Finance Committee on April 15th, 2010

[The Chair, Conservative, James Rajotte]

Good afternoon, ladies and gentlemen.

I call to order the eighth meeting of the Standing Committee on Finance. We are continuing our study of the retirement income security of Canadians.

I want to welcome all of our witnesses to the discussion here this afternoon. We have one individual and four organizations presenting.

We have Dr. Ian Lee from the Sprott School of Business, Carleton University. We have Tina Di Vito from BMO Financial Group. We have Catherine Swift and Doug Bruce from the Canadian Federation of Independent Business. We have three people from Federally Regulated Employers--Transportation and Communications; they are John Farrell, Ian Markham, and Marlene Puffer. Finally, from the Office of the Superintendent of Financial Institutions Canada, we have Judy Cameron.

Thank you so much for being here with us.

I think we'll proceed in the order of introduction. Try to limit your presentations to about seven minutes, and then we'll go to questions from members.

We'll start with Professor Lee, please.

[Prof. Ian Lee, Director, Master of Business Administration (MBA) Program, Sprott School of Business, Carleton University, As an Individual]

Thank you very much for the invitation today.

I have some slides. Some of them will be information or data that are familiar to some people, but I think it's worth reviewing them, and then I'll come to my conclusions. I'll try to be as brief as possible for the committee.

There are four things I want to talk about: first, whether there in fact is a pension crisis; secondly, the failure by many pension researchers in the academic community to include home equity as a savings towards pensions; third, the minimum pensionable age; and fourth, a failure to produce a level playing field between the private and public sectors.

I will disclose that I don't consult to any organization anywhere, directly or indirectly, not to unions, to governments, to corporations, and I have no investments, direct or indirect. I'm a tenured professor, so I can't be fired. I speak truth to power. I'm a rare, rare Canadian: I have a job for life--well, senators and tenured academics.

I'll start with the first slide up there. That's the OECD slide, from their massive comparative pension study, showing that Canadian elders, defined as people over the age of 65, are the third wealthiest on the planet earth in terms of their annual income.

The second slide shows the poverty rates among elders. We have the second-lowest poverty in the world among people over 65. The poverty rates for young people are much higher than for our elders.

A third comparative slide that is very useful to examine is the OECD pension spending across the OECD. We're one of the lowest, which I interpret as very good news. There are an awful lot of problems in the European Union, as we know; Greece is essentially insolvent. And underlying a lot of the problems in Europe are unsustainable and extraordinarily generous pension plans.

I'm jumping now to the home ownership data. Approximately 68% of Canadians own their own homes, which is one of the highest figures in the world. Many Canadian pension studies--and I'm referring to scholarly pension studies--simply ignore or deny the reality of home equity. Yet a much larger percentage of Canadians have homes than have RRSPs. Far fewer Canadians invest in RRSPs. I think we can interpret this data to suggest that Canadians understand they can live in their homes throughout their lives, sell them at the end, and retire or downsize to smaller homes, as many do.

This is a metric from Scotiabank's “A Nation of Homeowners”. We, as Canadians, state by our investment choices that we prefer home ownership to financial savings, including pensions.

I'm trying to rebut the argument that there are a lot of people who are ignorant about pensions. I'm arguing that they understand they have to make trade-offs, and they choose home ownership over pensions in their twenties and thirties when they're starting out.

Committee members have these metrics, so I won't belabour them, but again, it's showing a very nice segmentation--age and debt. And as we know, as we get older we pay down our mortgage and we have more equity, more savings to finance our pensions, among other things.

Canadians' household net worth, after a brutal recession, is now $6 trillion, which is an extraordinary amount of savings. This raises the question, if we're not saving enough, how much is enough? This slide of the homeowner equity is showing that, as is personal savings as a percentage of balance sheets.

I picked this metric from Statistics Canada from 2006. I want to go to the second slide, and it shows, once again, that the single largest asset is not pension assets or savings or retirement RRSPs, but home ownership, again reflecting the choice of Canadians to buy homes before any other investment.

I'm very conscious of my time, so I'll push forward very quickly.

Bismarck established the world's first pension in 1870, as the chancellor of Germany. He was a very clever politician. He set the pension retirement age at approximately the age of life expectancy. You dropped dead about the time you were eligible to collect the pension, which was 65. Of course pensions were highly sustainable in Bismarck's Germany, if you had very few people collecting.

Now, of course, women live to age 83--that's Statistics Canada data--and men to age 78. We have to start at least talking about adjusting the minimum pension age to 70 to reflect the much longer lifespan. Why 70? Well, in the OECD, more precisely in Europe, a good number of countries have already increased the age to 67. The U.K. shifted to age 68 last year.

The former Congressional Budget Office director is strongly advocating 70, as are the former director of the currency, who did the video I.O.U.S.A., and Pete Peterson, author of Gray Dawn. Pension ages in the OECD are going up, according to OECD analysis.

Just finally, because I have only a few slides left, I really want to talk about pension unfairness. I'm sure you'll hear this from others, such as the CFIB. Although I am in the public sector--I am a tenured academic--I did work for ten years in the private sector in banking, and I have great sympathy for people in the private sector, many of whom have no pension, while we in the public sector have very generous pensions. This is unfair to those in the private sector.

There are things that can be done. Annual caps on retirement savings rules can be addressed. There should be restrictions on private large-pooled pensions. Savings for timed pension plans should be addressed. What we really should be aiming for as an overarching goal, a policy objective, is a common set of pension rules that are approximately equal between the public and the private sectors, with a common pensionable age of 70. I realize many of my colleagues--academics and friends of mine in the public sector--are not going to be happy with this recommendation. Also, we should be discussing, because of the problems with Nortel, looking at one possible option—and I hope this committee will—being a pension guarantee corporation similar to the one in the United States, which is working, apparently, quite well.

The point I want to finish up with is that if you as the committee and you as Parliament increase pensions to produce much more generous pensions, it is going to mean a diminution of moneys available to Canadians to buy their houses. There is a trade-off involved. It's all very fine to talk about creating a much more generous Canada pension or other pension systems that are mandatory, but it will represent a diminution of moneys available for home ownership, and that's the trade-off that has to be addressed.

Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Lee.

We'll now go to Ms. Di Vito, please.

[Tina Di Vito, Director, Retirement Strategies, Private Client Group, BMO Financial Group]

Thank you, Mr. Chairman.

On behalf of BMO Financial Group, I am pleased to present some views on retirement income security of Canadians.

Throughout my career, I've been involved in financial planning and dealing with the many issues that the committee is facing right now. As financial planners, we hear from our customers all the time. We have first-hand knowledge of what's on their minds. I would be pleased to share that with you this afternoon.

In addition, as director of BMO retirement strategies, I'm head of the BMO Retirement Institute, which we established two years ago. The retirement institute is an independent research group that prepares reports and provides insight and financial strategies for individuals who are planning for, or are currently in, their retirement years. Our work is supported by the BMO Advisory Council on Retirement, which is chaired by someone well known to you, former clerk of the Privy Council Mel Cappe. The panel is made up of a cross-section of talented individuals across the country, including one of your colleagues from the red chamber, Senator Pamela Wallin.

We see all of this--the institute, the reports we publish, participation in events like these--as part of our efforts to help Canadians make better financial decisions. As a bank we are trying to do our bit to improve financial literacy among Canadians, and that is the thinking behind our customer commitment to making money make sense.

At BMO Financial Group it is our firm belief that Canadians need to take charge of their retirement. We see this as a very deliberate exercise that involves three basic steps: creating what we call your retirement picture, then building a financial frame for that picture, and finally putting in the financial strategies to help you achieve your retirement goals by starting that process as early as possible. This approach helps to identify savings gaps and trade-offs, as my colleague Ian Lee was talking about, between paying down a mortgage or saving for retirement that is necessary, but it also includes options that we're now seeing, such as working longer, spending less, or deliberately changing lifestyle in retirement.

In our view, Canadians are not doing all they can to save for retirement. We've conducted quite a number of surveys through the retirement institute, and I'd like to share some of the results with you.

For example, in January a survey we did showed that only 34% of Canadians had a financial plan. This was a significant improvement from 2008, when 27% of Canadians had a financial plan, but we think there is still a significant gap. That is part of the reason we're here today discussing pension reform and whether there is a problem or not.

We did another survey at the end of February, right after RSP season, and only 38% of Canadians reported making an RSP contribution before the deadline. When we asked the respondents why that was the case, not surprisingly, two-thirds of the respondents cited lack of funds as the reason for not being able to make an RSP contribution. In fact, they identified it as an important thing to do; they just had a lack of funds.

Another interesting finding from our research is that Canadians today, unlike our parents' generation, seem relatively unconcerned about taking debt into retirement. This is not a good idea. We urge all our customers, as well as Canadians, to do their utmost to enter retirement debt-free.

The research results are a little troubling. I think they particularly signal a cause for concern for members of the boomer generation who are on the verge of retirement. People retiring now are living longer--well beyond age 65--but they're saving less, and the trend away from defined benefit plans to defined contribution plans has certainly shifted the burden of managing retirement savings from institutions to individuals.

I will point also to the other matter that is of great concern to Canadians today, and that's financial fluency. I think the two issues go hand in hand. In fact, most people in this country have neither defined benefit plans nor defined contribution plans, although I should point out--and this may be of interest to our friends from the CFIB here today--that banks such as ours do offer individual pension plans as an alternative to provide a defined benefit plan for small business owners. In other words, there are some private sector alternatives to alleviate defined contribution or defined benefit gaps.

Many commentators of late have been focusing on the public pension side of the equation, but what I would like to address today are some brief changes to the existing RSP and RIF rules that would give Canadians more control over their retirement assets. I set these out in an article that appeared in Policy Options magazine last month, but I will summarize a few of those ideas today.

First we recommended the removal of the age restriction for contributing to an RSP. Canadians are living longer and working longer; it makes sense that they should be able to save by using their RSP for a few more years instead of having to stop making contributions at age 71. We can talk more about that later.

We also recommended reducing taxes paid on RRIF withdrawals. Currently, RRIF withdrawals are taxed as ordinary employment income, potentially attracting top rates of taxation and receiving none of the preferred tax treatments the underlying securities in those plans would have generated had they been invested outside of an RRSP. Instead, we recommend that only the deferred employment income contributions to the plan be taxed as employment income. The investment income would be taxed at a lower rate--something that would mimic what those funds would have been taxed at had they been earned outside of those plans.

We also recommend that the prescribed rate at which funds must be withdrawn from a RRIF be reduced. Currently, at age 71 the minimum RRIF withdrawal is 7.38%. We're recommending something lower than that to allow the RRIFs to last as long as Canadians will.

Next we think you should broaden the opportunities, when plan contributors die, to pass on their RRSPs and RRIFs tax-free to children who have RRSP and RRIF accounts as well. Why not allow tax-deferred rollover to the next generation to allow sons and daughters to benefit from their parents' RRSP savings? This could be an immediate benefit to people approaching retirement whose parents might still be alive. Those funds currently will pass to the second generation, but only on an after-tax basis. This could provide a boost to individuals who are short on savings for retirement.

[The Chair, Conservative, James Rajotte]

You have one minute, Ms. Di Vito.

[Tina Di Vito]

We recommended tax-free rollover from RRIFs and RRSPs to RDSPs in the last budget. We were very happy to hear that announcement included.

I'd like to make one final comment about Ian Lee's presentation on using home equity as a retirement vehicle. In our experience as financial planners, Canadians are very reluctant to move out of their homes during old age, and prefer to age at home.

Secondly, the amount of equity that is freed up when a home is downsized is often much less than anticipated. Although we view homes when totaling net worth and savings, using them as an alternative to registered savings plans could be misleading.

I thank you, Mr. Chairman. We'll be pleased to answer questions.

[The Chair, Conservative, James Rajotte]

Okay. Thank you very much, Ms. Di Vito.

Now we'll go to Ms. Swift with CFIB, please.

[Catherine Swift, President and Chief Executive Officer, Canadian Federation of Independent Business]

Thank you very much for the opportunity to be here today to speak with you.

In the pension area, small and medium-sized firms certainly have a number of interesting challenges, some of which have been alluded to a little bit by the earlier presenters. Because we don't know yet which way our discussions are going to head, I thought I'd open with some principles that are important to the small and medium-sized business community, which is equal to about just under half of our economy in Canada. This is obviously a very important group for the economy generally and for employment in general, because typically small businesses punch above their weight in terms of job creation.

As an example, you might be interested to know that during the last recession aggregate employment in the small and medium-sized business community stayed constant. It did not fall collectively, as some firms were down and some were up. They added a very welcome degree of stability during that time. They are obviously an important constituency. Naturally I'm biased, but I do think it's important overall.

Some of the principles.... A number of options have been put out on the table so far, such as doubling CPP premiums—in other words, doubling a mandatory payroll tax. We feel some type of voluntary option or options obviously would be much more welcome. We already have a high payroll tax burden in Canada that does fall disproportionately heavily on the smaller firm. And of course it really is a tax on jobs. That is something we would be very strenuously opposed to.

Think of the self-employed. The self-employed person pays both the employer and the employee proportion of CPP. You'd be asking them to pay 20%. That's pretty rich. Just using that example shows you that's not a particularly functional solution.

Something that was proposed by the Canadian Life and Health Insurance Association was perhaps to require firms with 20 employees and up to set up a plan. Again, we don't know details about that, but that type of mandatory approach we would oppose as well.

However, we do feel more flexibility could be introduced into the system to permit small and medium-sized firms to offer plans at a lower management cost than currently exists. Right now, the most accessible tool for a small firm is a group RRSP. As we know, management fees on those tend to be significant, so that's not the most efficient way of operating there.

But there definitely are ways--such as multi-employer pension plans—of making those rules a little easier for a smaller business, which is never going to have much in the way of economies of scale, to be able to tap in, join with other employers, and achieve the economies so they could bring down that cost-of-fees element.

As Ian Lee mentioned earlier, yes, we have done a lot of research on the large and growing gap between not just pensions but pensions as well as remuneration in the public sector versus the private sector. It's present at all levels of government. We'll just focus on the federal for the moment.

The current gap, if you include salaries plus pensions and other benefits in the federal public service, averages over 40%. Obviously that's a significant number. A lot of people have put forward the notion that as far as this issue goes, all we need to do is to get businesses to pay the same as they do in the public sector and all our problems would go away. For starters, if we did that, we wouldn't have any businesses left, because they simply couldn't compete. They have to compete in the marketplace, which governments do not. Also, they're not unrelated issues. Again, the example that if people don't have the money to put into an RRSP, there are probably a number of reasons for that. One is that we have quite high tax levels. The more you tax people, in part to pay for very generous pensions and benefits in the public sector, the less they're going to have to put away for their own retirement. So some fairness needs to be brought to bear there, and we very much believe that no one in the private sector—employee or employer—should be asked to put up one more cent to any kind of mandatory pension solution until we've made a start on bringing some fairness to the public sector versus the private sector disparities.

Entrepreneurs also have some special challenges in their own retirement, succession, whatever you want to call it. We have a large baby boomer contingent in the small-business sector, just like every other sector of the economy. They're looking to retire. We were very happy that government increased the lifetime capital gains exemption from $500,000 to $750,000 a couple of years ago. There are other measures. I'm saying don't only focus on pensions; maybe focus on some of these other tax measures that could also grease the wheels for the entrepreneurial group to be able to hand off, sell their businesses successfully. That's often their own retirement.

That leads me to the first slide here, which is based on some data going back to 2006. We're right in the middle of doing another survey on a bunch of related issues and will have that by the end of the month. So we'll be able to meet the deadline and will make sure that you get that information. We'll probably have it in about ten days, I would say. So these data are a bit old, but I don't think they're going to be terribly out of date.

When we asked our members in 2006 what was important to them in their own retirement, personal savings and assets were number one; lifetime capital gains were obviously also very important; then proceeds from the sale of a business, naturally; and RRSPs were not unimportant in the mix; and then there were dividends from business; and then the CPP, and so on. You can see that there.

The next slide looks at the types of plans offered in the workplace. Again, there are a lot of impediments right now to offering workplace plans. We think it's a good target area to do some work—and, again, you can see those data for yourselves. By and large, there are not pension plans offered in most of the small-business workplaces, and the typical tool tends to be group RRSPs. The third slide shows that matched employee contributions to a group RRSP is the most important tool.

For the owners who do not offer a plan, the number one reason obviously was that it was too expensive. Just under a third said it was too complicated and burdensome, and a pretty significant contingent of business owners, about a quarter, had no interest in offering a benefits plan because their employees say that's not where they want to go. So they don't see the value in offering that kind of plan.

When you look at the private sector versus public sector issue in terms of registered pension plan coverage, it's virtually 180 degrees different. There's very large coverage, over 80% coverage, in the public sector, and just a little bit less than that in the private sector. Those are StatsCan data, by the way.

Retirement age is something else. Some others were talking about the need to increase retirement ages, as we're living longer, which is good, but it does put the pressure on pensions. On this slide, we see those in the public sector retire significantly younger than those in the rest of the economy.

I know a lot of people say that public servants pay for their pensions. Well, the current federal situation is that they actually only pay 32¢ on the dollar now, but it is slated to go up to 38¢. So about two-thirds is being paid for by the private sector. Even so, private sector workers can't afford to put away for themselves what they are required to contribute to public sector pensions. So even if it were a 50-50 split, it wouldn't achieve fairness.

Finally, just to sum up, we have this two-tier system, the private versus public systems. It causes labour market distortions, as small business often get their employees poached away by the public sector. Of course they're subsidizing that poaching with their own tax dollars, and that is a little perverse. There's also the problem of the aging population, and so on.

Just in closing, we really need better information on our public sector liabilities. We see the trouble Greece got into, in part because it has a very bloated public sector with very attractive benefits. That's not Greece's only problem, but it's a key one. In Canada, we need to get a grip on our own issues, so we need better disclosure from government.

Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you very much, Ms. Swift.

We'll now go to FETCO. Mr. Farrell, will you be starting?

[John Farrell, Executive Director, Federally Regulated Employers - Transportation and Communications (FETCO)]

I will. Thank you, Mr. Chairman, and thank you very much for inviting us to talk to this committee once again.

I am John Farrell, the executive director of Federally Regulated Employers--Transportation and Communication, otherwise known as FETCO. Here with me as advisers to FETCO are Mr. Ian Markham, Canadian retirement innovation leader for Towers Perrin, and Dr. Marlene Puffer, managing director for Twist Financial. Mr. Markham is a leading actuary in Canada, and Dr. Puffer holds a PhD in finance and applied statistics and is an expert in fixed income and pension investments.

FETCO is an organization consisting of a number of major employers and associations under federal jurisdiction in transportation and communications. A list of our companies appears in appendix A. FETCO members employ approximately 586,000 employees. The majority of FETCO's members provide defined benefit pension plans, and some of the companies also provide defined contribution plans.

Last spring we appeared before this committee to discuss our recommendations for strengthening the pension plan benefits for employees and retirees without unduly constraining the financial flexibility of plan sponsors to maintain appropriate investments in their businesses. Then last October the government announced its intention to make specific changes to the Pension Benefits Standards Act and associated regulations.

The proposed changes are intended to be a balanced package of measures that resulted from extensive consultation with Canadians. The proposed changes provide enhanced protections to pension plan members. These include the following: full funding for any deficit upon plan termination; filing actuarial valuations on an annual basis; restrictions on contribution holidays; a prohibition on plan amendments if a plan is less than 85% funded on a solvency basis; an increase in the current “excess surplus” limit on employer contributions above its current 10% threshold to 25%; and greater pension plan financial disclosure to plan members.

The proposed changes in funding rules, including the ability to utilize letters of credit, will moderate, to some degree, the current volatility of employers’ defined benefit pension contribution requirements. These are much-needed changes that will provide employers with greater predictability in managing their cashflow.

FETCO's members support this balanced package and the changes to the Pension Benefits Standards Act and regulations. We would like to emphasize both the importance of these proposals being implemented and their implementation on a timely basis.

The need for permanent changes in the pension plan funding rules are apparent. Twice in the last four years the government has introduced temporary funding relief to address the onerous and volatile nature of solvency funding requirements. Yields on long-term government bonds, on which solvency liabilities are based, remain at historically low levels. Financial markets remain volatile. Defined benefit plan sponsors continue to be burdened with onerous and volatile solvency funding requirements.

Bill C-9, recently tabled in the House of Commons, contains the proposed changes to the Pension Benefits Standards Act. However, most of the details will be contained in regulations, which have yet to be pre-published. We urge the Parliament of Canada to adopt the proposed changes to the Pension Benefits Standards Act and the government to issue enabling regulations prior to June 30, 2010, the filing deadline for year-end 2009 actuarial valuations.

Now I'd like to address the issue of creditor status in the event of bankruptcy. I know this committee is examining the creditor status of less than fully funded pension plans in the event of a sponsor’s bankruptcy, and we would like to offer FETCO's comments.

We appreciate the policy intent of providing enhanced protection to pension plan beneficiaries in the event of a sponsor’s bankruptcy. The unintended but nevertheless adverse financial ramifications of such enhanced protection could, however, be significant.

Legislation granting preferred creditor status for pension plan deficits would negatively impact existing creditors, including corporate bondholders, as well as plan sponsors that rely on capital markets for financing. It would increase sponsors’ financing costs. It would reduce the value of the sponsors’ existing bonds. It would reduce the availability of credit to plan sponsors. For weaker plan sponsors, it could limit access to credit of any kind, and it could put fragile sponsors over the edge in a bankruptcy situation.

Equally important, granting preferred creditor status to pension plans would cause significant collateral damage to countless Canadians. Reducing the value of the plan sponsors’ bonds would erode the retirement savings for thousands of Canadian seniors for whom corporate bonds are a key component of their portfolios.

As well, most Canadians’ retirement savings, whether held in RRSPs, defined contribution pension plans, or other vehicles, are exposed to corporate bonds. Their retirement savings would also be eroded if defined benefit pension plans were granted preferred creditor status. In addition, it would exacerbate the inequities between Canadians who participate in defined benefit pension plans and those who participate in other types of retirement plans that cannot, by the nature of those plans, benefit from preferred creditor status for any loss in value.

Preferred creditor status for pension plans would place companies that offer defined benefit plans at a competitive disadvantage against companies that do not offer defined benefit plans, as well as companies in jurisdictions that do not provide such preferred creditor status, including the United States, Great Britain, the Netherlands, and Germany. As a result, such legislation would serve to accelerate the private sector’s move away from defined benefit plans.

In considering the security of plan participants’ benefits, it is critical that legislators not lose sight of the fact that the basic premise underlying the security of their benefits remains a financially strong sponsor. Companies must continue to invest in their businesses to remain competitive and increase productivity. Failure to do so will weaken companies and may even put some companies out of business. Continuing to burden companies with incremental costs, including the costs associated with preferred creditor status for pension plan deficits, will accelerate the process.

Now I'm going to return to the retirement income system in Canada.

FETCO supports the broader consultations that are currently taking place in Canada to ensure the ongoing strength of Canada’s retirement income system. At the heart of these consultations is the question of pension coverage for Canadians. Professor Jack Mintz’s December 2009 report stated:

The OECD suggests the Canadian retirement income system performs exceedingly well by international standards, with the three pillars enabling Canadians to provide enough retirement income to sustain an adequate standard of living in retirement.

FETCO believes that the existing mandatory elements of our current retirement savings system are, in total, sufficient as a minimum framework. Further, we believe that the diversity of the various components of the system reduces risk and contributes positively to income security in retirement.

It is generally acknowledged that Canada’s existing social security programs provide sufficient basic retirement benefit for those at lower earnings levels. In the event that governments wish to enhance the current system for middle-income Canadians, we oppose a mandatory expansion of the Canada Pension Plan. Employers need to have a large range of pension design options at their disposal that are suitable for their particular cost and risk tolerances.

Finally, the modernization of pension plan standards to support the viability of defined benefit plans is an important element in supporting retirement income adequacy for many Canadians. This will enable plan sponsors to continue to manage the risks inherent in their defined benefit plans, thereby allowing them to maintain these plans for current and future Canadians.

Mr. Chair, thank you very much for the opportunity to make these comments. I will turn to my advisers if you have some technical issues you want to discuss.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Farrell.

We'll now go to Ms. Cameron from OSFI, please.

[Judy Cameron, Managing Director, Private Pension Plans Division, Office of the Superintendent of Financial Institutions Canada]

Good afternoon and thank you for inviting me here today to contribute to the Finance Committee’s study of the Retirement Income Security of Canadians.

The Office of the Superintendent of Financial Institutions (OSFI) is the primary regulator of banks and insurance companies, as well as private pension plans that fall under federal jurisdiction. Federal pension plans represent about 7% of all private pension plans in Canada, and about 12% of total pension assets. The bulk of private pension plans in Canada are regulated at the provincial level.

Today I will provide an update on the current pension environment as OSFI sees it, and briefly describe some of OSFI's tools for monitoring the status of federal pension plans.

Everyone is likely aware that pension plans have been significantly affected by the financial and economic turmoil of the past few years. Pension plan assets were eroded by the stock market decline that began in autumn 2008, while pension liabilities have increased due to extremely low and declining long-term interest rates. At the same time, the economic slowdown has meant that many sponsors have not been well positioned to provide increased funding.

While there are some signs that the economy is strengthening, private pension plans will continue to face challenges. Unfortunately, the strong investment returns that pension plans earned in 2009 have been offset to some degree by the effects of the very low interest rates on plan solvency liabilities.

These trends are perhaps best illustrated in OSFI's solvency testing results. A pension plan’s solvency ratio is the ratio of plan assets to liabilities. Solvency valuations are actuarial calculations that use assumptions based on the pension plan being terminated and the assets used to pay promised benefits. They approximate how plan members would fare if their plan terminated at the valuation date.

OSFI estimates solvency ratios for federal pension plans every six months to provide a snapshot of the financial health of the defined benefit plans that we regulate. We monitor how the average ratio changes over time, as well as the proportion of plans that are significantly underfunded.

[The Chair, Conservative, James Rajotte]

Excuse me.

Is there a BlackBerry that's near the microphone? We're getting some interference with the reception.

Sorry about that. We were just getting interference in the reception. Please proceed. Thank you.

[Judy Cameron]

Two years ago we reported that the December 2007 average solvency ratio of federal plans was estimated at 1.05. In other words, pension plan assets, on average, exceeded liabilities by an estimated 5%. A year later, at year end 2008, the ratio had declined to 0.85, meaning that the market value of pension plan assets would have been sufficient to cover, on average, only 85% of promised benefits on plan termination—a significant reduction from 2007 to 2008. Our most recent estimates show that the average ratio has increased modestly to 0.90 at December 2009.

An indicator that has shown a more marked improvement is the proportion of materially underfunded plans. Based on OSFI's estimates, at the end of 2009, only 15% of all federally regulated pension plans had a solvency ratio of less than 0.80, whereas at the end of 2008 the comparable proportion was 40%.

A pension plan’s reported solvency ratio has a direct impact on the funding that the sponsor must contribute under federal funding regulations, which do not require defined benefit pension plans to be fully funded at all times, but where the ratio of assets to liabilities is less than one, the plan must make special payments to address the deficiency. The provinces and many other jurisdictions have similar rules. So while the most recent solvency testing results suggest an improving trend, many plan sponsors will still be required to make significant special payments, which may pose challenges for some plans.

OSFI's primary objective in estimating solvency ratios is to detect problems and challenges early so that we can, working together with the pension plans, take steps to safeguard members’ benefits where we feel they are at risk.

Solvency testing is a key element of OSFI's enhanced monitoring of federal pension plans. We use the results to identify underfunded pension plans and determine if the administrators of these pension plans are taking appropriate actions to deal with the situation. Where warranted, OSFI intervenes in a number of ways, ranging from encouraging plan sponsors to cease contribution holidays to requiring enhanced notification to members, to requesting early valuation reports.

Consistent with how we supervise financial institutions, OSFI takes a risk-based approach to supervising pension plans, tailoring our activities to the risk profile of our plans. Over the past two years we have identified those pension plans that have been most challenged by market conditions and have taken actions to protect the rights and interests of pension plan members and other beneficiaries.

While regulators such as OSFI have a role to play, under the terms of our legislation the primary responsibility for dealing with the challenges facing pension plans today rests with the pension plan administrators and sponsors. Therefore, effective plan governance is critically important to controlling risks. So a key focus of OSFI's supervision is to assess the quality of a pension plan’s governance.

OSFI regularly reminds plan administrators to be prepared for a wide range of potential shocks or adverse events and to use regular scenario or stress testing as a risk management tool. We believe regular scenario testing will help plan administrators to understand and prepare for the risks they face.

Given the current economic environment and the resulting impact on the health of Canadians’ pension plans, it is more important than ever for governments, regulators, and pension plan administrators to work together to meet the challenges currently facing private pension plans.

Thank you for listening. I would be happy to take any questions you might have.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation, Ms. Cameron.

We'll now go to questions from members.

Mr. McCallum, you have seven minutes.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you, Mr. Chair.

Thank you to all the witnesses for being with us today.

I'd like to start out with a line of questioning I had a few meetings ago with some bank and insurance company representatives. I want to say that I think it's a good idea to break down some of the barriers to multi-employer pension plans, as recommended by some of the banks and insurance companies, but I think at the same time one can have a voluntary supplementary Canada Pension Plan. It's not either/or; I think the two can coexist, and it would provide more choices for Canadians. The bankers and insurers at that meeting didn't seem to disagree with that.

First, I'd like to ask Ms. Swift, would you be in favour of such a combination?

[Catherine Swift]

The challenge for the CPP—and I'm sure the banks and insurance people told you this—is that they don't really have mechanisms right now; they don't have the infrastructure to have an individual contribution type of thing. But barring that, I think that within reasonable limits, the more options the better.

So, no, we're pretty agnostic in terms of whether it's private, whether it's CPP, whether.... You don't want to be reinventing the wheel all the time, but no, in principle I think that's fine.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you. Let a thousand flowers bloom, and more choice is usually better than less choice.

Mr. Farrell, would you have a problem with that?

[John Farrell]

No. We would support such an arrangement, providing it's a voluntary arrangement.

[John McCallum, Liberal, Markham—Unionville, ON]

Yes.

And Professor Lee?

[Prof. Ian Lee]

No, I agree with you completely. I like your phrase, too, “let a thousand flowers bloom”, as long as it's not mandatory.

[John McCallum, Liberal, Markham—Unionville, ON]

We seem to have a consensus, including everybody but the Conservative Party. That's good.

Let me now come to the question of the pension guaranty corporation, in relation to what you said, Mr. Farrell, about not favouring preferred status for pensions in bankruptcy.

I understand your argument: the problem is that it leaves the pensioners in a bad situation. Two of the countries you mentioned that are not giving preferred status are United States and Britain, both of which have a pension benefit guaranty corporation. Don't you maybe have to have one if you don't have the other? Otherwise you leave pensioners in a really untenable situation.

I see Professor Lee is nodding his head, so let me ask him first, and then go to Mr. Farrell.

[Prof. Ian Lee]

I agree with you. The pushback and the criticism that we've seen by ordinary Canadians has been on the very unfairness of a pension that fails. So either the Companies’ Creditors Arrangement Act has to be modified or, preferably, a private sector insurance corporation. We have the Canada Deposit Insurance Corporation, which is analogous in banking, and you, as a former banker—

[John McCallum, Liberal, Markham—Unionville, ON]

I'm interested that you're proposing this pension insurance, because you're not a raving socialist. Usually these proposals comes from unions.

Isn't it true, to take the other side, that the U.S. corporation has a big deficit? Do you think it's financially viable?

[Prof. Ian Lee]

I'm studying that right now, and I can't answer the question as to whether it is viable. I'm not sure what level.... It really depends on the effectiveness of the regulation by OSFI, at the front end, what level of premiums are required.