Good afternoon. My name is Malcolm Hamilton. I'm a pension actuary and have been for 30 years. I'm here speaking on my own behalf today.
I'm not going to try to answer all of your questions, but I'll make some observations on three of them, starting with the one about how our pension system compares to other OECD countries.
My company, Mercer—it's mine in the sense that I'm employed by it, not that I own it—created something called the “Mercer Melbourne Global Pension Index” last year, the purpose of which is to grade and rank retirement systems in the world. This was the inaugural run. We only looked at 11 countries, one of which was Canada. We gave them all a grade from A to D. We ranked them. Nobody got an A. Canada was one of four countries to get a B. Officially we came fourth, so we were out of the medals, but it was very close. There was no real significant difference between one and four; they were all viewed as good systems.
I won't bore you with how the ranking is done because it's very complicated, but here's the bottom line. I do believe that if you lined up the world's pension experts and gave Canadians an opportunity to change their problems for the problems of other countries, for the most part we wouldn't do it. I really can't think of a country that has fewer problems than Canada in the area of retirement savings.
Now, understand what that means. To some extent, it's like being the tallest of the midgets. I'm not saying that Canada's system is great. I'm not saying it shouldn't be improved or can't be improved or doesn't need to be improved, but we don't need to beat ourselves up in the sense of imagining that other countries have this right and we're the only one who has problems.
The top-ranked country in the Mercer Global Index was Holland. I know that if you read Dutch newspapers and read Dutch stories about the Dutch pension system, you would think it's one of the worst in the world. If you read Australian stories about the Australian system—they came second—you would think they had one of the worst systems in the world.
The fact is, when you have financial crises, retirement savings plans do badly. That's to be expected. I think it's almost unavoidable. When they do badly, the newspapers all over the world complain about their own systems—as they should—and what we all need to take from that is that we can do a better job. We need to learn from these things and we need to make the system stronger, but we shouldn't think that we're starting from a bad point, because we're not.
The second thing I want to comment on is the notion of how we treat underfunded pension plans when companies go bankrupt and what we do about the losses that pension plan members incur when that happens.
Let me bore you with a little history. If you go back to the 1960s in Canada, you could have a registered pension plan and set aside no money at all. That was permitted and it was done. In the 1960s, people decided—and I think one of the big events at the time was Studebaker's bankruptcy—that this was no way to run a pension system. You shouldn't have a pension system where the pension disappears at the same time the employer disappears.
Since that time, we have funded our pensions in Canada. We started off with basically “going concern” funding, which means that you put money in the plan on the assumption it keeps going, the only problem being that sometimes when the plan stops, even though there's enough money to keep it going, there isn't enough money to pay the benefits. In the 1980s we introduced solvency funding to try to address that problem. More recently, we have another round of reforms, federally and provincially, to try to improve the situation when plans wind up.
Now, none of these is going to be fully successful. The system today is much better than it was in the 1960s or the 1980s or five years ago, but the fact is, if there is a global financial calamity, if stock markets drop by 50%, if interest rates plunge, thereby raising the cost of discharging all the pension obligations, and if companies go bankrupt at the same time, if those things all come together as they did in 2008, pension plans will be badly funded at that time. The unlucky members of the unlucky plans that are wound up by bankrupt organizations will have an exposure and will lose benefits.
If we think we need to do something about that...and I'll point out that this is really no different from what happens to anyone with an RRSP. Everybody who had an RRSP--other than the few invested only in government bonds—saw their stocks go down when they got to 2008. Their corporate bonds went down, everything they had went down. They all lost money. In essence, they had the same type of experience as the unlucky few in defined benefit plans whose plans wound up at that time.
If you want to do something about that, there are four things you can look at.
One, increase funding levels. Try to put so much money in pension funds that even if there are dire economic events there's still enough money left over.
Second, you could tell pension funds they shouldn't take so much investment risk. Life insurance companies with annuity promises: don't put the money in the stock market. You could tell pension funds to take less risk with their investment.
The third thing you can do is a national insurance arrangement, like what we see in the U.S., or Ontario, or the U.K. They're all guaranteed money losers. They will all go bankrupt. But there still may be something to be said for that.
The last thing you can look at is the one that I believe you're considering--namely, saying that in that unfortunate circumstance, we will give preferred status to the members of the pension plan vis-à-vis secured and unsecured creditors. I think that works, but I think it's very dangerous.
I think all four have undesirable consequences. None of them will be painless from the perspective of the pension system. But that last one, I personally think, would probably be the most painful. Everybody is focusing on the fact that, well, the pensioners will go first so they'll get all their benefits. Nobody is focusing on the fact that when those companies go out to borrow money, they're going to find that either it will be hard to borrow or the borrowing will come with strings--i.e., you cannot improve your pension plan, because if the pensioners go before the secured creditors, why would you lend money to an organization that at the last minute can improve its pension plan and take away all the security for your debt? These types of things need to be thought through.
In the ten seconds that remain to me, I will simply say, on the issue of whether Canadians are saving enough, that one thing we know is that the incomes of retired Canadians are quite good for people who never saved enough. There was never a time in my life when people were thought to be saving enough, and yet it's worked out well for the current generation. Most studies find it hard to prove that Canadians aren't saving enough. Equally, they find it hard to prove that they are saving enough.
So while I think there's reason for concern, and I think there are difficult circumstances going ahead, again, so far the system has worked pretty well.
Thank you.
