Evidence of meeting #9 for Finance in the 40th Parliament, 3rd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was money.
A recording is available from Parliament.
Lawyer, As an Individual
But it raises a question as to whether these plans were sustainable or that model was sustainable, or whether we need something more like a targeted benefit pension plan model, where there's an explicit understanding from the beginning that there's risk.
Conservative
Liberal
John McKay Liberal Scarborough—Guildwood, ON
Thank you, Chair.
Thank you, witnesses.
I want to focus on the four comments you made, Mr. Hamilton.
First of all, on the fourth comment, with respect to the urban legend, it does make perfectly good sense that a lender would be a bit more hesitant if in fact they knew that in a bankruptcy or an insolvency they would rank as a lower priority. That makes perfectly good sense with respect to a defined benefit plan. Does the same concern apply with a defined contribution plan?
Senior Partner, Mercer
No, but defined contribution plans virtually can't wind up with deficiencies. What happens when you have a 2008 is that everybody's account balance drops just as fast as the assets, so you end up with a perfectly solvent plan where everybody's benefit is substantially reduced.
In the defined benefit, the pension stays up and the assets disappear. That's the thing that causes the deficiency that is the source of the underfunding.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
Okay. In the conversation, that hadn't been clear to me.
Your third point had to do with a national insurance. You didn't really expand on this and you seemed to think it was a really lousy idea, so I wasn't quite sure why you thought it was such a lousy idea.
Senior Partner, Mercer
It's not that it's a lousy idea. It's been tried in Ontario, and the Ontario government just had to throw in $500 million. It's been tried in the U.S. and it's insolvent. It's been tried in the U.K., where it's sort of insolvent, and that's a more recent experiment.
The problem is that it's not clear that you can insure this risk. Because the main problem with this insurance is that if you try to charge the ones with the biggest risks, you find they're the ones who can least afford to pay, and this is a real problem when you have an insurance system where the big bill goes to the organization least able to pay the big bill. Nobody has yet found a way to do this in a way that is totally self-supporting.
Now, I have no objection if governments want to say, look, we're going to do this, we know it's a money-loser, and we know it will, from time to time, go insolvent and need bailing out; the taxpayers will bail it out and we think that's a good use of public money. That's fine. The problem with it is obvious, though, and it is that the taxpayers include many people who don't have pensions, and what they're told is that from time to time money will be used to bail out the ones with pensions.
If we want to go there, let's just be open. Most governments so far have really not been open about it. They say that they're doing this, it's going to be self-supporting, and the government won't have to put any money in. But when the hard times come, the government has to put money in.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
You make a very good point. The problem is that ultimately it ends up being the taxpayer, no matter how you slice it, one way or another.
For our friends here in Nortel, who's going to bail--bad choice of words.... Who's going to supplement what they've obviously lost, other than the taxpayers of Canada? So directly or indirectly, honestly or dishonestly, it becomes a taxpayer-funded solution, in which case I guess the question is, why wouldn't you at least try to mitigate your anticipated loss with some form of insurance on private pension plans?
Senior Partner, Mercer
Do you mean government insurance or private insurance?
Liberal
John McKay Liberal Scarborough—Guildwood, ON
In effect, each plan pays some form of insurance against the bankruptcy of itself.
Senior Partner, Mercer
I have no problem with going down that road, but let's just be honest about it. Everybody has tried to find a way to make this self-supporting. To date, nobody has succeeded. It's a difficult thing to do. But if we think that's a good use of public funds, let's say that from time to time it will lean on government and we think that's appropriate.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
--had to do with taking less risk and, certainly, the distinction between CPP and QPP was a pretty valid point of distinction. How would you describe to pension managers what is less risk?
Senior Partner, Mercer
In defined benefit plans, less risk is picking assets that track the liabilities. This typically means long-term government bonds. If you had a pension plan in 2008 and it was all in long-term government bonds, you were fully funded at the beginning of the year and you were fully funded at the end of the year.
But here's the problem. You can tell pension plans to go down that road. The next thing I look at is what kind of return they are going to get on long-term government bonds and the answer right now is 4%.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
On the QPP versus the CPP problem, they wanted quick returns, they wanted to boost their bases--
Senior Partner, Mercer
The one thing we know is that they don't want 4% returns.
In the 1990s this looked great, because you could go to safe assets and get decent returns. Right now it's pretty lean if you try to de-risk the pension plan.
Conservative
The Chair Conservative James Rajotte
Thank you.
Monsieur Carrier, s'il vous plaît, pour cinq minutes.
Bloc
Robert Carrier Bloc Alfred-Pellan, QC
Thank you, Mr. Chair. First of all, I want to welcome all the witnesses.
My first question is for Mr. Hamilton.
Earlier, I was shocked to hear you say that the situation in Canada was actually pretty good and that we ranked fourth in the world. You seemed to be saying that your company has expertise in ranking countries' retirement plans. So you should analyze all the retirement plans.
Despite everything going on right now, you are telling us that things are going well and that we do not need to change much. However, the committee has already met a number of times to study ways of improving Canada's pension system, as a result of the fact that many retired workers ended up with nothing after paying into their company's pension fund. You must not be affected by the problems that these employees are facing right now, if you can say such things.
Nevertheless, I want to know whether you have any suggestions to improve things and keep this from happening again. You are aware that my party introduced a bill that seeks to take into account the benefits of employees who are lost after their company goes bankrupt and to allow them to, at the very least, receive refundable tax credits at the end of the year. The NDP also introduced a bill to at least give employees preferred creditor status during bankruptcy proceedings.
Do you have any suggestions or recommendations for improving the system so that these people do not have to go through this type of difficult situation?
Senior Partner, Mercer
Let me break this into two questions.
What I said earlier is that, relative to other countries, our system works pretty well. If you think there are countries around the world that didn't have a problem with 2008, and where the pensioners are fine, give me the list at some point, because I'm not aware of them.
Second, let's understand what we're talking about here. There's the pension system and then there's the economic system. What we had in 2008 wasn't a pension crisis; it was an economic crisis. It was a financial markets crisis. It took all the assets down.
Most pension systems are built on retirement savings, retirement savings in the sense that they have big pools of assets, and the bigger the pool of assets you had, the more money you lost in 2008. The big plans lost money and the little RRSPs lost money. The only people who didn't lose money are the people who invested entirely in government bonds.
If the question is about what people have to do to avoid a recurrence of 2008, it's to have a pension system built entirely on government bonds earning 4%. The problem is that this turns out to be a safe but unaffordable system. If you work out the cost of good pensions with 4% returns, you get, like the federal public sector plan, 34% of pay.
Most people don't think they can afford to pay 34% of pay for a pension plan. So you have to decide at some point whether you're going to learn to take the risk and deal with the risk, or whether you want to avoid the risk. If, as most systems do, we decide to take the risk, one of the things you have to resign yourself to is that when those very rare years come along, like 2008, there will be problems.
Bloc
Robert Carrier Bloc Alfred-Pellan, QC
We get a limited amount of time. I have less than a minute left.
So do you not think that increasing the Canada Pension Plan would be safer than relying on systems built by private companies such as Nortel, which do not favour employees? At least that way, workers accumulating retirement income would have a more reliable source of income. The Canadian Chamber of Commerce and Manulife did not make any recommendations today. I can understand since they are in a bit of a conflict of interest given that they offer employer retirement programs, which is good for business. But it does not seem good for employees.
Senior Partner, Mercer
Yes. I am not averse to expanding the CPP. I would do it by taking the earning ceiling up, not by taking the 25% up. But here's the thing: any extension of the CPP now, in order to treat the children fairly, has to be fully funded.
You should ask the question. If the existing CPP had been large and fully funded, it would have had $2 trillion going into 2008. That's what a fully funded large CPP would have looked like. It would have lost $400 billion in 2008. That's what would have happened. There would have been pain. So as for the notion that when the bad years come along there won't be pain if we set up the big asset pool in the QPP and the CPP, there will still be pain.