PPF National Summit on Pension Reform - Bill Morneau remarks
Fredericton, New Brunswick
Bill Morneau, Executive Chairman
Feb. 20, 2013
We are here in New Brunswick today because of an important development in the Canadian pension landscape: the Shared Risk Plans introduced in this province, and the implications of this idea for Canada.
My goal today is to provide you with my perspective, given that Morneau Shepell is the largest administrator of defined benefit plans in Canada, touching over three million Canadians as pension administrator or consultant.
First, some context:
Pensions are essentially about providing income security for retired workers. So, I think it’s important for us to start by considering how we as Canadians are doing on this front.
There is a good news story on income security for seniors in Canada. You wouldn’t know it if you only read the newspapers.
We took a look at the number of times the word crisis was attached to the word retirement or pensions over the past three years in Canada, on the Internet. I’m sure none of you would be surprised that it was cited 153,000 times.
The financial downturn of 2008, combined with a general concern that corporate defined benefit plans are under threat, leads many people to the conclusion that there is an enormous retirement problem in this country.
We don’t think the facts support this conclusion.
Canada has done a fantastic job in alleviating senior poverty in the past three decades.
As recently as the late 1960s, a Senate Special Committee on Aging and Poverty estimated that 65.9% of men and 70.1% of women over 70 years of age were classified as poor. The introduction of the Canada/Quebec Pension Plan and the Guaranteed Income Supplement in the late 1960s, plus the improvements made to the Old Age Security benefit around the same time, changed all that.
One recent study found that since the 1970s, no country had experienced as sharp a decline in elderly poverty as Canada. We indeed had a poverty problem among seniors around 1970, but this hasn’t been true for a long time.
Perceptions are often slow to change, but it is clear that the idea that poverty among the elderly is a significant problem in twenty-first century Canada should be laid to rest once and for all. If there is a poverty issue in this country, it is working Canadians and their families who bear the brunt of it.
Today, poverty rates for the elderly are under 6% – better than all OECD countries of our size or larger, and materially better than our poverty rate among working Canadians of about 12%. Dalhousie University economics professor Lars Osberg has called the reduction in the elderly poverty rate over the past three decades “the major success story of Canadian social policy in the twentieth century.”
So the real story is that Canada has done a tremendous job in alleviating elderly poverty.
I’m not saying that we don’t need to keep our eye on how to maintain our gains – just that we are doing well on this issue – an “A” grade in the recently released Conference Board of Canada report.
And, hard as it is to believe, we’ve done this while defined benefit plans have been going away.
As defined benefit plan consultants and administrators, we’ve been in the front row watching our clients move away from these plans.
We’ve all read about the shift to defined contribution plans, and the reasons.
At Morneau Shepell, our people are exposed daily to defined benefit pension plan sponsors as they consider their future. We are witness to the struggle that finance and human resources leaders have in managing these plans. It is almost always difficult – the experts know that these plans are superior for the employee.
Defined benefit plans take the investment management decision away from people ill-prepared to make it. Defined benefit plans smooth the volatility of the financial markets for the participants. Defined benefit plans ensure that members are less susceptible to longevity risks. We almost never hear that defined benefit plans are inferior for plan members.
But we spend much more of our time helping defined benefit plan sponsors manage the risks of these plans for their organization’s financial health.
A significant number of our clients have parent companies or sister companies in the United States or the United Kingdom. Since the movement away from defined benefit plans has been earlier and quicker in these countries, those clients are challenged to either defend their continuing defined benefit plan, or find a way out at the earliest financially plausible opportunity.
Those Canadian organizations that are master of their own destiny are regularly asking whether this trend away from defined benefits is appropriate for their organization.
Human resource leaders recognize that a relatively small percentage of their people expect to spend 30 years in one place – meaning that defined benefit plans may not be as beneficial for employees in practice as they are in theory.
Finance leaders face the volatility of funding a defined benefit plan, as a result of interest rate changes and capital market volatility, together with the unequal risk-sharing between employers and employees, and find it very difficult to support defined benefit plans. They are not inclined to accept an open-ended financial guarantee.
If it weren’t for opposition from impacted stakeholders, and significant wind-up costs, we believe that we would see even more employers moving away from defined benefit arrangements.
These challenges have pushed us to the brink of private sector elimination of defined benefit plans.
As an example, we looked carefully at the number of private sector workers in Ontario in defined benefit plans. When we dug deeply into the statistics, taking out multi-employer plans that weren’t really defined benefit as the benefit could be reduced, we found just 8.9% of private sector workers in truly defined benefit plans.
At the same time as we’ve dealt with senior poverty, we’ve pushed private sector workers to greater individual responsibility for their retirement. The numbers are clear.
And, we’ve done it while Canadians decided to retire earlier than ever before.
It was as recent as 1976 when the average retirement age was 65. Then by 1997 it moved to 61 years of age. It’s moved up to about 62 now.
So here’s the key point: we’ve moved away from defined benefit plans, retired an entire cohort earlier, and still made enormous gains in income security for seniors. At the same time, 65-year-olds are living about five years longer than they did in the 1970s, so they’re enjoying about eight more years of retired life than they used to.
This context is often forgotten when we talk about defined benefit plans, and the crisis in funding.
What we do to manage the crisis has to be put in the context of how this looks to average Canadians.
First of all, “average Canadians” don’t have a defined benefit pension plan. About one in ten private sector workers have a defined benefit pension plan. When you add the roughly 80% of public sector workers who are in defined benefit plans, about a third of Canadians are part of this lucky cohort. Or, better put, two-thirds of Canadians are not in a defined benefit pension plan.
More importantly, we believe that this trend is very likely irreversible. We have thousands of clients across Canada. I would be hard-pressed to come up with even one new defined benefit plan in our client base (with the exception of dealing with mergers or significant organizational changes) in the last decade. In fact, we’ve done some analysis of the expected number of defined benefit plans over the next decade, based on several scenarios. None of them look positive.
We looked at all of the plans we are involved with, and forecasted the future, using our actual experience with plan windups. While our defined benefit business is only a fraction of the overall pension industry, we are the actuary and/or the administrator for hundreds of pension plans. We’ve been keeping accurate records of conversions to DC, mergers and windups for many years, allowing us to forecast with some accuracy.
We figure, with about an 85% probability, that the number of plans in existence in a decade will be from 18-70% fewer than today – depending on your economic assumptions – and almost all of that attrition will come from private sector plans.
I would put it to you that defined benefit plans, in their current format, in the private sector, are on a path to extinction.
As we know, this is a slow trend, due to the long tail of plan participants already in those plans. The only question we can’t answer is whether this level of decline actually precipitates an even faster decline.
We can hope for something different – but hope is not a strategy.
So, here’s the question: what will the government do?
To summarize, here’s how the facts look:
- Elderly poverty is not a problem.
- The majority of Canadians and the overwhelming majority of Canadians working in the private sector do not have defined benefit plans.
- Canadians can clearly retire later, enabling them to save more. After all, only as far back as 1976 when life expectancy was five years less, Canadians were retiring, on average, three years later than they are today.
- Consumption replacement rates in retirement are actually quite high in Canada. We found, when we looked at all assets held by Canadians, that more than 90% of Canadians have sufficient assets to consume in retirement more than 75% of what they consumed pre-retirement. And when you consider that people generally consume less in retirement, 75% sounds pretty good. It’s not to say that those who have fewer assets aren’t going to have a problem – it just may not look like a big problem to a policy maker or a politician grappling with healthcare costs for an aging society.
I would suggest to you that governments will only deal with the potential “problem” in retirement income security by encouraging people to save more.
A modest CPP increase and/or the introduction of PRPPs with a default option to auto-enroll plan participants into a new savings vehicle appear to be the likely solutions.
So, what about defined benefit plans?
This is a public sector problem.
Who believes that the average Canadian, without a defined benefit plan, and with the demonstrated capacity to save enough to support their retirement, will, over the long term, agree to continue to fund public sector employees’ pensions at a level that they can only dream about attaining themselves?
Even the starting public sector employee, who should reasonably expect to have several jobs in his/her career, won’t actually get the public sector defined benefit plan.
So, it’s older public sector workers versus everyone else.
Not a great place to be.
Here’s what I think will happen.
We have two choices.
Choice Number One: We can continue with an attempt to fund rigid defined benefit plans for the public sector, causing decades of labour strife, reduced cash to employees in defined benefit plans, and private sector/public sector and intergenerational discord.
Choice Number Two: We can introduce flexibility into defined benefit plans, considering ideas such as Target Benefit Plans or Shared Risk Plans, so that there is risk sharing in the case of lower fund returns, or unexpected longevity gains.
We see it as this stark.
Like everyone involved with defined benefit plans, we know that they are an efficient vehicle for retirement savings.
We are very appreciative that the Public Policy Forum has organized this conference, because we believe that we must advocate for action.
We need legislation enabling Target Benefit Plans and Shared Risk Plans in all Canadian jurisdictions. New Brunswick has provided a good example. It would be a real loss to Canadian retirement security to throw away an excellent model because we are unwilling to be flexible.
We need stakeholders to realize that the alternative is unacceptable.
PPF National Summit on Pension Reform - Bill Morneau Remarks - Feb. 20, 2013 (PDF)