XPost: can.general, can.legal, can.politics   
   From: abc@123.cl   
      
   Rethinking Canada's pension problem   
      
   Getting Real   
      
   August 16, 2009   
      
   Alberta MP Ted Menzies is travelling the country getting feedback from   
   citizens and experts on pension reform. He does not have his own   
   pension.   
      
   Alberta MP Ted Menzies is travelling the country getting feedback from   
   citizens and experts on pension reform. He does not have his own   
   pension.   
   Photograph by: Canwest News Service , Canwest News Service   
      
   Pensions have been centre stage in many of the dramas that played out   
   in the recession, from retirement portfolios wiped out in the stock   
   market crash to the bankruptcies of high-profile corporations like   
   Nortel Networks Corp. and AbitibiBowater Inc., which have left massive   
   underfunded pension liabilities in their wake. No one was immune, not   
   even blue-chip funds like the Canada Pension Plan Investment Board.   
      
   Enter Ted Menzies. The Parliamentary Secretary to the Minister of   
   Finance has become the government’s face of pension reform. Since   
   March, Mr. Menzies has been criss-crossing the country getting feedback   
   from regular Canadians and experts alike. He is also chairing an intra   
   -provincial steering committee examining Canada’s national retirement   
   income system. It will be tabled at the finance ministers meeting in   
   December.   
      
   “The solvency issue in the major pension funds was a big wake-up call   
   to Canadians,” says Mr. Menzies, referring to multi-billion-dollar   
   losses at the Caisse de dépôt et placement du Québec and Ontario   
   Teachers’ Pension Plan.   
      
   While the losses grabbed the government’s attention, there is a bigger   
   issue to be addressed: The majority of Canadians do not have a pension   
   plan despite the fact we are living longer.   
      
   A 2007 report by consulting firm Towers Perrin, found the private   
   sector workforce grew by 26% in Canada between 1992 and 2005, but   
   overall pension coverage fell from 49% to 42%. It’s the perfect storm   
   for a pension crisis.   
      
   “We all have examples of people who sold their businesses thinking they   
   had a lot to retire on, but discovered they didn’t,” says Mr. Menzies.   
      
   The Conservative MP from Alberta ought to know. A former self-employed   
   farmer, Mr. Menzies doesn’t have a pension plan of his own. “I have   
   been self-employed for 35 years, and for many years I invested in farm   
   land rather than RRSPs... And I haven’t been a politician long enough   
   to have a pension plan,” he says.   
      
   Mr. Menzies says the goal of the steering committee is to decide   
   whether or not Canada needs a better system: “What can we do to   
   encourage more people to save and what else is needed to supplement the   
   Canada Pension Plan?”   
      
   Herewith, three possible fixes being considered for Canadians:   
      
   The Government Solution   
      
   One strong proposal is a second-tier fund that would sit on top of the   
   Canada Pension Plan. Rather than a defined-benefit (DB) plan, which   
   guarantees a certain pension amount, the model being floated is a   
   defined-contribution (DC) plan or some hybrid between DB and DC plans,   
   in which the employer and employees share the funding risk. Many   
   questions still need to be answered. For example, should the self-   
   employed be able to opt in? Should the plan be voluntary or mandatory?   
   And who would manage the fund?   
      
   One downside of a broad-based DC plan means anyone planning to retire   
   in a year of poor market returns would see a reduction in payout. “It   
   won’t give you real security,” says David Service of Towers Perrin.   
      
   The private sector is also raising alarms over an intra-provincial   
   government-run fund: “It would create a monopoly in the system,” says   
   Frank Swedlove, president of the Canadian Life and Health Insurance   
   Association.   
      
   The Private-Sector Solution   
      
   The insurance sector is floating its own multi-group DC plan. They are   
   calling for regulatory changes that would allow them to lump small and   
   mid-size companies together under one plan to achieve economies of   
   scale. The industry plan is a variation on the theme the government is   
   proposing, but insurance firms would be the administrator.   
      
   Life insurance companies already administer the majority of DC plans in   
   Canada and they “want to be part of the action,” says Mr. Service.   
      
   The upside of their proposal is that the industry already has the   
   administration infrastructure. The downside is that the industry hasn’t   
   proved it can offer an optimal service. It currently costs 50-70 basis   
   points more to administer a DC plan than a large DB plan, according to   
   Towers Perrin.   
      
   Analysts also question whether the private sector would manage   
   investments in the best interests of plan members. DC plan members need   
   a tremendous amount of financial knowledge in general and advice on   
   investing. “The current outcomes for DC plan members suggests that   
   these needs are not being met by industry offerings,” says James   
   Pierlot of Towers Perrin.   
      
   The Uber-Fund Solution   
      
   Two of Canada’s largest funds — Ontario Teachers’ Pension Fund and   
   OMERS — want to offer their services to smaller pension funds. The   
   blue-chip funds think they can do it better, and can offer economies of   
   scale. Not only would this reduce administration costs, but it opens up   
   new investing opportunities for smaller funds which can’t normally   
   access alternative asset classes such as infrastructure, private equity   
   and real estate.   
      
   This model, while beneficial for some, does not address the issue of   
   overall coverage for Canadians. Ian Markham of Watson Wyatt says it   
   will not increase the number of companies in the private sector willing   
   to have some kind of a pension plan.   
      
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