Pooled Registered Pension Plans Bill—Second ReadingPublished on 15 June 2012 by Senator
Hon. Art Eggleton:
Honourable senators, I rise to speak to Bill C-25, but I do not agree with the rosy picture that was just painted by the honourable senator with respect to the condition of the pension systems in this country.
Our pension system is stressed. It is estimated that roughly 5 million Canadians — one third of the workforce — are not building enough of a private nest egg to avoid a significant drop in their standard of living when they retire. Many Canadians are worried about this. They are worried about their retirement security, pension affordability, contribution and benefit levels, and whether they will be able to retire when they want to. According to HSBC Insurance, a survey showed that only 17 per cent of Canadians aged 30 to 70 years feel that they are financially prepared to retire; and 83 per cent of Canadians do not know how much income to expect once they stop working.
Pensions affect everyone: the employees, the employers, the taxpayers, governments and non-working Canadians as well. If many seniors’ living standards fall, and some slide toward the poverty line, the impact for Canadians in the country as a whole will be staggering. A review by the Government of Ontario correctly stated that this will lead to more cash-strapped elderly and a rising bill for society, including declining markets for goods and services purchased by seniors. If they have less money, they will purchase less. It also means declining tax revenues and increasing public welfare costs that the provinces will have to pick up, by and large.
We need to renovate our pension system. We have to nurture where the system is working — and parts of it are working — and repair where it is failing. We need to bring solutions to ensure that our aging population can live in dignity and respect. Reporter Steven Chase of The Globe and Mail pointed out:
It’s a problem . . . that some have called a defining issue for this generation.
Jim Leech, from the Ontario Teachers’ Pension Plan, said:
As Tommy Douglas and national medicare defined public debate in the 60s, the natural gas pipeline and C.D. Howe in the 50s and Brian Mulroney and free trade in the 80s, pension reform could be defining issue of the first decade of this century.
Honourable senators, our pension system is defined with two objectives in mind: to prevent poverty among the elderly and to prevent a significant fall in the living standards of workers upon their retirement. To achieve these goals, as in many other countries, the Canadian pension system comprises both private and public elements, as Senator Tkachuk pointed out. With the publicly financed OAS and GIS, Canada has gone a long way in lifting seniors out of poverty. It has resulted in the lowest incidence of poverty amongst seniors in all developed countries.
However, this has not lifted all Canadians out of poverty. In fact, poverty is on the rise for seniors, especially for single women living in big cities, immigrant seniors who do not qualify for GIS, and seniors with dependents. We must be vigilant and make the necessary changes to improve these important programs. Putting off the OAS from age 65 to 67 years certainly will not help those seniors when they reach that age. These people more and more will fall towards poverty because many on a low income or who cannot work past 65 years of age will find themselves with less to keep them out of poverty.
Achieving the second objective seems to be more difficult. Success is usually measured by reference to a suitable but much debated replacement rate: the substitution of retirement income for wages from employment. The CPP and the QPP are a good start to achieve this. Both are contributory earnings-related social insurance programs that provide a monthly taxable benefit to retired contributors, averaging $4,900 for women and $6,500 for men. Even when you put that together with OAS and GIS, you are still talking about a lot of people struggling to meet the poverty line.
Relevant to many OECD countries, Canada’s current public retirement income programs are quite modest, so they put a lot of strain on the private portion of the Canada pension system. As a result, workplace pension plans and other forms of private savings play an important role in providing retirement income security. It must be all of those combined.
If a person has a defined benefit plan, as honourable senators have, they are generally doing all right. The pension benefit is predetermined, is not subject to investment performance and is the obligation of the employer. However, not too many people have these plans any longer. In fact, very few of them exist in the private sector, with more in the public sector.
Defined contribution plans are becoming more numerous these days. They work in much the same way as an RRSP works. Individuals are responsible for doing their own investing, and they depend entirely on the market value of funds in their account at the time of retirement. If the markets have been bad, and all honourable senators witnessed the savings lost as a result of declining markets during the recession, retirement lifestyle could be less than if the markets boom.
These Canadians may be the more fortunate ones because at least they have a workplace pension plan. However, studies have shown that participation by Canadian workers in workplace plans is at an all-time low of 23 per cent. The remaining 77 per cent of Canadians with no pension coverage rely on growth in Registered Retirement Savings Plans or perhaps home equity or non-sheltered savings to supplement public pension benefits. However, most Canadians have not managed to set aside nearly enough for, let us say, 20 years of non-working life, and some may live well beyond that.
According to Statistics Canada, the median amount in RRSPs for those taxpayers nearing retirement is about $60,000. That is what Statistics Canada says. That is only enough to buy an annuity of approximately $3,000 a year during retirement, which is hardly enough.
As the proportion of Canadian workers enrolled in workplace pension plans declines, down to 23 per cent, and as older people
come to represent an increasing segment of the Canadian population, each of these economic effects is likely to change significantly, and not for the better. This is why we need to act now. Immediate steps must be taken in the short term if pension security adequacy and coverage are to be attainable for the long term.
The Conservative government through Bill C-25 is proposing the pooled registered pension plan, PRPPs, as the solution to increase workplace pension plans. More specifically, the federal government has indicated to provincial counterparts that it is only interested in pursuing a PRPP option at this time. Unfortunately, PRPPs are not the panacea to the pension predicament we have today. It is one tool, a flawed tool I might add, in the already-crowded tool box.
First, PRPPs are, in theory, meant to lower costs by pooling the pensions of many into large funds, but because PRPPs are nothing but locked in RRSPs — they are the same thing, locked in RRSPs — Canadians would face a number of problems if they join such plans.
Here is what some of these problems might be. First, like RRSPs, if the fund administrators do not invest properly and the return on investments is low because of market conditions, then Canadians — not the employer and not the administrators — will have to suffer the financial consequences because they bear 100 per cent of the investment risk.
Second, there is no ability for participants to vote with their feet. Under this bill, it is the employer that selects the pooled plan offering from private sector providers, not the employees. If the employees participating are unhappy with the pooled plan, they cannot transfer their money to another plan.
Senator D. Smith: Shocking.
Senator Eggleton: Third, because the employers do not have to contribute a penny, nor do they have to pay for any of the administration of the plan, there is very little incentive to monitor the effectiveness. Why should they monitor the effectiveness of the program? They have no skin in the game since they do not bear any of the costs.
At best, an employee is left with exercising his or her right to cease contributions and pray that the monies contributed will not be frittered away by management fees and poor investment results before finally, somewhere in their life, it is no longer locked in.
The fourth problem is there is no ability to make up for bad years by making additional tax-deductible contributions. If the market goes down, your equity goes down and your pension fund goes down. Can you make it up later? No.
Fifth, there is no ability to pool risk.
Sixth, it is currently unclear, and maybe this will be worked out in committee, whether homemakers or seasonal workers would be able to contribute unless they receive employment income directly.
I should also point out that Australia adopted their version of PRPPs over a decade ago, and a recent study commissioned by the Australian government shows that the only ones who truly benefited were the financial services industry. The report shows that while total assets in the system have grown through contributions, net earnings from investments were relatively low. We should get that evidence before the committee. The principal reason for the lower-than-anticipated earnings is the high cost in fees restraining the growth of the fund.
I accept and applaud that reducing cost is a laudable goal, and Senator Tkachuk said that is one of the objectives here. However, every piece of real world, quantifiable data available suggests that PRPPs will almost certainly fall short of that goal.
A much better approach would be to improve the current Canada Pension Plan, which is well managed by a board that charges much lower fees than will be charged by these entities that would be administering PRPPs, or bring into existence a supplemental Canada Pension Plan.
Honourable senators, in summary, I have doubts that Bill C-25 and this PRPP system will be of much benefit to Canadians. At a time when Canadians need a loaf of bread to help them, they are being offered crumbs. Let us see what the committee can do with this. Let us have some hearings and determine what other people have to say, and then consider it further in this house when it comes back for third reading.
Some Hon. Senators: Hear, hear.