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Pension Reform in Canada:Pension Reform in Canada:Implications for DC Plans
William RobsonPresident and CEOC.D. Howe InstituteC.D. Howe Institute
Presentation to the Benefits Canada14th Annual DC Plan Summit
Banff: 14 February 2012
xxOverview
Environmenti Economics
Investment returns Implications for retirement savers
Canada’s pension policy landscape OAS &GIS CPP & CPP Tax-prepaid vs tax-deferred saving Defined-benefit and target-benefit plansDefined benefit and target benefit plans
Defined-contribution plansDC l t R d D fi ld lik t DC plans get Rodney Dangerfield-like respect
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xxDC plans get no respect
Defined-contribution plans
Pilloried as bad alternative to DB
Underestimated as pillar of retirement plans for millions of Canadiansfor millions of Canadians
Hampered by tax and regulatory constraints
U d i d b li l Undermined by policy neglect
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xxThe economic environment
I t t t d d i thInvestment returns depend on economic growth…
Outlook for growth over next generation is subduedg g
Constrained by demography – workforce growth could add 0.4% annually
Supported by investment – growth in built capital could add 0.9% annually
Dependent on productivity – more output per worker and unit of capital ld dd llcould add 0.7% annually
Total real growth likely to be around 2.0% annually
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The economic environment
… and valuations
Outlook for valuations over next generation is fraught
Financial cycles since mid-20th century boosted financial asset prices faster than real wealth
Even after 2008 crash financial assets look overvalued relative to realEven after 2008 crash, financial assets look overvalued relative to real stocks of human and physical capital
Valuation changes will not help – and especially outside Canada may hurt investment returns– investment returns
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xxImplications for all retirement savers – including DC plans
Retirement income depends on returns…
Compound interest will be no miracle for average investor
Growth will support 2% real returns with downside risk from devaluations All investors will incur necessary and unnecessary costs People should plan on basis of net return close to zero
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xxImplications for all retirement savers – including DC plans
… work/retirement time … … wo / e e e e …
Most people’s current expected work/retirement split is unrealistic
A person starting out can expect to start saving at age 30 and live to age 90
Retiring at 60 means equal periods accumulating and decumulating wealthe g e s equ pe ods ccu u g d decu u g we
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xxImplications for all retirement savers – including DC plans
… and saving… d s v g
Comfortable retirement planning and retirement needs a new modelComfortable retirement planning and retirement needs a new model
Same consumption in equal accumulation and decumulation phasesSame consumption in equal accumulation and decumulation phases requires 50% saving rate
Consumption during decumulation can be lower than during accumulation
Even so, people should retire later
Even so, people should save more
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Canada’s Retirement Policy Landscape
Pillar 2:Pillar 1: Pillar 3:CPP/QPPOAS & GIS Voluntary & Contractual
Tax-DeferredTax-Prepaid (TFSAs)
RRSPs & Related Registered Pension PlansRRSPs & Related Registered Pension Plans
Defined-Benefit Defined-ContributionTarget-Benefit
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xxDC plans “better looked over than overlooked”
A more Mae West-like take on DC
Not so bad
Matter to millions of Canadians’ plansMatter to millions of Canadians plans
Can be better
Can be even better with policy support Can be even better with policy support
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xxImplications for DC plans
Low-return environment
Will intensify focus on costs
Ensure value for money
Keep downward pressure on providers
Ensure they are well disclosed
Examine for tax-efficiency from participant’s perspective
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xxImplications for DC plans
Low-return environment
Will pique participant interest in riskier options
Encourage primacy for promise-to-pay assets
Reinforce safeguards such as glide paths
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xxImplications for DC plans
Low-return environment
Should promote higher saving
Add or refine nudges to enrollAdd or refine nudges to enroll
Add or refine nudges to increase participant contributions
Will promote later retirement
D l t t ti t t i ( h d h ) Develop smarter retention strategies (who and how)
Tell participants what’s realistic
Will discourage rapid decumulation
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xxImplications for DC plans
Changes to pension-policy landscape: Pillars 1 & 2
Clawbacks may come later, but be fiercer
GIS may expand
Provinces will income-test more seniors’ benefits
CPP expansion, if any, will be modestp y
Ottawa is wary of liability and complexity
Unions support, but employers and pension plans do notUnions support, but employers and pension plans do not
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xxImplications for DC plans
Changes to pension-policy landscape: Pillar 3
TFSAs will grow rapidly Better for low- and modest-income people A il bl t ll i l di d t t d f d Available to all, including maxed-out tax-deferred savers
DB will keep shrinking Plan and sponsor bankruptcies Plan and sponsor bankruptcies Shrinking participant base Conversions to target-benefit and DC
PRPPs in current form will not go far Too little benefit to participants vis-à-vis RRSP Too big cost to sponsors vis-à-vis RRSPToo big cost to sponsors vis à vis RRSP Mandatory participation a big pill for most employers to swallow
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xxDC plans: getting respect and positive attention
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xxImplications for DC plans
Enhancing respect …
Tell policymakers about numbersC i i i i l h i l k l i DC participation is larger than it looks relative to DB
DC participation is growing DC assets are growingg g
Tell public and policymakers about costs Make sure you have a good story, and tell it Put out more information rather than less Detail how DC costs differ from other capital accumulation vehiclesDetail how DC costs differ from other capital accumulation vehicles
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xxImplications for DC plans
… and positive attention
Tell policymakers they can help make DC better Raise contribution limits Delay mandatory decumulations
M k LIF d RRIF d d h d l l i Make LIF and RRIF spend-down schedules less aggressive Ease annuitization options Allo TFSA options in DC plans Allow TFSA options in DC plans
Unite private and public sector DC plans in making case Unite private- and public-sector DC plans in making case
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Pension Reform in Canada:Pension Reform in Canada:Implications for DC Plans
William RobsonPresident and CEOC.D. Howe InstituteC.D. Howe Institute
Presentation to the Benefits Canada14th Annual DC Plan Summit
Banff: 14 February 2012