The Committee’s witnesses held a variety of views about the “health” of the nation’s current retirement income system, the extent to which reforms are needed to public pensions, voluntary tax-assisted retirement savings vehicles and/or occupational pension plans, and Canada’s international ranking in respect of pension adequacy.

THE NEED FOR REFORM

Various elements of Canada’s retirement income system have been reformed over time, but in Canada, like in a number of other countries, the recent global financial and economic crisis highlighted the need to reform some elements of the system. In Canada, federal and provincial governments,  as well as other stakeholders, have been examining whether—and, if so, what—reforms are needed to ensure a standard of living in retirement that is at least adequate.

The views of the Committee’s witnesses about the need for reform varied, with some arguing that the country’s retirement income system is basically sound, although limited reforms may be required in specific areas. For example, Ms. Shirley-Ann George and Ms. Sue Reibel, of the Canadian Chamber of Commerce, suggested that reform efforts should be focused on improvements to key areas rather than on fundamental changes, a view that was supported by Carleton University’s Mr. Ian Lee, who—appearing on his own behalf—said that there is no pension crisis, and by BMO Financial Group’s Ms. Tina Di Vito. This opinion was also expressed by Mercer’s Mr. Malcolm Hamilton, who appeared on his own behalf and described the current situation as an economic and financial markets—rather than a pension—crisis. He said that he could not think of a country that has fewer problems than Canada in respect of retirement saving.

Other witnesses, however, believed that broader reforms are needed. Open Access Limited said that there is widespread acknowledgement that change is required. Ms. Susan Eng, of the Canadian Association of Retired Persons, noted a C.D. Howe Institute report by Mr. Keith Ambachtsheer, entitled The Canada Supplementary Pension Plan (CSPP), which argued that Canadians have inadequate retirement saving. Specifically, she observed that nearly 30% of Canadian families have not saved for retirement and that the registered retirement savings plan (RRSP) system is not fully utilized. Ms. Eng also highlighted inequities between private- and public-sector pension plans, a point that was also made by Mr. James Pierlot, a pension lawyer who appeared on his own behalf.

Similarly, Mr. Scott Perkin, of the Association of Canadian Pension Management, indicated that the lack of occupational pension plans is one of the main impediments to adequate retirement income. On that subject, Mr. Dean Connor, of the Canadian Life and Health Insurance Association, explained that the administrative costs and complexities of such plans stop many employers, especially small firms, from establishing them.

Mr. Perkin also commented that insufficient voluntary retirement saving is another impediment to adequate retirement income. He argued that individuals are not saving enough on their own, partly due to the complexity of the current savings mechanisms. The Rotman International Centre for Pension Management’s Mr. Keith Ambachtsheer, who appeared on his own behalf, also spoke about this issue, saying that the average Canadian does not know how much to save in order to ensure adequate income once retired. Furthermore, he noted that administrative costs on mutual funds, which constitute a sizeable proportion of retirement saving, are often 2% or higher, making it difficult to reach a reasonable income replacement rate.

Additionally, Ms. Diane Urquhart, an independent financial analyst appearing on her own behalf, argued that Canada provides relatively less protection for occupational pension plan members in the event of their employer’s bankruptcy. This view was also held by witnesses from Nortel Retirees’ and Former Employees’ Protection Committee. However, Mr. Hamilton brought a Mercer publication, Melbourne Mercer Global Pension Index, to the Committee’s attention. According to this report, in 2009, Canada was tied for second among 11 countries, behind the United Kingdom, on the issue of employee protection in a fraud, mismanagement or insolvency situation, including the protection of accrued benefits in the case of employer insolvency. Furthermore, the report highlighted that—among the 11 countries—Canada, Germany, the United Kingdom and the United States were the only jurisdictions that offered some sort of protection for accrued benefits in the event of insolvency in 2009.

AN INTERNATIONAL PERSPECTIVE

The Organisation for Economic Co-operation and Development (OECD)’s Mr. Edward Whitehouse, who appeared on his own behalf, provided an international context for the examination of Canada’s retirement income system, comparing it to 12 other OECD member countries. He concluded that, for several reasons, Canada has a relatively “high-performing” retirement income system. For example, poverty among Canadian seniors is relatively low, with a poverty rate of 4.4% in the mid-2000s compared to the OECD average of 13.3%. He argued that the relatively low poverty rate is partly due to Old Age Security (OAS) and Guaranteed Income Supplement (GIS) benefits, which provide an effective and universal safety net for Canadian retirees. However, while recognizing that Canada has a retirement income system that is very efficient at reducing poverty in old age, the University of Saskatchewan’s Mr. Daniel Béland, who appeared on his own behalf, argued that the role played by pensions in replacing income should go beyond replacement at the poverty line. In his view, the Canadian retirement income system does not adequately fulfill this role.

Supporting this view, Mr. Jean-Pierre Laporte, a pension lawyer who appeared on his own behalf, noted that—in 2006—Canada ranked 12^th out of 14 OECD member countries in terms of the nation’s pension income replacement rate, at 57.9% of pre-retirement income. However, the OECD report presented by Mr. Whitehouse noted that, on average and in the mid-2000s, Canadians over age 65 had incomes equal to 91% of the average Canadian population, giving Canada a ranking of 3^rd among 12 OECD member countries.

Figure 1: Average Income of Persons Aged More than 65 Years as a Proportion of
the Average Income of the Population, Various Countries, Mid-2000s

Source: Whitehouse, Edward. “Canada’s Retirement Income Provision: An International Perspective,” report presented by Mr. Whitehouse to the House of Commons Standing Committee on Finance, 27 May 2010.

The long-term financial sustainability of Canada’s retirement income system was also noted by Mr. Whitehouse. He observed that, while the population will age and public expenditures on pensions will rise, the current system’s public expenditures—which are equivalent to 4.5 % of gross domestic product (GDP)—are well below the OECD average of 7.4%. Moreover, by 2060, public spending on pensions in Canada is projected to increase to 6.2%, still below the current OECD average. Mr. Whitehouse also noted that the combination of public and private sources of retirement income in Canada’s system provides protection against the risk and uncertainties affecting it. Finally, he asserted that another favourable attribute of the pension system in Canada is that it does not provide incentives for early retirement.

While Mr. Whitehouse identified positive aspects of Canada’s retirement income system, he indicated that there is room for improvement in respect of occupational pension plans, private retirement saving and public pensions. More specifically, he suggested that private pension plan coverage could increase, particularly for low- and middle-income earners. Regarding such plans, he commented that automatic enrolment is occurring in some countries, and that other countries are introducing and streamlining tax incentives, particularly for low-income earners.

As well, Mr. Whitehouse noted that contributions to registered retirement savings plans are small in comparison to occupational pension plans, and stressed that the administrative charges for the former are relatively high; he argued that such costs should be reduced. Finally, although Canada’s pension system does not provide incentives to leave the workplace early, he provided figures indicating that the participation rate of older Canadians nearing the retirement age of 65 is somewhat low compared to other OECD countries.

Regarding public pensions, Mr. Whitehouse suggested increasing the pension age, and indexing OAS and GIS benefits to growth in average earnings to ensure that retirees’ standard of living does not decline relative to the average population. Finally, to provide better protection against risk, he suggested that the investments in defined contributions pension plans of people near retirement should be automatically shifted to less risky assets.

Finally, Mr. Hamilton spoke to the Committee about Mercer’s Melbourne Mercer Global Pension Index report, which evaluates the state of the retirement income system in Canada and ten other countries in three broad areas: adequacy of benefits; long-term sustainability of the system; and the integrity of the private-sector system, with a focus on prudential regulation, governance, risk protection and communication. This report was also mentioned by Mr. Connor. Overall, Canada ranked 4^th out of the eleven countries in 2009, behind the Netherlands, Australia and Sweden. According to the report, the Canadian retirement income system could be improved by addressing the low coverage of occupational pension plans and the low household savings rate. It was also argued that Canada should index the pension age to life expectancy and ensure that voluntary retirement saving is used for retirement purposes and not withdrawn earlier for other expenditures.