Finance Committee on May 27th, 2010

[John McKay, Liberal, Scarborough—Guildwood, ON]

Mr. Wallace anticipated my question, so I just want to pursue that a little bit more. Essentially in this, what's being described as a super CPP or additional savings, you have three choices: you can go voluntary; you can go mandatory; or you can go, in effect, with negative option billing. It seems to me that from what all of you are saying, voluntary is just a waste of time. It just won't happen. So then the choice becomes negative option billing versus mandatory. I'd be interested in your thoughts, first of all, both Mr. Whitehouse and Mr. Ambachtsheer, on that choice.

Then the second issue we've been hearing a lot about is whether it's a public model or a private model. I think what you were saying, Mr. Ambachtsheer, is that if it's a public model, i.e. wholesale, then the costs are 0.4%. If it's a private model, your costs then effectively become 2%. But if you don't in effect create a private model or option, shall we say, you make a lot of insurance companies and banks very unhappy indeed.

Could you elaborate on those two issues for us, please?

[Dr. Keith Ambachtsheer]

Right. I'd be happy to start.

First of all, when you say “negative option billing”, it reminds me of Rogers.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Which was not a happy experience.

[Dr. Keith Ambachtsheer]

That was a very different situation, because basically they said we're going to take your money unless you stop us. Here, with auto-enrolment, we're saying we're going to allow you to put your own money into a pension account that you still own if you allow us to do it. I think that's a different context. So that would be my number one point.

By the way, in the U.S., where this auto-enrolment has been used in 401K plans for years, it's shown to be tremendously effective. It's shown that the retention rate of employees is 95% with automatic enrolment, whereas if you go the voluntary route, it's much lower than that. That's point number one.

On the question of the wholesale-retail, it isn't as simple as public versus private. For example, in our database, if you look at very large 401K plans in the U.S., they also run at one-third of 1% per year. So it's not public versus private; the big driver is scale. In other words, scale creates economies of scale, which leads to low unit cost.

The other driver is, in whose interest are the decision-makers acting? The problem with commercial vendors is they have a conflict of interest. They have their own bottom line they're trying to maximize and they're trying to do the best for the employee. I'm not saying that they totally go one way or the other, but they have this conflict.

If you create a situation where the conflict doesn't exist, in other words, where by definition and by design all decisions are made for the interest of the beneficiaries, the combination of scale and that element will drive your cost up.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Mr. Whitehouse? Hello, Mr. Whitehouse.

[The Chair, Conservative, James Rajotte]

Mr. Whitehouse, we have about a minute. Do you have a comment on that question? Mr. Whitehouse, can you hear me?

[John McKay, Liberal, Scarborough—Guildwood, ON]

It's 11:30 there. Maybe he fell asleep.

I'll go back to Mr. Ambachtsheer with respect to public and private. That's an interesting distinction: it's scale. So if we look at scale, what is the tipping point of scale? Is scale $100 billion? Is scale $1 trillion? It seems to me that's a pretty important point,and you actually have a handle on that.

[Dr. Keith Ambachtsheer]

Right. If you look at the size of the funds in the CEM database, they go as small as $100 million and as large as $400 billion. We actually do see a very considerable size range. What you find over that range is that for every tenfold increase in size you get about a 20 basis point, or 0.2%, reduction in costs. So there is a significant difference between a $100 million fund and let's say a $20 billion fund.

The interesting question is, is there such a thing as getting too big? In other words, can you run into dis-economies of scale if the operation gets too large? I think, theoretically, yes. We haven't seen it very much yet in our database in that range we're looking at, where the maximum largest funds in the world are funds that are $200 billion, $300 billion.

The other way to look at it is in terms of the size of the membership of the fund, of the pension plan. Again, there, numbers like 100,000 minimum membership work a lot better than 20. Whether you need to go to a membership of one million versus 100,000, I don't think so. I think you'll get very good scale effects at 100,000.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Monsieur Généreux, s'il vous plaît.

[Bernard Généreux, Conservative, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Thank you, Mr. Chairman.

Thanks to all the witnesses.

I'd like to ask Mr. Béland a question. In your brief, I also underlined the sentence that states: “While CPP is fiscally sound for the predictable future, this is not the case of QPP...” I'm relieved to belong to Canada, not a country of seven million inhabitants.

[An hon. member]

Oh, oh!

[Bernard Généreux, Conservative, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

I knew that would trigger a reaction. Moreover, don't feel uncomfortable “scaring people” with the words “will” or “would”. In the past 20 years, they're the heavy weight champions in the art of “scaring people”. We don't need anyone else to do that.

However, I would like you to go back to the report you mentioned earlier, that is to say on exactly what the report states and the variable years aspect. We agree that there will always be good and bad years in the stock market and elsewhere, so there will be variable years. However, we're nevertheless talking about a long period of time here, nearly 30 or 40 years.

[Daniel Béland]

You're absolutely right. Obviously, Mr. Paillé is also right in that these are actuarial forecasts related to changing economic and fiscal realities, that's true, but also to basic demographic realities.

I mentioned the Quebec Pension Plan report. The main reason, which was also raised in other studies that I cited in the brief I've given you, that was distributed, is a demographic situation, and that is the main reason, I would say, why there is this challenge. However, it's an easy challenge to meet. It doesn't require a lot of changes.

The idea isn't to “scare people”, but to encourage action. And I think we can kill two birds with one stone: we can improve benefits for everyone in Canada and Quebec in both areas, and we can resolve the long-term problems or challenges.

In fact, my aim isn't to say that one plan is better than the other. This is a reality; these are facts. It is true that these are forecasts. However, they are nevertheless based on demographic realities that cannot be denied.

[Bernard Généreux, Conservative, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

You made such a good pass I couldn't miss it.

Some countries have opted for automatic membership. I would like you to talk to me about that, Mr. Béland and Mr. Ambachtsheer. Where automatic membership is implemented, how can that really improve the system in the very long term? It's the employer and employee who contribute to the plan, of course.

Unless I'm mistaken, based on the evidence we've heard to date, there is no single solution in this matter. Variable solutions will have to be consistent with each other. I'd like to hear what you have to say on that subject.

[Daniel Béland]

I agree on this idea of mechanisms related to economic theory.

It's true that the idea that people should be automatically included in the system and then that they should be able to decide to withdraw has positive effects on a purely voluntary system in which people choose to save. In the latter case, they automatically save until they decide to withdraw.

Studies have shown—Mr. Ambachtsheer might be better at talking about this than I—that people generally save more if they are automatically encouraged to save and can withdraw voluntarily, rather than the other way around.

In my view, it's true that the basic argument is valid. The question is whether this is a solution to the challenges that must be met. Personally, I think we can increase Canada Pension Plan and Quebec Pension Plan benefits and that that would be a major step in the right direction.

Is the other perspective possible? Yes, it can be done at the same time. I don't see any contradiction between the idea of increasing the benefits of both plans and exploring other possibilities regarding voluntary or automatic saving.

[Bernard Généreux, Conservative, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

All right. Thank you.

May I get an answer from the gentleman in Toronto?

[The Chair, Conservative, James Rajotte]

Could we have a very brief response, Dr. Ambachtsheer?

[Dr. Keith Ambachtsheer]

There's a book called Nudge: Improving Decisions About Health, Wealth, and Happiness, and it basically explains behavioural economics. The example that starts out this book is a high school cafeteria, and what we're asked to imagine is how the diet of the kids would change depending on how you arrange the food choices. If you think about that for a minute, I think we would all agree that by arranging the order that people go through the choices in food, you could create healthy diets or poor diets.

The analogy is actually a very powerful one because it explains how people make decisions, and, by the way, a lot of the stuff the Obama administration is doing is based on these notions of behaviour. The point of the Nudge book is that we could do the same thing with retirement savings, in that how we design the mechanism impacts how people behave. If we can do a really good assessment of what makes the most sense, then we can design that.

[The Chair, Conservative, James Rajotte]

Thank you. Merci.

We'll go to Mr. McKay.

[John McKay, Liberal, Scarborough—Guildwood, ON]

I know you're just trying to give me a nudge here, Mr. Chair.

The other issue that keeps coming up here--and Nortel is the classic example--is the issue of a superpriority. Folks who are entitled to their pension benefits lose out because other people get in ahead of them in a bankruptcy situation.

We are certainly getting push-back from a variety of financial entities, saying that if there is the creation of a superpriority for either defined benefits or for regular pension plans, financing will dry up, the cost of capital will become more expensive, and businesses will find other places to lend their money in countries that don't have this kind of a superpriority.

I understand Mr. Whitehouse is back with us. Maybe I could direct it to all three of Mr. Béland, Dr. Ambachtsheer, and Mr. Whitehouse. I'd be interested in your thoughts with respect to the concept of a superpriority for folks such as the ones Ms. Borenstein represents.

[The Chair, Conservative, James Rajotte]

Could we just have a brief comment from each, please?

Mr. Whitehouse, perhaps let's start with you.

[Edward Whitehouse]

I think a number of countries have addressed this question, but we have to remember that only in very rare conditions do we have such major underfunding of companies' pension schemes as occurred after the global financial and economic crisis. As I said before, at that time there was a shortfall of about 25%, on average, in defined benefit plans in most of the OECD countries where these are common.

When a company goes bankrupt with an underfunded scheme, there is, of course, a problem, and some countries--the U.K., for instance--have moved unfunded pension liabilities higher up the priority in bankruptcy. The taxman always wants to come first, of course, and then you have the banks and the bondholders, but they have tried to move pensioners up the range. They have also introduced the pension protection fund to protect those defined benefit liabilities.

[The Chair, Conservative, James Rajotte]

Thank you.

Go ahead, Dr. Ambachtsheer, please.

[Dr. Keith Ambachtsheer]

My response would be that the question is becoming increasingly a moot point. Most corporations have already closed their defined benefit plans. They've already moved to a system oriented to individual pension accounts.

No new DB plans are being opened by the corporate sector, so you're really talking about almost a wind-up situation. As for the idea that you can retroactively change these priorities, I'm not a lawyer, but I think there's a huge legal argument that says you cannot. I don't think it's a big deal to do it prospectively, because that's not where pensions are going.

[The Chair, Conservative, James Rajotte]

Go ahead, Monsieur Béland, s'il vous plaît.