Implications for DC Plans

Transcription

1 Pension Reform in Canada: Implications for DC Plans William Robson President and CEO C.D. Howe Institute Presentation to the Benefits Canada 14 th Annual DC Plan Summit Banff: 14 February 2012

2 xx Overview Environment Economics Investment returns Implications for retirement savers Canada s pension policy landscape OAS &GIS CPP & CPP Tax-prepaid vs tax-deferred saving Defined-benefit and target-benefit plans Defined-contribution plans DC plans get Rodney Dangerfield-like lik respect 2

3 xx DC plans get no respect Defined-contribution plans Pilloried as bad alternative to DB Underestimated as pillar of retirement plans for millions of Canadians Hampered by tax and regulatory constraints Undermined dby policy neglect 3

4 xx The economic environment Investment t returns depend d on economic growth Outlook for growth over next generation is subdued Constrained by demography workforce growth could add 0.4% annually Supported by investment growth in built capital could add 0.9% annually Dependent on productivity more output per worker and unit of capital could add 0.7% annually Total real growth likely to be around 2.0% annually 4

5 The economic environment and valuations Outlook for valuations over next generation is fraught Financial cycles since mid-20 th century boosted financial asset prices faster than real wealth Even after 2008 crash, financial assets look overvalued relative to real stocks of human and physical capital Valuation changes will not help and especially outside Canada may hurt investment returns 5

6 xx Implications for all retirement savers including DC plans Retirement income depends on returns Compound interest will be no miracle for average investor Growth will support 2% real returns with downside risk from devaluations All investors will incur necessary and unnecessary costs People should plan on basis of net return close to zero 6

7 xx Implications for all retirement savers including DC plans wo work/retirement e e time e Most people s current expected work/retirement split is unrealistic A person starting out can expect to start saving at age 30 and live to age 90 Retiring at 60 means equal periods accumulating u and decumulating u wealth 7

8 xx Implications for all retirement savers including DC plans and saving Comfortable retirement planning and retirement needs a new model Same consumption in equal accumulation and decumulation phases requires 50% saving rate Consumption during decumulation can be lower than during accumulation Even so, people should retire later Even so, people should save more 8

9 Canada s Retirement Policy Landscape Pillar 1: Pillar 2: Pillar 3: OAS & GIS CPP/QPP Voluntary & Contractual Tax-Prepaid (TFSAs) Tax-Deferred RRSPs & Related Registered Pension Plans Defined-Benefit Target-Benefit Defined-Contribution 9

10 xx DC plans better looked over than overlooked A more Mae West-like take on DC Not so bad Matter to millions of Canadians plans Can be better Can be even better with policy support 10

11 xx Implications for DC plans Low-return environment Will intensify focus on costs Ensure value for money Keep downward pressure on providers Ensure they are well disclosed Examine for tax-efficiency from participant s perspective 11

12 xx Implications for DC plans Low-return environment Will pique participant interest in riskier options Encourage primacy for promise-to-pay assets Reinforce safeguards such as glide paths 12

13 xx Implications for DC plans Low-return environment Should promote higher saving Add or refine nudges to enroll Add or refine nudges to increase participant contributions Will promote later retirement Develop smarter retention ti strategies t (who and dh how) Tell participants what s realistic Will discourage rapid decumulation 13

14 xx Implications for DC plans Changes to pension-policy landscape: Pillars 1 & 2 Clawbacks may come later, but be fiercer GIS may expand Provinces will income-test more seniors benefits CPP expansion, if any, will be modest Ottawa is wary of liability and complexity Unions support, but employers and pension plans do not 14

15 xx Implications for DC plans Changes to pension-policy landscape: Pillar 3 TFSAs will grow rapidly Better for low- and modest-income people Available to all, including maxed-out ttax-deferred df dsavers DB will keep shrinking Plan and sponsor bankruptcies Shrinking participant base Conversions to target-benefit and DC PRPPs in current form will not go far Too little benefit to participants vis-à-vis RRSP Too big cost to sponsors vis-à-vis RRSP Mandatory participation a big pill for most employers to swallow 15

16 xx DC plans: getting respect and positive attention 16

17 xx Implications for DC plans Enhancing respect Tell policymakers about numbers DC participation i i is larger than it looks relative to DB DC participation is growing DC assets are growing g Tell public and policymakers about costs Make sure you have a good story, and tell it Put out more information rather than less Detail how DC costs differ from other capital accumulation vehicles 17

18 xx Implications for DC plans and positive attention Tell policymakers they can help make DC better Raise contribution limits Delay mandatory decumulations Make LIF and RRIF spend-down d schedules less aggressive Ease annuitization options Allow TFSA options in DC plans Unite private- and public-sector DC plans in making case 18

19 Pension Reform in Canada: Implications for DC Plans William Robson President and CEO C.D. Howe Institute Presentation to the Benefits Canada 14 th Annual DC Plan Summit Banff: 14 February 2012