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Post on 12-Aug-2015
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Four Worries and a Funeral
De-risking or re-risking?Can we democratize
ownership?Does choice equal freedom?
Is the State provider or facilitator?
And did this man kill British pensions?
Questions for Today
1. Is there a retirement design that better balances a guaranteed pension and a pension delivered through ‘best intentions’?
2. Can we ‘nudge’ people towards better behaviours when it comes to their financial security in retirement? How much choice do they need, want and can cope with?
3. What can Canadians learn from Britain’s experiences (and vice-versa)?
Challenges with Traditional DB Plans
Low interest rates, volatile equity
markets, maturing plans, increasing
longevityUnacceptable volatility and
asymmetrical risks for plan sponsors
Mark-to-market accounting
Seen as a public sector employee
‘perk’
Relief measures are short-term solutions;
don’t address underlying issues
Complex regulatory environment
Challenges with Traditional CAP Plans
Predictable costs, but unpredictable benefits in
retirement
Members exposed to significant risks,
especially in retirement
Complex decisions left to plan members; ‘choice
overload’
Few efficient ‘decumulation’ products
Few benefits from pooling of costs/risks, reducing
efficiency
First ‘cohort’ of career-DC employees yet to reach
retirement
2. Democratising Pension Ownership
1. Triple lock on state pensions guarantees a minimum 2.5% pension increase p.a.
2. Public sector DB subject 3. Private sector DB protected by pension
protection fund4. Auto-enrolled DC pensions for 10m new
workers
Where is Canada today?
1. Private Sector and Not for Profit
2. Public Sector
3. Multi-Employer Trades
Where is Canada today?
Private Sector and Not for Profit
• Legacy mode for DB (freezes and de-risking)
• Movement to fixed cost DC
• Unions the remaining stronghold for private sector DB
Where is Canada today?
Public Sector (with solvency exemptions)
• Municipal, Hospitals, University and Education sectors
• Generally unionized environment
• Lots of design and governance changes
• Consolidation of plans is the current theme
Where is Canada today?
Multi-Employer Trades
• Temporary solvency exemptions
• Still a strong DB landscape
• Need permanent funding rule solutions in most jurisdictions
Legislative/Regulatory Response
1. Minimum Funding
2. Traditional MEPPs
3. Termination Benefits
4. Hurdles for Innovation
Legislative/Regulatory Response
Minimum Funding
• Not much help for traditional DB
• Solvency relief and exemptions for some
• Minimal progress towards alternative funding regimes
Traditional MEPPs
• Solvency exemptions (for now)
• No permanent solutions yet
Legislative/Regulatory Response
Termination Benefits
• Concepts of being ‘asset share based’
Hurdles for Innovation• Regulatory change
is slow
• Legal concerns; lawsuits in New Brunswick
• Many issues surround conversion, consent and funding
Where is Britain headed?
DrawdownCash Annuity
Freedom and choice Pension
Wise
State funded guidan
ce
Workplace Plans: Innovation
Push for regulators to be open to new types of pension deals and transitional approaches
Jointly Trusteed arrangements
Consolidation of plans and/or assets
Workplace Plans: Target Benefit Plans
TBPs, or ‘defined ambition’ plans, aim to combine the best of DB and DC (and remove the worst of both)
Typical features:1. Fixed contributions2. Members receive a target DB-type benefit, with few (or
no) guarantees3. Benefits may be adjusted up or down to balance
funding
Not currently accommodated by most jurisdictions’ regulations
4. The State and British Pensions Providing -
Single state pension – simpler but less ambitious A safety net for insolvent DB covenants
Compelling – employers to auto-enrol staff in workplace Insurers to manage legacy and improve governance
Protecting– the consumer with charge caps
Educating - at retirement– Pension Wise
Facilitating risk sharing – Not New Brunswick (yet) Encouraging reluctant employers Enabling collective decumulation
State Plans
Hot political issue
Significant debate over extent of Canadian retirement crisis
Importance of state plans in Canada stems from: Poor usage of existing retirement savings vehicles
(RRSPs) Few employees covered by workplace pension plans Limited government support programs for middle
class
State Plans - CPP
Enhance Canada Pension Plan (CPP)
2013 efforts to enhance CPP stalled
Is now likely to be part of 2015 Federal election platforms
Provincial support is needed (but is mixed)
State Plans - ORPP
2. Development of Ontario Retirement Pension Plan (ORPP)
Belief that Ontario would prefer CPP enhancements; stalls have led to proposal of “Made in Ontario” MEPP-like mandatory public pension plan for Ontario employees,
Target is to replace15% of an employee’s earnings in retirement
Would supplement existing pension arrangements, personal savings, CPP, OAS and GIS
Grappling with questions on implementation and design– particularly breadth of scope, earnings thresholds and self-employed
citizens
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