Good morning. My name is Bob Howard, and I am president of the Canadian Institute of Actuaries. We appreciate being invited to this meeting, and I look forward to an exchange that benefits all Canadians.
The Canadian pension system, especially defined benefit, has been challenged for many years, and recent events have forcefully brought home issues that need long-term remedies. It's time to bring together decision-makers at a national pension summit to reach conclusions on a road map and timetable to increase the coverage of private sector defined benefit pension plans, to improve the environment for defined contribution pension plans, to foster sound innovation in post-retirement income security, and to implement intergovernmental harmonization of pension legislation and regulation for the benefit of all Canadians.
On August 6, the premiers indicated their agreement by calling on the federal government to host a national summit on retirement income. We've yet to hear a reply from the government on this important item, and we urge the finance minister to act.
The Canadian Institute of Actuaries would be pleased to assist with this summit in any appropriate way. The institute has met with many members around this table regarding pension reforms proposed in our Prescription for Canada's Ailing Pension System. The dire circumstances that the pension system faced when we released that report in 2007 persist, and the economic crisis has made things even worse.
Canadians are not saving enough for retirement. Canadians need defined benefit pension plans, and these plans need to be saved and revitalized. Claude Lamoureux, special adviser on pensions to the institute, has said that if the trend continues “the only Canadians covered by DB plans will be politicians, government employees...”. Imagine how taxpayers will feel about supporting these plans through their taxes when their own workplace offers either a less effective plan or none at all.
We have, in our earlier report, said that legislation should be put in place to remove disincentives to employers starting up or maintaining defined benefit pension plans, which would improve benefit security. This legislation would include three important interrelated changes for pensions plans.
First, permit the use of a 100% employer-funded pension security trust. This is a side fund, independent from but complementary to the regular defined benefit pension fund. It is a practical solution to the surplus asymmetry issue. Employers gain because they can contribute more than the absolute minimum, knowing that if a surplus arises in the future it can be recovered. Pensioners and employees gain because higher employer contributions will make their benefits more secure.
Second, require each defined benefit pension plan to establish a target solvency margin. A target solvency margin would recognize the volatility of pension plans and their assets and help establish a risk-based approach to planned funding contributions. At present, when times are good, employers stop contributing when the plan becomes 100% funded, so when the inevitable downswing occurs, the plan goes into a deficit and members' pensions are at risk. Under our proposal, the funding target would be higher than 100%, so the risk of a deficit would be reduced. Employers would be more willing to accept additional funding through the pension security trust as it remains under their control. The institute would be pleased to work with regulators to develop guidance on the required levels of target solvency margins.
Third, increase the maximum allowable surplus in a pension plan to the greater of two times the target solvency margin or 25% of the going concern liabilities.
Had these proposals been in place prior to the recent crisis, pension funds would have been less threatened and some relief measures may not have been necessary, and the risk of members' pensions being cut back would have been reduced. The task now is to put in place long-term measures that will, over time, improve and safeguard the retirement incomes of all Canadians.
Mr. Chairman, this ends my formal statement. I look forward to answering questions from the committee.