Submission of the Canadian Institute of Actuaries to the Commission des affaires sociales

Transcription

1 Submission of the Canadian Institute of Actuaries to the Commission des affaires sociales Toward a Stronger and Fairer Québec Pension Plan August 2009 Document Canadian Institute of Actuaries

2 Canadian Institute of Actuaries comments on proposals contained in the working paper: Toward a Stronger and Fairer Quebec Pension Plan The Canadian Institute of Actuaries (CIA) is pleased to provide you with its views as part of the public consultation on the working paper: Toward a Stronger and Fairer Québec Pension Plan. Our input takes into account both the Québec process in connection with the Québec Pension Plan (QPP), and the federal initiatives as well as those of the other provinces and territories in connection with the Canada Pension Plan (CPP), particularly as described in the document put out by Canada s Department of Finance on May 25, Also, we favour maintaining similar benefits (as defined on page 20 of the working paper) under the two public plans, primarily in terms of pension benefits, and designing them on the basis of sound, simple and equitable principles. The two plans, however, face different economic and demographic challenges. These challenges, which loom larger for the QPP, may result in higher plan contributions. While the contribution rate is not covered by the tacit agreement on plan similarity, given the economic impact (see the Issues section) of both plans, we feel that adjustments (in terms of benefits) must be built into the similarity principles so as to maintain only a minimal (if any) gap between the two plans contribution rates. Failing this, we feel that the plans cannot be considered similar. CANADIAN INSTITUTE OF ACTUARIES The Canadian Institute of Actuaries establishes a Code of Professional Conduct, guiding principles and monitoring processes for actuaries, all of which support the guiding principle that the public interest is paramount. The CIA also helps the Actuarial Standards Board develop standards of practice for actuaries practising in Canada, including standards governing actuarial valuation of pension plans. ISSUES In analysing the proposals made by the two levels of government, we must stress the importance of both public plans from a number of angles: Financial security: the QPP is a key part of many Quebecers financial planning when it comes to retirement, disability and death. For many Quebecers, the benefits paid by this plan represent their principal source of income. Thus, any changes to the QPP will have an impact on their financial security. Coordination with private plans: QPP contributions and benefits (eligibility and amount) are taken into account by the retirement savings plans and group insurance plans that many organizations offer their employees. Thus, any significant changes to the QPP could impact on the design and funding of these plans. Economic impact: the QPP s funding impacts considerably on the Quebec economy, be it from the standpoint of contributions considered as a tax on employer payroll, the investment of these contributions (managed by the Caisse 2

3 de dépôt et placement (CDP) du Québec and generating a large pool of capital for companies), or the benefits providing income to scores of families and that income then being redistributed through the economy via consumer spending. The QPP will also impact on many workers decisions as to when they will start transitioning toward retirement. Thus, any changes to the QPP will have an impact on Québec s economic prosperity. Social balance: QPP funding has never been based on the desire for full funding of benefits on an individual basis or for each age cohort. Consequently, workers fund part of their future benefits and part of previous generations benefits. What s more, since contributions and benefits are not based on the same definition of salary, some groups of workers fund a portion of the benefits of other groups of workers. The balance in these intergenerational or intergroup transfers can be maintained only if workers believe in the plan s sustainability and buy into the idea of social solidarity. Thus, any changes to QPP contributions and benefits will have an impact on this social balance. Communicating the proposed changes: Since much of the public may find it difficult to grasp some of the provisions of the QPP, care should be taken to ensure that the changes are developed in a straightforward manner. Otherwise, financial planning and decision making may prove difficult for many Quebecers. While all in all we concur with a number of the proposals, we feel that it behooves us to make known to the Commission des affaires sociales our general and specific comments on the matter. GENERAL COMMENTS The working paper Toward a Stronger and Fairer Québec Pension Plan describes in detailed fashion the issues facing the QPP, possible solutions and the reasons for advancing these alternatives. The paper released by the Federal Department of Finance does not go into as much detail. While we assume that there were exchanges between the various decision-making bodies to compare the issues, analyses and impact of various alternatives, we note a lack of consistency between the alternatives proposed for the QPP and the CPP. This lack of consistency may be due to the fact that the QPP is not on as sound a financial footing as the CPP, and that the demographic impact, particularly in the form of population aging, will not affect the two plans in the same way. That being said, we welcome the efforts made by Québec stakeholders to adapt the QPP s design in light of the following parameters, and we would ask you to continue along this path to harmonize the plans around these parameters: Pension accrual over effective period of 40 years; Flexibility and neutrality as to beginning of pension pay-out; and No accrual beyond point that maximum pension has been reached. 3

4 The same parameters were presented recently in connection with the proposed changes to the CPP. Before presenting our specific comments, we would like to look more closely at these parameters. Pension accrual over effective period of 40 years Under the current provisions of the CPP and the QPP: Normal pension is payable at age 65; Workers are required to contribute between the ages of 18 and 65 (potentially 47 years of contributions); and 15% of the lowest-earning years can be excluded from the pension calculation, allowing workers to be eligible for the maximum pension after only 40 years of maximum contributions. This means that contributions paid over and above the 40 years of maximum contributions are not used to fund the pension. This provision constitutes a social measure, but had no impact before 2006 (the plan began in 1966) and affected only highearning workers having contributed for many years. The basic exemption used to determine the contribution amount (currently $3 500) is another social measure, even more impactful, that benefits low-income workers and could be sufficient in terms of the Plan s desired effects on income redistribution. We propose that the QPP take solution number 3 further and amend it to adopt the concept of pension accrual over an effective period of 40 years, as follows: Target pension is equivalent to 25% of the five-year average for maximum pensionable earnings (MPE), payable at age 65 and funded by 40 years of maximum contributions; One year of maximum contributions funds 1/40 th of target pension; a smaller contribution funds a portion of this pension; Contributions end after 40 years of maximum contributions; and Workers with less than 40 years of contributions are eligible for a proportionally reduced pension (before early or deferred pension factors are applied). Flexibility and neutrality as to beginning of pension pay-out As things stand today, the CPP s and QPP s provisions are not neutral when it comes to early retirement. For example, workers opting to receive their pension at age 60 must have paid 36 years of maximum contributions to be eligible for the target pension. While reduced for early retirement (by a factor of 0.5% a month), it is not reduced for accrual over a period of less than 40 years. Thus, the plans provisions encourage early retirement. As for deferred retirement, the same factor of 0.5% is used. The reduction or deferral factors should be calculated on the basis of actuarial equivalence. In the context of a gradually shrinking labour pool, we feel that the QPP s provisions should not encourage early retirement. At best, the provisions should produce a neutral effect. 4

5 In examining the paper, we see that the lack of neutrality in the early and deferred pension provisions has been noted. Solution number 4 proposes reviewing the adjustment factor for a deferred pension. But in the case of early pensions, while solution number 3 proposes adopting the parameter of pension accrual over an effective period of 40 years, this parameter and that of neutrality are not fully integrated. No accrual beyond point that maximum pension has been reached The target pension can only be exceeded by workers with high earnings and many years of maximum contributions. Since such workers will have contributed for more than 40 years, they will have reached a certain age, and the pension accrual cost at this age will be higher than the average cost for workers as a whole. This raises the following question: why impose an additional cost on the plan when this already constitutes an issue? It raises another question as well: will this provision really encourage workers to put off retirement? In response to these questions, we are of the view that the maximum pension must be equal to the target pension (after 40 years of maximum contributions) and that contributions must end after the same 40-year period. SPECIFIC COMMENTS 1. Increase the contribution rate from 9.9% to 10.4% starting in 2011, by 0.1% a year, for a total increase of 0.5%. From the time the QPP was founded in 1966 until 1986, the overall contribution rate remained at 3.6%. Beginning in 1987, it was gradually raised until the mid-1990s, when it was increased more sharply, reaching the current rate of 9.9% in Over the same period, benefits failed to keep pace. Consequently, an intergenerational transfer occurred; in other words, current contributors are paying in part for their future benefits and in part to offset the lack of funding for benefits currently being paid to plan recipients. For example, it is estimated that for workers having entered the workforce in 2003, the contributions (before the changes being considered) they and their employers will have made will be used to fund nearly 2.5 times the value of their pension, based on ultimate assumptions of inflation, MPE increase and yield used for the latest QPP actuarial valuation. Accordingly, the larger the group of workers subsidizing the benefits of other older workers or current pensioners, the greater the threat to intergenerational solidarity. Thus, we believe that now is the time to resist increasing the intergenerational transfer, i.e., the contribution rate, and to instead seek adjustments in benefit levels for a similar contribution rate. There are other challenges that could pose a threat to intergenerational solidarity. The stock market woes in 2008 and the economic downturn that also began that year could necessitate an rise in contributions. Also, an aging population whose effects are being increasingly felt in Quebec and the rest of Canada will exert additional pressure on the QPP contribution rate. And since the CPP is not planning to raise its contribution rate, the competitive position of Quebec workers and employers could be undermined in relation to that of the workers and employers in other provinces, despite the plans being considered similar. Lastly, since the proposed solutions as a whole do not seem to involve the current group of pensioners, intergenerational solidarity will be automatically diminished. 5

6 According to the final impact that each of the possible solutions presented in the following sections will have on the contribution rate, it is very likely that adjustments in benefits, other than those presented in sections 2 to 13, will need to be contemplated to maintain a contribution rate of 9.9%. These adjustments are presented in the section Other possible solutions. If these are not considered, we believe that the contribution rate should be increased as quickly as possible to limit transferring the cost to the next generation. 2. Eliminate the requirement to stop working in order to be able to apply for a retirement pension before age 65. We agree with this proposal, since it fits in with the measures taken to encourage phased retirement. Also, this measure will reduce the costs of administering the plan. However, following the coming into force of Bill 68 in 2009 (see page 31 of the working paper), there will be a pension supplement equal to 0.5% of the contributory earnings for each year of contribution once the pension has begun to be paid. This provision does not constitute an actuarial equivalence and is at odds with the parameters suggested in the general comments as regards flexibility and neutrality in terms of pension payout start date and absence of accrual beyond the point when the maximum pension has been reached. Thus, we suggest doing away with this provision that took effect in 2009 and considering our suggestions in the following two sections. And since the provision has not been around long (early 2009), the impact of withdrawing it would not be significant. 3. Calculate the retirement pension by taking into account the 40 best years of career earnings. This proposal is in line with the parameter of accrual over an effective period of 40 years presented in the general comments. However, it does not incorporate all the parameters. Adopting these parameters would make it possible to modernize the QPP s provisions and add consistency and neutrality when it comes to pension benefits. If these parameters are adopted, we propose that they be implemented as follows: Assuming that reaching the maximum pension is a desirable objective, any worker not having reached the threshold of 40 years of maximum contributions would be authorized to contribute to the QPP and accrue a portion of a retirement pension; Based on a normal retirement age of 65, payment of contributions should be mandatory before age 65 and voluntary from 65 on; Payment of contributions should cease after 40 years of maximum contributions; One year of maximum contributions should allow workers to accrue 1/40 th of the target pension, as opposed to 0.5% of pensionable earnings; and The supplemental pension thus accrued should continue to be paid to surviving spouses at the rate of 60%. Also, this proposal should be adjusted to take account of the years during which the contributor is disabled or has dependent children, as is currently the case. 6

7 Lastly, this proposal would eliminate the arbitrary 15% adjustment for years when earnings are lower, ensure greater equity among contributors and make pension benefits more predictable. 4. Increase from 0.5% to 0.7% a month the actuarial augmentation factor applied to the pension of a person who postpones applying for a retirement pension until after age 65. Since this provision, combined with the adjustment for early retirement (0.5% for each month before age 65), is presented as an actuarial adjustment, we concur with a proposal that calls for regular revision of this adjustment in light of the economic and demographic context. But in view of our flexibility parameter as to the start date for pension payout, we feel that the monthly percentages for early and deferred pensions should be actuarially neutral. If the factors are not arrived at neutrally, pension behaviours will be altered and this could generate unwanted additional costs. 5. Have only one definition of disability, which would apply up to age 65, by eliminating the less stringent definition that currently applies to contributors aged 60 to 64. AND 6. Cover the risk of total disability for beneficiaries of a retirement pension who are aged 60 to 64 and who continue to work and to contribute to the QPP. We concur with these proposals, which bring consistency between the disability and pension benefit levels, as well as with the CPP. 7. Raise the fixed portion of the disability pension to the level of the OAS pension and set the variable portion to the amount of the actuarially adjusted retirement pension. We concur with this proposal, which aligns the variable portion of the disability pension with the retirement pension and its fixed portion with the OAS. In the process, the disability pension prior to age 65 is boosted a bit, and income after age 65, with the OAS, is in line with income prior to age 65. It does, however, create a difference with CPP benefits. 8. Triple the orphan s pension by increasing it from $66 to $209 a month. We agree with this proposal, which brings things more in line with the CPP. 9. For a spouse under age 65, replace the surviving spouse s pension, currently paid for life, with a temporary pension paid for a maximum of 10 years and equal to 60% of the pension the deceased contributor would have received if he or she had instead become disabled. AND 10. In addition to the temporary pension, transfer, to the account of the surviving spouse under age 65, 60% of the earnings entered under the deceased contributor s name, for each of the years they lived together. AND 7

8 11. Change the calculation of the surviving spouse s pension after age 65 to provide a pension equal to 60% of the retirement pension that was paid to the deceased contributor (i.e. including the actuarial adjustment) rather than 60% of the unadjusted pension. AND 12. Allow the retirement pension and the surviving spouse s pension to be cumulated (added together), up to the maximum amount of the retirement pension. The surviving spouse s pension is complex, seemingly based in part on notions of needs and seeking to deal with a range of family situations that only partially reflect changing family conditions. Thus, some of the proposals seem reasonable at first glance. For example: The proposal replacing the lifelong pension with a temporary one (maximum 10 years), which reflects the changes in families; Those seeking to protect the retired spouse with a spouse s pension or a transfer of the deceased contributor s earnings; Those limiting the accrual of the surviving spouse s pension and of the retirement pension to the maximum pension amount. Some of the other proposals strike us as inconsistent, however: In many cases, a 60% surviving spouse s pension can be more generous than a transfer of 60% of earnings when the latter are limited (in combination with the surviving spouse s earnings) to the MPE for each year; A surviving spouse aged 65 or up can be the spouse of a contributor who was not old enough to receive a pension hence the need for a transfer of earnings; and The temporary pension should cease at age Reimburse the contributions that a person made to the QPP, up to $2 500, if the person dies without giving his or her family entitlement to the death benefit and without receiving other benefits under the Plan. We feel that this proposal flies in the face of the insurance principle, which stipulates that there is a price to pay to be covered against a risk. Furthermore, this change if implemented risks generating high administrative costs in relation to what it can offer those availing themselves of this measure. 14. Increase the maximum pensionable earnings (MPE) under the QPP. At first blush, this proposal seems straightforward enough. But a deeper analysis raises numerous questions concerning its design, and clarification is required. In particular, how would the contribution rate be set?; which years would be taken into account for this second chunk of salary?; and would there be intergenerational transfers in respect of this second portion of the plan? There is also the matter of the administrative red tape that would be generated by a second plan. 8

9 Assuming that this second plan would mirror the existing one, we feel that this would not be a desirable solution since it would add to the intergenerational transfer, compound the funding problems (see our comments in point 1) and create an enormous difference between QPP and CPP benefits unless the CPP were similarly amended. Moreover, this proposal seems based on a finding of failure of two of the pension system s pillars (private plans and individual savings plans). While we are aware of the problems with the current system, we feel that it can be improved and that such a finding of failure is ill-founded, especially if the analysis that led to this finding leaves out a large portion of retirement savings generated by group registered retirement savings plans (RESP) and deferred profit sharing plans (DPSP) set up by many organizations. We urge Québec decision makers to put in place a framework that further encourages Quebecers retirement savings and employer-sponsored pension plans. 15. Allow Quebeckers to make voluntary contributions to the QPP. This proposal is similar to others in the rest of Canada. British Columbia, for one, will be introducing a defined-contribution plan in The C.D. Howe Institute made proposals through Keith Ambachtsheer, and provincial premiers agreed recently to discuss the question of retirement savings. Any comparison between other provinces initiatives and Québec s needs should take account of certain distinctive but similarly aimed elements introduced fairly recently in Quebec, in particular the Fonds de solidarité, simplified pension plans (SIPPs) and member-funded pension plans (MFPPs). While we cannot comment on a concrete proposal (the paper is lacking in details), we welcome initiatives aimed at increasing the retirement savings of Quebecers and their fellow Canadians. But if such a proposal were to go ahead, we feel that it should include the following: Overall costs assumed by workers should be lower than under current schemes; It should be easy to contribute to this plan and transfer funds out of it; Some investment options should be offered, and transfers among these options should be facilitated; Tools to assist in investment decisions (to help answer the questions how much should I invest? and where should I invest? ) should be available to workers; Investment education should be offered to workers; Retirement planning tools should be available; Periodic statements should be prepared; Workers should have regular access (upon joining the plan, upon retirement and at least once a year) to retirement professionals to help them with their choices; A number of options should be offered at the retirement stage, including withdrawal of funds; 9

10 Financial risks should be well managed when the capital is converted into a pension to avoid a transfer of cost or risk; The private sector should play a role in managing the capital to avoid an overconcentration of savings management. In addition, the economic impact of such a plan should be measured in its entirety, since this plan will likely drain part of the existing retirement savings. A number of stakeholders in the retirement savings field could be harmed in the process. OTHER ALTERNATIVES In light of the general and specific comments expressed earlier and while we cannot be sure what the impact will be exactly we believe that the benefits should be adjusted in order to maintain the current contribution rate. Consequently, we propose taking a closer look at three other alternatives that could help achieve this objective. Other alternatives First, we suggest that consideration be given to adjusting, at least temporarily, future indexing of pensions to a level just under 100% of the increase in the CPI possibly in the order of 80% or 90%, but also perhaps by taking account of a degree of modulation according to demographic criteria, pension levels or the period of the reduction in indexing. This measure would help avoid increasing the current level of intergenerational transfer, since both workers and pensioners would be participating in the benefit reduction. The effect on pensioners would be minor in the short term. But in the long term, the ultimate impact would depend on the level of inflation in future years. We should bear in mind, however, that pensioners eligible for the GIS might suffer no harm. Lastly, this measure would not undermine the principle of similarity with the CPP, as set out on page 20 of the paper. Second, we suggest considering a minimal, phased increase in the normal age of retirement in order to create a better balance (or ratio) between the number of years of work and the number of years of retirement (since the creation of the QPP, the number of years worked has gone down on account of lengthier education or leave from work, and the length of time workers receive a pension has gone up on account of an increase in life expectancy). This measure would be effective in influencing the age at which workers want to take their retirement, and would be beneficial in countering the labour shortage that we are already beginning to see. Given that the United States and several European countries have already adopted such measures, it would bring us more in line with the international community. But the principle of similarity with the CPP would be ruptured if the same provisions were not adopted by the CPP. Third, the basic general exemption (currently at $3 500) could be reduced so as to maintain the same 9.9% contribution rate. Although this measure would have a larger impact on low earners, it would enable a larger number of workers to amass a retirement pension. Last, this measure would not endanger the principle of similarity with the CPP. The CIA is willing to work with the Government of Québec on this matter. Please feel free to contact us should you require any further information. 10