federal Income Tax Act to implement
Pooled Registered Pension Plans or PRPPs. As stated by witnesses from Finance
Canada, the proposed rules are intended to fit within the existing system of
rules and limits for RRSPs and registered pension plans. This is perhaps an
over-simplification because, in terms of tax treatment, PRPPs will be
functionally equivalent to RRSPs, with the exception that payroll taxes, such as
EI and CPP contributions, will not apply to employer contributions.
In various press releases and announcements, the government has stated that
PRPPs are intended to help low- and middle- income Canadians and small business
owners and their employees to save more for retirement. The hope is that PRPPs
will deliver outcomes that are better by reducing fees through asset pooling and
by transferring fiduciary and administrative duties from employers to third
parties, such as financial institutions.
The key elements of tax rules for PRPPs, as proposed in Bill C-45, are as
follows: contributions are to be subject to RRSP limits; self-employed and
employed individuals will be able to join the plans; and retirement income
choices will be similar to those available for defined contribution pension
plans, for example, transfer to a registered retirement income fund, payment of
variable benefits or purchase of an annuity.
The question is, when designing a new pension vehicle, what you would like to
see in a pension plan. What are the features it should have? Those features are
identified in the tables of the document that I passed out to you. The French
table is the first; the English is the second.
The features that I think would be desirable in a pension plan are: that it
pay a predictable lifetime pension; that it provide sufficient contribution or
accumulation room to provide an adequate pension; that it can pay a disability
pension when a person becomes disabled while they are still in the workforce;
that it will allow a pension to be earned during workforce absences for
disability, child care, unemployment periods, et cetera; that it will allow
pooling of longevity and investment risk to reduce the cost of pensions for
members; that it will allow asset pooling to reduce the cost of administration;
and that it will allow new contribution room to be provided when members have
investment losses when there is a market downturn.
The table shows how retirement savings outcomes for PRPP members will
essentially be equivalent to those for people who save in RRSPs. If you compare
the current features of the PRPP, as proposed, to all the desirable features of
a pension plan, with the exception of asset pooling, they do not respond to
The most significant deficiencies of PRPPs, as proposed, is that they will
not pay retirement pensions. Contribution room will be inadequate for most
workers who should be saving in them, especially in today's economic environment
of low investment returns. Investment losses for PRPP members will result in
permanent loss of retirement saving room. As such, PRPPs, as proposed, represent
a further perpetuation of a problem that has existed in federal tax rules for
retirement saving for almost 100 years. You cannot participate in a pension plan
that provides a predictable, target, lifetime pension unless you are fortunate
enough to find an employer who will provide it to you. Today, less than 15 per
cent of Canada's private sector workers are in this fortunate position. As
proposed, PRPPs will do nothing to help the remaining 85 per cent who are not.
Perhaps the most troubling aspect of PRPPs has to do with the constituency for
whom the federal government has stated that they are intended — low- and
middle-income workers who are not saving enough. A study published in August of
this year by the C.D. Howe Institute, which I co-authored, demonstrated that
saving in a PRPP will actually be harmful to many low- and middle-income workers
because they will face effective marginal tax rates of as much as 50 to 80 per
cent when they withdraw their savings in retirement. The study shows that many
low and middle income workers would be well advised to avoid PRPPs, RRSPs, or
any other tax-deferred saving vehicle and instead to save in tax free savings
accounts because withdrawals from these plans do not affect entitlement to the
Guaranteed Income Supplement and other elder benefits, such as the Alberta
What all this means is that, as proposed, PRPPs cannot improve the standard
of living for low- and middle- income workers when they retire, but they will
certainly reduce the federal government expenditure on elderly benefits. It is
not just a bad news story because there is much that the federal government can
do to make tax rules for PRPPs work better for Canadian workers of all income
levels. The first thing the government could do would be to allow tax prepaid
saving within PRPPs. This will ensure that PRPPs can be a good retirement saving
vehicle for low-income workers.
To ensure that all workers have enough retirement saving room and to
eliminate the age discrimination that characterizes current TFSA limits of
$5,000 annually, the TFSA limit should be eliminated and replaced with a
lifetime accumulation allowance of $250,000, as recommended in the study that I
The second thing that the federal government should consider is allowing PRPP
members to accumulate pensions under the same tax rules as apply to its own
workers and to contribute to their own target pensions.
Current tax rules allow career federal government workers, and other members
of DB pension plans, to accumulate pensions worth 1 to $2 million at retirement,
which provide lifetime retirement pensions of between $40,000 and $80,000
annually for workers who retire at age 60, which is a typical retirement age for
a federal public sector worker. Under the proposed rules in Bill C-45, PRPP
members cannot practically hope to accumulate more than a quarter to one third
of these amounts. To ensure equal access to retirement saving room for all
Canadians, the federal government should consider replacing current annual and
income-based retirement saving limits with a uniform lifetime accumulation limit
of $2 million, as recommended in a C.D. Howe Institute study published in
This will level the playing field between members of defined benefit pension
plans, members of PRPPs, and those who save in RRSPs and make it possible for
PRPP members to save enough.
My conception of a pension plan, if it is to be called that, is that it
should allow pensions to be paid. However, as proposed, PRPPs will not pay
pensions. The proposed rules should therefore be amended to allow PRPPs to pay
lifetime pensions to their members. PRPPs currently present only the appearance
of reform because they are effectively a re-release of an existing retirement
savings vehicle, RRSPs. If PRPPs, in their current form, increase tax-deferred
saving by low- and middle- income workers, they will actually be harmful to many
because they will amount to a regressive tax increase. For middle to upper
middle income workers, PRPPs will be of little help because they do not address
the savings opportunity gap between DB pension plans and RRSPs. Finally, they
will not pay pensions.
However, this review of Bill C-45 presents an opportunity to take a second
look at PRPPs. With changes to tax rules, such as I have identified, PRPPs offer
great potential to help the 75 per cent of private sector workers who have no
pension coverage and who need access to better options. Thank you.
Ron Sanderson, Director, Policyholder Taxation and Pensions, Canadian Life
and Health Insurance Association Inc.:
Thank you, Mr. Chair, and honourable senators. I am pleased to appear today on
behalf of the CLHIA to share our views as you consider Bill C-45, the jobs and
growth Act 2012, and, in particular, provisions relating to Pooled Registered
The CLHIA is a voluntary association whose member companies account for 99
per cent of Canada's life and health insurance business. The industry provides a
wide range of financial security products, such as life insurance, annuities and
supplementary health insurance to about 26 million Canadians. Over two thirds of
Canada's pension plans, primarily defined contribution plans for small- and
medium- sized businesses, are administered by life and health insurers.
Before commenting on the tax provisions in Bill C-45, we would like to
commend the government for adopting Bill C-25, the Pooled Registered Pension
Plans Act. That initiative targets the savings gap identified by Mr. Jack
Mintz's 2009 research for the joint working group of finance ministers: Modest
and middle-income Canadian households may not be saving enough for retirement.
Bill C-25 builds on the consensus among all finance ministers federally,
provincially and territorially and strengthens the third element of our
three-pillar retirement system: private sector savings.
PRPPs can make a fundamental difference to the retirement savings landscape
for Canadians. The keys to their success will be low cost and driven by simple
designs and pooling, which will enhance scale and efficiencies; professional
administrators, who will relieve small- and medium-sized businesses from the
administrative and legal burdens that prevent them from offering retirement
plans; harmonization across the country, which will build additional scale and
efficiencies; and automatic features that will provide behavioural nudges to
encourage people to save while preserving opt-out rights.
Bill C-45 sets forth a simplified tax framework, building on the best aspects
of both pensions and RRSPs. For example, the proposals treat PRPPs in the same
way as RRSPs for purposes of contribution limits, transfers between plans, and
the payment of death benefits for a surviving spouse or common law partner.
Relative to the more complex treatment historically accorded to registered
pensions, we believe that this simple and familiar process will be more
transparent and intuitive for consumers and their advisers and will remove
significant administrative burdens from employers. Administrators and regulators
also benefit from a straightforward approach to PRPP tax rules. Most
importantly, simple rules and processes reduce costs ultimately borne by
We applaud government for moving forward with a simple, proven and effective
tax regime; and we support this approach. However, we note one concern with
proposed subsection 147.5(3) of the Income Tax Act, whereby the non- compliant
actions of a single employer could make a PRPP for all employees of other
employers participating in the same plan revocable. We believe that such action
should be narrowed to impact only those plan members to whom the non-compliant
Bill C-25 and the related regulations, together with the tax provisions
contained in Bill C-45, set out a simple, easily implementable framework. Our
members are ready, willing and able to bring PRPPs to market. We know that small
business will support PRPPs. In a CLHIA survey of over 800 small- and
medium-sized businesses, two thirds of respondents said they would be interested
in offering PRPPs. Over 70 per cent of that group said they would be interested
in contributing to PRPPs, even though they are not required to do so. Over 70
per cent of respondents thought all employees should have access to a workplace
retirement plan. We are ready, but there is still work to do.
Prior to the recent election in Quebec, that government introduced bill 80,
which provided a framework for their version of PRPPs. We understand that the
new Quebec government will introduce a similar initiative early in 2013. Our
discussions with ministers and officials in other jurisdictions suggest that
they are also moving forward with PRPPs. We encourage them to do so and to adopt
this template without unnecessary and costly modifications.
Thank you, Mr. Chair, for the chance to appear today. I would be pleased to
respond to any questions.
The Chair: Thank you, Mr. Sanderson. You referred to Bill C-25, which
created PRPPs. Is that correct?
Mr. Sanderson: That is correct.
The Chair: Bill C-45, part of the omnibus budget bill, proposes many
changes to the Income Tax Act so that it is reflective of the initiative in Bill
Mr. Sanderson: That is correct. Obviously, the tax provisions have to
mirror the intent of Bill C-25 and work with it; and we believe they do that.
The Chair: Assuming Bill C-45 is passed, when do you anticipate this
program being up and running? Should we expect more proposed legislation before
Mr. Sanderson: To the extent that federally regulated entities would
be subject to Bill C-25, certainly we can be up and running by the first of the
year. The challenge is that most federally regulated organizations already have
pensions in one form or another, so the real value of Bill C-25 and the tax
provisions in Bill C-45 relate to employers under provincial jurisdiction.
Certainly, we have been working with the provinces to encourage them to move
forward with parallel legislation. I think many of them are very close to that
stage. One of the challenges, of course, is that until the regulations under
Bill C-25 and the tax provisions within Bill C-45, the provinces, to some
extent, would be buying a pig in a poke if they were to proceed before this was
all settled. Once we get Bill C-45 and the regulations to Bill C-25 through,
then the provinces will introduce their legislation quickly.
The Chair: You referred to Quebec having PRPP legislation from the
previous government there.
Mr. Sanderson: Yes.
The Chair: You have heard that the new government may be coming
forward with its own version.
Mr. Sanderson: There is a study of retirement plans under way in
Quebec that will report early in the spring. We have been advised by the premier
that they expect to move forward with PRPP-style legislation shortly after that
report is tabled.
The Chair: Have any other provinces passed such legislation?
Mr. Sanderson: No other provinces have passed legislation, but many
are working on it. I would rather not commit them to something here at this
The Chair: I understand. We just want to get an idea of where this is
in the process.
How about the regulations for Bill C-25?
Mr. Sanderson: Two tranches of regulations have been made public. The
first tranche was formally gazetted on October 24, I believe, and are in effect.
The second tranche was released about three days later for a 15-day comment
period. I would expect them to be gazetted in the next week or two.
The Chair: Have you been involved in consultation on those
Mr. Sanderson: Certainly, we have seen drafting instructions for those
regulations and have commented on them. In general, they are a good package.
The Chair: Mr. Pierlot, have you been involved in the regulation
Mr. Pierlot: No, I have not.
The Chair: You have not been invited.
Mr. Pierlot: No, I have not.
The Chair: Thank you. Okay, I will start with Senator Buth from
Senator Buth: Thank you both for being here to present. Mr. Pierlot, I
have some questions for you about the C.D. Howe Institute study. Did you mention
that you were an author on that?
Mr. Pierlot: I am a co-author of the study, yes.
Senator Buth: Specifically, what did the study look at?
Mr. Pierlot: The study looked at taxpayers in a few different income
classes: single individuals making $30,000 a year and $50,000 a year; and
couples with and without children making, if I recall correctly, $75,000 a year.
Everybody receives public pension benefits, such as the Canada Pension Plan, Old
Age Security and, potentially, the Guaranteed Income Supplement. Everyone who
works in Canada receives CPP. The study came to an estimate of what these
workers could expect to receive from government plans and how much of their
income they would need to save to have a pension that would keep them at a level
standard of living in retirement.
The study looked at the numbers and computed the contribution required as a
percentage of income to derive the amount that would need to be saved. The study
then looked at what would happen if one saved those amounts in a Tax Free
Savings Account as opposed to an RRSP, which is functionally equivalent to a
PRPP, and what it would look like for the taxpayer at the end.
This study concluded, as have approximately five other studies completed by
the C.D. Howe Institute on the same topic going back to 2003, that if you are
saving in a tax-deferred plan, you will actually face a higher tax rate in
retirement than you had during working life. Conventional wisdom is that when
you put money into an RRSP or a pension plan, you put it in when your tax rate
is relatively high and then when you take it out your income is lower and then
you will save tax. It essentially averages your lifetime tax rate. That is often
true when you consider only the effects of income tax. However, when you
consider the effect of the clawback of income-tested benefits, such as the
Guaranteed Income Supplement or the Alberta Seniors' Benefit, you pay income tax
on the withdrawals but you also lose, at certain income tranches, 50 per cent or
50 cents on the dollar of that benefit for every dollar that you withdraw from
your RRSP. That leads to the highest marginal tax rates possible in Canada. For
example, in Ontario, if you are making $130,000 a year, your marginal tax rate
is 46.41 per cent. When a person withdraws money from an RRSP such that they
lose Guaranteed Income Supplement benefits, their tax rate is over 50 per cent.
That is the highest possible tax rate.
It varies according to income class, and there is quite a bit of complexity
in modeling this because it depends on when people earn income and what their
lifetime income is, et cetera. There is no perfect way to model it. We chose
what we thought were reasonable assumptions that were conservative to the
arguments. The conclusion was, as with all other studies, that if you are going
to save for retirement and you are low to middle-income, you should be in a tax-
paid vehicle, not a tax-deferred vehicle.
Senator Buth: Just to clarify, do you support any of this legislation
related to PRPPs?
Mr. Pierlot: Yes, I do, because I actually proposed this idea in a
2008 paper that I wrote for the C.D. Howe Institute. There are a few things that
are really good features of this legislation.
First, the idea of asset pooling is a good one. I have a few concerns with
asset pooling in a structure that continues to allow the members investment
choice because that puts more cost into the system. If you have a structure
whereby you have a professional asset manager, all the assets are pooled, the
members do not have any choice and you have auto- enrolment with possibility of
opt-out, which is how Bill C-25 is structured, then you really do, as many say,
have the possibility for cost savings. If the plan gets large enough, you could
get the costs significantly lower than retail fees, which can be as much as 2 or
2.5 per cent of assets. In a world where risk-free rates of return are below 2
per cent, if you put yourself into a retail product, you could actually be
losing money. The cost is a very important feature of this. That is one aspect.
The pooling can reduce costs.
The second aspect of it is I think the government is right in targeting
small- and medium-sized businesses, because these are organizations that do not
typically have sufficient resources to set up their own retirement plans. There
is a lot of complexity in pension legislation. As an employer, when you set up a
plan, you attract a lot of fiduciary responsibility and administrative duties
that can be quite costly. It makes sense to outsource that to an expert
institution. It could be a life insurance company, a bank or a consulting firm
that is specifically focused on delivering that. That outsourcing of
administrative and fiduciary duties can be of great benefit to smaller employers
because running a pension plan is not their core business.
Those two aspects of the PRPP legislation are definitely in the right
Senator Buth: Thank you for that. You made some suggestions here in
terms of lifetime accumulation limit for Tax Free Savings Account, and also a
lifetime accumulation of $2 million.
Mr. Pierlot: For tax-deferred plans, yes.
Senator Buth: Right. Did you or the C.D. Howe Institute cost out the
cost or figure out what the cost to government would be of these suggestions?
Mr. Pierlot: That is a question that I have been asked so often that I
cannot remember the number of times. How much would that cost? Let us take the
TFSA limits, for starters. The TFSA limits of $5,000 a year accumulate every
year. For example, if you are 25 years old, you can look forward to a TFSA limit
of $5,000 a year, and then periodically it will be bumped for inflation. We
actually had some numbers in the paper where an individual at age 25 who has
enough resources to contribute the maximum to a TFSA and earns a 5 per cent rate
of return could nominally accumulate $800,000 in tax-sheltered TFSA savings by
the time they are 60 or 65. However, if you take a much older worker, 50 or 55,
their accumulation opportunity would be only 60 or $70,000. That is why I say
the TFSA limits are age discriminatory.
To answer your question directly, if you imposed a TFSA limit of $250,000 a
year on everyone, you would expect to see that higher income people would
immediately use it, but they would be subject to a hard cap. They could never
get to the $800,000. Lower-income people would have more flexibility. What would
happen with TFSA limits is that there would be a net revenue benefit to the
government over time because you would put a hard cap on the investment income
that people are allowed to shelter from tax. That is on the TFSA side.
On the lifetime limit side, the $2 million, it is important to remember two
things. First, these $2 million contribution amounts or accumulation amounts are
being permitted right now for a certain subset of the population that is in
generous defined-benefit pension plans and have high incomes. It is very routine
right now that people are in defined- benefit plans and accumulating pensions
worth these amounts. All of those amounts are sheltered from tax. You have a
small portion of the population, fewer than 20 per cent, who are accumulating
those amounts, 1 to $2 million, and everyone else is subject to much less. I
think that brings into play a very serious equity issue.
In terms of the cost, the short answer to your question is that I have not
costed it, and it is difficult to cost, but I can give you an estimate based on
Statistics Canada data of what you could expect to see in terms of short-term
cash flow effect on government revenues if you were to make this available. You
can do that by looking at the Statistics Canada pension satellite account, which
shows that today, in Canada, exclusive of CPP and OAS and Quebec Pension Plan,
there is about $2.1 trillion in retirement savings right now.
I have worked a little bit with those numbers, and I conclude that about half
of that amount is currently held by defined-benefit pension plan members, who
are 26 per cent or less of the population, and most of that money is actually
held in public sector plans. If you were to make that retirement savings room
that they have available to everyone else, you could expect to see, potentially,
somewhere between half a trillion to $1 trillion of additional tax deferral.
That is a very rough kind of bush-league estimate, but I think it is a fair way
to look at it because we have already seen what happens with those individuals.
However, it is important to remember that this is not tax avoidance; it is
tax deferral. What people are doing when they put money into these plans is they
are borrowing it from the government and they have to pay it back later with
interest, and that economically could work to the government's advantage when
these people retire. The labour income tax base is shrinking, and they would
have another tax base to look at to replace revenue from the labour income tax
Senator Buth: Thank you very much for your comments.
Mr. Sanderson, do you have any remarks in terms of the C.D. Howe Institute
report or any of the comments that Mr. Pierlot made?
Mr. Sanderson: I think Mr. Pierlot's comments are certainly well
considered and something for government to consider going forward. They are
perhaps a little bit off point in terms of today's discussion in terms of
working with the PRPP framework as it has been set up in Bill C-25 and the tax
measures that are in Bill C-45. Obviously we believe that the PRPP can make a
fundamental positive change for Canadians, and that we should certainly proceed
with it. That does not preclude further refinement of the PRPP structure or
other elements of the retirement savings structure in Canada over time, but let
us not delay one in order to do the other.
Senator Buth: Thank you.
Senator Bellemare: Thank you, Mr. Chair. Picking up on Mr. Sanderson's
last statement, I would ask Mr. Pierlot to respond afterwards. As far as pension
plans go, we know, Mr. Sanderson, that we have a major problem on our hands in
Canadian society in the current context. We have a problem when it comes to
private defined benefit plans. A number of companies in the private sector are
facing significant solvency deficiencies and shortfalls with pension plans. We
know there is a serious problem in terms of pension plan funding in the
municipal sector. We know there is a large disparity between public and private
sector employees. The jobs that young people have today do not pay as well as
those of their parents. They do not have access to as many permanent jobs, so
short-term employment is more common among young people. There are a variety of
real dimensions at play.
Let us consider Quebec's situation, for example. The data shows that more
than half of the province's pensioners receive the Guaranteed Income Supplement
because their private pension plan is not doing the job, even with CPP or QPP.
How do you see this pooled savings plan solving those problems? I would like
you to comment on that. Do you not think the plan should instead be examined as
a complement to our pension system? Or, conversely, do you see it as the
cornerstone of the reform needed to solve all the problems on the table? And in
that case, how would this plan solve those problems?
Mr. Sanderson: Senator, you have posed a rather wide-ranging set of
problems, and I am not sure pension reform can necessarily solve all of them. I
will not suggest that the PRPP will be a panacea to address all of those issues.
Certainly underemployment among young people is a real challenge. Many of these
things can be tied into the general lack of financial literacy in this country,
and obviously we are moving forward to try to address those issues.
I do not see PRPP as a replacement for a public sector pension plan, the Old
Age Security or Guaranteed Income Supplements, but it is one of the three
elements of the pension regime as part of that private sector element.
To the extent that we can use automatic features such as automatic
enrollment, default investment option choice and automatic escalation of
contribution over time, those all build a larger pool of assets for the
individual to fund their retirement. This is obviously something that will have
to be reconsidered and refined as we go forward, but we have a significant
building block here, something that has been tried in other countries around the
world and has proven successful. There have been some mistakes in other
jurisdictions, and we have learned from them in terms of the Canadian model. It
is certainly a big step forward, but it will not solve all of the problems you
put on the table.
Senator Bellemare: If I understand you correctly, you agree that this
plan plays a complementary role, in addition to our retirement income security
system. You know that other countries have savings plans as well, but they
complement the universal pension plans, those that are broader in scope,
contributory in nature and more similar to Canada's pension plan, albeit a bit
I would like to hear your thoughts on something, Mr. Pierlot. Last year, a
group of provinces formed a coalition calling for improvements to CPP and QPP,
in response to all the problems, with the understanding that savings plans are
another necessary component of our pension plan structure. Would you support a
complete overhaul of the Canada Pension Plan?
Mr. Pierlot: You want to know whether improving the Canada Pension
Plan is a good idea?
Senator Bellemare: Yes.
Mr. Pierlot: The Canada Pension Plan is not a retirement plan in the
true sense. Initially, the plan had no fund and the contribution rate was
roughly 6 per cent, on an employer-employee basis. In the 1990s, CPP was
reformed, with the contribution rate eventually reaching 10 per cent to build a
fund. At this point in time, the fund has around 25 per cent of the assets
necessary to pay out the benefits owed to recipients.
The Canada Pension Plan also serves as a disability insurance plan. If the
plan is enhanced, it would be necessary to establish a contribution rate that
provides for a real fund. You cannot have a pension fund without a fund. Another
consideration would need to be addressed: does the contribution rate change for
new contributions or does it stay the same as the current plan? Keep in mind
that when you contribute to CPP, your reimbursement is lower than it is with an
I would stress the importance of looking at a CPP enhancement very carefully,
because the same problems arise for CPP recipients as for pooled registered
pension plan members. Receiving CPP benefits reduces your entitlement to
government benefits as well.
Senator Bellemare: Are you familiar with international pension plans
such as the ones in Sweden, Poland and other European countries? Are you
familiar with hybrid plans offering defined benefits, while being financed
through a pay- as-you-go system and a bit of funding? Are you familiar with that
Mr. Pierlot: Not really.
Senator Hervieux-Payette: I am going to refer to the French version of
your brief, since you read it in English. I read it in English, but I can
understand better with the French. The second-last paragraph on page 2 of the
French version — also page 2 in the English — states that pooled registered
pension plans cannot improve the standard of living for low-and middle-income
workers when they retire, even though the plans will certainly reduce the
federal government's future expenditures on elderly benefits.
I would say that was probably the only positive objective as far as the
federal budget goes, but what do you mean when you say middle income? You
mentioned $146,000 earlier, but that is not the average income in Canada. The
average income is between $40,000 and $50,000 a year. Someone earning $50,000 a
year cannot afford to make huge contributions to this plan. A few hundred
dollars a month is the most that person can afford to contribute. Is there some
pattern showing that, at a certain point, it no longer makes sense to contribute
to that plan? With every contribution, a worker loses what they should receive
under the current plan; you called it the clawback.
It troubles me that people would go out and buy pooled registered pension
plans without knowing they are falling into a trap and missing out on government
benefits they would have received later.
What should I tell my children, who are in their forties and earning decent
but not huge salaries?
What advice are we supposed to give them? This new approach does not seem to
make having an RRSP or a pooled registered pension plan worthwhile, because when
it comes time to actually receive your benefits, they are automatically deducted
from government benefits you would have been entitled to otherwise. There is no
benefit. They will not benefit in the least from having put money away
regularly. So why not use the money for a beach vacation?
Mr. Pierlot: That is exactly the point of the paper that we have
written. To the extent that people are told that the PRPP is good for them and
they contribute money to it not knowing that they could face very high effective
marginal tax rates at retirement, we have done them a disservice in that we have
relied on an information asymmetry to effectively reduce federal government
expenditure on the backs of the people who can afford it least. That is my
biggest concern with the PRPP as proposed.
I did not want to come here to be totally negative about the structure
because I think there are good things about it. However, if we go out there and
say that low and middle income people are not saving enough, therefore, we need
a new savings vehicle, here it is, put money in and then they get to retirement
and lo and behold, they find they are losing their Guaranteed Income Supplement
or other benefits they would otherwise have received, I do not think we would
have served them well. As you point out, they would be better off taking the
vacation when they are young and healthy and can enjoy it.
The big problem is that the pension system and the tax system are
complicated. We need systems that work by default for everyone. We need to
actually tell people how and when to save because, by and large, they do not
know how to do it themselves. When you look at the large public sector pension
plans, some of which operate extremely sufficiently with 0.35 per cent to 0.7
per cent of assets as cost, have very good investment returns. However, the
members themselves do not know much about those pension plans. They just know
they will get a secure pension when they retire. We can argue about whether they
cost too much, et cetera, but the point is that with this plan, to the extent
that people are putting money in it and are not told that they could be losing
their benefits from government sources, we have done them a very serious
Senator Hervieux-Payette: If people put money into a TFSA, they will
not be impacted in the same way as if they had invested in an RRSP or a pooled
registered pension plan? The size of the TFSA will not count? The money will not
be set aside only to be deducted from benefits as a supplement? That TFSA will
not be taxable? Can people keep the full amount while receiving other benefits?
That seems odd to me. That is why I would like a clear answer to that.
Mr. Pierlot: When you put money into a TFSA, the contribution is not
deductible. When you put money into an RRSP, it is deductible and thereby
reduces your income. In both plans, the invested amounts within the plan are not
taxed as they accumulate. With an RRSP or a pension plan, when you take the
money out, it counts as income. With a TFSA, it does not count as income.
One of the legitimate concerns of the Department of Finance is that if you
allow unlimited TFSA saving, then everyone will put money into TFSAs and avoid
pension plans. People who are quite wealthy will end up collecting benefits that
are supposed to be paid to low-income people. This is one of the reasons that we
have proposed in this paper a limit on TFSA accumulations so that it cannot be
used primarily as a tax avoidance vehicle to allow people of greater means who
do not need the Guaranteed Income Supplement to collect it.
To answer your question directly, when you take money out of a TFSA, it does
not reduce your entitlement to government benefits. That is why we proposed the
tax-free savings options in the PRPP so that it can respond to the needs of
lower income workers. I am not saying that $250,000 is the right number; maybe
it is $100,000 or whatever. There is a legitimate concern that if you allow too
much TFSA saving, you end up with people who make a lot of money getting
government benefits who arguably should not get them.
Senator Hervieux-Payette: The banking, trade and commerce committee I
am on studied the issue of pooled registered pension plans. The system was
heralded as the best thing since sliced bread and a solution to all the problems
of SMEs and self-employed workers. And now we are turning around and telling
them: ``Bad news, we gave you the magic formula, but it does not produce the
results we thought''. The only positive under this plan concerns the federal
government's budget, not your income when you retire.
I am shocked. After all the effort spent championing and supporting this
initiative, we are now realizing that it does not actually benefit taxpayers and
that we encouraged them to buy into a pension fund that will not help them all
that much when they retire. People in their thirties and forties today may be
tempted to make significant contributions to the plan, but at the expense of
losing out on a number of government benefits come retirement.
Mr. Sanderson: If the PRPP required individuals to contribute to those
plans at low-income levels, then I would agree that we have a particular
problem. However, one of the key features of the PRPP in Canada is that
individual participation is optional. For lower income individuals, it will make
much more sense in many cases to invest via a TFSA. I fully expect that
providers of PRPPs will offer them in tandem with a wholesale-priced TFSA
arrangement so that we can address that segment of the market.
The PRPP is not targeted at low-income individuals. It is targeted at modest
and middle income levels. The concern that Mr. Pierlot has identified is true
and real if we have people who are contributing to the PRPP at all income
levels; but that is not what we expect. Certainly, I expect there will be some
guidance from the providers to say, ``Given your particular situation, you are
better in the TFSA model rather than in the traditional PRPP.''
Senator Hervieux-Payette: That may be wishful thinking.
Senator L. Smith: Mr. Sanderson, Mr. Pierlot was asked a question
about analysis before making the C.D. Howe Institute report. What type of
analysis did your members do? You talked about the level of people that should
look at a PRPP versus low-income levels. I wonder what type of analysis you
folks did to come to your conclusions.
Mr. Sanderson: One of the challenges of retirement income planning is
that it is very personalized. Therefore, I am always cautious of sweeping
We have been delivering plans very much similar to defined contribution plans
and group RRSPs across the Canadian marketplace for a considerable time. We have
about one and a half times the assets under administration in these arrangements
as the Canada Pension Plan has, so we are not newcomers to this.
In terms of delivering product, perhaps employers are closest to the
questions that consumers and employees ask. While not entirely privy to that, I
think the most common question is: ``What would you do?'' Employees are often
looking for that kind of advice, and I think it is unfair and unrealistic to
expect an employer or an HR official within a company, particularly a small
business, to be able to advise individuals on what investment choices they can
make. That is why the PRPP builds in what we like to think of as smart defaults,
things that are prudent, are focused on retirement savings and will achieve the
best results within the confines of the plan.
Yes, there will be some individuals who are at lower income levels and have
expectations of lower income levels going forward. For those individuals, the
PRPP may not be the best option, but for the vast majority of middle- and
modest-income people we believe that a pension plan, an RRSP style, a
tax-deferred vehicle, as Mr. Pierlot has referred to them, is the way to go.
Senator L. Smith: I am not trying to create controversy, but you
suggested that some of Mr. Pierlot's points were off target. What was that in
Mr. Sanderson: I think the analysis is good, and I have no criticism
of that. The concern is what the target demographic is for the PRPP. Mr. Pierlot
may be suggesting that it is targeted at very-low-income individuals, and I do
not think that is the case.
Senator L. Smith: Mr. Pierlot, this is the first opportunity we have
had to look at some of this information. Is part of the objective of the report
with which you were involved to look at the whole system and try to come up with
an overriding solution for all pensions? It looks like Mr. Sanderson is saying
that the PRPP can fit into a certain demographic and, therefore, in terms of the
big picture of investment with the maze of opportunities, this is something that
can service the lower-middle-income group, so that it does work among the TFSA
and all the other options out there.
Are you suggesting that a sweeping type of macro plan should be set up for
pensions? I just want to understand exactly what you are suggesting.
Mr. Pierlot: The genesis of this paper was a concern with the stated
intentions of the government. This is targeted to modest- and middle-income
workers. A modest-income worker would be someone earning about $30,000 a year. A
middle-income worker is someone earning $50,000 to $60,000 a year. Therefore, I
think the focus of the paper was fair, because it is not just about the people
in the low-income range. People with quite high family incomes are affected by
this clawback problem, and that was the real focus of the paper.
I think it is a problem for middle-income people, and I think of
middle-income as from $50,000 to $150,000, even though the top of the income
distribution, the people earning $150,000, is 1 per cent or 2 per cent of the
distribution. The people at greatest risk are those earning from $50,000 per
year up to $90,000 per year.
I think the answer to your question is yes. We were trying to think about how
the system should work globally in order to serve taxpayers of all income
classes. There is a certain level of taxpayer who does not need to save for
retirement. If you are making $25,000 or $30,000 a year and you want to have a
level standard of living after retirement, the Canada Pension Plan, the
Guaranteed Income Supplement and the Old Age Security benefit are enough. You
probably should not save for retirement at all unless you want to put a little
aside in a TFSA or pay off your mortgage, if you are lucky enough to have a
Once you get above $35,000 or $40,000, you will have to start thinking about
saving for retirement, because the public service benefits will not be enough.
It is that tranche with which we are concerned. How can we make the system work
for people who need to save for retirement and are earning from $40,000 to
$150,000 a year? We are not concerned about the people earning more than that,
because they have other ways of taking care of themselves.
We concluded that to make the voluntary or private retirement savings system
work we need something that works for that entire group of taxpayers, those
making from $40,000 to $150,000. For the people making $55,000 and below, in
most cases they need to use TSFAs. People making more than that probably need to
be in an RRSP, a pension plan or a PRPP.
The answer is, yes, we were trying to come up with something that would work
for all taxpayers.
Senator Bellemare: Thank you, Mr. Chair. I want to come back to
retirement savings plans. Everyone here probably has an RRSP, which, on an
individual scale, represents what we are studying here today, pooled savings
plans. Personally, the value of my RRSPs has not gone up much in recent years.
In fact, it has dropped, and my management costs for the RRSPs are quite high,
despite the fact that a first-rate financial institution is managing them. The
topic before us today is pooled savings plans, as set out in Bill C-45. One of
the objectives of this measure is reducing RRSP management costs because the
OECD criticized Canada for those very fees. The management expense ratios were
so high that they ate into RRSP returns.
In the current climate, where interest rates are relatively low and returns
relatively poor, what percentage of an average income — ranging from $50,000 to
$60,000 a year — would a family without a private pension plan have to put away
in order to benefit here? What percentage of their income would that person have
to put into the plan to receive a pension or annuity payment entitling them to
maintain a lifestyle at 70 per cent of their pre-retirement income, when they
turn 65? What would the savings-to-income ratio be?
Mr. Pierlot: That is a very good question and the one that everyone
needs to know the answer to. I can answer the question.
If you want a pension that will be paid for life, you start with your life
expectancy at your retirement age. If you want to retire at age 65 and you
expect to live to age 85, the difference is 20 years. It is a good rule of thumb
that for every dollar of indexed retirement you want, you will need to save $20.
If you want a $10,000 pension, you will need to have saved $200,000. If you want
a $20,000 pension, you will need to have saved $400,000. That is at current
expected rates of return.
That is called an annuity factor, and those are the factors actuaries use to
determine the cost of benefits in defined benefit plans. That gets you to a
number. If you want a supplementary pension income, that is a good way to
estimate what you will need.
How much money do you need to contribute as a percentage of salary? You have
to assume a rate of return, and then you have to assume a period of time and
make assumptions about your earnings to get to your number, be it $200,000 or
I can tell you that in the public sector pension plans right now, which are
providing earnings replacement of 60 to 65 per cent of final earnings indexed to
inflation and paid for life, the aggregate employee-employer contribution rates
are between 30 per cent and 40 per cent of pay. You will hear that later when
the public sector pension plans are discussed.
If you want that 70 per cent pension, at today's rates of return, you are
looking at a lifetime contribution rate in excess of 30 per cent of your salary.
Senator Buth: Mr. Pierlot, I want to come back to a comment that you
made and that we have been talking about.
I understand what you are saying. If someone invested in a PRPP, it could
jeopardize their GIS and their Alberta supplement. However, you did make the
statement that PRPPs will certainly reduce the government's future expenditures
on elderly benefits, and I have to take exception to that. You are making
assumptions that that is what will happen in the future in terms of this
government. You are basing it on a set of assumptions in terms of what is
happening now. For the GIS benefits that we have now, this is the only
government that has increased that and has a commitment to ensuring that there
are benefits for people below certain levels of income.
I just want to make that comment because it is an assumption in terms of what
will happen in the future. I think that just needs to be made clear. I just want
your comments on whether or not you did take into account what might happen in
Mr. Pierlot: You are right, senator. There are some assumptions there.
We assumed, when we made that statement in the paper, that participants in PRPPs
would put money in, in accordance with the government's policy intention, and
that those people would be persons of modest and middle income. Those are two
assumptions that we made, and a third assumption that we made was that the
Guaranteed Income Supplement would continue to exist at the time that they
retired and would work roughly as it does now, with a 50 per cent clawback. We
made those assumptions because two of them related to the government's stated
policy intent and one of them might or might not be incorrect 30 or 20 years
from now. I do not know whether the GIS would exist, but we assumed that it
would and that it would be essentially similar to what it is today.
Senator Buth: I understand. I just wanted to make it clear that those
were assumptions that you based your analysis on.
Mr. Pierlot: Yes, that is correct.
Senator Buth: Thank you very much.
Senator McInnis: I was pleased to see this legislation for
self-employed individuals who do not have access to a pension. I listened to
both of you. One looks at the glass as half empty, and the other looks at it as
half full. I want to ask the latter a question because you said earlier that
this was not perfect but that it was a good start, something that we could build
on. How would you build on it?
Mr. Sanderson: I think that some of the suggestions about perhaps
offering a TFSA-type option within a similar framework would be appropriate.
One of the challenges with the existing TFSA, just as with a Registered
Retirement Savings Plan, is that people can and do take money out of those plans
rather than dedicating them to retirement income. If we could develop a locked-
in TFSA, I think that would be something that Mr. Pierlot would look forward to
as something positive. I think that our industry would as well, and I think that
would broaden the breadth of retirement options available to Canadians, and I
think that is a good thing.
Senator McInnis: A suggestion for an amendment for the next bill, next
year, Mr. Chair.
The Chair: Do you want to ask a question of the half empty?
Senator McInnis: No slight intended.
Mr. Sanderson: I think the answer is that we would all like the glass
to be full.
The Chair: Mr. Pierlot, you made a point of saying that this is not a
Mr. Pierlot: Yes, I did make that point. I have a very traditional
view of a pension plan in that it pays a pension. The reason that I say that and
put so much emphasis on it is that, in a pension plan such as a defined benefit
or target benefit plan, all the risk of life expectancy at retirement is pooled.
Some people will live to 95 and some to 75, but the average is around 85. When
you retire, you can expect to get a secure retirement income for life, and that
is what people need. If you are in a defined contribution plan or in this
particular plan, you are in the situation where you have to try to manage your
money through retirement. You will probably have to assume that you will outlive
the mortality tables, which means that you will have less retirement income or
run out of money and not have enough to continue. These plans also effectively
expect older people, as they become physically and mentally infirm, to manage
their retirement money when they are often not in the position to be able to do
so. If you think of the old person in the retirement home who has advanced
dementia rebalancing her RRIF portfolio every quarter, you have that image in
your mind and can see that older people who are retired need pensions. One of
the recommendations that we have made to improve this is to allow these plans to
actually fund to target pensions and then pay their members a lifetime pension
so that, when you retire, you can say, ``I will get X dollars a month every
month until I die,'' and that is what retired people need. That is what the CPP
provides. That is what the GIS provides. That is what Old Age Security provides,
and that is what the best defined plans provide.
The Chair: Do you not get something similar to that if you purchase an
annuity with your pot of money at retirement?
Mr. Pierlot: You do, and people can purchase annuities with the pot of
money. Often, that is a good financial choice. There are two problems with that.
Insurance companies will provide annuities, but, if an individual is buying an
annuity, the insurance company has to take into account that one of the reasons
the individual is buying it is because they expect to live longer than the
mortality tables. That is called adverse selection risk, and they have to price
the annuity accordingly. You cannot blame the insurance companies for that. They
cannot sell these things at a loss, but, in a group pension arrangement, if a
group of people are settled to buy an annuity purchase, the rates are lower,
and, in a traditional pension plan, people are not allowed, as Mr. Sanderson has
said, to unlock their money and take it out. They are forced into a pension, and
the adverse selection risk does not arise.
People can purchase an annuity, but they typically do not because they
perceive the cost to be very high and want to keep control of a lump sum of
The Chair: Mr. Sanderson, did you have any comment on that?
Mr. Sanderson: Annuities are a very viable option, from our
perspective. I think that they can be and are priced on a group basis, so that
removes some of the cost issue for individuals who are thinking that they should
buy that at retirement age. I am just thinking back to a time when the federal
government sold annuities in this country, back to 1908.
The Chair: That was before my time.
Mr. Sanderson: I am looking around the table and wondering how many of
you would remember the Glascoe Report from 1962. I have a one-liner from that
report that I would like to add in relation to the government's sale of
annuities, and it is this: ``The only circumstance in which they will be sold in
volume is when they are priced below the current market.''
Yes, annuities tend to be expensive relative to what many people think they
should cost, but there are real risks to those guarantees. OSFI and insurance
companies recognize those risks, and we think that they are an absolutely viable
element of retirement planning for all Canadians.
The Chair: Thank you.
Senator Chaput: A very brief question. In an ideal world, what would
be the best choice for the low-income, the medium-income and the others? What is
the best choice of everything that you have explained today?
Mr. Sanderson: There are so many variables. I hate to make a
generalization, but, given the focus of this bill and Bill C-25 on modest and
middle-income people, I think that the PRPP or some other arrangement that is a
tax-deferred arrangement is really the only game out there. As much as many of
us would appreciate having a defined benefit pension plan, they are largely off
the table. I think that there would be significant risks if we were to
dramatically expand the CPP, so I think that the PRPP is the option of choice
for a great many Canadians. At lower-income levels, a locked-in TFSA, if such a
vehicle were permitted, would be a very appropriate option. At very low-income
levels, as Mr. Pierlot has said, retirement savings is probably not a priority.
If your concern is a roof over your head, clothes on your children and food on
the table, then retirement saving tends to be a low priority.
Mr. Pierlot: It is clear that the lowest-income workers should not
save for retirement. Workers of modest and middle income, that is, people making
$30,000 to $50,000, should probably be doing some retirement saving. They should
probably be looking at a TFSA-style plan first or, as Mr. Sanderson mentioned,
and we basically agree on this point, a tax-paid savings vehicle within the PRPP
that is locked in so that they cannot take the money out. For people making
$50,000 and above it makes more sense to be in a tax deferred plan.
It is true that defined benefit plans are not an option for many people right
now because they are not offered, but as I was saying earlier, if you want that
60 per cent or 70 per cent pension, at today's rates of return you will have to
put away 30 to 35 per cent of your salary every year to have a hope of having
it. However, the tax limits for PRPPs limit you to 18 per cent of income, so how
will you get there? You cannot possibly have that 70 per cent pension in a PRPP,
even the people who are supposed to be saving in tax-deferred accounts.
That is one of the biggest problems with our structure. It says that one
group can save 35 or 40 per cent of their pay in a pension plan and another
group can save only 18 per cent of their income. Why is that?
Senator Finley: My question is a lot more general. You have discussed
a myriad of options and potentials. How many people in the general population
even remotely understand this? I ask that question seriously. I was just talking
with a young fellow outside about high school and college. Are there courses to
prepare people coming out of high school and going to university or college or
into the workforce for this?
You said that people earning $20,000 or $30,000 may as well not save
anything. How many people understand that right from the get-go? Is there a way
that we could remedy some of that?
Mr. Sanderson: As a former teacher I can tell you that it is very
difficult to engage a grade 2 student on mortgage finance. You have to look for
teachable moments. That has become a bit of a buzz word, but there are
initiatives in the school system and there are more that can be undertaken.
Things like the negotiation of a cell phone contract is relevant to a preteen or
How you move from that to the longer term, given that our collective
attention spans tend to be shrinking, is a real challenge, but it is one that we
recognize. Materials are being developed to assist consumers generally, and
young people in particular, to understand the various elements of the financial
system, from banking to car insurance, life insurance and retirement savings. It
is very much a work-in-progress, and I hear your point.
Senator Finley: That concerns me quite a bit. Thank you.
Mr. Pierlot: I can give a very direct answer to that question. They do
not, by and large. I know that from anecdotal evidence, but it is based on a
relatively large sample. Part of my work with pensions has involved giving
seminars to a number of members of pension plans at their workplaces, educating
them about pension and retirement savings. I was hired by an employer to spend a
solid week giving day-long sessions to a large number of shop floor employees —
in one case it was prison guards — explaining their pension to them and
answering their questions.
Typically out of a group of 20 or 25 people there might be one who understood
right away what I was saying, the smart one in the group who had done the
research and was asking all the right questions. The rest had absolutely no
idea. Everything I was telling them was new.
I think it is fair to say that people do not understand this stuff.
Senator Finley: Most people are in the workforce by the time they are
in their early twenties. Most people who work with pensions and savings plans
would say that that is when you have to start making decisions. My concern is
that there does not seem to be a mechanism anywhere in our society, whether it
is education, government or anything else, that at least prepares the interest.
Most kids have computers of some description. There are lots of computer
simulation models on this, but you have to know where that is and why you would
want to do it as a lifestyle choice.
We teach kids so many different forms of lifestyles now, not all of which are
perhaps appropriate. There seems to be a huge gap in the preparation of young
people transitioning into being adults and looking forward. I know that your
industry does a lot in terms of materials, but do you see some way that the
focus could be more centralized or concentrated, perhaps through governments
spending more time doing this? The answer may be more money.
Mr. Sanderson: There is a financial literacy initiative and the notion
of a literacy champion floating around, which is positive. However, we have to
recognize that we will not get everyone to the level of literacy in financial
matters that we might hope for, and that is where things like smart default
options that will assist people to get to the right spot, perhaps in spite of
themselves, are important. That is a key feature of the PRPP in terms of
automatic enrolment, again a chance of opt-out; automatic investment selection
defaults; automatic increases in contribution levels so that you do not just set
it and forget it. Putting 2 per cent of your pay into the plan may get you
started but, as Mr. Pierlot has indicated, that is not enough to get the job
Mr. Pierlot: I agree with Mr. Sanderson that intelligent default
options are needed. The best pension savings arrangements are the ones where the
members do not have to think about it. Those are the ones that operate most cost
effectively and have the highest rates of return. If you are a surgeon, you
should not be managing your pension, and if you are a pension manager, you
should not be performing surgery on yourself. There is something in economics
called comparative advantage. You should do what you are good at, and retirement
saving is not something most people are good at. They should have an expert do
it, an expert that is paid to act in their interest and has no conflict of
interest. The best pension plans work that way and they deliver the best
The Chair: Thank you very much, Mr. Pierlot and Mr. Sanderson. We have
gone over our time, but yours was a subject of great interest to this committee.
Thank you for taking the time to explain it to us.
The Chair: We are going to continue with our study of the
subject-matter of Bill C-45, A second Act to implement certain provisions of the
budget tabled in Parliament on March 29, 2012 and other measures.
We will now go to Division 23 in Part 4, entitled Public Sector Pensions, on
page 353 of the bill.
We are pleased to welcome Mr. Chris Aylward, National Executive Vice
President of the Public Service Alliance of Canada; Ms. Rosemary Pitfield,
Director of Communications, and Ms. Sayward Montague, Pension Information and
Research Officer, of the National Association of Federal Retirees; by
videoconference from Toronto, Mr. William Robson, President and Chief Executive
Officer of the C.D. Howe Institute; and by videoconference from Hamilton, Mr.
Bill Tufts, Founder and Executive Director, and Mr. Mark Mullins, Director, of
Fair Pensions for All. Given the number of presentations and the fact that we
have to finish fairly well on time, I would ask all of you to keep your opening
statements fairly brief, leaving ample time for discussion.
We will begin with Mr. Aylward.
Chris Aylward, National Executive Vice President, Executive Office, Public
Service Alliance of Canada: Good afternoon, senators, and thank you for
inviting the Public Service Alliance of Canada to speak to you today. The PSAC
is the largest federal public sector union representing more than 172,000 people
from coast to coast to coast and from embassies and consulates abroad.
The majority of PSAC members work for the federal government and its
agencies. The PSAC has major concerns with the latest budget implementation
bill, Bill C-45. Many of these proposed legislative changes will have a drastic
impact on Canadians. They should not be rushed through Parliament in one large
bill that does not allow for careful consideration, public scrutiny and debate.
Today, I will comment on the proposed changes to the retirement age in the
federal public sector pension plans.
Bill C-45 will increase the normal retirement age from 60 to 65 for new hires
beginning in 2013. This change undermines younger generations who make up the
majority of new hires in the federal public service. The increase in the
retirement age will generate a two-tier system. It will create inequities
between young and older workers in the public service, forcing younger workers
to retire at an older age. PSAC's position is that the Public Service Pension
Plan is sustainable, and there is no reason to penalize young workers.
Since 2000, employee and employer contributions have been invested by the
Public Service Pension Investment Board. Pension funds are managed according to
actuarial projections that spread the risk across generations and over a very
long time horizon. Naturally, over that amount of time, there will be projected
deficits and surpluses. Nevertheless, according to the latest actuarial
evaluation of the federal Public Service Pension Plan tabled in June this year,
the plan remains adequately funded. It is important to remember too that federal
employees pay a significant amount for their pension benefits through direct
contributions every year that they work. Their share of pension contributions
has been rising steadily and will be increasing to 50 per cent. Employer
contributions to the pension plan are factored into the cost of the compensation
package when the employer comes to the bargaining table. The pension plan is a
worthwhile investment toward committed and professional employees, who provide
high quality services to Canadians.
Members of this committee should also be aware that the Canada Pension Plan
and Quebec Pension Plan payments are integrated with federal public service
pensions. The average annual pension received by retired federal public sector
workers in 2011 was $25,991. The PSAC believes the government should focus on
strengthening pensions for all Canadians, instead of weakening pension plans and
retirement security for those dedicated to public service and generations to
The PSAC has other concerns about Bill C-45 that echo much of the criticism
being expressed by environmental, scientific and Aboriginal groups and
individual Canadians. We believe Canadians are not well served by omnibus bills.
Bill C-45 should be broken down into individual pieces of proposed legislation
so that parliamentarians and all Canadians have ample opportunity to study and
understand the consequences of the proposed changes.
Before I close, I will take a few moments to iterate our concern about
significant changes to programs and services that affect the livelihoods,
environment and safety of Canadians. These changes are being made without
transparency and without hearing from those who depend on the service. Search
and Rescue and Coast Guard stations are being shut down despite the pleas to
reconsider coming from coastal communities. Veterans Affairs district offices
are being closed across the country, including the one and only office in Prince
Edward Island. Caseloads are almost doubling, despite the desperate situations
faced by our veterans. With cuts to the budget of the Department of Fisheries
and Oceans, fish habitat staff are being cut. Meanwhile, the recently issued
Cohen Commission of Inquiry Report into the Decline of Salmon in the Fraser
River reaffirmed the importance of restoring the Department of Fisheries mandate
and resources to protect fish habitat. Just this week, the Canadian Centre for
Policy Alternatives released a report on the impact of federal government job
cuts in Atlantic Canada. The report estimates that approximately 4,400 direct
full-time federal jobs will be lost in the Atlantic region by 2014 and 2015.
That represents at least $300 million in lost salaries and wages. The report
also estimates that several hundred more jobs will be lost in federal crown
The Chair: Mr. Aylward, do you have a written text that you could
provide to us? We have designated this time for pensions, so if you could give
us that written report, I can assure you that everyone will have a chance to
Mr. Aylward: We can do that.
The Chair: Did you have any final comment with respect to pensions?
Mr. Aylward: That was it.
The Chair: Thank you, and I apologize for having to do that.
William B.P. Robson, President and Chief Executive Officer, C.D. Howe
Institute: Thank you very much, senators, for your time and for the
invitation to appear today. My take on the situation of the federal employee
pension plans is a little different from what you have just heard. They are
unusual pension plans in that they make promises of benefits that have no
flexibility in respect to the funded status of the plan. In that respect, they
are certainly different from defined contribution pension plans. They are also
different from pension plans such as the Ontario Teachers' Pension Plan and many
of the British Columbia and broader public sector pension plans elsewhere in the
country where there is some provision for benefits to have flexibility in the
event that there is not enough funding in the plan to pay for them. That matters
a lot in this particular case because it makes the promises these plans pay
equivalent to any other kind of federal government debt. As interest rates have
gone down, the value of that promise to the employees and the corresponding
obligation that it imposes on taxpayers has gone up dramatically over time.
There are people who are not enthusiastic about this way of thinking about
federal pensions. They do not think that it is appropriate to look at the
interests rates actually out there. They think that it is more sensible to look
at assumed rates of return. Against that argument, I would make three points.
One of them is that these plans are mostly unfunded. It is true, as the previous
speaker said, that there has been some funding going into these plans since the
year 2000, but there was a large legacy of unfunded liability, part of the
federal debt, at that point. The contributions that have been going in since
that time have not been sufficient to fund the plans adequately. There is a very
large unfunded liability there that is like any other federal government
obligation, and I think the right way of thinking about the value of that is to
look at the yields on other federal government debt.
Flip it around and ask: Suppose someone who did not work for the federal
government wanted to put aside the same kind of nest egg, guaranteed by the
taxpayer and indexed to inflation, what would they buy? They would buy federal
government real return bonds. That is the instrument they would buy. A taxpayer
could say, ``There is an obligation out there that I will someday have to pay
taxes to cover. How would I hedge against that?'' What would that person invest
in? What would they set aside as a nest egg to cover the obligation out there?
They would buy real return bonds.
When I look at the federal government's obligations for pensions, I do not
think that these assumed rates of return that formed the basis of the previous
claim that these plans are adequately funded makes any sense at all. There are
no assets in the plan to earn a return, so how could you earn a return on an
asset that does not exist? For that reason, I think that it is appropriate for
the federal government to value these plans not according to assumed rates of
return but according to the interest rates on the rest of their debt. When you
do that, the total unfunded obligation is far larger than what is shown in the
public accounts. It is more than $100 billion larger.
The relevance of that to the provisions before the committee is that,
although the contribution rate is going to be rising under this legislation, it
is not going to be rising anything like enough because the calculation of how
much the contributions should be is likewise based on an assumption about rates
of return that has no basis in economic reality.
My concern is twofold. First, the contribution rates are not going to be
rising enough to actually cover the cost of the benefits being earned under
these plans because the cost of those benefits is understated by the federal
Second, the existing unfunded liability that is out there continues to be
entirely borne by taxpayers. The risk of changes of its value is borne entirely
My concern about this legislation is that it does not go far enough. I do not
understand why we would grandfather existing federal employees when it comes to
changes in the retirement age. That is not what is happening to most Canadians
who are affected by the changes to OAS. We are all living longer. We all need to
save more in order to finance our pensions. I do not see why there should be
exceptions in this case.
A more fundamental rethink of this plan would be appropriate beyond some to
have the parameters around the retirement age. I will close by making the same
point that I started out on: There are other public sector plans in this country
that do have benefit flexibility. If the plan is not adequately funded, they do
things like suspend indexation or cut back on some of their indexation. In the
province of New Brunswick they are reacting in a farsighted way to the pressure
on their plans, both public and private sector, by allowing conversion of
existing defined benefit plans to shared risk plans. I think that is very
appropriate. I think that the federal government should go in the same
I am not opposed to the changes made in this legislation, but I do not think
that they go far enough. I think that we will be looking at these plans again in
very short order because their costs are continuing to mount, and what is before
the Senate today is not adequate to deal with that problem.
The Chair: Thank you very much. I will now go to Ms. Pitfield from the
National Association of Federal Retirees. Do you speak for you and Ms. Montague?
Rosemary Pitfield, Director of Communications, National Association of
Federal Retirees: I will be opening, and Ms. Montague will be following. I
will keep my comments very brief in the interests of time. You do have our
speaking notes. The only comment that I would like to make is that I believe we
are all in agreement that we need to find solutions and that the retirement
situation in Canada is not healthy and is not looking healthy for people in the
future. I think we can agree on that.
What I think that we disagree on are the tactics being used. We believe that
it is a deliberate attempt, by focusing on those who have defined benefit
pensions, to remove the focus from the real issue, which is that most Canadians
do not have adequate retirement savings programs. We need to look for solutions.
What we are proposing is that we all come together — those who are opposed and
those who are for the solutions — and try to figure out what is right for not
only individual groups but also for all Canadians.
At this time, I pass it over to Ms. Montague and ask her to speak
specifically to the reforms.
Sayward Montague, Pension Information and Research Officer, National
Association of Federal Retirees: Thank you for the opportunity, senators, to
present today. FSNA is very concerned that the government's deficit reduction
strategy is being achieved at the expense of its employees. In the 2012 federal
budget, the government announced $5.2 billion a year in spending cuts, largely
in the form of job and program cuts. Public service pension reforms will account
for over $2.6 billion in savings in the coming five years and $700 million a
year after that, savings separate from the original $5.2 billion in savings
announced in the 2012 federal budget. Treasury Board President Tony Clement
confirmed this with his comment, ``By far the lion's share of taxpayer savings
from that $2.6 billion over five years obviously occurs in the public sector
pension changes because we have 420,000 public sector employees, and there [are]
only 308 members of Parliament.''
In order to achieve these savings, the government has announced that they
will increase pension contribution rates. Pension contribution rates have been
increasing regularly since 2006 to achieve a 40/60 cost sharing ratio between
the employees and the employer. This has not yet been achieved. As of 2011, the
ratio was 35/65. However, Bill C-45 proposes to accelerate and exceed the 40/60
target by taking the cost sharing ratio to 50/50.
The federal government announced that these increases would begin in January
2013; yet the public service, Canadian Forces and RCMP pension plan members are
still in the dark with regard to the timing and full schedule of pension
contribution rate increases. At a time when we are seeing increased costs of
living, uncertainty with regard to take-home pay is difficult for any employee
in any sector. The federal government needs to be respectful of its employees by
consulting them fully and providing clear and timely communication. Finally, I
would like to reiterate what Ms. Pitfield said. Rather than continue to attack a
small percentage of the population and look to reduce everyone's pension to the
lowest common denominator, FSNA would like to urge all stakeholders to come
together and have a conversation about the real issues, that is to identify and
refine the solution that would ensure that all Canadians have retirement income
security. Some of the discussion in the presentations from Mr. Pierlot were most
encouraging. That is the kind of conversation that we would welcome.
Ms. Pitfield: And encourage.
Ms. Montague: Thank you.
The Chair: Thank you. We do have your submissions. We will have those
translated and circulated to everyone on the committee. We appreciate you being
here. Next I will go to Mr. Mullins. Will you speak on behalf of both yourself
and Mr. Tufts, or do I have it reversed?
Mark Mullins, Director, Fair Pensions for All: I will speak on behalf
of both of us, and Mr. Tufts will be answering questions afterwards.
The Chair: You are with the Fair Pensions for All group.
Mr. Mullins: Yes. Thank you. Honourable senators, the mission of Fair
Pensions for All is to promote a pension system for Canadians that is both
affordable and fair to all working Canadians and taxpayers. We are here today to
comment on the public sector pension plans and to propose changes to those plans
and the effect on Canadian non- government workers and taxpayers.
The government is now taking bold initiatives through Bill C-45 to begin
fixing the pension inequalities in Canada. We think it is a good start, but much
more work is needed.
Pensions are fundamentally an issue of fairness. According to Statistics
Canada in May 2011, 57 per cent of the Canadian working population did not have
any pension whatsoever. Those folks are almost exclusively concentrated in the
Of the other 43 per cent, those who have pensions, half are in the private
sector and have pensions of assets totalling about $338 billion, and the
remaining half with pensions are government workers whose pension assets total
about $840 billion, or about three times the amount on a per capita basis that
exists in the private sector.
You can see that we have become a nation of pension haves and have-nots that
is split along the lines of those who work in the government sector and those
who do not. RRSPs are what 57 per cent of working Canadians rely on, but the
contributions to RRSPs have not kept up over the last decade. Contributions have
increased about 16 per cent, which does not keep up with inflation. On the other
hand, contributions made to public sector pensions have gone up about 200 per
The public sector plans, even with the huge increases, are still estimated to
be short about $300 billion on the promises they have made for their current
employees, meaning that taxpayers are on the hook for a huge shortfall.
The retirement age is also an issue. Many public sector employees begin much
earlier retirement than the rest of working Canadians. In 2011, 21 per cent of
those retiring from the federal civil service were 55 years of age or less, and
by age 60, 59 per cent of the workforce had retired. This contrasts to the
recent move by the government to increase the Old Age Security for the rest of
Canadians to age 67. At that time, the Prime Minister stated, ``aging of the
population and shrinking of the labour force is a serious economic challenge for
Canada, as it is for other countries.'' We agree with this statement but we ask:
Why is it only a problem in the private sector? Why is it not a problem for the
public sector as well?
The private sector is switching from defined benefit to defined contribution
plans. Notably over the past year, many private sector companies like Air
Canada, General Motors, the Royal Bank and ArcelorMittal have all moved to
defined contribution plans, most of them moving their existing employees as
well. Simply starting off new employees in those plans was not sufficient, and
we believe it will not be a sufficient fix for the public sector plans, either.
There is also an issue of fairness between younger and older Canadians. It is
estimated that in some pension plans, two thirds of the contributions made by
younger workers go to cover funding shortfalls for retired or soon-to-be-
retired workers, leaving the availability of pensions for themselves in doubt.
Also, the eventual need of employers, both private and public, to limit
employment costs from spiraling out of control often translates into layoffs and
hiring freezes that disproportionately fall on the youngest workers.
There are four considerations we wish to propose for changes related to
public sector pensions. First, the government is proposing changes to its
pension such that annual contributions into the plans will be 25 per cent of
salary. However, C.D. Howe has pointed out that a contribution of 40 to 50 per
cent of salary is actually needed. The government should ensure that
contributions really do cover the true cost of future obligations, shared on a
true 50/50 basis.
Second, the government should begin placing all new employees into a defined
contribution plan or, at a minimum, a hybrid plan that takes much of the onus
and risk off of taxpayers now and into the future.
Third, the government should reduce the incidence of early retirement and in
the process make sure that retirement age is the retirement age and that it is
not overridden by an age plus years of service concept like it is today.
Finally, changes must be made for existing employees as well. The current
shortfall in the federal civil service pension that is in excess of $200 billion
is due to provisions made to current employees, so these employees must be part
of the solution.
In conclusion, consideration of these solutions will help to address the
federal deficit, correct unfairness that exists between public and private
sector lifetime earnings and address issues of intergenerational fairness.
The Chair: Thank you very much. Could you tell me, Mr. Mullins, did
you take into consideration the proposed change in Bill C-45 to increase the age
when a pension can be drawn from 60 to 65?
Mr. Mullins: We have taken that into account, but we often feel it is
trumped by the combination of age and years of service, and we do not think that
should be the case.
The Chair: You made that point at the very end. Thank you for that.
Thank you for your comments.
Senator McInnis: Thank you. I have a question for Mr. Aylward.
I understood you to say that the pension fund for the public sector was in
very good shape. You heard from the C.D. Howe Institute that the plans are
mostly unfunded, that contributions are simply not sufficient. You also heard
that the public pensions are rich and the private sector is poor.
How can you sit there and make the comment you just made about the pensions
being well funded?
Mr. Aylward: We can talk about biased math or about what the chief
actuary officer has said about the Federal Public Service pension plan. That
officer stated that the public service pension plan is in good shape and is
If you look at what was just stated concerning the $200 billion, that is
called fear of value assessment. How you arrive at that figure is that if the
government were to cease operations today, the same way private corporations
would go bankrupt, we would have a whole lot more to worry about than our
Senator McInnis: Well, we will not have a debate here between our
witnesses, but I am sure they can counter what you are saying.
I want to ask you about your concern regarding the retirement age going from
60 to 65 and the inequities of pitting young against old in the public sector. I
am having trouble with that. How are you squaring that? If a person commences a
careen in 2013, are you telling me it will be a problem for them to retire at
the age 65 as opposed to 60? Is that realistic?
Mr. Aylward: They are now going to have to retire at an older age.
They will be sitting next to someone who possibly started work in 2012, may be a
year or two younger, and they will be on two different pension streams now. That
is the inequity.
Senator McInnis: Change must commence at some time.
Mr. Aylward: By creating inequities and unfairness?
Senator McInnis: I will just leave that alone. Do you feel that
governments should be employers, or should they be there to provide services?
Should they actually become employers as opposed to the private sector doing
things? You suggest 4,000 jobs were lost in Atlantic Canada. I am from Atlantic
Canada, and I have heard nothing but positive things about this because people
are of the belief the government is too large.
How do you feel about that? I understand your position. I know where your
paycheque comes from, but really, do you not think we should have a streamlined
government, as lean as it can possibly be?
Mr. Aylward: Let us talk about the services you just mentioned. I am
not sure who you have been speaking to from the Atlantic region. I am also from
the Atlantic region; I am a proud Newfoundland and Labradorian. I have spoken to
people in Prince Edward Island, in Montague specifically, where Service Canada
is shutting down. That community will be devastated by the job losses. The
services being eliminated by this government, again across the country but
especially in small town Canada, will devastate communities. They will devastate
the economies in those communities. When we talk about people having to put away
— bringing it back to pensions for a second — for pensions to be able to retire
with some dignity and respect in their retirement age, when they are losing
their business because of federal job losses within those communities, that is
also a concern.
I am going to Sydney, Nova Scotia tomorrow because Veterans Affairs is
closing the Sydney office. The veterans that walk into that office to get
service will be told to go to Halifax or to go home and try to navigate online
for the same service they are receiving today.
With respect to should the government be employers, they should be providing
quality public service that Canadians have come to rely on.
Senator McInnis: Services. I will be more respectful of the witness.
Senator Campbell: Thank you for coming today. I want to try and rise
above the political end here, but it is difficult because, like Senator McInnis,
I have difficulty putting these two ends together where on one end it is fully
funded. I understand the issue of if the government collapsed tomorrow there
would be a bigger problem.
Mr. Robson, you say that there is in fact no funding there, that it is on the
books but there is no funding. How do you put that together with what we have
heard from Mr. Aylward?
Mr. Robson: He said that if the government were to cease operating
there would not be money to pay the pensions but that we would have a larger
problem. I agree we would have a larger problem, but I also agree we would not
have the money to pay the pensions. The reason for that is because up until the
year 2000 there was no funding in any of these plans. As I said earlier, since
the year 2000, there have been contributions going in for many of the plans, the
ones that we are mainly focusing on here, although not, I will add, MPs' plan.
The public service plan, the RCMP plan and the Canadian Forces plan have had
contributions going in. The difficulty is, as everyone who is trying to save
outside one of these plans for retirement knows, rates of return are low so the
cost of buying a dollar of income in the future has been going up. The
contributions that have been going into these plans have not been sufficient to
It is very difficult for me to listen to anyone say that the plans are
properly funded. If you look in the Canadian public accounts — and the Canadian
government's financial reports are pretty good in laying this stuff out — the
unfunded obligations, part of the net federal debt, there in plain sight, not
hard to find, is $150 billion. That is the amount which the recorded obligations
exceed the assets in the plan. The assets are a little more than $60 billion,
and then there is this much larger obligation. The assets are nowhere close
enough to cover even the obligations that are shown in the public accounts.
My objection to the way that the federal government's financial reporting
works is that they use this high discount rate in saying what those future
dollars of benefits actually should represent as costing in the here and now.
The rate of return they are using is quite a bit higher than the rate that
actually exists on federal government debt.
In a funded pension plan, there is a big argument among actuaries and others
about what kind of rates of return are reasonable to assume because it may be
that on certain assets you can earn higher rates of return than you can on
government debt, but when a plan is unfunded, when it is simply an obligation
that the government has taken on without any asset to back it, it seems to be
very straightforward to say the discount rate you should use, the interest rate
you should use is the one you see out there in the market for what government
debt is yielding right now. When you do that, the unfunded obligation in these
plans is far bigger than the $150 billion odd shown on the federal government's
balance sheet. It is actually more than $270 billion.
I want to quickly make the point about the inequities here. That is a very
large amount of money by any standard. It is large compared to the Canadian
economy and to the number of Canadian taxpayers who will have to bear it. It is
about $31,000 per family of four. It is true that there are difficult pension
circumstances, difficult retirement savings circumstances for people who do not
work for government. They are the ones who will have to underwrite this
obligation. It strikes me as problematic that Canadians who are having trouble
saving for retirement and are not, in most cases, saving enough for retirement
have this liability out there that is actually larger than they think and that
some of the witnesses you are hearing from are denying is there and seem to be
defending the provisions created. I do not think that is fair and I think it is
appropriate to do something about it.
Senator Campbell: Thank you, sir.
The Chair: Could you clarify, Mr. Robson? Does the $150 billion
unfunded liability include parliamentarians' and ex-parliamentarians' pension?
Mr. Robson: Yes, it does. That is the total amount of pension
obligation shown in the federal government's balance sheet for all of its public
Since you ask about the MPs' pension plan, the actuarial report shows that
plan is in pretty good shape. However, there is no funding at all in that plan.
You have heard me already say that I do not think it is appropriate to use a
higher discount rate than what is available on regular government debt in
valuing these things. The MPs' plan being totally unfunded is one where if you
do the adjustment I come up with an unfunded liability for a loan of about $1
billion. When I do the adjustment you just heard, looking at the $150 million
odd on the balance sheet and saying it should be more than $270 million, the
plans we are mainly talking about in this bill are for the public service plan,
the Canadian Forces and RCMP plans, as well as the other federal government
pension plans for judges, MPs and others.
The Chair: Thank you very much.
Senator Buth: Thank you to everyone for being here. Unfortunately, Mr.
Aylward, you have gone beyond the pension side of things. Because of that, I
think I have to challenge you on a couple of things.
The Chair: We only have seven minutes left and we have two other
senators who wish to participate.
Senator Buth: This will be quick. A report from the Canadian Centre
for Policy Alternatives claims that Veterans Affairs will lose 398 jobs in
Atlantic Canada. Interestingly, that is 46 per cent more than the total national
reduction. The report also claims public service will lose 368 jobs. That is
twice the total national reduction. I do not know where they are getting their
numbers from. The report itself admits it does not take into consideration our
reinvestments in the region such as the new pay centre of excellence which will
employ 550 people. Would you like to comment on the inaccuracies?
The Chair: I cut Mr. Alyward off and he did not get a chance to give
his full presentation because of the point that he was on to something that was
not part of this particular session's intended subject matter.
If you would like to send something in writing, that would be fine, but I
have two other senators and four minutes left.
Senator Bellemare: I will try to keep it short. I have a comment. We
have three stakeholders, little time and utterly irreconcilable positions. That
highlights the fact that we have a pretty fundamental equity problem that will
only continue to grow. The bill before us impacts two areas: the retirement age
and the way actual contribution costs are split to bring them more in line with
the private sector system.
The conclusion I have drawn from everything I have heard today is that we
should review our pension system in Canada, as a number of countries have
reviewed theirs. The OECD provides all kinds of examples in that respect because
the positions of the groups cannot be reconciled right now.
The Chair: We lost our colleagues from Toronto. I would like to have
your position on the record, if possible.
Senator Chaput: Just a quick question. As part of the review of the
increase in federal employee contributions, I was wondering whether employees
had had a chance to discuss it with their employers, be they departments or
other government organizations. Were they warned? Were they told about it? Did
they have a chance to respond or did the change come as a surprise to them?
The Chair: Either one of those comments, if you have a short reply, we
would be pleased to hear from you. If you would like to send us a written reply,
we would like to hear that too, but we have about two minutes left.
Ms. Pitfield: We will reply in writing.
The Chair: Thank you kindly.
Mr. Aylward: We will respond in writing as well.
The Chair: Thank you. That would be very helpful. You can send it to
the clerk and she will ensure that everyone on the committee receives a copy of
your written reply. If you would like to add anything else that flows from the
discussion today, we would be pleased to read that as well.
Honourable senators, we have run a wee bit over time and there is another
committee waiting to use this room. I now call this meeting to a conclusion.
Thank you very much.