November 29, 2010 Ministry of Finance Retirement Income Security Submission c/o Communications & Corporate Affairs Branch 3rd Floor, Frost Building North 95 Grosvenor Street Toronto, ON M7A 1Z1 Re: Comments on Securing Our Retirement Future: Consulting with Ontarians on Canada s Retirement Income System The Canadian Institute of Actuaries (CIA) is the national organization of the actuarial profession. The CIA establishes the Rules of Professional Conduct, guiding principles and monitoring and discipline processes for qualified actuaries. All members must adhere to the profession s Standards of Practice. The CIA follows its Guiding Principles, including Principle 1 which holds the duty of the profession to the public above the needs of the profession and its members. The CIA also assists the Actuarial Standards Board in developing standards of practice applicable to actuaries working in Canada. Actuaries apply their specialized knowledge in mathematics of finance, statistics and risk theory to problems faced by pension plans, government regulators, financial institutions, social programs and individuals. We believe these skills also make actuaries uniquely qualified to greatly contribute in the sphere of pension reform. The CIA welcomes the opportunity to respond to your document Securing Our Retirement Future: Consulting with Ontarians on Canada s Retirement Income System. We note that several questions were embedded in the document; however, we felt that our responses would be more effective if we grouped them into two major categories. Expansion of the Canada Pension Plan (CPP) Goals and Implications Before any revisions to the CPP are considered, the goals of any such changes should be clearly defined and the implications well understood. Canadians should be clear on what shortfalls in the retirement income system are being addressed. If there are perceived shortcomings with the retirement savings options provided by the private sector, then they should be clearly communicated. If, on the other hand, the proposed changes are attempting to address the fact that Canadians do not take full advantage of current retirement savings opportunities, we encourage policymakers to investigate why this is the case. It may well be that many cohorts of Canadians have other priorities (such as paying down mortgages), in which case there may be no problem to solve. Document 210093 1
We believe the private system has several advantages and can function effectively. We would prefer to see several issues with the private system addressed first, such as the asymmetry in the treatment of pension surplus or the complexity of conflicting provincial regulations, to name a couple. Assuming that a CPP expansion is still the desired approach, we would like to offer comments on how this should be done. General Principles Whatever changes are decided upon, we believe it is important to maintain intergenerational equity. If benefits are expanded, they should apply for future employment only to avoid a windfall gain by any benefit recipients. In addition, expanded benefits should be fully funded through future contributions which are commensurate with the additional benefits being provided. We acknowledge that this approach may take more than 30 years to come fully into effect, but we maintain that this is the most equitable approach. Changes to the CPP should be viewed as a long-term solution, not a quick fix. We also believe that any reforms to the CPP should target the proper stakeholders. We believe that lower-income Canadians are already adequately covered when Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) are taken into account. At the other end of the scale, we believe that high-income Canadians have adequate means to prepare for retirement without additional government assistance. Therefore, any reforms should generally target middle-income Canadians. Any expansion which enhances benefits for other groups will result in unnecessary economic costs. Evaluation of Alternatives A number of proposals to expand the CPP have been presented. These proposals include a number of alternatives, the most popular of which involve increasing the Year s Maximum Pensionable Earnings (YMPE), increasing the benefit level as a percentage of covered earnings from the present 25%, or both. We recommend that the potential outcome of any proposal be examined carefully, as the easiest solution may not necessarily be the best solution for the majority of Canadians. Given our position that any reform should target middle-income Canadians, the most effective way to do so is to increase the YMPE. An increase to the YMPE by a modest factor would be reasonable. Any expansion beyond that may be unnecessary. We believe that if the CPP is to be expanded, the expansion should be modest for two reasons: The required level of retirement income varies significantly by individual depending on their personal circumstances (factors such as marital status, whether they own a home, whether they are supporting children or parents, etc.). Consequently, the CPP in combination with OAS should provide a basic level of retirement income. Individuals can supplement their retirement income through other means as appropriate, based on their particular circumstances. An excessive expansion of the CPP would in essence be forcing some Canadians to save more than they actually need in retirement. Further, it is reasonable to expect Canadians to bear some personal responsibility for funding their retirement. 2
Any increase in payroll taxes will likely have some negative economic impact in terms of labour costs and employment levels. The impact of any CPP reforms on the GIS needs to be carefully analyzed and explained. Additional contributions from an expanded CPP may be an unwelcome (or even unbearable) extra expense to lowincome earners. For these reasons, we do not recommend increasing the benefit percentage from the current 25%. It may be possible to minimize the impact of a benefit percentage increase on lowerincome Canadians by having it apply only above a certain earnings level (e.g., 50% or 75% of the YMPE); however, this might make the plan a bit too complex to understand. The optimal solution may be to implement a separate program, with its own contribution rates and a separate fund, especially if the added benefits require a lower contribution rate. The CIA would very much welcome the opportunity to provide advice on any option considered. Residual Impacts An expansion of the CPP will have a residual impact in a number of areas; specifically, existing private sector plans, and the tax treatment of both CPP contributions and RPP/RRSP contributions: Private Sector Plans: An expansion of the CPP would benefit the majority of Canadians in the target range who do not have a workplace pension. However, an expanded CPP would be of little or no benefit for the minority of Canadians in the target range that already have adequate pension coverage from employer pension plans. There is also the possibility that employers may decide to reduce the benefits being accrued or the contributions being made to their employment pension plans if the CPP were expanded. In some cases, employers could decide to terminate their pension plans entirely. Consideration may be given to an opting-out provision for employers, tied to pension adjustment mechanisms. However, we would advise caution with this approach as it would create an administrative burden and may still leave members of the target group without adequate coverage. Opting-out also introduces anti-selection as another potential issue to be considered. More mature workforces may prefer to fully participate in an expanded CPP, whereas a younger workforce may not see the benefit in doing so. The pros and cons of an opting-out approach need to be well understood, including whether the benefits provided by the substitute plan should be locked in both before and after retirement. Tax Treatment of CPP Contributions: Since a new CPP tier may end up replacing current retirement savings for many workers, consideration should be given to restructuring the tax treatment of CPP contributions in the future as a tax deduction as opposed to a tax credit. RPP/RRSP Contribution Limits: The impact of CPP expansion on existing registered pension plan (RPP)/registered retirement savings plan (RRSP) benefit and contribution limits would need to be clarified (i.e., will the enhanced CPP result in lowering of existing contribution limits?). RPP/RRSP programs remain an important element in the overall retirement income system. A modest expansion of the CPP may imply that adjustments to the existing tax limits are not required. 3
Other Issues We also wish to offer comments on a couple of other issues: Transitional Considerations: Thought should be given to a short transition period (e.g., up to five years) for Canadians to adjust to new contribution rates, as long as there is a corresponding transition to new benefit levels. The alternative, an immediate increase in contributions and benefit levels for prospective employment only, would require sufficient notice (e.g., 18 to 24 months) for employees and employers to prepare for contribution increases and for employers to implement any necessary changes to benefit programs or payroll systems. Single Investment Fund: On the issue of whether a single fund for the expanded CPP is appropriate, we have several comments. We support the notion of any investment management being done by an institution at complete arm s length from the government, with an independent board, as is currently the practice with the CPP Investment Board. This principle should apply regardless of whether a single fund or multiple funds are used. We do offer one caution if further subdivision of funds at the provincial level is contemplated. Economies of scale could be lost, and it would create a sense of inequity if different provinces had different contribution rates and benefit entitlements. The treatment of interprovincial worker mobility would become quite complicated. Other Design Considerations: In discussions on expanding CPP coverage, we encourage policymakers to not lose sight of other facets of the operation and design of the CPP, including whether any expansion of the current CPP ought to be confined to retirement benefits only or applied to the full range of ancillary benefits. Some form of risk-sharing (such as indexation tied to the financial health of the plan) should be considered for any expanded benefits. Diversity Should be Maintained We believe that a diverse range of retirement savings programs (both public and private) are in the best interests of Canadians and their employers. Although there are issues within the private sector that need to be addressed particularly the shift from defined benefit to defined contribution plans we still believe there are solutions that can and should be pursued. We do not feel that one single solution is necessary or desirable. Pension Innovation One overriding theme we would like to see followed is that any retirement income system operates in the best interests of its members. Good governance standards which may include boards of trustees, fee guidelines and effective member communication are essential. Governance issues should be addressed, including whether members should be represented on the governing body. We would like to offer comments in a few specific areas: Asset Pooling: We believe that there are opportunities to generate efficiencies and reduce costs by allowing unrelated employers to join in a common plan; specifically, the pooling of assets will generate economies of scale and allow for more diverse investment opportunities. Whereas these 4
structures are currently allowed in unionized situations, we see no reason why this opportunity cannot be extended to other employers and self-employed individuals. The CIA supports the development of multi-employer asset pools (MEAPs), which could be used as the investment vehicle for both defined benefit and defined contribution plans. The extension of target benefit plans (TBPs) to non-unionized and single-employer arrangements should also be allowed, provided that members have appropriate representation on the governing body. The current rule that only members represented by a bargaining agent can participate in a TBP reduces the effective use of this innovative plan design and unnecessarily complicates the situation where employers have both unionized and non-unionized staff. The tax treatment of TBPs will need to be clarified and may depend on the nature of the TBPs that might be created. The CIA would welcome the opportunity to provide guidance to the tax authorities in this regard. Auto enrollment: Auto-enrollment options within employer-sponsored plans have been shown to be effective in terms of increasing member participation. We encourage investigation of this feature. Financial Education: Canadians need to better understand the various retirement savings options available to them, how to properly diversify, and how to manage their income when it is time to retire. We hear many discussions about income replacement ratios, when in fact there is not one solution for everyone. Individuals should ideally develop an income replacement ratio which is most suitable for their circumstances. The CIA would be pleased to play a greater role in any educational efforts that are contemplated. In particular, we believe we can add value by analyzing the various options under consideration, and assisting with any issues surrounding implementation. We also support greater disclosure of fees for investment management. In that way, consumers would be able to make better informed choices between providers of investment services. Role of Private Financial Institutions: We believe that private financial institutions have an important role to play in the retirement savings world, either through the provision of defined contribution plans and group RRSPs, or simply through administrative-services-only arrangements. This may be an efficient way for smaller plans to have easy access to investment management expertise. The concept underlying the Québec Simplified Pension Plan is worthy of study in this regard. Conclusion The Canadian Institute of Actuaries hopes its comments herein will be of value. We thank you for offering us the opportunity to respond. Respectfully submitted, Micheline Dionne, FCIA President 5