Thank you for inviting me.
It appears that Canada has approximately a 15-year pension reform cycle. We created the Canada and Quebec Pension Plans in 1965. Fifteen years later, we looked at the supplementary pension arrangements, employment-based pension plans, and RRSPs, and created the legislative environment for these plans to operate. Adding another 15 years takes us to 1995, when we reformed the CPP and QPP arrangements so that they became sustainable. If you add another 15 years to 1995, that gets us to today.
Now, quite correctly, the attention today in terms of pension reform focuses not so much on the public side of the system, which actually was created and made more sustainable 15 years ago, but on the supplementary elements to those public pensions, namely employment-based pension plans and the private pension arrangements generally called RRSPs.
We've been doing research on these questions for the last five years. A lot of good research has been done. We know a lot more about what the issues are than we did five years ago. You could make a long list, but my list only has two items: first, we have uncovered a coverage and cost issue; second, we have uncovered a defined benefit plan sustainability issue.
To give you some context of where those two issues fit into the general broad scheme of things, think of this: Canada has a labour force of roughly 18 million people; 8 million of those 18 million are, for a variety of reasons, in the low-income category of $30,000 or less, partially because they may be part-time workers. They may have genuinely low-paying jobs. As the previous speaker pointed out, our public pension arrangements provide high rates of income replacement for low-income workers. I think the reform now has focused quite appropriately on the middle- to higher-income workers in Canada and on having a serious look at how well they're faring today with the current arrangements. We're talking about roughly 10 million workers.
Interestingly, when you look at that particular segment of the workforce, you find that about half of them are members of employment-based pension plans and half are not. You have five million workers with supplementary pension plans and five million workers without.
Obviously the two issues around defined benefit plan sustainability relate to the segment of the workforce that has a pension plan. For the other half, the issue is not so much sustainability as the question of whether these workers should have coverage and a pension arrangement of some kind. The other related question is this: if we ask them to save on their own through RRSPs, how cost-effective are these arrangements in helping them facilitate the creation of pensions that will be adequate for maintaining a standard of living after they stop working?
Let me give you a very brief insight into what we have learned about both of those issues. With respect to the defined benefit plan sustainability question, the history there is that originally these workplace pensions were gratuities. Over the course of evolving decades, they've looked increasingly like financial contracts. As these arrangements became financial contracts, we have not kept up with how we cost those contracts and how we provide for the capital requirements to ensure that those contracts can in fact be paid when they fall due.
That is essentially the issue with defined benefit plans. I believe the direction of the answer lies in what the world leaders in pensions, the Dutch, did almost 10 years ago. They started treating defined benefit pension liabilities the same way as they treat liabilities for insurance companies and banks. It's the general idea that if you make a financial promise, you have to keep it.
Regulation ensures that financial promises made are financial promises kept by creating capital requirement rules that ensure there will be sufficient capital to back up those promises. That's what the Dutch did almost 10 years ago, and it has hugely increased the sustainability of defined benefit plans by effectively making them more sustainable, more flexible, and more adaptable to changing conditions over time.
We have been stuck with DB arrangements that have not been flexible enough to deal with changing environments, and we need to change our regulatory environment so they become more flexible and hence more sustainable. I'm happy to discuss that issue further if you want to pursue it.
Let me go on to the other issue, which is the coverage and cost question for the five million workers who are not members of employment-based pension plans. Effectively, what we're saying to these five million workers is, figure it out yourself. Yes, we have provided the tax deferral rules that currently are in place, so there is an incentive to defer paying taxes on a part of your earnings if you put them in a registered pension plan, and you will pay those taxes later on when you withdraw the money as a pension.
So we have provided some provision in that sense, but we have provided very little from a public policy point of view into how much these people should save, what kinds of investment programs they should engage in, and what the costs might be that are incurred as they set up their own retirement savings programs.
What we have learned is that it is a very difficult thing for the average Canadian without a pension plan to figure out how much they should save to have a reasonable post-work standard of living that sits on top of what they get from the public pension. So the savings rate question is very difficult for them. The investment question is very difficult for them in the sense that the average person is not well schooled in investment theory, and then related to that question is the fact that if, for example, this money goes through retail mutual funds--and a good part of these retirement savings do go through that channel--then I think members of the committee generally are aware that the fees that are paid for being in those vehicles can be 2% or easily exceed 2% per annum. It doesn't take a lot to figure out if you pay 2% per annum in fees in a world where gross returns are perhaps 4%, 5%, 6%, it's very difficult to reach a reasonable income replacement rate, with a reasonable savings rate, over a 30- to 40-year period.
So these are the problems these people face. The question is, is that okay, or is this enough of a public policy issue where we should think about how to assist these people so they end up with reasonable income replacement when they retire, at a reasonable cost?
Two kinds of solutions have been proposed to deal with this challenge.
One, as was mentioned earlier, is just to expand the Canada Pension Plan so that it covers a higher level of earnings, for example, and that the benefit rate potentially could be increased. That approach has merit. It also has some demerits: does one size fit all? Do we really want to expand the notion of mandatory retirement savings without the flexibility of having people having some options? So those are the pros and cons of the “expand the CPP/QPP” approach.
The other approach that's been put forward is to facilitate the creation of personal pension accounts, but to do it in a way that gets more systematic savings owing, that regularizes the approach to savings, that helps people develop an investment policy, without their having to become investment experts, and also to help them, once they do retire, with how to de-accumulate their accumulated retirement savings in a way that they last the rest of their lives.
Should we help through creating some structures for these people, which could be a combination of private sector provision of the services together with some new regulation as to what these plans need to look like, especially with respect to cost? Those are the questions before us, those are the questions that have been debated, and those are the questions we now need to move to a resolution on.
As you well know, the next finance ministers' meeting on pension reform is in P.E.I. in the middle of July, and I think the time has now come to move from discussion and debate of these options to actually engaging in how to make some choices and move forward.
Thank you very much.