Alarmed by statistics about the number of Canadians who lack adequate retirement resources, the provincial governments are offering their own solutions to help them. This public sector initiative is worrying the insurance industry, which wants to keep its dominant position in the defined contribution pension plan market.
Companies are shouting their disapproval: the private sector doesn't want the public sector on its turf. The industry is reminding governments that it couldn't meet the public need because it was prevented from doing so by these governments' own pension legislation. Frank Swedlove, President of the Canadian Life and Health Insurance Association (CLHIA), says that if they want to see improvements, governments will have to change the rules.
In its speech from the throne in February, the government of British Columbia announced its intention to create and offer, as of 2010, a voluntary contribution plan for those who do not have pensions. Alberta is thinking about taking a similar step, although no precise date has been set.
For its part, the CLHIA has been actively campaigning to convince the provinces not to step on insurance companies' toes.
Last year Quebec proposed an obvious foray into the private sector with a consultation paper published in June. In this paper, the Régie des rentes du Québec (RRQ) suggested adding a voluntary contribution plan to fill the gap left by the Quebec Pension Plan. These funds would be held in a tax-free savings account.
Consultations took place before Quebec's Commission on Public Finance on August 27 and on September 2-3. Several participants expressed their opposition to the RRQ's idea of voluntary supplementary contributions, including the CLHIA and the Quebec Council of Employers.
The recession has worsened an already bad problem for millions of Canadians who are not members of a company pension plan, or who do not have enough money to retire. According to data collected by Statistics Canada in 2007, just 5.9 million Canadians belong to a registered pension plan (i.e., a retirement plan offered by an employer and registered with the appropriate governing body). That's only 38.3% of all paid workers.
This average varies depending on the province or territory. For example, in its 2008 annual report the Régie des rentes du Québec estimated that 44% of workers in that province were covered by a private pension plan. The situation appears to be more alarming in the two provinces which are interested in a supplementary system. An information bulletin published by the British Columbia Ministry of Finance in the spring says that only 22% of employees in that province are covered by an employer's pension plan. In Alberta, the Alberta Federation of Labour (AFL), puts this percentage at 18% for those who work in the private sector.
The annual premiers' meeting held in Regina on August 5, 2009 revealed that these two provincial governments are serious in there intentions.
For the moment, however, observers note that the British Columbia government hasn't ruled on the role the private sector will play in its new regime. In it's information bulletin, it says that it's multi employer defined contribution plan will be accessible to all employers, employees, and self employed workers in the province. The BC Minister of Finance assures the public that the plan will work "at arm's length" from the government.
Change the laws
The industry, however, wants to assure itself that the public sector isn't encroaching on its turf. Mr. Swedlove of the CLHIA estimates that insurers hold about 70% of private pension plans in Canada. He adds that the industry also manages the vast majority of Group RRSPs in the market.
"Some provincial governments envisage offering defined contribution plans capable of encompassing several employers and even independent workers," said Mr. Swedlove in an interview with The Insurance Journal. But the industry doesn't offer multi employer products at the moment because regulations don't permit it, he explains.
Regulations require that there be a link between the pension plan sponsor and the employees. An insurer can offer a defined contribution plan and handle the administration, but the sponsor must remain the employer. If the government wants to improve the situation, Mr. Swedlove believes it should change the rules so that a private provider could also act as the sponsor for the plan it puts in place. This way an independent promoter could gather several employers as well as independent workers under the same plan - an ideal solution for small to medium sized businesses and the self employed.
The CLHIA is particularly clear on one point, namely that having a system in which the government is the only possible plan sponsor is not the best alternative, since it will create a monopoly situation. Mr. Swedlove notes that the industry believes it is better positioned to offer consumers more choice and more innovation.
"Our members already have the infrastructure in place to offer these kinds of plans. What's more, when government gets involved [in this kind of infrastructure], it always gives the public the impression that it is going to support it financially, up to making good on any shortfall that might come up." That's a misleading perception, he says.
In a speech on July 7, 2009, Dean Connor, President of Sun Life Financial Canada, replied to initiatives announced by the provincial governments earlier this year. He advised them against creating new pension organizations and encouraged them to introduce legislation that would make retirement plans more accessible for employers and employees.
In an interview with The Insurance Journal, he went one step further on the subject of the efficiency of the private sector. "There's nothing like competition between different providers to bring cost efficencies and motivation to act quickly. In the United Kingdom, the Personal Account Delivery Authority has been trying to start up a government regime since 2003. They expect to be finished by 2011. Last year, they used up a budget of $15 million... The private sector can get there much more quickly and at a lower cost."
He believes that it is thanks to private sector innovation that we have the products that have now become the essential enhancements to defined contribution plans, such as life annuities, life cycle funds and guaranteed minimum withdrawal funds. Mr. Connor also believes that the life annuity market will undergo a significant evolution in the future.
Low cost offering is another private sector asset, but current rules prevent many employers from establishing a pension plan and remaining competitive at the same time.
Mr. Connor admits that the CLHIA's proposals won't fix all of the problems, but he does believe they will make many of them disappear.
Besides the changes to legislation that would allow insurers to offer multi-employer plans, the CLHIA suggests requiring pension plan and group RRSP sponsors to automatically enrol every employee whose earnings exceed the yearly maximum pensionable earning level established by the Canada Pension Plan. This formula was recently used with success in the United States, where 90% of employees who were automatically enrolled were still contributing to their plan a year later.
For his part, Mr. Connor believes that it would be easy for governments to make these changes. "They are in the public interest. It is hard to imagine that lobby groups would go against good common sense."
One well known pension plan consultant in the private sector, believes that despite the CLHIA's best intentions, the industry has done little to serve the population segment targeted by recent public sector initiatives, be they small to medium sized businesses or independent workers.
Mr. Connor rejects such criticism. On the contrary, he says that statistics about Canadians' inadequate retirement savings are distorted. In his speech, he put the number of Canadians who aren't members of pension plans or who are not saving enough for their retirement, somewhere between three and five million. These figures also appeared in an article by Keith Ambachtsheer published by the C. D. Howe Institute in May of 2008. The piece, The Canada Supplementary Pension Plan (CSPP): Towards an Adequate, Affordable Pension for All Canadians, is considered to be the authoritative work on the subject." If we consider that there are 18 million workers in Canada, this group is far from representing 40%," he said in response to numbers presented by the Alberta Federation of Labour at a premiers meeting in June. Why is there this distortion in the figures? Mr. Connor explains that often these statistics do not include group RRSPs.
Sue Reibel, Senior Vice President of group savings and retirement solutions at Manulife Financial, believes that there is a need to better educate the public about pensions. She suggests that the information put forward by various interest groups isn't necessarily complete or exact.
For example, she explains that the provinces often use the information they have relating to the plans under their jurisdiction when conducting their analyses. Group RRSPs, however, are under federal jurisdiction. "How many Group RRSPs are there in Ontario or in Alberta? The provincial governments do not have access to that information. So most of the work done until now has excluded that whole piece of the retirement puzzle."
One regulatory body?
Ms. Reibel believes that the need for education will be well served by two recently launched task forces, namely an industry task force and the research working group established by the federal government.
There are so many things that are being said about this serious retirement problem that she believes the industry needs a strong presence. "For example, we do not know what route BC will take. Will it include the private sector in its solution or not? The impact will be positive or negative depending on the answer. So we want to support the governments in their research."
She says the industry is also wondering about the reasons behind the current system's inadequacy. Why, for example, do so many small and medium sized businesses not offer defined contribution pension plans, and turn more often to Group RRSPs? Part of this she attributes to the complexity of the current system, especially the rules for registered pension plans. Employers don't want to deal with the administrative burden, and so they would rather open a Group RRSP instead.
"The idea is to reduce this complexity and lessen the employers' burden," she says. For this reason, insurers are campaigning for national pension regulation rather than ten sets of provincial rules, Ms. Reibel explains. "The key element, in our opinion, is harmonization."
The industry working group also believes that tax laws should be amended to allow employers to impose certain restrictions on access to Group RRSP contributions (vesting rules). Ms. Reibel suggests that employers might be more likely to invest in Group RRSPs if they could limit member withdrawals of the money contributed by the employer.
For it's part, the federal government is studying possible solutions. It created a research working group on pension reform when the premiers met at Meech Lake in May of 2009. It will be chaired by MP Ted Menzies, parliamentary secretary to the federal Finance Minister. Jack Mintz, a public policy professor at the University of Calgary and former president and CEO of the C. D. Howe Institute, will be the research director.
This task force, however, does not have a mandate to make a recommendation. The goal is simply to understand the situation. Its second mandate is to present its findings before the end of the year.
Some organizations have complained about the federal government's inaction on the pension issue. This is the case with the Canadian Association of Retired People (CARP). CARP reproached the federal Finance Minister for launching a task force without giving it the power to make recommendations. Mr. Menzies brushed aside these remonstrances in an interview with The Insurance Journal. "We were on the case even before CARP intervened," he says, noting that they launched an online consultation on the subject of pensions a year ago, all across the country.
Mr. Menzies is set on what he says is a tried and trusted political adage: don't make a decision until you have all the facts. He suggests that the first step is to determine what's wrong with the current system and what can be done to fix it.
After having compared our system with that of other countries, Mr. Menzies says it's possible they may determine that Canada has a very good system that only requires a few minor changes.
One thing is certain, he says, and it's that a one-size fits all system is not the answer for Canada. The objective is not to remove the incentives that encourage Canadians to prepare for their own retirement. "Everyone has different expectations about retirement, and will choose different ways of meeting them," he says.
"We believe that part of our conclusions will show that many Canadians who do not have private pension plans may be very well prepared all the same. Some may have individual RRSPs, others may have bought properties and hope to sell them at a profit, and so on."
On the other hand, Mr. Menzies adds that basic solutions like the Canada Pension Plan and the Guaranteed Income Supplement exist for those who haven't been able to prepare themselves adequately.
In conclusion, he points out that only 10% of plans are under federal jurisdiction, and the rest fall under auspices of the provinces or the territories. The federal task force expects to present its findings on the Dec. 17-18 in Whitehorse.