Mr. Chair and members of the committee, it is a great pleasure for me to be here today. My name is Claude Lamoureux and I represent the Canadian Institute of Actuaries, of which I am a member.
I have been working with the institute for many years on pension issues. The institute is the national organization representing over 3,800 members of the actuarial profession in Canada, many of whom work in a North American environment.
The CIA's number one guiding principle states that the institute holds the duty of the profession to the public above the needs of the profession and its members. The CIA also assists the Actuarial Standards Board in developing standards of practice for actuaries practising in Canada, including standards governing the actuarial valuation of pension plans.
We appreciate this opportunity to present our views on the issues of Canada's retirement system and workplace pension plans. The institute has been very active on both these subjects for years.
In the view of Canada's actuaries, Canadians are not saving enough for independent retirement. A University of Waterloo study we commissioned asked the basic question, “Are Canadians who are retiring in 2030 saving enough for their independent retirement?” The short answer was no. The study concluded that only one in three Canadians expecting to retire in 2030 is saving at the level required to meet basic household expenses in their retirement, and many may need to sharply increase their annual savings or continue working past age 65 to avoid financial hardship.
The defined benefit plan, an important retirement savings vehicle, is quickly disappearing in the private sector. After years of decline, only 21% of workers are members of defined benefit plans, which I call DB for short. The move away from defined benefit plans, especially in the private sector, should be of great concern to legislators, regulators, and all citizens. This percentage, in fact, may overstate the number of members in DB plans, because today many members are members of both DB and DC plans, but the DB plan is closed to new members, and also members may not get any credit in the DB plan.
The resulting transfer of uncertainty, risk, and cost to individual workers in a defined contribution plan--or worse, no plan at all--is also distressing. Today there is a low level of solvency funding in DB plans as a result of weak markets, increasing risk, disincentives for plan sponsors to fund more prudently, and fiscal barriers to accumulation of surpluses larger that 10% of liabilities. These barriers are worrisome as well. Therefore, defined benefit plans today are less secure than they should be.
A great number of plans were underfunded before the economic crisis hit, and many more are underfunded now. To quote a report from OSFI last Thursday, “The results show that the average estimated solvency ratio of federally regulated defined benefit private pension plans at December 31, 2008 was 0.85, a decrease from 0.98 as reported in June 2008”.
As Canadians with RRSPs and DC plans watched their savings melt away over the past year, it has become clear that defined benefit plans are plainly better for Canadians than other types of plans, but defined benefit pension plans, while superior in nature, need certain conditions to be put in place to make certain they endure. They need a cushion that is linked to the riskiness of a plan's investments. Tax changes are required to allow larger cushions to be accumulated before attracting tax.
Retirees need to be given priority in bankruptcy proceedings. Employers need to be encouraged to fund their pension promises conservatively; side funds can help. Private defined benefit pension plans are as important to Canadians as public plans. However, if the current downward spiral continues, the only members of defined benefit plans will be politicians and public servants. This is an untenable situation, as taxpayers and voters are unlikely to accept that their taxes are being used to pay for retirement plans that they themselves cannot access.
Some have suggested that increasing the CPP benefit might be a solution to the pension problem. This idea needs to be explored.
Canadian banks are said to be the most financially secure in the world at the moment. This is mostly due to the strong regulatory system in place. The same strong approach should be put in place in pensions. Perhaps the notion of a regulator, or of regulators who work together, ought to be studied.
Our goal is not to paint a completely negative picture of Canada's retirement system. Yes, it's being looked at as never before; however, Alberta, British Columbia, Nova Scotia, Ontario, and Finance Canada have either completed or are in the process of reviewing their pension legislation. Good ideas have surfaced in these reviews, and in our view, there has never been a better opportunity to reform the pension system for Canadians.
These are tough times, but they will pass. While governments have been responsive to short-term relief for pension plans, we need to think about long-term legislative and regulatory reform to ensure that DB plans survive and thrive.
The current problems of defined benefit pension plans cannot be solved overnight. We have seen stock markets decrease by 50% from the top, and in the last few weeks these markets have rebounded by 20% to 25%. If you do the math, that means that the stock market is now at 60% of the peak.
Clearly DB plans are not the only ones that can be invested for the long term, but they're one of the main ones. Last Sunday, the program 60 Minutes demonstrated that the 401(k) plans in the U.S., the equivalent of our DC plans, have been a boon to the financial services industry but have not served their members well over the years.
The same can be said in Canada. Assuming we cannot reverse the trend to DC plans, we must ensure that people have good DC plans that provide them with the possibility of accumulating assets and of enjoying professional investment management. The role of a large DB plan or a professionally managed DC plan, in part, is to try to sell when stocks are expensive and to buy when they are cheaper. This is the opposite to what we see in mutual funds, where the public tends to buy when everyone is euphoric and sell when everyone is pessimistic.
Merci de votre attention.