Common Wealth co-founder Alex Mazer's presentation on the Ontario Retirement Pension Plan and Canada Pension Plan enhancement to SHARE's Toronto Pension and Investment Governance Course on May 6, 2016.
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Implications of Public Pension Enhancement in Canada
1. Implications of public pension enhancement in Canada
Opportunities and challenges for trustees and sponsors
1
May 2016
SHARE Toronto Pension and Investment Governance Course
2. Playing an active role in the provision of retirement security is a
critical opportunity for the labour movement
2
§ Labour unions have a historical track record of fighting for retirement security
and creating/governing pension plans, including some of the world’s best
pension plans
§ In addition to advocating for an expansion of public pensions, the labour
movement has an opportunity to use current political / economic moment to
deepen its role in the provision of pensions
o Providing best-in-class retirement vehicles is an important tool for
unions to attract new members and retain existing ones, adding to value
of union membership at a time of declining union density and
increasing legal and political challenges to trade unionism
o If unions can be successful in creating viable, effective “portable
benefits,” including modern pensions, these can be a critical tool to
help support and organize the self-employed and others in the gig
economy
o An expanded role for government in providing pensions makes sense,
particularly in the private sector. However, labour should avoid ”vacating
the space” of pension provision to government and financial
institutions, as this could undermine the strength of the labour
movement in the long run.
Importance of complementing advocacy for public pensions with a deepening of labour’s direct role
3. Pensions are now on the political and public-policy front burner
3
Legislative and regulatory activity around pensions has reached a level not seen in decades
§ Expert commissions / reviews in BC, Alberta, Ontario,
Nova Scotia, Quebec, and at the federal level
§ Reforms to pension standards legislation in many
provinces (Ontario’s reformwas the most
comprehensive in 20+ years)
§ Fiscally-driven reforms to public sector pensions (e.g.,
contribution caps, benefit reductions, governance
reforms)
§ Ontario proposes OntarioRetirement Pension Plan as
alternative to CPP enhancement
§ Ontario creates asset pooling vehicle (Investment
Management Corporation of Ontario)
§ Introduction of new plan designs and vehicles (e.g.,
Pooled Registered Pension Plan, Quebec Voluntary
Retirement Savings Plan, New Brunswick “shared risk”
plan, target-benefit plans)
§ Increase in Old Age Security eligibility age from65 to
67 (now back to 65)
§ National debate about CPP enhancement and
commitments to expand CPP from all 3 major political
parties, including the current Liberal federal
government
1980s 1990s 2000s Post 2008 crisis
§ Creation of CPP
Investment Board
§ CPP shifts from
pay-as-you-go to
pre-funded
§ Creation of
Ontario Teachers’
Pension Plan
§ Creation of asset
pooling entities
in Alberta
(AIMco), BC
(bcIMC), and at
the federal level
(PSP Investments)
§ Tax reforms to
level playing field
between DB and
other savings
plans
§ Reforms to CPP
ancillary benefits
(disability, child-
rearing, spousal,
early retirement)
§ Old Age Security
“clawback”
introduced
§ “Great Pension
Debate” in early
1980s, including
over 10
government
reports, but little
concrete reform
§ Creation of Tax
Free Savings
Account
§ Jointly
sponsored
pension model
introduced in
Ontario
Sources: Government of Canada; Government of Ontario; pension fund websites; Bruce Little, Fixing the Future: How Canada’s Usually Fractious
Governments Worked Together to Rescue the Canada Pension Plan (2008).
Spotlight on pensions creates an important opportunity for
pro-pension organizations such as labour unions
4. There are two key policy goals underlying the push to enhance
public pensions, including the CPP and the ORPP
4
Encourage
more saving
Encourage
greater efficiency
1
2
Studies show that between 17% and 50% of
Canadians are not on track to maintain their standard
of living in retirement. Mandatory, employer-matched
programs such as the CPP and ORPP can encourage
Canadians to save more.
Well-run pension plans (e.g., the CPP) are well-
documented to be more effective than many
individual savings vehicles, which are prone to high
fees, suboptimal investor behaviour, and ineffective
management of investment and longevity risks. The
ORPP and CPP enhancement would shift more of
Canadians’ retirement savings into vehicles that are
more effective at producing retirement security.
5. A looming retirement security crisis?
5
A significant minority of Canadians are unprepared for retirement
Findings from recent studies on retirement income adequacy
17%
50%
44%
31%
of Canadians not ready for retirement
- McKinsey & Co (2015)
of Canadians not ready for retirement
- Keith Horner, former Finance Canada official (2009)
of current 25-30-year-olds will face a 25%+ drop in replacement rate
- C.D. Howe Institute (2010)
of middle-income earners will face 25%+ drop in replacement rate
in retirement
- Michael Wolfson, University of Ottawa, former Assistant
Chief Statistician at Statistics Canada 2011)
Sources: Keith Horner, “Retirement Saving by Canadian Households,” (2009); McKinsey & Company, “Building on Canada’s Strong Retirement
Readiness,” (2015); Kevin D. Moore, William Robson and Alexandre Laurin, C.D. Howe Institute, “Canada’s Looming Retirement Challenge,”
(2010); Michael C. Wolfson, “Projecting the Adequacy of Canadians’ Retirement Incomes,” (2011).
6. Overview of Canadian retirement assets
6
A fragmented market including high-performing large pools and high-fee retail products
Top 10 public
funds
$1,112B
RRSPs and related
accounts
$959B
DC plans
$53B
Other pension
plans
$541B
~$2.7T in Canadian retirement assets
$ billions
Sources: Statistics Canada; Benefits Canada Top 100 Pension Funds 2015; pension fund annual reports and websites, Canadian Centre for Policy
Alternatives, Investment Funds Institute of Canada.
~7,000 plans
$94B
$114B
$152B
$226B
$269B
$72B
$61B
$22B
$18B
Notes: All figures from top 10 funds from most recent version of fund annual reports. Data on assets in other pension plans, DC plans, and RRSPs and other
accounts derived from 2013 Statistics Canada tables. Calculations do not include non-financial assets such as housing.
~11,000 plans
$84B
47
under
-lying
plans
§ Includes RRSPs,
LIRAs, and RRIFs
§ A large portion of
Canada’s $1.3T
mutual fundmarket
§ Average Canadian
mutual fundfee is
2.1%
§ Overall ETF market
is $95B
7. Seemingly small differences in fees can make a huge difference for a
worker over the long run
7
$-
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
1 5 9 13 17 21 25 29 33 37
Assumptions: Starting salary of $30,000 with average annual salary growth of 3%. Annual contributions into retirement savings of 8% from employee and
8% from employer. 7% gross nominal return per year. Expenses of 2.1% for mutual fund and 0.4% for pension. Does not include potential differences in
investment performance or differences in retirement income due to differences in now longevity and investment risk are managed.
Year
Pension
0.4% fee
Mutual fund
2.1% fee
Difference of over
$437,000
due solely to
higher fees
Pension plan vs. mutual fund case example
8. There are three potential outcomes from the current debate and
policy making process on public pensions
8
1 2 3
ORPP only
Pan-Canadian
CPP enhancement
Hybrid / “flexible
federalism”
§ Ontario introduces
the ORPP starting in
2018
§ No other province
introduces
enhanced public
pensions
§ Provinces and the
federal government
agree to enhance
CPP
§ Ontario does not
proceed with the
ORPP and/or agrees
to fold the ORPP
into the CPP
§ Federal government
creates a framework
to allow provinces to
enhance public
pensions on a
voluntary basis
§ ORPP is
implemented, with
other provinces
possibly introducing
a similar program
9. Scenario 1: Ontario implements the ORPP in 2018
9
§ Government’s policy is broader than just the ORPP; its law would require
all provincially regulated employers to enroll their employees in the
ORPP or a “comparable” pension plan by 2020
§ ORPP is unlikely to affect most DB plans — most have 0.5% accrual rate
and would therefore be considered a “comparable plan” under ORPP
legislation
§ DC plans are more likely to need to adjust, given the minimum
mandatory contribution rate of 8% (4% of which must come from the
employer)
§ For those without comparable plans, sponsors will need to decide
whether to create their own plans, improve existing plans, or allow the
ORPP to apply
10. Identify
opportunities for
improvement
Perform
impact assessment
Ontario’s “pensions 2020” policy as opportunity to expand coverage
10
Three-step process for union sponsors
Gather facts on your
membership & their
retirement arrangements
§ How many have a
pension plan or other
retirement savings
plan?
§ Who is in what kind of
plan?
§ How effective are the
plans?
§ Impact of ORPP on
existing members
§ Impact on bargaining
dynamics and strategy
§ Impact of ORPP on
existing pension /
retirement
arrangements
§ Opportunities could
include:
o Creating a new
plan
o Enhancing /
expanding
existing plans
o Promoting the
ORPP, while
avoiding
”clawbacks” in
bargaining
11. Ten principles underlying good pension plan design
11
1. A singular focus on delivering cost-effective retirement security for members
2. Lifetime approach, with accumulation integrated seamlessly with decumulation
3. Members’ interests first (strong fiduciary duty)
4. Low-cost
5. Simplicity through limited investment choice
6. Passive investment management is almost always better than active management,
except for the most sophisticated institutions
7. Investment philosophy and asset allocation informed by best international examples
and thinking
8. Transparency and benchmarking
9. Governance similar to best public pension plans
10. Plan design optimizes other government benefits and tax efficiency for members
Can help evaluate the effectiveness of existing retirement arrangements
12. Scenario 2: pan-Canadian CPP expansion
12
§ 3 potential options: raise replacement rate, raise Year’s Maximum Pensionable
Earnings (YMPE), or hybrid (see next slide)
§ If CPP expansion is universal (covers all workers, as the current CPP does), it will
affect plans that are integrated with CPP and/or decide to integrate with an
expanded CPP
§ Trustees can be proactive in asking for scenario analysis by actuary or plan
administrator in order to inform decisions and planning around any potential
adjustments to plan design and administration that may be required
§ Three questions to ask to explore impacts of integration:
o How will it affect member benefits? The CPP benefit formula differs from
that of many pension plans.
o How will it affect plan funding? Integration will decrease both assets and
liabilities. The net effect will depend on the plan’s demographics and other
factors.
o How will it affect the plan’s investment strategy? Integration will mean
fewer contributions flowing into the pension fund and could also affect the
plan’s liability profile, which could have an impact on the plan’s approach
to investments.
13. Three options for CPP expansion
13
Current CPP
Current CPP
Current CPP
Current CPP
Status quo Increase replacement rate
Increase YMPE Hybrid (ORPP-like version)
CPP+
CPP+
Replacementrate
Earnings
~$50k
25%
Replacementrate
Earnings
~$90k
25%
CPP+
CPP+
Replacementrate
Earnings
~$50k
40%
Replacementrate
40%
Earnings
~$90k
Illustrative examples
14. ”Stacking” vs “integration”
14
Current CPP
Existing DB
plan
9.2%
6.9%
Current CPP cap
(~$50k)
Contributionrate
Earnings
CPP+ cap
(~$90k)
CPP
Existing DB
plan
9.2%
6.9%
Current CPP cap
(~$50k)
Contributionrate
Earnings
CPP+ cap
(~$90k)
CPP+
11.1%
CPP+
CPP+
“Stacking”
an enhanced
CPP on top
of the
existing plan
“Integration”
of the existing
plan with an
enhanced
CPP
§ Similar overall
contribution
levels
§ Similar overall
benefits
§ Lower
contributions /
benefits from
existing plan
§ Higher overall
contribution
levels
§ Higher overall
benefits
§ No change to
contributions /
benefits from
existing plan
Illustrative example based on ORPP-like CPP enhancement
15. The importance of coordination and collaboration between trustees
and sponsors, while respecting the difference in roles
15
Sponsors need Trustees need
§ Data and analysis related
to their members’
pension arrangements,
and the potential impact
of ORPP/CPP
§ Technical assistance on
issues of pensions in
bargaining and in
shaping the union’s
overall position on
retirement security
§ Help in communicating
pension-related
information to members
§ To understand the
advocacy positions and
broader retirement
income strategies of their
sponsoring organizations
§ To ensure clear
communication and
consultation with
sponsoring organizations
on proposed changes to
plan design as a result of
ORPP/CPP
16. Recap of key points
16
§ The spotlight on pensions creates an important opportunity for labour to
defend and expand its role in providing effective retirement security
§ Expanding access to pensions isn’t just about people saving more; it’s also
about the effectiveness of the retirement vehicle
§ If the ORPP is implemented as expected, it will likely have little effect on DB
plans. But the ORPP does raise a range of questions, opportunities, and risks
for sponsors, including the opportunity to create “comparable plans” either
by starting new plans or expanding/improving existing ones
§ Trustees/sponsors can begin to prepare for potential CPP expansion now by
assessing the impact of different CPP-expansion scenarios on member
benefits, funding, and investments
§ Union sponsors should consider taking a “portfolio” view of their members’
retirement arrangements, gathering basic facts, assessing the effectiveness
of each arrangement, and developing options for improving retirement
security for those who lack a pension plan or are in suboptimal arrangements
17. About Common Wealth
17
Common Wealth is a
specialized advisory firm
dedicated to strengthening
retirement security and
expanding access to good
pensions. We serve pension
plans, unions, governments,
and associations in developing
integrated, innovative solutions
to the investment,
management, regulatory, and
stakeholder challenges
associated with pension
security.
About us
Design, build, and
support innovative
new pension vehicles
and products
What we do
Pension strategy,
regulatory affairs, and
capacity building
Pension plan growth,
consolidation, and
asset pooling
Contact
Alex Mazer
FoundingPartner
amazer@common-wealth.ca
www.common-wealth.ca
@CWpensions