Finance Committee on March 1st, 2012

[The Chair, Conservative, James Rajotte]

I call this meeting to order. This is the 45th meeting of the Standing Committee on Finance. I want to welcome all of our guests here today.

Pursuant to the order of reference of Wednesday, February 1, 2012, we're continuing our study of Bill C-25, An Act relating to pooled registered pension plans.

We have before us seven witnesses.

First we will hear from Mr. Jean-Pierre Laporte.

Welcome.

We have, secondly, the Canadian Labour Congress. We also have the Canadian Life and Health Insurance Association. And we have the Canadian Union of Public Employees.

We have a representative from the Quebec Employers' Council.

We have Teamsters Canada. And as an individual, we have Monsieur Michel Lizée via video conference.

Can you hear me, Monsieur Lizée? Is the sound coming through for you? We can't hear him....

[Michel Lizée, Economist and Coordinator, Community Services, University of Québec at Montreal, As an Individual]

Is this better?

[The Chair, Conservative, James Rajotte]

Yes, it's fine.

Welcome.

[Michel Lizée]

Thank you, Mr. Chair.

[The Chair, Conservative, James Rajotte]

Thank you.

Each of you will have up to five minutes for your opening statements, and then we will have questions from all members of the committee.

We'll start with Mr. Laporte.

You have the floor.

[Jean-Pierre Laporte, Pension Lawyer, As an Individual]

Good afternoon. My name is Jean-Pierre Laporte. I'm a pension lawyer with the law firm of Bennett Jones LLP in the city of Toronto.

I welcome the opportunity to provide to the committee some expert testimony on pooled registered pension plans. My sense is that Bill C-25, in its current form, is an example of good intentions creating a legislative response that will have numerous unintended adverse consequences. Let me explain myself.

The stated goal of the legislation is to make it easier for Canadians to save towards their retirement. This is a goal that is shared by most Canadians. The vehicle chosen by Parliament is this pooled registered pension plan, or pooled plans. My remarks will explain why pooled plans are unlikely to achieve this goal.

First, at its core a pooled plan is a locked-in RRSP. As such, it shares all of the flaws of the RRSP, which I will discuss later, and has the added disadvantage that it doesn't have a lot of flexibility.

One of its three main deficiencies is that it locks in money until retirement. In other words, withdrawals are strictly restricted until retirement age. This may make sense in a traditional pension plan for someone who has a good salary and where every penny doesn't need to be used up to balance the family budget, but clearly this isn't the population that is targeted by pooled plans. We're talking about small entrepreneurs and their employees, and the self-employed.

The second is that it doesn't compel any employer contributions. This means that 100% of the funding responsibility rests on the backs of those who already have a hard time saving. At least under a defined contribution plan, the Canada Revenue Agency has imposed a minimum 1% employer contribution. I don't understand why the pooled plans don't have that 1% rule.

The third deficiency is that it doesn't give participants the right to vote with their feet. As I understand the legislation in its current form, it is the employer who selects the pooled plan from private sector providers, not the employees. So as long as the participants are employed, if they're not satisfied with the pooled plan, they're stuck with it. This isn't like an RRSP, where if you find higher returns somewhere else, you can always transfer your money.

Let me return to the RRSP flaws. Because it's a capital accumulation plan, the responsibility for the investments rests on the shoulders of the member. The member often is unsophisticated or doesn't have the time or the inclination to become an investment expert. So it ends up that bad decisions are made, which mean lower returns.

Finally, one of the fundamental flaws with all capital accumulation plans, including RRSPs, is that when there is an economic downturn and the value of the assets under management shrink, and you happen to retire at that time, the losses cannot be made up with additional contributions, the way they are in defined benefit plans, like the benefit plan the federal civil servants participate in. So there are no special payments and no way to make up for bad years. You're playing Russian roulette with the savings of Canadians. To me, this is a lot of taxpayer assistance going down the drain after decades of investing, so I have some real reservations about the current legislation.

Thank you for your attention.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Laporte.

We'll go now to Mr. Roberts, please.

[Chris Roberts, Senior Researcher, Social and Economic Policy Department, Canadian Labour Congress]

Thank you very much.

Thank you to the members of the committee for giving us the opportunity to appear before you today and to present our views on Bill C-25. My remarks to the committee today are developed and amplified in the written submission that I believe you all have before you.

Just as a quick word about the Canadian Labour Congress, it's the national voice of 3.2 million workers in Canada. We bring together Canada's national and international unions, along with provincial and territorial federations of labour and 130 district labour councils whose members work in virtually all sectors of the Canadian economy, in all occupations, and in all parts of Canada.

The CLC is particularly concerned that a growing body of evidence suggests that a very significant proportion of middle-income earners are entering retirement with significant debt levels and facing a major post-retirement decline in their standard of living. The most recent study suggests that half of baby boomers earning modest incomes—so between $35,000 and $80,000 a year, on average—risk at least a 25% decline in their standard of living after retirement.

While the causes of this are several, a significant factor contributing to this outcome is the declining access of employees to workplace pension plans. By 2009, just under 10 million employees, or over 60% of all paid workers, had no workplace pension plan coverage whatsoever. Factoring in the self-employed, there are 12.4 million Canadians in the labour force with no pension plan coverage. The problem is especially acute in the private sector, where three-quarters of paid workers have no access to a pension plan at work.

In the CLC's submission, a phased-in, fully funded doubling of future Canada Pension Plan retirement benefits remains the most efficient and cost-effective means of addressing the problem of inadequate retirement savings in Canada. Unmatched by any private sector retirement savings scheme, the CPP delivers a secure, dependable retirement benefit, protected against inflation and payable until death, at a very low cost. The CPP is funded through earnings based on contributions so that future beneficiaries are not dependent on future tax revenue. Virtually all working Canadians are already members and contributors to the CPP.

By contrast, PRPPs are voluntary arrangements that employers may choose to make available to employees, and to which both employers and employees may choose to contribute. Significant challenges confront PRPPs in achieving anything close to the universal portability that the CPP already provides. Built on voluntary individual savings accounts, PRPPs cannot provide income predictability or security in retirement, as the CPP now does.

In the CLC's submission, PRPPs will not reverse the decline in workplace plan coverage. The crisis of workplace pension plan coverage in Canada is largely a crisis of coverage in small workplaces. Currently the vast majority of workers employed by small employers have no access to a workplace pension plan or a workplace-based voluntary savings vehicle. This has to do with a higher likelihood of bankruptcy and high rates of job creation and destruction, as well as high labour turnover in small enterprises.

Taken together, the economic and financial circumstances facing small and medium-sized enterprises make the voluntary take-up of PRPPs by small employers no more likely than the take-up of group RRSPs or defined contribution plans. The reasons for that are developed more extensively in our written submissions.

I want to say, finally, that there is little evidence that savings rates are a function of fees. To be sure, high fees are a serious problem for building retirement savings, but it is the presence of a mandatory plan in the first instance that predicts adequate savings in retirement, not low fees in voluntary savings plans.

In sum, PRPPs are unlikely to significantly expand workplace pension coverage. Rather, they are likely to further undermine defined benefit pension plans that currently exist and distract from what many pension experts already agree is needed: an expanded CPP.

Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Roberts.

We'll hear now from Ms. Byrnes, please.

[Leslie Byrnes, Vice-President, Distribution and Pensions, Canadian Life and Health Insurance Association Inc.]

Thank you, Mr. Chair and members of the committee.

I'm very pleased to have the opportunity to be here today on behalf of the Canadian Life and Health Insurance Association and to share our views as the Standing Committee on Finance considers Bill C-25, the Pooled Registered Pension Plans Act.

The CLHIA is a voluntary association whose member companies account for 99% of our country's life and health insurance business. The industry provides a wide range of financial security products, such as life insurance, annuities, and supplementary health insurance, to about 26 million Canadians. Also, over two-thirds of Canada's pension plans, primarily defined contribution plans for small and mid-sized businesses, are administered by our life insurance companies.

We commend the government for introducing Bill C-25.

It targets the gap in Canada's retirement savings system that was identified in Jack Mintz's 2009 research for the joint working group of finance ministers, that gap being modest and middle-income Canadian households that may not be saving enough for retirement. It builds on the consensus among all federal, provincial, and territorial finance ministers, and it does so by seeking to build on the strengths of the third element of our three-pillar retirement saving system, namely, private sector savings.

The goal of the first two pillars, the public part, through OAS/GIS and CPP/QPP, is to provide a minimum income to meet basic needs. Canada is recognized internationally as doing a very good job at that.

It's the third pillar, private sector savings through workplace plans and individual savings, that's intended to provide income beyond the basic needs. This is where the shortfall exists, particularly with those who don't have access to a workplace retirement plan.

We believe PRPPs can be a vehicle to make a fundamental difference to the retirement savings landscape in Canada. The keys to their success are several.

One is their low cost: pooling will help to enhance scale and efficiencies. Another is simple designs that help keep those costs down. Also, professional administrators will relieve small and mid-sized businesses from the administrative and legal burdens that prevent so many businesses from offering retirement plans today. Next is harmonization across the country, which will be important in gaining the scale and efficiencies and which, again, are so important to getting at those low costs. Also, there are automatic features that provide behavioural nudges to encourage people to start saving, with appropriate opt-out provisions, of course.

We're hearing that small businesses are keenly interested in PRPPs. We've provided the clerk with the results of a survey of small and mid-sized businesses that we commissioned before Christmas. I'd just like to highlight a few points.

First, and hardly surprising, the smaller the company, the less likely they are to have a workplace retirement plan. Second, two-thirds of respondents said they would be interested in offering PRPPs. Third, over 70% of that group said they would be interested in contributing to a PRPP, even though they realize they wouldn't be required to do so. Finally, over 70% of all respondents thought that all employees should have access to some form of retirement savings plan at the workplace.

Clearly, there is still work to be done. Bill C-25 sets out the framework, but much of the detail will of course be spelled out in the regulations. As well, to ensure that PRPPs can be effective national plans, we'll also need provincial legislation. We look forward to working with governments and policy-makers on these next steps.

Thank you again, Mr. Chair, for the chance to appear here today. I'd be pleased to provide any further input.

[The Chair, Conservative, James Rajotte]

Thank you very much, Ms. Byrnes.

We'll now hear from Mr. Skerrett, please.

[Kevin Skerrett, Senior Research Officer, Canadian Union of Public Employees]

Thank you, Mr. Chair.

My name is Kevin Skerrett. I work as a senior research officer on pensions at the national office of CUPE, the Canadian Union of Public Employees. In my role as researcher for the past 15 years, I've provided support to our locals and provincial sections dealing with pension issues, including collective bargaining.

We would first like to thank this committee for the opportunity to present to you today on Bill C-25. As we are all aware, this proposed legislation arrives in a period of very significant challenges for those of us working to defend, strengthen, and improve retirement security for Canadians.

CUPE is the largest trade union in Canada. We represent well over 600,000 workers, mostly in the public sector, but not entirely. While a majority of our members belong to secure defined benefit-type workplace pension arrangements, we have a significant minority, maybe about a third or 200,000 members, who do not have any workplace plan, or only have some form of defined contribution system or an RRSP.

I'll limit our comments today to three main issues. First of all, I'd like to strongly affirm our agreement with the written submission that was provided to the committee by our colleagues at the CLC. CUPE is the largest affiliate of the CLC. We feel that submission presents a powerful and comprehensive case that the basic design of the PRPP as represented in this legislation is fundamentally flawed.

Insofar as our common goal, the goal we all share, and the government's stated goal, is to enhance the current and future retirement security of Canadians, we do not see evidence that the introduction of a completely voluntary individual savings scheme, with absolutely no benefit security, will do anything to achieve this objective.

In contrast, the proven viable proposals from the CLC and other quarters for a fully funded and phased in doubling of the CPP at no cost to government budgets would greatly improve the pension and retirement prospects for those lower- and middle-income workers the current system is now failing.

This leads me to the second point we would like to make today, and that is about workplace pension arrangements. It is no secret that the defined benefit workplace pension plans that most of our members belong to, and many other workers, are under significant attack in both the private and public sectors.

In the private sector many of us have seen some high-profile cases where secure defined benefit arrangements with large employers—we think of Inco, U.S. Steel in Hamilton, the Royal Bank more recently, and even Air Canada last year—saw decent defined benefit-type arrangements replaced either entirely or partly with less secure defined contribution arrangements for newly hired employees. That's part of the landscape that is evolving.

Public sector workers, the bulk of our members, are also seeing pressures to give up secure benefits, often in the form of losses of indexation provisions—protection of the purchasing power of pensions.

In this context we believe that it is not only workers that have an interest in expanding the secure and efficient CPP, but also many employers. While most employer organizations will express opposition to expanding the CPP, we are convinced that many individual employers would in fact be supportive if an expanded CPP were recognized as an opportunity to rearrange their workplace-based pension arrangement and thereby reduce their cost and cost volatility.

[The Chair, Conservative, James Rajotte]

One minute.

[Kevin Skerrett]

Thank you.

This leads directly to my third and final point that I have for today. The government and the advocates for PRPPs have argued that the goal is to establish an arrangement that will extend workplace coverage to workers who don't currently have a pension plan. We are very concerned that there is a risk that the opposite will be the effect.

We believe that many employers will see this option of a PRPP as an alternative to their existing decent secure workplace pension coverage and see it as attractive to replace those arrangements with this less secure option. In that sense, the potential is to cannibalize those secure pension arrangements that have actually proven to be a success. We're greatly concerned about that.

I will close with the comment that there is a lot of turmoil evolving in the pension world these days, and I think we all know it. This has perhaps been underlined recently by federal government contemplation of changes to the OAS/GIS system.

We're greatly concerned about that. There are a lot of elements of our overall system that are being put into play. We'd like to see a summit called with government, labour, and the business community to discuss these issues in a holistic way.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Skerrett.

Mr. Dorval, you have five minutes.

[Yves-Thomas Dorval, President, Quebec Employers' Council]

Thank you, Mr. Chair.

The Quebec Employers' Council is comprised of several large Quebec companies and also includes the vast majority of sectoral employer associations. It is the only employers' confederation in Quebec.

The mission of the Quebec Employers' Council is to ensure that businesses have the best possible conditions, especially with respect to human capital, in order to prosper in a sustainable way in the context of global competition.

We thank the Standing Committee on Finance for giving us the opportunity to comment on Bill C-25 as part of its consultations.

The Quebec Employers Council supports the federal government bill providing for the creation of pooled registered pension plans for federally regulated companies. The flexibility and adaptability envisioned by the PRPP will allow federally regulated companies that do not already have a pension plan to provide a simplified one for their employees. Employers, notably those in the small and medium-sized business sector, will thus have the opportunity to offer a plan that ensures financial security for their employees when they retire but will not have the fiduciary responsibility or the obligation to make contributions.

Let's recall that, according to several evaluations, in particular from the OECD and Mercer, Canada's retirement income system is one of the best in the world. The three pillars of this retirement income system enable Canadians to maintain an adequate lifestyle when they retire. But it seems that up to 30% of Canadian workers do not save enough to ensure the same lifestyle after retirement as when they were working.

There is also a challenge for future generations. Some changes are desirable to improve retirement savings, even though we acknowledge that the problem of financial security is not necessarily generalized and that, therefore, the solutions mustn't be generalized either.

We need to keep in mind that, to finance their retirement, Canadians invest not only in pension savings accounts, but also in other assets, particularly the house they own and live in or in various financial vehicles. They can also choose to work full-time or part-time for a few years more, assuming they remain in good health.

The Quebec Employers Council proposes that discussions regarding the retirement savings issues be guided by four main principles: no transferring of the burden to future generations; no hindering of businesses' competitiveness; no removing of individuals' responsibility; and no increasing of businesses' administrative load. Any change should encourage a marked improvement in the investment rather than substituting one form of an investment for another form that already exists. The regulatory structure has to be simple and flexible. The simpler the plan is to put in place and the easier it is to administer, the better chance it has to be successfully implemented.

This bill clearly seems to be moving in this direction, and we have a few specific comments to make.

First, this bill offers a greater number of workers who were not covered by a retirement plan, especially those working in small and medium enterprises, the possibility of being covered. It also allows employees in SMEs to benefit from the economies of scale that large plans do. The intended employees would automatically be enrolled in their employer's PRPP, but could withdraw if they wish to. According to all the examples we have seen, being signed up automatically generally encourages greater participation.

Second, we also want employers to be able to offer their employees this kind of plan without being required to contribute. Companies that wish to may do so, but companies, particularly SMEs, often cannot afford to contribute more.

[The Chair, Conservative, James Rajotte]

Mr. Dorval, you have one minute left.

[Yves-Thomas Dorval]

Third, we also appreciate the fact that the employer does not have a fiduciary responsibility with respect to this new type of plan. This new plan should be attractive to employers, employees and the financial institutions that will offer it. So the framework would have to be simple and the obligations for administrators clear in order to generate interest from a minimum number of institutions, which would encourage competition. However, the devil is in the details. The simpler the plan is to implement and administer, the more chance of it being established successfully.

Pooling funds and simplifying the regulation and management of the retirement contributions by a financial institution should make it possible to reduce the administrative costs of the plan and the costs associated with investment management. So that the costs are reduced and the savings in place, there need to be enough participants and contributors. So it is important that there be a certain coordination and harmonization between the plans that would be offered by the employers in the various provinces and by federal employers targeted by this bill.

To conclude, this bill is clearly an interesting part of the solution for the issue of retirement savings, but it isn't the only one.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Benson.

[Phil Benson, Lobbyist, Teamsters Canada]

Thank you, Mr. Chair, and my thanks to the committee for allowing me to appear before you today.

In a perfect world, we would be discussing modest increases in CPP and the PRPP. It's been said that politics is the art of the possible. The PRPP is possible, so let's deal with it.

The government has moved at breathtaking speed to strengthen the private leg of retirement savings. The TFSA, and now the PRPP, will give Canadians meaningful alternatives to save for retirement. If the PRPP does nothing more than reduce risk or reduce cost for retirement savings, it will be worthwhile.

The proposed PRPP could be viewed as a pooled RRSP offering lower-cost access to existing investment options, probably mainly mutual funds. Our experience with multi-employer plans suggests that it would be better for investors to share in that type of pooled retirement savings.

We're going to offer some thoughts on how we can make the PRPP more like a multi-employer plan.

Sponsors should have a legal obligation to serve the beneficiaries. There would be an obligation to include only investment options that meet the retirement purposes of the PRPP. It would seem inappropriate in a sponsored PRPP to allow the kind of “anything goes” investment options that RRSPs can include. Any investment options provided to members should fit a purpose within risk-reward objectives. The guidelines of the Canadian Institute of Actuaries for capital accumulation plans should apply. At the very least, we can hope investments will be more like those of insurance companies than RRSP mutual funds—bonds and their equivalents, rather than a reliance on stocks.

We think fiduciary duty is a critical idea and it should encompass no trailer fees. No proprietary product should be permitted unless it can be proven to be the best product for the plan. Plans should be subject to discretionary investing. Let the professionals make investment decisions, not individual investors. And if we call it pooled pensions, then let's deliver pensions.

Dealing with fiduciary duty will lower risk, but we have to deal with costs. Our canvass of existing pension plans leads us to believe that the upper limit should be 100 basis points, reduced to 50 basis points for plans approaching one billion dollars. Equally, there must be full transparency. There should be no benefit to plan sponsors as employers for offering a plan to employees. There should be a declaration of all ties between the trust and sponsor as well as a full declaration and report of all fees.

We think there should be, where possible, transportability of plans. Let's try to avoid stranding small pensions or, for that matter, other types of savings vehicles. Allow the transfer of a PRPP to a better pension where available or of a stranded pension to a PRPP. Let's promote some competition. Why don't we allow the transfer of RRSPs to a PRPP?

We also think it may be advantageous to allow existing entities that run multi-employer plans to offer PRPPs. From the Teamster's experience, it's not always possible to include company employees in those existing plans, but a PRPP alternative would be a better option than, say, matching RRSP contributions. This may allow existing MEPs to offer PRPP solutions where available.

No single solution will resolve the retirement savings issue. I think the PRPP proposal will move the ball closer to the goal line. Improving savings, reducing risk, and reducing costs is a winning formula. We think our suggestions will make this an even better product.

Thank you.

I welcome your questions.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Benson.

Mr. Lizée, you have the floor.

[Michel Lizée]

Thank you, Mr. Chair, for giving me the opportunity to appear before the Standing Committee on Finance.

I agree with the government's goal of increasing the rate of retirement coverage. But I fear that the goal will not be achieved and that improving the Canada Pension Plan would have been and remains a better option to consider.

A number of things have been mentioned, but I would insist on the argument of weakness. For the same level of contribution, improving the Canada Pension Plan would make it possible to provide pensions that are twice as high as a defined contribution plan. This is basically because a group plan tends to invest in a full economic cycle, but also bypasses the problem of a person who, retiring with significant capital, has only a very few investment options because he or she must protect the capital at all costs. In fact, a group plan can have a diversified policy, and the Canada Pension Plan management fees, which are at 0.67%, are much lower than the current fees for mutual funds, which are more around 2%. Each 1% savings in fees results in 20% more paid at retirement.

Quebec has been using the simplified pension plan for over 10 years. It is similar to the PRPP in a number of ways, and the results have been quite modest.

It seems to me that, at the next finance ministers' conference, it would be desirable that improving the Canada Pension Plan still be on the table. In a context where the PRPP would be improved, this model could be one more tool that would be available.

I would like to point out three main issues with the bill.

The first issue relates to the choice of the administrator. The paradox of the bill is that it's the employer, who doesn't pay a penny into the plan, who chooses the service provider, which is fairly specific. There's an old saying that goes:

no taxation without representation.

You can find more details about this suggestion in the brief. Actually, during the 30-day consultation period, participating employees should have an opportunity to raise objections to the choice of the administrator, the way it is with Quebec's member-funded pension plan, which is also for small and medium-sized businesses. And if more than 30% object, it would be safe to say that the employees have some serious reservations about that choice.

The second item I wanted to draw your attention to is more specific. I would actually like to point out that some features of federal legislation should be reviewed. For a number of years, I have been with a multi-employer pension plan that was set up for community groups and non-profit organizations. This plan is designed for modest-income employees, earning about $35,000. Given that the salaries are low and that the economic opportunities for employers are limited, the contribution rate is very low, at around 6%. So right from when the plan started, a mechanism was developed to encourage participants to make voluntary contributions and to take advantage of the collective management mechanism. The idea was for them to convert their contributions into additional annuities with a higher interest than the regular annuity conversions, even though we are very careful with our assumptions. On page 9 of my brief, you will see a graph that compares the possibilities for the two scenarios.

We are currently in talks with the Canada Revenue Agency, which is strongly encouraging us to get rid of that mechanism. Yet, based on the last date for which we have figures, almost 8% of the plan's assets came from voluntary contributions made by participants who had understood the message that they had to assume their responsibilities and take advantage of collective mechanisms.

Finally, Mr. Chair, I urge the federal government to think about the impact of introducing the PRPP on labour-sponsored funds. Quebec has two funds: the Fonds de solidarité FTQ and the CSN Fondaction. Just those two funds alone have almost 600,000 shareholders of whom 60% are unionized workers. For a number of them, the RRSPs from either one of those two funds is their primary pension plan. Those funds had a major impact in terms of job retention and job growth in Quebec. But if those funds are not recognized as a PRPP, there is the danger that a registered group pension plan would drain this source of funding and it would deny employees access to attractive mechanisms both in terms of taxes and job creation and retention.

Thank you, Mr. Chair.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Lizée.

We will start members' questions now. We'll start with Mr. Marston for a five-minute round, please.

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

Thank you, Mr. Chair.

Ms. Byrnes and gentlemen, welcome. I'm very pleased to have you here. The only problem is that I could spend 10 minutes on each one of you.

Mr. Benson, I was pleased to hear you talk about fiduciary duty. If that's written into the law, would it not impede the banks from being able to provide this product?

[Phil Benson]

Thank you for the question, Mr. Marston.

Most banks, of course, have trust divisions, and they do act, under fiduciary duty, for those particular trusts. I don't see this as being a product, if you like, from your TD bank on the corner. I view it as more of a trust; it has to be a trust relationship.