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Discussion Wednesday

What lies ahead for pensions?

Globe and Mail Update

There's a serious flaw with tax policy, according to Paul Forestell, leader of the retirement professional group at Mercer.

"They should allow individuals to fund shortfalls," he told the Globe's Janet McFarland last week.

And as Ottawa considers what kinds of retirement and pension provisions to put into the budget on Tuesday, he calls on the federal government to raise the financial contribution limits for individuals with defined-contribution pension plans and registered retirement savings plans, and make it easier for employers that fund pension plans to make up deficits.

Unlike traditional pension plans that provide a guaranteed income in retirement, defined-contribution plans pay a return to workers that depends on the performance of their investments.

Mr. Forestell said it is unfair that sponsors of traditional pension plans can put additional money into the plans to repay funding shortfalls caused by declining investment values, but individuals do not get more contribution space to put money into personal retirement savings when their investment values plunge.

Mr. Forestell joined us for a discussion about the Canadian pension environment, and what any changes might mean to your retirement savings. Thanks to all those who submitted questions.

Mr. Forestell, F.S.A, F.C.I.A., is a Worldwide Partner and the leader of Mercer's Canadian Retirement Professional Group, based in the Toronto office. He is also a member of the Canadian Retirement Operating Committee.

He joined Mercer in 1992. A senior pension consultant to both public and private sector clients, he leads Mercer's government lobby efforts to affect change to pension legislation.

Editor's Note: editors will read and allow or reject each question/comment. Comments/questions may be edited for length or clarity. HTML is not allowed. We will not publish questions/comments that include personal attacks on participants in these discussions, that make false or unsubstantiated allegations, that purport to quote people or reports where the purported quote or fact cannot be easily verified, or questions/comments that include vulgar language or libellous statements. Preference will be given to readers who submit questions/comments using their full name and home town, rather than a pseudonym.

Claire Neary, Thanks a lot for joining us today, Paul. We've received a lot of questions, so we'll get right to them.

I'll start off with a general question. Given the significant losses in all kinds of pension plans over the past year, how much pressure is the government under to make changes in this area?

Paul Forestell: All governments in Canada, provincial and federal, are feeling the pressure on retirement savings in Canada due to the losses that occurred in 2008. Evidence of this is that nine separate governments announced some form of funding relief for defined benefit pension plans in the latter part of 2008. Looking just at the Federal government they announced temporary funding relief in 2008 and just last week indicated that they will be reviewing pension rules in general during the first half of 2009. To date the focus has been on defined benefit pension plans and the federal government has been quiet on defined contribution pension plans and RRSPs.

LOU Padula from Montreal: Defined contribution plans suffer from two serious flaws: 1) Individuals are not necessarily knowledgeable to manage their own pension investments. 2) Companies are not prepared to assume the responsibility for investing on behalf of the employee, or training the employee adequately to make appropriate long term investments.

Defined contribution plans were introduced, so that employers would not have the liability of meeting the employees' promised pensions, and the cost associated with same. In this the defined contribution plans have worked very well for the employer. They have however left the employee high and dry.

One suggestion I would like Mr. Forestell to comment on, is: Why not provide an option in the defined contribution plan for an employee to contribute his and his employers' defined contribution contributions to the CPP or QPP, thus allowing individuals to increase the amount of CPP or QPP they would receive at retirement. I appreciate that this would not be very attractive to the financial industry, however if we truly want to help the employee get a pension, this would be the surest way of achieving it.

Paul Forestell: There are studies in the U.S. and other parts of the world that demonstrate that large professionally managed investment pools typically have better returns than individual investors. Whether the CPP or QPP is the right vehicle to achieve this is a separate question. In a report prepared for the B.C. and Alberta governments there is a recommendation to start a large provincial DC plan that companies could join voluntarily. I think as we move forward we will see more interest in these types of arrangements but they probably will not be provided through the CPP or QPP.

David Whiting from Ottawa: Dear Sir, I believe pension legislation should require employers to give employees the option of 'opting-out' of the company pension plan, such that the employees can manage their pension in a self-directed plan. Would you agree or disagree and why?

Paul Forestell: I have no issue with employees having the option to opt out of their company pension plan. However, in most cases it would not be in the employee's best interest to opt out. Company pension plans typically have lower fees associated with the management of the pension funds and provide access to investment options that may not be available to the individual. As well, company pension plans have an employer paid component to them that the employee would be giving up if they opted out. Therefore if this option was available and some plans already have it, you have to be sure the employee fully understands what they could be giving up by opting out.

lady been from toronto: What happens when a company has a large unfunded liability and goes bankrupt? And if the government gives a contribution holiday to a company and then it goes bankrupt, what happens to the pension fund and the pensioners?

Paul Forestell: The pension plan assets are held in a trust separate from the company. If a company goes bankrupt the assets of the plan are used to provide the pension benefits. If there are not enough assets to provide the promised benefits the pension plan becomes an unsecured creditor of the company for the shortfall. If that shortfall is not made up member's pensions will be reduced to the level that can be paid for by the assets of the pension plan.

For example, if the plan is 80 per cent funded and someone is receiving $1,000 per month, their pension would be reduced to $800 per month. For people employed in Ontario there is Pension Benefits Guarantee Fund that helps insure the first $1,000 per month of pension.

Claire Neary, Do you believe Ottawa will make any changes to the Registered Retirement Savings Plan program — such as increase the amount of money people can contribute, or other measures that might allow them to make up for lost savings?

Paul Forestell: I think Ottawa should make changes to the Registered Retirement Savings Plan program to allow people to save more to make up for their 2008 losses. This would put RRSPs on the same footing as defined benefit pension plans which are not only permitted but required to make additional contributions to make up for the losses. Unfortunately, I am not certain that this will be part of the budget.

Mark Dip from Ottawa: Mr. Forestell, do you foresee the elimination (such as through a single, national securities regulator) of the tough restrictions currently placed on the conversion of "Locked-In RRSPs", such as those which prevents using them to buy back private pension years? These RRSPs can be combined only with other locked-in RRSPs — as long as both plans are governed by the same provincial legislation.

The problem arises for Canadian Federal Public Servants in that the Canadian Federal Superannuation Plan is governed by federal legislation. As such, a Canadian Federal Public Servant cannot use their private sector, provincially-regulated locked-in RRSP to buy back pension years, even if they haven't moved when they switched jobs. Comparably, a private sector employee can't use their locked-in RRSP from another province to buy back pension if they have moved to start a new job.

In my case, there will be nothing left in my locked-in RRSP by the time I retire because TD Bank charges me $100 per year for account fees. I get to watch it die a slow death before I'll ever get to use it. TD Bank gets an annuity — but not me. The benefit of these changes would better-enable employees to achieve a more secure retirement if they can bring their locked-in pensions with them. It would also foster better labour mobility between provinces.

Paul Forestell: Most provincial locking in rules would not prevent an employee from transferring their locked in pension money to a new employer's pension plan even if it is in a different province. The more common issue is that the new employer's pension plan does not permit transfers into the plan due to the cost of administering the transfer.

With respect to fees paid on small retirement savings accounts, I agree with you that this is a problem but the only solution is to find an alternative provider that will charge less to administer the fund or to leave your funds with your prior employer.

Denis Hancock from Toronto: I noticed when the OTPP announced a massive shortfall a few years ago, the primary reason was lowering their real-return forecast to 2.5% from 4.1% (over a 75 year time frame). I've also noticed that they never ACTUALLY lowered their forecast nearly that much (something around 3.8% now I believe), and that notably the CPP was also using 4.1% and have never changed it.

In turn, my question is what do you consider an appropriate real-return forecast? I had (and continue to hold) much respect for the folks at the OTPP and the reasons they initially lowered it to 2.5%, and my hunch is that not only is that more realistic, it would indicate the funding shortfalls for many defined benefit pension plans are much larger than is often being reported.

Paul Forestell: I think a real return in the range of 3.5 to 4.5 per cent is a reasonable best estimate and most pension plans in Canada would be using something in that range. The higher real return assumption, the greater the chance that the pension fund will not earn it and therefore have a deficit larger than what they are showing today.

Jason Reed from Calgary: Paul — I agree that individuals should be able to fund losses in their RRSPs in the same manner than pension plan sponsors can. What do you envision the federal government should do after periods of great returns and RRSPs are in 'surplus'? De-registered a portion of the account balance? Take away future contribution room?

Paul Forestell: My recommendation would be to maintain the current year contribution level and not adjust following years of great returns but still allow people to make up for losses. I do not support de-registering assets or taking away future contribution room. This is consistent with what we have seen recommended for defined benefit plans to allow companies to build bigger cushions for less than stellar investment returns. Individual savers should have the same opportunity.

Neil Craig from London, Canada: I totally support your view on deficit recovery but isn't the really pressing issue the lack of any coverage for employees of firms with less than 100 employees and wouldn't an inducement by way of a tax break or credit over and above expense deduction be a real incentive for these employers to offer a retirement plan?

Paul Forestell: Lack of pension coverage is a real issue in Canada. However, the suggestion of an additional tax break or credit is unlikely to be implemented. The key will be making it easier and less expensive for smaller employers to offer pension coverage and also reinforcing for employees the need to save.

c jared from Toronto: I understand the 18% number used for allocation calculations was based on an old rule of thumb that in turn was based on old mortality tables. Based on current mortality expectations, what should the revised number be?

Paul Forestell: The 18 per cent of earnings RRSP maximum contribution was based on a number of assumptions including mortality, interest rates and inflation rates.

The reality is that if Canadians save 18 per cent of earnings for their entire working life and earn a reasonable return on their investments they will have a comfortable retirement. Low income Canadian do not even need to save that much because of the Canada Pension Plan and Old Age Security benefits they will receive. Higher income Canadians are affected by the dollar limits on RRSP contributions not the 18 per cent of earnings limit. I think the dollar limit could be increased by 50 per cent to bring Canada in line with the U.S. and U.K. limits on pension.

myronINRD G from Red Alberta: Throwing good money after bad isn't really the answer. And what happens to retirees who lost huge amounts due to the decline in value of investments because of the Trust Funds debacle? Only time or a miracle will heal those who are on fixed incomes.

Paul Forestell: Retirees who have lost money for whatever reason during 2008 are in a more difficult position than active employees who can adjust their retirement dates to help make up the shortfalls. Younger retirees will likely need to consider returning to work, but older retirees are affected the most as there are not many options available to them. I think 2008 has provided an illustration of the risks that individuals face and hopefully this will cause people to better manage the risk they face but looking for more stable less risky returns.

Anne Williamson from Brantford, Canada: While I agree the RRSP and DC RPP contributions are too low for some, the majority of Canadians do not even contribute to an RRSP and those that do, contribute on average less than $3,000. Many have carryforward room they will never use. Wouldn't the development of hybrid DC/DB investment fund options for the group platform, be a better solution for the average plan member (Individual products include: Manulife's GIF and Sun Life's SunWise product, but the group versions are pale comparisons).

Paul Forestell: I personally like hybrid DB/DC solutions going forward. They allow for a minimum level of guarantee and an appropriate sharing of risk. However, putting a plan like that in place for the future won't fix the shortfall that exists today because of the 2008 investment performance. To permit individuals to fix the existing problem, some individuals would need additional RRSP room even if they hadn't contributed the maximum in the past.

Claire Neary, One of our readers has followed up with a response to Paul's answer to his earlier question about smaller companies often not offering pension plans at all.

Neil Craig from London, Canada: The expense of the investments and administration isn't what is keeping employers from offering plans, it is the overall cost in general, so unless you offer inducements or force participation new plans won't happen. Government sponsored supplemental plans with large start up costs and administration are not the answer.

Paul Forestell: A defined contribution pension plan is simply another form of pay. If the employer wants to provide a pension arrangement it is part of the total compensation they pay to the employee. Many smaller employers have elected to pay only cash compensation to their employees and let the employees decide how and when to save for retirement. Another option for providing a pension plan may encourage some employers to provide a pension saving opportunity for their employees. Many still will not.

Claire Neary, Paul, thanks very much for joining us today. You've shed a lot of light on an issue that's at the top of many Canadians' minds. Now we'll have to wait and see what next week's budget has to offer.

And thanks, as always, to all of our readers who submitted their thoughtful and insightful questions.

Paul Forestell: Thank you for your questions. Hopefully governments in Canada will continue to pay attention to the issue of retirement savings and how to ensure to Canadians will have a financially secure retirement.

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