Adapting Pensions to Changing Demographics

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  • 1. A Populous Now: Adapting Pensions to Changing Demographics Plenary II The retirement challenge: bridging the generations Association of Canadian Pension Management September 10-12, 2013, Ottawa René Beaudry Partner, Normandin Beaudry Member of the Expert Committee on the Future of the Québec Retirement System
  • 2. 2 Financial Situation of Plans under the RRQ’s Supervision Solvency deficits • $22G as at December 31, 2010 • $37G as at December 31, 2011 • $41G as at December 31, 2012 Median solvency ratio Source: Régie des rentes du Québec 93% 72% 77% 80% 74% 73% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100% 2007 2008 2009 2010 2011 2012 Status quo is not an option
  • 3. 3 What happened? • Demography • Lower interest rates • Stock market returns • Use of plan surplus – Contribution holidays – Plan improvements
  • 4. 4 We Live Longer, We Retire Earlier Life expectancy at age 65: 13 years Retirement age 6546 years of working lifeAge 191970 2009 Age 22 38 years of working life Retirement age 60 Life expectancy at age 60: 23 years Sources: Ministère des Finances et de l’Économie du Québec, Institut de la statistique du Québec, Régie des rentes du Québec and Statistics Canada. Childhood and schooling Working life Retirement
  • 5. 5 We Retire Earlier 59 60 61 62 63 64 65 66 Age Evolution of retirement ages (1) Canada Québec 60,1 61,6 (1) 5-year moving averages Source: Statistics Canada
  • 6. 6 We Retire Earlier Retirement ages by province and by sector • Earlier retirement in Quebec than in the rest of Canada • Earlier retirement in public sector plans
  • 7. 7 0 5 10 15 20 25 1940 1950 1960 1970 1980 1990 2000 2010 En années Femmes Hommes 2,9 années 4,7 années We Live Longer 18.9 years 21.8 years Source: Canadian Human Mortality Database and Institut de la statistique du Québec. Life Expectancy by Gender at Age 65 OAS at 70 CPP OAS at 65 Years 4.7 years 2.9 years
  • 8. 8 We Live Longer • Louis Adam, Université Laval – Mortality study based on CPP and QPP members – Mortality improvements in Canada will be higher than currently anticipated • Leveraged impact of mortality improvements Before Mortality Improvement After Mortality Improvement Assets $80M $80M Liabilities $100M $108M Surplus/(deficit) ($20M) ($28M) 40% increase in deficit payments 8% increase in liabilities
  • 9. 9 A balance for an overall solution Vision Objectives Values Principles Recommendations Viable Retirement System for Quebec Financial Security at Retirement Sustainable Retirement System Inter- generational Equity Transparency Accountability In Line with True Costs Pooling Flexible Legal Framework Diversity of income sources
  • 10. 10 Recommendations Return to Financial Reality Enhance Governance and Flexibility Reduce Deficiencies through Restructuring Reinventing the Role of Personal Savings Longevity Pension: Additional Financial Security
  • 11. 11 Odds of Surviving from ages 65 to 95 Year Men Women 2009 9% 17% 2036 15% 28%
  • 12. 12 Reinventing the Role of Personal Savings QPP OAS Private initiatives Salary 0% 20% 40% 60% 80% 100% 120% 0 10,000 20,000 30,000 40,000 50,000 60,000 55 60 65 70 75 80 85 Source: Régie des rentes du Québec $ , , , , , ,
  • 13. 13 Reinventing the Role of Personal Savings With postponement of public pensions QPP OAS Private initiatives Salary 0% 20% 40% 60% 80% 100% 120% 0 10,000 20,000 30,000 40,000 50,000 60,000 55 60 65 70 75 80 85 Source: Régie des rentes du Québec $ , , , , , ,
  • 14. 14 Reinventing the Role of Personal Savings • Favor diversification of retirement income sources by optimizing their use • Quick implementation of Voluntary Retirement Savings Plans (VRSP) • Allow variable withdrawals from defined contribution plans, based on the life income fund (LIF) model • Allow earlier withdrawals of locked-in retirement savings on and after age 60 and contributions to RRSPs until age 75
  • 15. 15 Recommendations Return to Financial Reality Enhance Governance and Flexibility Reduce Deficiencies through Restructuring Reinventing the Role of Personal Savings Longevity Pension: Additional Financial Security
  • 16. 16
  • 17. 17 Ratio of the number of people aged 15 to 24 to those aged 55 to 64 (Source: Statistics Canada, 2012: 9 Figure 5)
  • 18. 18 Longevity Pension In a Nutshell • Pension equal to 0.5% of salary up to the Yearly Maximum Pensionable Earnings (YMPE) for each year of contribution • Payable as of age 75 – Appropriate place for private savings between ages 60 and 75
  • 19. 19 Longevity Pension In a Nutshell • Plan cost prudently valued and funded – Funding rate of 3.3% of salaries shared equally between workers and employers • Total contributions would be roughly $4 billion/year – Additional contributions estimated at $2 billion because of reallocation for members of group plans – Forced coordination for public sector plans • Limited impact on Québec’s GDP – 0,08% to 0,13% per year (phased-in over five years)
  • 20. 20 Longevity Pension Its Advantages • Efficient management of savings – Low administration costs and investment management fees – Professional management • Pooling of longevity risk • Reduces pressure on defined benefit plans • Reduces the gap between workers who benefit from a defined benefit plan and those who do not • Intergenerational equity
  • 21. 21 Longevity Pension The Better Option Six reasons why the Longevity Pension is the better option • New reality – LP: Designed for today’s demographic reality • Benefit – QPP2: Several types of benefits – LP: Retirement pension only
  • 22. 22 Longevity Pension The Better Option • Cost – QPP2: Payable as of age 65 – LP: Payable as of age 75 • Cross-subsidization – QPP2: QPP is under-financed; additional benefits would inevitably increase intergenerational transfers – LP: Fully-funded and independent from QPP; new contributions would exclusively be used for the new benefits
  • 23. 23 Longevity Pension The Better Option • Relevance of employer plans – QPP2: significant increase in public pension could make employer plans less relevant – LP: leaves room for personal savings, employer plans and personal choices • Early retirement – QPP2: 2/3 of Quebecers begin their pension by age 62 – LP: neutral with respect to retirement age
  • 24. 24 Sources of Income at Retirement Current System 0% 20% 40% 60% 80% 100% 120% 0 10,000 20,000 30,000 40,000 50,000 60,000 55 60 65 70 75 80 85 $ Salary Private initiatives OAS QPP Source: Régie des rentes du Québec , , , , , ,
  • 25. 25 Sources of Income at Retirement System with Longevity Pension 0% 20% 40% 60% 80% 100% 120% 0 10,000 20,000 30,000 40,000 50,000 60,000 55 60 65 70 75 80 85 $ Salary Private initiatives OAS QPP Longevity Pension Source: Régie des rentes du Québec , , , , , ,
  • 26. 26 Recommendations Return to Financial Reality Enhance Governance and Flexibility Reduce Deficiencies through Restructuring Reinventing the Role of Personal Savings Longevity Pension: Additional Financial Security
  • 27. 27 Return to Financial Reality Discountrate Member’s ageRetirement age Based on corporate bond yields Active period rate Retired period rate (current) Retired period rate (proposed) Based on expected return « Enhanced Funding » Discount Rate
  • 28. 28 Recommendations Return to Financial Reality Enhance Governance and Flexibility Reduce Deficiencies through Restructuring Reinventing the Role of Personal Savings Longevity Pension: Additional Financial Security
  • 29. 29 Enhance Governance and Flexibility • Separate accounts for active members and retirees – The two groups of members clearly have very different characteristics – Investment policy tailored to each separate account – Possible to make changes to one group’s provisions without impacting the other group’s financial position • Annuity purchases – Permit transfer of liability to the insurance company
  • 30. 30 Recommendations Return to Financial Reality Enhance Governance and Flexibility Reduce Deficiencies through Restructuring Reinventing the Role of Personal Savings Longevity Pension: Additional Financial Security
  • 31. 31 Reduce Deficiencies through Restructuring • 5-year period that would allow parties to – Adapt their defined benefit plan to the new economic and demographic realities – Attain a balance between security and affordability • While respecting – Negociation/discussion processes – Intergenerational equity – Protection of basic pension and pensions in payment • Typically, the basic pension represents only 50% to 70% of the total plan cost
  • 32. 32 Reduce Deficiencies through Restructuring Typical current service cost breakdown (Plan indexed according to inflation minus 1%) 50% 10% 11% 7% 4% 18% Indexation Survivor pension Bridge benefit Early retirement subsidy before age 65 3-year final average salary Basic career average pension formula payable as of age 65 Source: Régie des rentes du Québec
  • 33. 33 To Remember • Status quo is not an option • We live longer, we retire earlier • We can reinvent the role of personal savings for retirement • The Longevity Pension will pool the longevity risk • We need to return to financial reality • We need to enhance the flexibility in managing pension assets and liabilities • We need to allow willing employees and employers to restructure their pension plans
  • 34. Appendix
  • 35. 35 Public Plans Gross replacement ratio at age 65 from public plans Salary as a % of average salary 50% 100% 150% Quebec 82% 47% 32% Canada 77% 44% 30% G7 Average 56% 44% 38% OECD Average 57% 42% 37% Sources: OECD 2008 study and Régie des rentes du Québec Insufficient coverage for those earning average or above average salaries
  • 36. 36 Insufficient Retirement Savings Coverage breakdown of Quebec workers One out of two workers are not covered by any type of group savings plan 4 million Quebec workers of workers are not covered by any group savings plan of workers are covered by a group savings plan 35% defined benefit 4% defined contribution 14% other