Finance Committee on May 27th, 2010

[Dr. Keith Ambachtsheer]

I have to say that I found the previous speaker's answer quite compelling, and mine is very much the same. I think we have a national issue of how we address poverty. There's a whole discussion around what the poverty level is and how you calculate that and how you provide income for people who somehow fall below that poverty level.

What we have designed in Canada, at least for people over 65 years of age, is the GIS, which plays a major role in lifting people above the poverty line. As our speaker from the OECD pointed out, over a 20- or 30-year period, that program has been hugely successful in reducing poverty among seniors. So I think we shouldn't try to change a program that has been fundable and successful.

The issue from my point of view today is not so much poverty among seniors. We've demonstrated that we have largely dealt with that issue. The issue today, for me, is the middle-income workers who do not have pension plans. That's a different issue that requires a different design. You could use CPP/QPP to address the middle-income worker issue, but it relates to raising the YMPE from $47,000 to a much higher number, for example. It implies increasing the benefit level from 25% of income replacement to a higher number, like 50%, for example. It's a different discussion. This is not about fighting poverty; it's about creating mechanisms for middle-income workers to be able to maintain a reasonable standard of living after they stop working. It's a different discussion.

[The Chair, Conservative, James Rajotte]

Thank you very much. Merci beaucoup.

We'll go now to Ms. Block, please, for seven minutes.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Thank you very much, Mr. Chair.

Welcome here. It has been a very good discussion so far, and I just want to turn the discussion a little bit to something that was referenced to us as a finance committee earlier in our study. One of the themes that we as a committee have heard is the idea of calling for publicly funded insurance or backstops of pension plans. Insurance in general is something we can all agree is good for people to have. In fact, we Canadians gain comfort from having our homes and our cars insured, and we all, to varying degrees, make use of health insurance.

But I have a few observations concerning the development of plans, the goal of which is to insure pensions. From what I have been reading and have been able to learn about this idea of a pension guarantee fund, I would say that the development of this type of a plan brings with it a very unique set of circumstances and challenges. For example, a guarantee fund could provide a disincentive for employers in financial difficulty to properly manage their pension plans to control risks if their pension liabilities would be covered, an example of moral hazard. A plan sponsor could engage, in fact, in riskier investment practices without bearing downside risk, which would increase its incentives to take on such risk while potentially increasing the cost to guarantee the fund.

We've also heard the concern expressed that the creation of such a fund would lead to the inappropriate subsidization of weak sponsors at the expense of strong ones. A risk-based premium would be perceived to penalize most of the plans that are vulnerable and for which the protection scheme would be sought. Ultimately it could contribute to a plan wind-up or exacerbate the challenges of the sponsor in financial difficulty as it would impose additional costs.

Finally, it is also my understanding that the experience with these types of plans has been problematic. In fact, existing guarantee funds in the U.S., the U.K., and Ontario all have significant deficiencies and could require taxpayer funds in order to meet their obligations.

So having said all of that, I'd like to ask Dr. Whitehouse a couple of questions. Are there any jurisdictions that have managed to address the issues of moral hazard with respect to a pension guarantee fund, and if so, what are the characteristics of the country's pension and retirement income system that led it to be able to do so?

[Edward Whitehouse]

Thank you very much for the question.

As you said in the question quite rightly, all of these schemes that have been established have faced immediate problems. The Pension Benefit Guaranty Corporation in the U.S. was set up in the mid-1970s and was already in deficit a couple of years later because of problems with steel companies and the airlines and so on.

The U.K. has tried to address the issue of the moral hazard question by attempting to risk-rate the premiums for the pension protection fund established in the U.K. Again I think there is a problem there where the recent financial crisis has just made the holes in the balance sheets very much larger. Most countries with significant defined benefit schemes--Canada, Ireland, the U.K., the U.S. or even the Netherlands--were in pretty similar situations of being about 25% underfunded immediately after the crisis. And there's a risk, such as in the case of the lady from Nortel, that when a company goes bankrupt it will leave behind a scheme in significant deficit.

I am greatly concerned that these funds do face problems in their design, and I don't think any one country has been able to have a protection fund that avoids the moral hazard problem and doesn't become a drag on the public finances.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Thank you. So we've addressed the challenges.

I'm wondering, are there any policies that you would suggest could reduce the risk of plan members facing a loss in respect of their promised pensions that are more effective than a pension guarantee fund?

[Edward Whitehouse]

I think part of the problem we're facing in many countries is there is a shift away from defined benefit to defined contribution schemes. Canada has been a little behind the U.S. and the U.K. in that shift, but the shift is nevertheless going on.

The problem is that we now have defined benefit schemes where the demographics of those schemes is very old. The schemes are closed to new members and they consist of pensioners and older workers. That's very difficult to finance when you don't have ongoing movement and contributions into the schemes. It makes the options very, very difficult when plans are closed to new members or closed to new contributions from existing members, as many plans have become.

It is a very difficult problem. In the long term, when we have defined contribution schemes, this problem does not arise. People have their individual accounts.

[Dr. Keith Ambachtsheer]

Mr. Chair, if I could add to that, what I said earlier is in fact a response to your question, which is to start regulating defined benefit plans the same way we regulate banks and insurance companies. In other words, if you have risk on a balance sheet, you must have a risk buffer against adverse outcomes. That's what we do with banks and insurance companies. We have not done that with DB plans. Until we start doing that, we're going to continue to have these problems.

I totally agree with everything that was said about these insurance schemes. They will never, never work.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Thank you very much, Mr. Ambachtsheer.

[The Chair, Conservative, James Rajotte]

You have time for a brief question.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Are there any other witnesses you could suggest we call to appear before us who could make some more suggestions on this point?

Dr. Whitehouse.

[Edward Whitehouse]

I think I could recommend colleagues from OECD. I certainly have colleagues at OECD who are experts in this field, and I can forward their names to you.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

That would be great. Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Ms. Block.

We'll go to Mr. Marston, please.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

Thank you, Mr. Chair.

I'm at one of those stages where I have way too many notes from these presentations.

I want to thank the folks for the information being provided today.

Ms. Borenstein, I was the one who put the motion about LTD to the House. I've offered our party's support for Mr. Eggleton's bill on it. We'll be moving forward on that as best we can.

Mr. Béland, you were talking about the Canada Pension Plan. The one thing that's happening to some degree today is that we're moving to the point where we're looking at the private side as opposed to the public side. From my perspective, the public side has to become the foundation, and it has to sustain as the bare minimum for people.

My understanding on living in poverty...we heard the figure of 4% a few minutes ago. From Statistics Canada, the figure is 266,000. It is growing, the last I heard, so we had proposed an immediate increase to GIS.

But in talking about the CPP plan, you're probably aware that some of the provinces and the Liberal Party have suggested a supplemental plan to the CPP. We're concerned about that because of administration costs. We've proposed that you take the core assets of CPP and increase those.

The other difference I'm seeing is that the Liberal Party has spoken about it being voluntary. I don't think that will work. We understand that 63% of Canadians have neither a pension nor savings, and there's evidence built into that number that I believe makes it important that whatever we do we build a foundation that is mandatory.

I'd like your response on comparing the two, if you would.

[Daniel Béland]

The supplementary plan is better than nothing. It's better to have a supplementary plan than no action whatsoever regarding CPP and public pensions, but I think that we already have CPP and QPP programs that Canadians know about. The programs work, but they are relatively modest by international standards. There are different ways to increase the contributions and benefits. It could be the replacement rate, it could be a YMPE increase, or it could be both. I think it's just a more straightforward and probably more effective way to improve long-term retirement security for Canadians.

I believe in simply improving what we already have instead of creating something on the top. We already have a lot of supplementary options for Canadians. There are RRSPs, which are voluntary, obviously, and there are private pensions, but coverage is limited. Some people are not covered. The good thing about CPP and QPP is that all workers contribute and participate. I think it's a program that could be expanded.

I'm not saying we should necessarily double the replacement rate. Even an increase from a 25% to a 30% replacement rate or in the YMPE will be a significant increase and way above the average wage. That could help a lot of people who don't save enough for retirement. Again, it's not just about low-income people; in that case it's really the middle class.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

It takes the pressure off.

[Daniel Béland]

I think it's important to increase the maximum pension available under CPP. Again, it's an income maintenance issue here. The focus is not so much on poverty, although it could have a positive effect on that too.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

Thank you.

Dr. Ambachtsheer, in your opening statement and at several other times I heard you talk about the role of government regulation within the defined benefit pension plan.

We've had instances in Canada of corporations apparently using the CCAA to get out from under these obligations. At the start of your presentation--at least, I believe it was yours--you mentioned how it began as a gratuity and became a contract, and workers today very much see the private pension plans with their employers as contracts.

We had the situation of Hollinger, which sold off some newspapers but kept the pension liability, and now people are receiving notifications that they're going to wind it up. In my home community of Hamilton, when Canwest was selling off CH TV to, I believe, VisionTV, they had a pension plan that was $5 million short. They wound up that pension plan for the employees, but they put $41 million in for the executive side just before they wound it up.

Those kinds of abuses, to me, scream for some sort of government intervention, and I would like your comments on that. Also, there's a bill in the House that just went to committee. It's called Bill C-501, and it talks about giving preferred status to pensions within CCAA and within the BIA. I'd like to hear your comments on that, please.

[Dr. Keith Ambachtsheer]

In the short term, that might help some workers some of the time, but it doesn't fundamentally deal with the question that defined benefit arrangements, especially in the private sector, are incomplete contracts even today. So you always have this property rights problem.

The only way to deal with the property rights problem--and this may not totally suit you--is to have individual pension accounts that are owned by workers themselves. At least then you would have clear property rights. That's why I believe that in the private sector the move is inevitably toward individual pension accounts.

I do agree that increasing the Canada Pension Plan and the Quebec Pension Plan is a reasonable and attractive alternative in a number of ways. But I read somewhere that politics is the art of the possible, and the reality is that there is a very significant constituency in Canada of small employers who would be forced to increase their labour costs, and you just cannot ignore that issue. So when you advocate a mandatory increase, you can't just talk about the workers; you have to talk about the total system, and the reality is that you're going to have considerable resistance to that approach.

I've been scratching my head and thinking about what an alternative might be that would get greater buy-in, that would still meet some of the needs of coverage and property rights but also get larger buy-in from a larger group of people.

There is now a new branch of economics called behavioural economics. It has taught us that even though economic theory assumes people are rational and do rational things all the time, the reality is they don't. So how do we design retirement income systems that take that reality into account?

You mentioned earlier the notion of voluntary. I agree you could create the best voluntary system in the world and you would get relatively low take-up. But we've learned that the notion of automatic enrollment in a well-designed system... But let's say every non-covered worker in Canada who doesn't have a pension plan gets a letter on January 1 of some future year. It says, “Congratulations, as of January 1 you are now a member of...” In my C.D. Howe paper, I call it the Canada supplementary pension plan. “You don't have to make a lot of choices. This will be your contribution rate. This is the target pension it should produce under reasonable assumptions. This is what your investment program will look like as you age over time, unless you intervene.”

That kind of design is tremendously attractive, in the sense that if people trust the system, a lot of them will go along and say thank you very much that you did this for me.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Ambachtsheer.

Thank you, Mr. Marston.

We'll move to Mr. Eyking, please, for a five-minute round.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

Thank you, Mr. Chair, and I thank the committee for having me here today.

I'm replacing Mr. McCallum, which is very convenient for me, because I have some employees from Nortel in my riding and they have brought me some of the very bad situations they're in. One is Derrick McPhee. He has MS and he's from Nortel. When you mentioned that, it showed how bad a shape they're in--not only losing their jobs, but having illnesses to deal with.

What should we be doing to help these employees? How are they dealing with it now? Do they have CPP or...?

[Arlene Borenstein]

Are you talking about the ones on long-term disability, OAS?

[Mark Eyking, Liberal, Sydney—Victoria, NS]

Yes.

[Arlene Borenstein]

We don't even know who the 400 employees are. We have contact with about 100 or so. It seems that most of us have qualified, even under the stringent eligibility requirements for Canada Pension disability. That's even more difficult to qualify for than the long-term disability plan at Nortel. But the average monthly amount is only about $800, according to 2008 numbers I have from Service Canada. As I said earlier, that puts us about $8,000 below the poverty line for a single person, and it forces us to rely on government social programs.

If there were an amendment to the bankruptcy legislation, it would be part of a safety net that would prevent people like us from falling through the cracks. The legislation seems to be missing a piece on self-insured plans.

[Mark Eyking, Liberal, Sydney—Victoria, NS]

There has to be a safety net there, and that brings me to my second question. I'm going to ask Mr. Ambachtsheer about a safety net.

When you hear today about employers going bankrupt and taking the money before they go, and managers of funds taking 2% and more, it seems that others are getting the take on this and employees are left in the lurch. What if we had a system similar to the EI system, where employees put some in and employers put some in? I don't know if you'd have the government manage the fund, but you would also have a bit of insurance. Every company in Canada would pay into an insurance plan of some sort, so if one went bankrupt the insurance could cover some of that failure.

Are there any creative ideas like that in other countries, where they have something like that and everybody pays into it? You would have two things: one part where you'd both contribute, but also an insurance where the company would have to put so much money in. All companies across the country would have that fund that could be administered to help the plan that was not sufficient.