February 13, Dear Minister,

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1 Frank Swedlove President and CEO February 13, 2015 The Honourable Mitzie Hunter Associate Minister of Finance (Ontario Retirement Pension Plan) Ministry of Finance 6th Floor, Frost Building South 7 Queen's Park Crescent Toronto, Ontario M7A 1Y7 Dear Minister, Please find enclosed a submission from the Canadian Life and health Insurance Association (CLHIA) providing input to your consultation paper, "Ontario Retirement Pension Plan: Key Design Questions". Established in 1894, the Canadian Life and Health Insurance Association (CLHIA) is a voluntary trade association that represents the collective interests of its member life and health insurers. Our members account for 99 per cent of the life and health insurance in force in Canada, and contribute to the financial well-being of Canadians by providing a wide range of financial security products such as life insurance, annuities and supplementary health insurance to about 28 million Canadians. About two-thirds of Canada's pension plans, primarily Defined Contribution plans for small and medium-size businesses, are administered by life and health insurers. Within Ontario, life insurance companies administer over 18,000 workplace retirement plans for over 2.2 million workers. The life and health insurance industry strongly urges the government to reconsider several of the key design elements of the ORPP in order to better promote the retirement income prospects of Ontario workers. As currently proposed, the ORPP would destabilize existing successful programs, force over-saving on low-income Ontarians and those already on track for retirement, and undermine the PRPP before it has even been implemented, to the detriment of small business and the self-employed. We believe that it will introduce unnecessary burdens on business, taxpayers and the economy. Canadian Life and Health Insurance Association 79 Wellington St. West, Suite 2300 P.O. Box 99, TD South Tower Toronto, Ontario M5K 1G Association canadienne des compagnies d'assurances de personnes 79, rue Wellington Ouest, bureau 2300 CP 99, TD South Tower Toronto (Ontario) M5K 1G Toronto Montréal Ottawa

2 We appreciate the opportunity to comment and remain at the disposal of you or your staff should you wish additional information. Yours sincerely, Original signed by Frank Swedlove FS:241 2

3 Submission by the Canadian Life and Health Insurance Association to The Honourable Mitzie Hunter Associate Minister of Finance (Ontario Retirement Pension Plan) re: Ontario Retirement Pension Plan: Key Design Questions February 13, 2015

4 Table of Contents I: EXECUTIVE SUMMARY... 1 II: CANADA'S RETIREMENT SAVINGS SYSTEM: IDENTIFYING THE SAVINGS GAP... 3 III: REVISITING ASSUMPTIONS... 7 IV: ORPP DESIGN ISSUES... 9 (i) What should qualify as a comparable plan?... 9 (ii) Impact of excluding workplace retirement plans from "comparable": unintended consequences? (iii) Low-income threshold (iv) Self-employed V: OTHER SOLUTIONS VI: CONCLUSIONS APPENDIX A ASSUMPTIONS APPENDIX B - FEATURES OF ORPP AND OTHER WORKPLACE RETIREMENT PLANS APPENDIX C ABOUT CLHIA... 25

5 I: EXECUTIVE SUMMARY Despite talk of a "pension crisis", Canada has a strong, internationally-respected retirement income system that works well for the majority of Canadians. Statistics show that per cent of Canadians are on track to retire at desired income levels relative to their pre-retirement income. It will be critical that the Ontario government carefully structure the design elements of the Ontario Registered Pension Plan (ORPP) taking into consideration the target group, the existence and interplay of other elements of the retirement income system, and the realistic costs of developing and managing the ORPP. The very real danger exists that, as currently proposed, Ontario workers and the economy will be disadvantaged. Designing the ORPP as a universal system rather than one targeted at the specific cohort of under-savers could undermine current savings efforts and introduce unintended and potentially irreversible duplications and distortions into the retirement savings system. The recommendation to exclude Defined Contribution (DC) pension plans, Group Registered Retirement Savings Plans (RRSPs), Pooled Registered Pension Plans (PRPPs) and other workplace retirement plans disenfranchises responsible employers who have taken the initiative to establish workplace plans, and could have negative implications for the 2.4 million Ontario workers who participate in these plans. A recent Environics poll underlines this risk, indicating that, if introduced as currently proposed, the ORPP could lead almost 80per cent of Ontario employers to curtail contributions to existing Defined Contribution pension plans and Group RRSPs. Setting the minimum earnings threshold at $3,500, as proposed, would put an unreasonable burden on workers who are outside of the target group and can least afford an additional reduction in their takehome pay. The minimum threshold should be $25,000. The self-employed are excluded from the ORPP. Once PRPPs are implemented in Ontario, they will provide the self-employed with access to a low-cost, efficient workplace retirement plan. However, this will only happen if PRPPs are supported and promoted by the government. The proposed design of the ORPP will significantly undermine PRPPs, not just in Ontario, but throughout Canada. 1

6 Many of the assumptions in the consultation paper are flawed and bear revisiting. In addition to discounting the workplace regimes of 2.4 million Ontario workers and ignoring the small target group of under-savers, they ignore the high cost of setting up and running an ORPP. Finally, there are other ways to address the needs of the target group of under-savers, including improving access to workplace retirement plans and improving participation in existing plans, which are consistent with the stated public policy objectives. 2

7 II: CANADA'S RETIREMENT SAVINGS SYSTEM: IDENTIFYING THE SAVINGS GAP Canada's retirement savings system is respected internationally and ranks among the best in the world. It is built on a balanced, three-pillar approach which has proven itself over six decades and has succeeded in reducing poverty among the elderly from 35 per cent 35 years ago to 6 per cent today. 1 The first pillar is the universal Old Age Security (OAS) and, for low-income Canadians, a Guaranteed Income Supplement (GIS). In Ontario, this is further supplemented by the Guaranteed Annual Income System and programs such as the Ontario Drug Benefit. This pillar is funded on a pay-as-you-go basis from current tax revenue, and there are no dedicated underlying assets. The second pillar is the employment-based Canada Pension Plan (CPP) and Quebec Pension Plan (QPP). Assets within the second pillar (CPP/QPP) are $251 billion. 2 The third pillar, meant to provide a level of income adequacy that goes beyond the bare basics, relies on private sector savings and consists of two elements -- workplace retirement plans and, outside the workplace, individual savings through Registered Retirement Savings Plans and Tax-Free Savings Accounts. Assets within the third pillar are $2.6 trillion. 3 In addition to the above, and often missing in any discussion of retirement income adequacy, are the savings and assets that Canadians have outside of the three-pillar system in a fourth pillar ; this includes non-registered financial assets, home equity, insurance, other real estate, small business equity, collectibles, inheritance, etc. Non-registered assets, excluding home equity and non-financial assets, are $2.1 trillion. 4 Home equity and non-financial assets are estimated at an additional $ Bob Baldwin. Research Study on the Canadian Retirement Income System Prepared for the Ministry of Finance, Government of Ontario (Toronto: Baldwin Consulting, 2009), pp Canada Pension Plan Investment Board. Total Assets as per Balance Sheet as at December 31, 2013, $211.6 billion, s%20eng.pdf, accessed February 11, The most recent statement of reserves for the Quebec Pension Plan was $39.3 billion at the December 31, 2012 actuarial valuation. p.37, accessed February 11, Canada. Statistics Canada. Pension Satellite Account, 2013 reports $1.57 trillion in employer-based pension plans and $1.03 trillion in RRSPs at December 31, accessed February 11, Pooneh Baghai and Fabrice Morin. Building on Canada's Strong Retirement Readiness (Toronto: McKinsey and Company, 2015), p

8 trillion. 5 While this latter asset segment may not normally be considered as a source of retirement income, ignoring any of these income sources paints an incomplete picture of Ontarians' savings, and the income potential provided by those savings. The first and second pillars serve the purpose of ensuring nearly complete income replacement for lower-income Canadians. OAS/GIS and CPP/QPP together replace 75 per cent of employment income for someone making $20,000 and 41 per cent for someone making $40,000. As employment income rises above these levels, the income replacement ratio falls, in part due to "clawback" of universal public benefits targeted at lower- income Canadians, so that a $100,000 earner would see OAS and CPP/QPP covering only 17 per cent of pre-retirement earnings. Thus, as income rises, there is greater reliance on both the third and fourth pillars to realize desired retirement income levels. This system works effectively for the majority of Canadians. Analysis by Keith Horner for the 2009 federal-provincial-territorial Finance Ministers' Research Working Group on Retirement Income Adequacy (the Mintz Report) indicated that 78 per cent of Canadians were saving sufficiently to maintain a 90 per cent consumption replacement level after retirement. 6 The Ontario Ministry of Finance report Ontario's Long-Term Report on the Economy (April 2014) identified the under-saving gap as approximately 35 per cent of the workforce. 7 A 2015 report by McKinsey & Company, Building on Canada's Strong Retirement Readiness, finds that 83per cent of Canadian households are on track to maintain their lifestyle in retirement, up from 75per cent in The McKinsey report includes sensitivity analyses on the impact of various factors on the retirement readiness of Canadians. Their 83 per cent measurement remains robust even when assumptions are changed. From these reports, it appears that, at most, only per cent of Canadians are not on track to maintain their standard of living in retirement. So the question becomes Can particular cohorts of under-savers be identified? Baghai and Morin. idem. Keith Horner. "Retirement Saving by Canadian Households", in Report on Retirement Income Adequacy Research (Ottawa: Research Working Group on Retirement Income Adequacy of Federal Provincial Territorial Ministers of Finance, 2009), p. 4. Kevin D. Moore, William Robson and Alexandre Laurin. "Canada's Looming Retirement Challenge", C.D. Howe Commentary 317 (Toronto: C.D. How Institute, 2010): p. XXX, cited in Ontario. Ministry of Finance. Ontario's Long-term Report on the Economy (Toronto: Queen's Printer for Ontario, 2014), p. 150 (Chart 6.1). 4

9 All credible research agrees that lower-income Canadians (e.g., those with incomes below $25,000) are not in the target group of under-savers, since they will have retirement incomes at comparable or greater levels than pre-retirement incomes through government plans (OAS, GIS and CPP/QPP). Research has found that the under-saving group tends to be mid-to high income workers who do not have access to a workplace retirement plan and/or do not participate in one 8 and do not have sufficient savings outside the workplace. The target group of under-savers, then, does not consist of all Ontarians nor even of all middle-income workers (typically defined as annual incomes between $25,000 and $90,000). To quantify the number of Ontario's under-savers, consider that Ontario has a workforce of 5.6 million workers. About 3.5 million participate in workplace retirement plans. 12 This leaves 2.1 million workers who do not have workplace plans. Those with incomes below $25,000 - approximately 700,000 Ontarians 13 - should be excluded from the target group. It would be misleading to assume that the remaining 1.4 million Ontarians all fall into the target group of under-savers. Many are saving adequately for retirement outside of the workplace. McKinsey's recent research concluded that only There are some workers who have access to a workplace plan, but do not participate in their plans. In the case of DC pension plans in Canada, the 2014 CAP Benchmark Report for the Canadian Institutional Investment Network reports that non-participants represent about 20 per cent of eligible workers. For Group RRSPs, non-participants represent almost half of eligible workers. Keith Ambachtsheer, speaking at the Public Policy Forum's Second National Summit on Pension Reform, October 8-9, 2014 in Toronto, and quoted in Public Policy Forum. Retirement Security for Everyone, (Ottawa, Public Policy Forum, 2015), p. 8, noted that the undersaving cohort was "a significant proportion of middle-income, private sector workers without workplace pension plans." Keith Horner, in a study for the 2009 Research Working Group on Retirement Income Adequacy, identified the under-saving gap (middleincome Canadians without workplace retirement plans who are not saving enough on their own) as about 30 per cent of middle-income Canadians. In his 2009 Research Study on the Canadian Retirement Income System for Ontario's Ministry of Finance, Bob Baldwin identified a separate cohort -- mature immigrants, for whom an employment-based retirement income system has limited impact, and where reform of OAS/GIS is more material. 1.9 million of which are pension plans. Data from CLHIA's Annuity Business in Canada and Benefits Canada's 2014 CAP (Capital Accumulation Plan) Suppliers Directory indicate that approximately 1.05 million Ontarians have DB or target benefit pension plan entitlements. 850,000 Ontario workers have DC pension plan entitlements, the vast majority of which reflect current service (as opposed) to former service. A further one million Ontario workers have entitlements under Group RRSPs, with 650,000 Ontarians having entitlements under other forms of CAP. Supplementary CLHIA data corrects for individuals with entitlements under multiple plans, with the result that we believe that 2.4 million Ontarians have workplace retirement savings plans that are not defined benefit or target benefit plans. Canada: Statistics Canada. Persons in Low Income Before Tax, 2007 to 2011 (Ottawa: Statistics Canada, 2013), scaled by Canada. Statistics Canada, Labour force characteristics, seasonally adjusted, by province, X, February 6, 2015 (Ottawa: Statistics Canada, 2015), table 3. 5

10 37 per cent of middle-income Canadians without workplace retirement plans were under-saving 14, suggesting that the actual target group of under-savers in Ontario would number about 525,000. This represents 9 per cent of Ontario's workforce. These facts are at odds with over-generalizations in the consultation paper such as "There is a gap between what people will need and what they will have". 15 Given the narrow scope of the retirement savings challenge, it is not clear that the proposed ORPP addresses the actual need effectively. Imposing a universal solution on a targeted problem will have unintended consequences Baghai and Morin. Exhit 2, p. 6. Ontario, Ministry of Finance. Ontario Retirement Pension Plan: Key Design Questions, (Toronto: Ministry of Finance, 2014), p. 1 (unnumbered). 6

11 III: REVISITING ASSUMPTIONS A number of assumptions made throughout the consultation paper will clearly be influential in making the ultimate design decisions about the ORPP. We believe that some of these assumptions are significantly flawed, and we would strongly suggest that they be revisited and reviewed carefully. They include: This is a universal problem requiring a universal solution The ORPP will be cost effective to administer. The 3.8 per cent contribution rate will produce a 15 per cent income replacement ratio The government needs to step in because 50 per cent of Canadians don't make RRSP contributions. A publicly run plan can invest more prudently than privately-managed investments. Personal rates of return are better in DB plans than in DC plans. The ORPP would be universal and facilitate portability All retirement income should be guaranteed The first point has already been discussed. Discussions on the other points, with the exception of cost effectiveness can be found under Appendix A. In this section, we want to draw particular attention to the cost assumptions. There is a pressing need for greater transparency on this matter, as the long-term impacts on Ontario taxpayers and the economy will be very significant. Neither the set-up costs nor ongoing administrative costs of the ORPP should be underestimated. The experience of the United Kingdom's National Employment Savings Trust (NEST) program is instructive. It grew from a 2006 government decision to require all employers to provide a workplace pension plan, with employees having a right of opt-out. NEST is the back-up option for employers, particularly smaller employers, who do not offer another form of retirement plan. Set up costs have been around $500 million, provided by a government loan that is expected to take decades to recoup. These costs are projected to reach $1 billion, over the next 20 years, imposing a significant drag on the net investment 7

12 earnings and efficiency of individuals' savings via NEST. NEST currently strips 2 per cent out of every contribution to pay for those costs, although this cost could rise significantly as underlying costs mount. Many assume that a new government-run retirement plan can operate at low costs similar to the Canada Pension Plan. But the costs of running the CPP are not as low as sometimes assumed. With current CPP assets of approximately $220 billion, and annual costs of over $2.3 billion, the Fraser Institute recently confirmed 16 that the CPP's "all-in" operating cost for the last year was 1.15 per cent, consistent with a long-term rise in CPP's cost over the last decade. By contrast, Jack Mintz's 2009 report on Retirement Income Adequacy noted that large privately managed DC pension plan and workplace RRSPs operate at about half of CPP's current costs. 17 And industry analysis indicates that those costs have fallen since 2009, as assets have grown. Even if a new government retirement plan could attain long term cost levels comparable to the CPP, this would take considerable time, since the initial asset base over which costs would be spread would be very small. If the medium-to-long-term objective is to integrate the proposed ORPP within the CPP, it is unclear that the near-term costs of establishing and operating the proposed ORPP will ever be recovered from operations of that plan, potentially leaving a significant expenditure to be borne by Ontario taxpayers in the future Philip Cross and Joel Emes. Accounting for the Trust Cost of the Canada Pension Plan. (Vancouver: Fraser Institute, 2014), p. 1. Vijay Jog. "Investment Performance and Costs of Pension and other Retirement Savings Funds in Canada: Implications on Wealth Accumulation and Retirement", in Report on Retirement Income Adequacy Research (Ottawa: Research Working Group on Retirement Income Adequacy of Federal Provincial Territorial Ministers of Finance, 2009), Table 7D. 8

13 IV: ORPP DESIGN ISSUES In this section, we look at three design issues identified in the consultation paper: (i) comparable plans; (ii) Impact of excluding workplace retirement plans from "comparable"; (iii) low income threshold; and (iv) the self-employed. (i) What should qualify as a comparable plan? We take serious exception to the government's preferred approach that only DB and Target Benefit Multi-Employer Pension Plans be considered comparable plans. The recommendation to exclude DC pension plans, Group RRSPs, PRPPs and other workplace retirement plans disenfranchises responsible employers who have taken the initiative to establish workplace plans, and could have negative implications for the 2.4 million Ontario workers who participate in these plans. It also suggests a lack of understanding of the contribution that these plans make to the retirement landscape for Ontario workers. (That misunderstanding is reflected in the chart on page 11 of the consultation paper which contained some errors, and failed to include several relevant factors. Given that that chart was apparently used to make recommendations on comparable plans, we have amended it and attach it as Appendix B. Several of these features are beyond the scope of the consultation paper, and will be addressed in subsequent representations to the Ontario government.) Industry data, supplemented by Benefits Canada research 18, confirms that the government's estimate of 400,000 Ontario workers who are currently participating in DC pension plans is materially understated. 19 CLHIA data totals active DC pension plan participants across member companies in their role as service providers to such plans, and indicates that at least 675,000 Ontarians are currently members of DC pension plans in Ontario. When information from non-insurance company service providers is considered, we estimate that over 850,000 Ontarians are active members of DC pension plans. More than one million Ontario workers also participate in Group RRSPs in the workplace, with almost 600,000 participating in other workplace savings programs such as Deferred Profit Sharing Plans and TFSAs. Allowing for individuals participation in multiple plan types, the retirement savings of 2.4 million See note 12, supra. This discrepancy arises from the characterization by FSCO of all employees who participate in a plan that has a DB component as DB plan members, even if those individuals have no DB entitlement under the plan. 9

14 Ontario workers - about 43 percent of Ontario's full time labour force of 5.6 million - have been ignored in concluding that the savings gap is widespread and in need of a blanket response by government. We strongly recommend that such plans be treated as comparable under any ORPP legislation, to avoid disruptive displacement and substitution effects. Pooled Registered Pension Plans (PRPPs) should also be considered comparable. They are operationally analogous to DC pension plans and their intent is to provide a solution for workplaces that don't currently offer retirement plans. As such, they are particularly valuable for employees of small and midsized employers in the private sector. The recommendation to exclude these valuable plans from the definition of comparable plans appears to be premised on a lack of understanding about the scope and importance of these plans to Ontario workers, the extent of employees and employers contributions, concern that contributions are not locked-in, and concern that they cannot produce retirement income certainty. We address each of these matters below. Scope As noted, 2.4 million Ontario workers participate in workplace retirement plans, other than DB or TBMEPPs. That number can be expected to grow with the introduction of PRPPs which are specifically intended to improve access to workplace plans. Contributions According to the 2014 CAP Benchmark Report by the Canadian Institutional Investment Network, the average employer contribution to a DC pension plan is 5.2 per cent (and this has grown significantly, from 4.6 per cent in 2009). The average employee contribution to a DC plan is 4.3 per cent. On average, then, the total annual employer and employee contribution is 9.5 per cent of the employee's salary. Unlike DC plans, employer contributions to Group RRSPs are not mandatory. Despite that, recent data shows that 70 per cent of organizations with fewer than 500 employees that offer Group RRSPs made employer contributions, and 49 per cent of organizations with more than 500 employees made 10

15 employer contributions; the larger organizations were also more likely to have additional retirement plans which would include employer contributions. 20 The average employer contribution to a Group RRSP is 4.3 per cent. The average employee contribution to a Group RRSP is 4.0 per cent, meaning that, on average where there is matching, the total annual employer and employee contribution is 8.3 per cent of the employee's salary. Locked-in status Contributions to DC plans are locked-in. We would agree that Group RRSP contributions should also be locked-in, and have made representations to that effect to the federal government. We would note that, although not mandated, in practice, 69 per cent of employers offering Group RRSPs restrict employee withdrawals through plan provisions and/or collective labour agreements, creating the equivalent of a statutory locking-in mechanism. 21 For retirement plans that do not impose such withdrawal restrictions, there is some leakage, but a recent report by the Régie des rentes du Québec submitted to the National Assembly s Committee on Public Finance found that the leakage represented only 0.1 per cent of total RRSP assets, far less than might have been expected. Retirement income certainty In the past, annuities which provide guaranteed income for life formed an integral part of Canadians' pensions. They were the mechanism through which governments, and subsequently employers, provided employees with retirement income security. They remain an option for individuals with DC plans, Group RRSPs and personal RRSPs. Some years ago, in response to the evolution of trusteed pension plans using non-annuity-based investments such as mutual funds, governments decided that greater flexibility was needed and allowed for other options that provided the possibility of greater short-term returns. This focus on short-term investment yields rather than avoiding the real risk of outliving retirement income means that annuities Canadian Institutional Investment Network CAP Benchmark Report: Understanding results to create desired outcomes (Toronto: Rogers Publishing Ltd., 2013), p.8. Sun Life Financial Group Retirement Services. Designed for Savings. (Toronto: Sun Life Assurance Company of Canada, 2014), p

16 fell out of favour. However, as the baby boomer cohort in particular enters retirement, there is an increasing focus on minimizing longevity risk rather than maximizing short term investment yields, particularly given the increase in life expectancy over the last several generations. Indeed, the volatility of short term investment performance becomes broadly undesirable as individuals transition into "decumulation mode". It has been suggested that DC pension arrangements do not provide income security that is comparable to DB pension plans. We believe this is incorrect. We would note that accumulations within DC pension plans are not paid out as lump sums, but either annuitized to provide guaranteed lifetime income, or received as Life Income Fund benefits or variable benefits payable directly from the DC pension plan s fund. Absent annuitization of payment of benefits from within a DC pension plan, DC pension entitlements payable via a Life Income Fund or as variable benefits are capped to effectively provide a predictable income stream to age 90. Thus, even in a flexible income structure such as a LIF, there is a strong guaranteed income element. While these latter two options provide some sensitivity to investment performance after retirement, use of prudent investment options, such as target date, fixed income and balanced funds, can significantly reduce any retirement income volatility. One question frequently raised regarding annuities is whether there is sufficient capacity within Canada to meet the demand for such products. Canada's life insurance industry holds investments of over $240 billion in Ontario, and has access to the global reinsurance market. Rather than a lack of capacity, we believe that the problem has been that valuation practices for pension plans have not fully considered all risks that insurers must address when pricing annuities, with the result that fully guaranteeing retirement incomes via annuities has been perceived as expensive. Just as DB pension plans are recognizing that transferring longevity risk to expert life insurance companies via annuitization makes sense, governments have also recognized the value of annuities and strengthened the capital requirements imposed on insurers. And just as annuities provide value and certainty to pension plans, the reality is that annuities can provide real value and guaranteed retirement income security to consumers participating in DC pension plans, PRPPs, RRSPs and other savings options. 12

17 (ii) Impact of excluding workplace retirement plans from "comparable": unintended consequences? At a January 20 th roundtable with Minister Hunter that we attended, representatives of all types and sizes of Ontario employers expressed grave concern that workplace retirement plans that employers have established responsibly and in good faith - and typically with significant contributions by both employees and their employers - would be considered "second rate" by the Ontario government. All warned about the unintended consequences of imposing a universal approach on those workers outside of the narrow target group. Representatives of employers who attended the roundtable wondered about scaling back, or even eliminating such plans in favour of a government plan that would require smaller contributions and provide less benefit to their employees. Some also warned that the required employer contributions under the proposed ORPP would result in offsetting reductions in employerprovided health and dental benefits, depressed wages, reduced hiring, and eliminating current jobs to balance costs. An Environics Research study 22, conducted at the end of January, sought to gauge the possible impact of the implementation of the ORPP with the proposed narrow "comparable plan" definition. It surveyed 401 Ontario companies with existing plans other than DB or TB (primarily DC and GRRSP). Results were disquieting. More than three-quarters (78per cent) of respondents said they would consider reducing contributions to their existing plans, and two-thirds (66per cent) said they would consider eliminating their existing plans altogether. The consequence of not recognizing existing workplace retirement plans will be to disrupt existing robust retirement plans and potentially reduce savings for 2.4 million workers who are not in the target group of under-savers. If employers simply reduce contributions by ORPP levels, the result will be that no net new contributions will be made to the retirement security of Ontario workers. If employers eliminate existing plans, the result will be a reduction in the retirement savings of Ontario workers. 22 Environics Research Group. CLHIA ORPP Research (Toronto: Environics Research Group, 2015), p

18 If PRPPs are not considered comparable, clearly this will affect their level of uptake by Ontario businesses. It would be a shame for Ontario's small businesses and their employees, and for the selfemployed, should that happen. (iii) Low-income threshold The consultation paper solicits recommendations with respect to the thresholds below which ORPP contributions should not be required. We believe that participation in the ORPP should not be required for individuals within the two lowest income quintiles, essentially exempting individuals with incomes below $25,000 per year, and this threshold should be indexed to ensure that low-income Ontarians are not forced to save beyond their ability to do so in the future. The targeted nature of any under-saving in Ontario means that required ORPP participation must exempt those for whom increasing retirement savings is not economically responsible or desirable. Those with income below $25,000 per year would not reasonably expect any benefit in retirement from the ORPP, but would only see high net marginal taxation rates through the clawback of, or disqualification for, existing federal and/or provincial income supports for low-income Ontarians. (iv) Self-employed The proposed ORPP would exclude self-employed individuals who have not incorporated their business activities. The rationale is reportedly that the federal Income Tax Act and Regulations preclude such individuals from participating in a registered pension plan. By contrast, PRPPs have been designed to ensure that all workers, including the self-employed, have access to a low-cost, efficient workplace pension plan on the same basis as workers in larger businesses. But that equity is defeated if PRPPs are prevented from obtaining appropriate scale, as would likely be the case if PRPPs are not considered to be comparable plans under the ORPP regime. 14

19 V: OTHER SOLUTIONS There are other options to improving the retirement income prospects for the target group of midincome workers without workplace retirement plans who are not otherwise saving enough for retirement. One is to improve access to workplace plans, and the government has taken an important first step in this regard with the introduction of PRPP legislation. Another is to increase participation in existing plans through behavioural nudges. And a third is to build in a greater degree of income certainty for non-db plans. Individually, or taken all together, these will measurably contribute to the public policy objective. Improving access to workplace retirement plans We commend the government for the introduction, in December, of Bill 57, An Act to create a framework for pooled registered pension plans and to make consequential amendments to other Acts. PRPPs are designed to target workplaces without workplace retirement plans and to do so by leveraging the expertise and strength of Canada's financial services sector. Legislation has already been adopted in British Columbia, Alberta, Saskatchewan, Quebec and Nova Scotia. The policy objective behind PRPPs is to make simple, low-cost workplace retirement savings plans available to Canadian businesses and their employees, especially to small and mid-size employers who have shied away from offering workplace plans in the past because of the cost and complexity of traditional pension plans for smaller groups. As such, PRPPs are precisely aimed to close the gap, providing under-savers with the necessary access and tools to ensure adequate retirement incomes. To the degree that Ontario wishes to further improve access to workplace plans, we would refer government to the Quebec example where they have taken the approach of requiring that all employers with five or more employees need to provide a workplace retirement plan, be it a DB or DC pension plan, a Group RRSP or VRSP (the Quebec version of PRPP). One of the keys of achieving the low-cost objectives of the PRPP is building scale. PRPPs leverage the scale and efficiency of existing investment options and the supporting administrative infrastructure used by DC pension plans and workplace RRSPs, delivering immediate low cost options to the smallest employers. Continuing to build scale through the participation of businesses in Ontario and across the country will be critical to ensuring that the low-cost objectives are maintained. Disallowing PRPPs as 15

20 comparable plans run counter to those objectives and could undermine the success of this important new option. Improving participation in existing plans Not all those who have access to workplace plans are participating as they could. In many cases, this lack of participation is due to behavioural inertia - i.e., the tendency to procrastinate and to defer long-term priorities such as retirement saving. One way of addressing this challenge is to statutorily permit adoption of automatic enrolment within existing workplace retirement plans while preserving individuals right to opt-out, as is permitted under PRPPs. Automatic escalation of employee and/or employer contributions complements automatic enrolment by allowing initial savings rates to be set at comparatively modest levels and escalate over time to the more robust levels necessary to ensure income adequacy in retirement. These automatic features would come with an opt-out feature, thus preserving individual choice. Experience in other jurisdictions has found these behavioural "nudges" to be highly effective, with only a small percentage of employees choosing to opt-out. A 2014 study 23 of U.S. 401(k) plans by Aon Hewitt reported that only 15 per cent of plans do not incorporate auto-enrolment or contribution escalation. Amendments to section 13 of Ontario's Employment Standards Act could extend auto-enrolment with opt-out and automatic escalation of contributions to traditional pension plans as a way to effectively encourage higher participation rates, thereby helping more workers overcome inertia. Auto-annuitization Just as it makes sense for consumers to invest in a disciplined, scheduled manner rather than attempt to time the market, it is also prudent to minimize timing risk in structuring retirement incomes. For workers approaching retirement age, gradually converting some of the accumulated value of DC pensions, PRPPs or Group RRSPs to annuities providing income for life and commencing at retirement would minimize consumers sensitivity to annuity pricing that could arise if annuities were only purchased on the spot market at retirement. While some consumers will want to maintain some flexibility in structuring income options, periodic annuitization of a significant portion of DC pension, 23 Aon Hewitt, Pulse Survey: The Impact of automatic Enrollment, (Lincolnshire: Aon Hewitt, 2015), p

21 PRPP and Group RRSP savings may be a prudent way to create a retirement income that can be gradually built up in slices. More discussion will be needed to address any legislative or regulatory barriers to such an approach. 17

22 VI: CONCLUSIONS Evidence indicates that under-saving is a targeted problem. It needs a targeted solution. Imposing a universal solution that does not recognize the 2.4 million Ontario workers who participate in effective workplace retirement savings plans other than defined benefit and target benefit pension plans could be destabilizing to those workers and the economy, dividing, atrophying or completely cannibalizing existing savings regimes that work well. We would strongly urge the Ontario government to ensure that DC pensions, Group RRSPs, and other capital accumulation plans (CAPs), as well as the new Pooled Registered Pension Plans being set up in Ontario, be considered comparable for the purposes of the ORPP. These plans typically have robust contribution rates that exceed the rate contemplated for the ORPP, offer investment yields comparable to large DB pension plans, and restrict access to those savings prior to retirement. Through structured income options, they can provide prudent, long-term, retirement incomes. We believe that these retirement arrangements address the same public policy concerns as the proposed ORPP. Public policy should focus on preserving and promoting these robust workplace retirement plans and, to the extent other structures are needed, on addressing the retirement income needs of only the small cohort of Ontarians who are not saving adequately. As proposed, the ORPP appears destined to produce unfortunate, unintended outcomes. 18

23 APPENDIX A: ASSUMPTIONS Assumption: The 3.8 per cent contribution rate will produce a 15 per cent income replacement ratio. The assumptions underlying the economic modeling of the government proposal - in terms of interest rates, employment growth, and evolving longevity - are not explicitly stated, but if they mirror those of the Canada Pension Plan, these may be viewed as aggressive in the current low for long market context. If these assumptions turn out to be unfounded, and the government remains wedded to the replacement rate, this would set the stage for increases in contribution rates and intergenerational subsidies in the future, with both being contrary to the stated public policy and design objectives of the proposed ORPP. The alternative would be a significant reduction in the intended benefit level. The impact of either increases in contribution rates on small business and on the economy as a whole or of reduced benefits on Ontario's retirees could be significant. Government should be very careful not to create an expectation among Ontario workers that a robust level of sustained retirement income is being guaranteed by the province; rather than reduce benefits in response to market conditions, it could be all too easy to resort to intergenerational subsidies, despite current design intentions to fully fund target benefits. Assumption: The government needs to step in because 50 per cent of Canadians don't make RRSP contributions. Government shouldn't lose sight of the fact that a lot of Canadians do contribute to RRSPs. In 2012, 6 million Canadians contributed $35.7 billion to RRSPs, and total assets in RRSPs are about $950 billion. For those who don't, the reality is that it is not always the right decision for all Canadians to make RRSP contributions in any given year. Many - notably younger to middle-age adults - will have legitimate shorter-term priorities like paying down student or other debts, saving for a home or paying down a mortgage, and funding children's education. The implied assumption in the consultation paper is that short-term needs should be subverted to long-term needs. But that doesn't necessarily hold true. And, for some low-income Canadians, it just doesn't make sense to make RRSP contributions when that competes with current spending on basic needs such as a family's food, clothing and shelter, and could result in a future clawback of their OAS/GIS benefits. Research from sources as diverse as credit counseling organizations and Canada s banks repeatedly indicates that it is often prudent for younger, lower income individuals with other short-term financial 19

24 priorities to defer retirement savings, 24 especially since RRSP contribution room can be carried forward to subsequent years. Consequently, RRSP contribution rates can be expected to rise significantly with age and income level, thereby taking full advantage in later years of the contribution capacity that is created in earlier years. As well, there is a significant risk that the proposed ORPP will create a perception that Ontario s workers do not need to save for retirement beyond any forced savings under the ORPP. This could lead to a wide-spread inadequacy of retirement income for millions of Ontarians, with resulting pressure for public income supports beyond current levels. This could have disastrous economic impact on the province as a whole. Assumption: A publicly run plan can invest more prudently than privately-managed investments. As evidenced by past experience in both Canadian and international jurisdictions, there is a significant risk that publicly-run pension investments will be managed for purposes that may conflict with the objectives, rights and/or interests of individual plan participants. Instead, such investments may be used to further other objectives, such as supporting industries that would otherwise be economically unsustainable, in an effort to maintain employment levels, leading to depressed investment returns. Moreover, by concentrating investment decisions within a single, large, investment organization, there is significant risk that desirable diversification of investment risk will be compromised, and that the investment organization could unduly influence or control broader investment markets, particularly in a domestic context. It must also be noted that there are numerous cases of publicly-run DB pension plans, both in Canada and internationally, that have become financially unsustainable or insolvent, for reasons ranging from inconsistency between each plan's underlying financial assumptions and macroeconomic or actuarial experience to faulty governance or investment management. Assumption: Personal rates of return are better in DB plans than in DC plans. There is an underlying assumption throughout the consultation paper that DB plans are "good", that they yield the best returns and make the best investment choices, and that nothing else will adequately address retirement income needs. We beg to differ. It has been well established for at least 25 years that investment performance within DC pension plans can match that of DB pension plans, without exposing individuals to high 24 See, for example, the Investor Education Fund's website: accessed February 13,

25 volatility of returns. 25 Indeed, Keith Ambachtsheer's 2012 article The Dysfunctional "DB vs. DC" Pensions Debate: Why and How to Move Beyond It 26 argues against this dogmatic bias in favour of DB arrangements, noting that "factors other than DB vs. DC determine cost experience". Ambachtsheer continues, noting that while DB defenders often confuse pension design and implementation, highperformance, twenty-first-century pension institutions can cost-effectively manage any pension design, not just those based on DB formulas. Historical comparisons of DB and DC pension plans' investment performance have also typically erred in failing to address the effects of scale; they have compared large, mature, professionally managed DB plans with high contribution rates and substantial assets per member against small DC pension plans that typically have been in "start up" mode, with lower contribution rates and the resultant low asset levels per member. Spreading the fixed costs of DC plans over a significantly smaller base than for such DB plans produces an automatic bias in favour of DB plans. Once this scale bias is corrected, it is clear that well-funded, professionally-managed, DC pension plans are performing on par with DB plans, especially where members are directed to target date investment options that adjust choices to their particular retirement time horizons. Recent industry analysis indicates that, in absolute terms, target date funds typically return between 1.2 and 1.5 per cent more annually than do non-target structures. 27 Assumption: The ORPP would be universal and facilitate portability. For employees of medium and large employers with operations in multiple jurisdictions, and particularly for employees who are parties to collective labour agreements, it is unclear how - or if - the ORPP would be applied to workers outside Ontario. This inconsistency of treatment of workers is at fundamental odds with the collective bargaining process. Failure to include multi-jurisdictional DC pensions, group RRSPs, PRPPs and similar workplace retirement plans in the definition of comparable plans for purposes of the ORPP can be expected to lead to inconsistent benefits for workers between Ontario and other jurisdictions. And this may discourage employment in Ontario Zvi Bodie, An innovation for stable real retirement income, Journal of Portfolio Management 7, 1980: pp Keith Ambachtsheer. "The Dysfunctional 'DB vs. DC' Pensions Debate: Why and How to Move Beyond It" Rotman International Journal of Pension Management 5,2 (2012): p. 36. Sun Life Group Retirement Savings, internal data as of December 31,

26 For individuals who change employers within Ontario, portability of ORPP participation may be more complex than assumed, since the current approach to comparability means that such individuals could be frequently moving in and out of active participation in the ORPP. Tracking entitlement and ensuring appropriate and equitable benefit payments for individuals within a particular age cohort would significantly increase the cost of ORPP administration. Assumption: All retirement income should be guaranteed. Having a baseline of guaranteed income provides security, and government programs such as OAS, GIS and C/QPP provide what is essentially a guaranteed income. But we would argue that having flexibility is also needed. As people move through their retirement years, their needs change. Consumption levels will vary and a strictly level income is not necessarily the best answer. DB pension plans have historically been represented as providing guaranteed income in retirement. But recent experience centering on the solvency of DB pension plans clearly demonstrates that such guarantees may not be realized, particularly if the employer becomes insolvent. Ontario s experience with the Pension Benefits Guarantee Fund underlines that the ability of government to step in and guarantee retirement benefits from failed DB pension plans is limited at best. Ontario's financial services industry already provides a wide range of retirement income mechanisms - including guaranteed lifetime incomes via annuities and more flexible options - that allow employers and workers to customize a mix of guaranteed and flexible incomes appropriate to individual needs. For instance, a household with a significant guaranteed income stream from one individual's retirement program may choose to focus all of a spouse's retirement income in flexible arrangements. Imposing a "one size fits nobody" option would typically be inappropriate in such circumstance, and that forced structure would be poor public policy. 22