A presentation about the different approaches to pension risk-sharing in Canada and Britain

1. Who’s Risk Is It Anyway?
May 27, 2015
Henry Tapper
Simon Nelson

2. Four Worries and a Funeral
De-risking or re-risking?
Can we democratize ownership?
Does choice equal freedom?
Is the State provider or facilitator?
And did this man kill British pensions?

3. Questions for Today
1. Is there a retirement design that better balances a
guaranteed pension and a pension delivered through
‘best intentions’?
2. Can we ‘nudge’ people towards better behaviours
when it comes to their financial security in retirement?
How much choice do they need, want and can cope
with?
3. What can Canadians learn from Britain’s experiences
(and vice-versa)?

4. Challenges with Traditional DB Plans
Low interest rates,
volatile equity
markets, maturing
plans, increasing
longevity
Volatility and
asymmetrical risks
for plan sponsors
Mark-to-market
accounting
Becoming a public
sector employee
‘perk’?
Relief measures
are short-term
solutions; don’t
address underlying
issues
Complex
regulatory
environment

5. Challenges with Traditional CAP Plans
Predictable costs, but
unpredictable retirement
benefits
Members exposed to
significant risks, especially in
retirement
Complex decisions left to plan
members; ‘choice overload’
Few ‘decumulation’ products
Few efficiency benefits from
pooling of costs and risks
First ‘cohort’ of career-DC
employees yet to reach
retirement

6. 1. De-risking corporate pensions

7. But who will take on the risk?

8. Discussion #1

9. 2. Democratising Pension Ownership
1. Triple lock on state pensions guarantees a
minimum 2.5% pension increase p.a.
2. Public sector DB subject
3. Private sector DB protected by pension
protection fund
4. Auto-enrolled DC pensions for 10m new workers

10. 1.2m DC pensions to be set up in next 3 years

11. But can employers help transfer the risk?
1.2m new employers set up
workplace pensions

13. Where is Canada today?
1. Private Sector and Not for Profit
2. Public Sector
3. Multi-Employer Trades

14. Where is Canada today?
Private Sector and Not
for Profit
• Legacy mode for DB, with
freezes and derisking
• Continuing trend towards
fixed cost DC
• Unions still (are they the
last?) DB stronghold

15. Where is Canada today?
Public Sector (with
solvency exemptions)
• Municipal,
Hospitals,
University
and

16. Where is Canada today?
Multi-Employer Trades
• Temporary solvency
exemptions
• Still a strong DB landscape
• Looking for permanent
funding rule solutions in most
jurisdictions

17. Legislative and Regulatory Response
1. Minimum Funding
2. Traditional Multi-Employer Plans (MEPPs)
3. Termination Benefits
4. Hurdles for Innovation

18. Legislative/Regulatory Response
Minimum
Funding
• Not much
permanent
help for
traditional
DB
• Solvency
Traditional
MEPPs
• Temporary
solvency
exemptions
• No
permanent
solutions

19. Legislative/Regulatory Response
Termination
Benefits
• Concepts
of being
‘asset
share
based’
Hurdles for
Innovation
• Regulatory
change
takes time
• Legal
concerns;
litigation in

20. Discussion #2

21. Where is Britain headed?
Freedom and
choice
• Drawdown
• Cash
• Annuity
State funded
guidance
• Pension
Wise

22. 3. Granting pension freedoms

23. Plenty of information

24. But does Information equal knowledge?

25. Where is Canada headed?
Workplace
Plans
• Innovative
Designs
State Plans
• Better Coverage

26. Workplace Plans: Innovation
Push for regulators to be
open to new types of
pension deals and
transitional approaches
Jointly trusteed
arrangements
Consolidation of plans
and/or assets

27. Workplace Plans: Target Benefit Plans
 TBPs, or ‘defined ambition’ plans, aim to combine the
best of DB and DC (and remove the worst of both)
 Typical features:
1. Fixed contributions
2. Provide a target DB-type benefit, with very few guarantees
3. Benefits may be adjusted up or down to balance funding
 Not currently accommodated by many jurisdictions’
regulations

28. Discussion #3

29. 4. The State and British Pensions
 Providing -
 Single state pension – simpler but less ambitious
 A safety net for insolvent DB covenants
 Compelling –
 employers to auto-enrol staff in workplace
 Insurers to manage legacy and improve governance
 Protecting–
 the consumer with charge caps
 Educating -
 at retirement– Pension Wise
 Facilitating risk sharing –
 Not New Brunswick (yet)
 Encouraging reluctant employers
 Enabling collective decumulation

30. State Plans
 Hot political issue
 Significant debate over extent of Canadian
retirement crisis
 Importance of state plans in Canada stems from:
 Poor usage of existing retirement savings vehicles
(RRSPs)
 Few employees covered by workplace pension plans
 Limited government support programs for middle class

31. State Plans - CPP
Enhance Canada Pension Plan (CPP)
 2013 efforts to enhance CPP stalled
 Likely to be part of 2015 Federal election platforms
 Provincial support is needed (but is mixed)

32. State Plans - ORPP
Development of Ontario Retirement Pension Plan (ORPP)
 Belief that Ontario would prefer CPP enhancements; stalls have
led to proposal of “Made in Ontario” MEPP-like mandatory public
pension plan for Ontario employees
 Target is to replace15% of an employee’s earnings in retirement
 Would supplement existing pension arrangements, personal
savings, CPP, OAS and GIS
 Grappling with questions on implementation and design
– particularly breadth of scope, earnings thresholds and self-employed citizens

33. Discussion #4

34. Wrap Up
Who’s risk is it anyway?