Meeting the Pension Needs of Canadians - Speech by Alain Néemeh, Chairman of the Board of Directors (CLHIA)Release Date: 04/14/2011 Staff Reference: Janice Hilchie
Luncheon Speech at the International Finance Club of Montreal
Alain Néemeh, Chairman of the Board of Directors
Canadian Life and Health Insurance Association (CLHIA)
Thank you, Monsieur St-Arnault. Good afternoon ladies and gentlemen, distinguished guests, thank you for having me here at the International Finance Club today.
Your club, which was founded nearly 20 years ago now, is a particularly appropriate forum for discussing issues that impact our society and its financial players, such as those in the life and health insurance industry.
I am honoured by the invitation and very happy to be here among you as Chairman of the Canadian Life and Health Insurance Association, which represents approximately 99% of the industry.
Although we tend to relegate it to the bottom of the list of our day-to-day concerns, retirement is a phenomenon that evokes not only happy anticipation – at the prospect of having the time to do whatever we want, for example – but also feelings of uncertainty or even fear, particularly with regard to our finances.
The basic question is therefore the following: given the current pension system in our country, how can individual citizens make sure they will continue to enjoy the same quality of life when they retire? Will public and private plans be able to adapt and provide adequate financial support?
Today I’d like to share with you some thoughts on the future of the retirement system in Canada, on the evolution it will need to undergo, and on the contribution the private sector can make towards better meeting the needs of Canadians.
But before moving on to my main topic, I'd like to provide a little context around the Canadian Life and Health Insurance Association, the CLHIA, of which I am the Chairman. Established in 1894, the CLHIA is a trade association that represents the Canadian life and health insurance industry. Its membership consists of life and health insurance companies that work to help protect Canadians against the financial risks associated with premature death, illness and retirement.
The Canadian life and health insurance industry is a significant contributor to this country’s economy. Through its products and services, it plays an active role in ensuring the financial security of 26 million Canadians. The industry currently administers more than 70% of pension plans for Canada's small and medium-sized businesses and the vast majority of group RRSPs. CLHIA members also manage more than 45,000 employer pension, group RRSP and other savings programs serving more than 4.9 million Canadians, with over $105 billion in assets.
We represent a mix of strong Canadian-controlled companies and foreign-owned companies that contribute significantly to Canada, both domestically and internationally.
Our industry is stable and well capitalized. In Canada, the success of our industry is the envy of many sectors of the economy, with its 131,000 jobs and its $475 billion in assets. Our industry also stands as a shining example of success on the world stage. In fact, three Canadian insurers rank among the 20 largest insurance companies in the world.
Canadian life and health insurers remained sound throughout the global financial crisis, effectively navigating through the turmoil in credit markets and the resulting recession.
You can now understand why we take such a keen interest in matters relating to retirement and why our industry, by its very nature, has an important role to play in the resolution of this public policy issue, one that is critical to our collective future.
In recent years, many questions have been raised about our retirement savings system. At a time when large numbers of Canadians are at the point of entering this phase of their lives, many are experiencing feelings of uncertainty about their future standard of living.
Indeed, judging by the headlines in the media and the results of various surveys, you might easily get the impression that Canada’s retirement income system is in bad shape and that many Canadians are going to be reduced to the most abject poverty when they retire.
Do Canadians really have reason to be worried?
Certain recent trends could justify their concerns if nothing is done to correct them.
Let’s look at the savings rate among Canadians. It’s now the lowest it’s been in the last 30 years, dropping from 20% of disposable income in 1980 to 5% today.
Furthermore, we find that employers in the private sector are continuing to move away from defined benefit pension plans, towards defined contribution plans and other types of group retirement savings plans.
Individual investors have also been affected, and many have seen their assets and income eroded by the decline in the stock markets and continuing low interest rates.
Another factor is population aging. The percentage of seniors in Canada is expected to nearly double in the next 20 years, rising from 13% to 23%.
The increase in the number of retirees puts a heavy strain on Canada’s social safety net, as population aging gradually raises the dependency ratio and stretches taxpayer resources to their limit.
Underlying all of this is the more fundamental transformation that we see taking place in retirement systems. For example, in countries around the world we’re seeing a shift away from defined benefit plans in favour of defined contribution plans and other types of pension plans.
As a result, defined contribution plan assets today account for 42% of total retirement assets, and that percentage is growing at a rate of 6.2% annually, compared to an increase of only 1.6% for defined benefit plan assets.
Although this trend is less pronounced in Canada, the shift towards defined contribution plans and group RRSPs is gaining strength, as employers who offer defined benefit plans face difficulties relating to funding, legal liability, and DB plan legislation that is needlessly complex.
So, disregarding for a moment the trends I’ve just described, can we still say that our retirement system is in bad shape and in need of an overhaul?
Some people think so and believe there should be sweeping structural changes to our pension system, along with the creation of new programs.
We do not share that view.
In our opinion, Canada already has a healthy and well-established pension system. In it we find an effective mix of public plans and private plans, as well as attractive tax incentives. And added to this is the key role that insurers play as facilitators of personal savings for Canadians.
Our retirement income system is in fact one of the best in the world, according to the Melbourne Mercer Global Pension Index, which compares the features of retirement systems in various countries.
Something else not many people know is that Canada’s retirement savings system has helped to reduce the poverty rate among seniors from 35% thirty years ago to 5% today. In addition, the average income for seniors in this country is the third highest among OECD member countries. Canada has made tremendous progress in ensuring a more equitable retirement income for its citizens.
Of course, this doesn’t mean that our system should not evolve.
Let’s take a few minutes now, if you don’t mind, to look at this more closely. Our retirement income system consists of three components.
The first is the Old Age Security program and the Guaranteed Income Supplement, which are indexed to inflation and funded through general tax revenues. The purpose of this component is to provide a basic level of coverage. In the recent federal budget, the Minister of Finance proposed adding funds to enhance the Guaranteed Income Supplement. Several political parties have also incorporated this into their electoral platforms.
The second component consists of the pension plans provided by the government, that is, the Quebec Pension Plan and the Canada Pension Plan. These plans are funded through mandatory contributions by employers and workers. The federal government is proposing to make modest changes to the plan if it can reach a consensus with the provinces. But Quebec must first restore the QPP to financial health as proposed by the province’s Minister of Finance. Together, these components replace 25% of the median income of an individual earning $47,200.
The third piece is intended to provide income to supplement the coverage for basic needs that individuals have under the first two components. It is built around the savings options available in the private sector and includes employer-sponsored pension plans and individual savings.
Currently, the percentage of workers covered by Registered Pension Plans (RPPs) is in decline and now sits at 39%, compared to 46% thirty years ago. In addition, two million workers are covered by employer-sponsored group RRSPs, although the funds in these plans are not necessarily locked in for retirement. In the area of individual savings, Canadians contribute more than $34 billion annually to RRSPs. However, they've used only 6% of the contribution room they’ve accumulated since 1991.
For the current generation of retirees, their income is derived for the most part from private pension plans, either group or individual. In this way women retirees are able to replace 45% of their income, and men, 58%.
It’s within this third component that we find the biggest challenge facing our retirement income system. In fact, while people who work for large companies and for the government can count on having an adequate pension plan with their employer, that’s not the case for many who work in the private sector. Indeed, it is estimated that approximately 50% of these people do not have access to a pension plan in the workplace.
Why is this important?
Because, generally speaking, the workplace represents the best place to save.
The problem is going to become even more acute for the next generation of retirees. It’s estimated that 30% of Canadians earning an average income are not saving enough to be able to maintain their standard of living in retirement.
But there is a solution to this challenge, and it exists both in the key directions that should be taken and the measures that should be implemented.
The life and health insurance industry believes it’s important to give a new direction to policies around retirement savings based on four key guiding principles.
Firstly. Canadians must continue to count on their governments to ensure their basic needs are met, through benefits from public plans.
Secondly. Canadians should be encouraged to save more through savings incentives, whether on an individual or a group basis.
Thirdly. Canadians should have access to products and services in the private sector that will enable them to plan beyond meeting their basic needs. In Canada we have a financial services sector that is especially robust, competitive and accessible. It’s a resource that could be utilized more extensively.
And lastly. Canadians should have the freedom to decide for themselves how they will save for their retirement, based on their own needs and objectives. The government cannot and should not take responsibility for everything.
In keeping with these four principles, we approached the various government authorities with a suggestion for a novel solution to help make saving easier for Canadians: the Pooled Registered Pension Plan (PRPP).
We feel that the measures proposed by the federal Finance Minister and the Voluntary Retirement Savings Plan (VRSP) proposed in the latest Quebec budget align well with these principles.
In Quebec, companies that do not have a pension plan could offer a Voluntary Retirement Savings Plan (VRSP) to eligible employees
without necessarily contributing to it themselves, and without having to manage the plan, as administration would be handled by an insurance company or financial institution. The pooling of many plans together would allow members to enjoy economies of scale that previously were available only to large pension plans.
Eligible employees would be automatically enrolled by their employer but would have the option to withdraw, and the plan would be portable if an employee changed jobs. VRSPs would have tax advantages similar to those that apply to RRSPs.
A majority of Quebecers and Canadians welcome the introduction of such plans. A survey that we conducted this past February shows, for example, that 86% of people in Quebec are in favour of these plans.
Their approval echoes that of the federal government and the governments of the ten provinces and three territories, all of whom have already expressed their intention of working towards making PRPPs available. With the proposed VRSP, the government of Quebec is the first to establish concrete measures in that regard. We applaud this initiative and hope that the other governments will soon follow suit.
The introduction of these new savings tools means that amendments will be required to existing legislative and regulatory schemes, at both the federal and provincial levels. The provinces will also have to revise their employment standards so as to allow automatic enrolment for workers and an automatic increase in employee contributions to defined contribution pension plans, with the option to opt out in both cases.
The VRSP, which in large part incorporates the industry’s proposals for resolving the retirement savings issue, can be viewed as belonging more to a process of innovation than a process aimed at changing the system.
The objective here is not to replace existing vehicles, but to add a vehicle that is accessible to people who haven’t yet been able to contribute. We’re thinking, for example, of the large number of average income earners working for small and medium-sized businesses, and the self-employed.
With that in mind, we encourage our government leaders to move forward as soon as possible with making this new option available to the largest possible number of working Canadians.
We understand the necessity of periodically evaluating our public plans to determine whether they still effectively contribute to meeting the basic needs of retired Canadians, and we are in favour of the modest adjustment proposed in that regard in the recent federal budget.
We also recognize the soundness of the measures recently proposed by the Quebec government, in particular the tax measures applicable to workers who are 65 years of age, incentives for postponing retirement, and increased contributions to the Quebec Pension Plan.
These are all steps in the right direction.
In conclusion, I would say that while Canada’s retirement savings system is structurally sound, it is not perfect. It does, however, represent a solid foundation on which we can build to ensure its development and improve its performance.
Achieving that goal will require a combination of legislative amendments, tax incentives and educational initiatives, all within a framework that will enable Canadians to choose from among a variety of competitive savings instruments and service providers.
The life and health insurance industry in Canada today plays a vital role in helping Canadians prepare for retirement, not only through company plans, but also through the advice and the savings and lifetime income solutions that are available from the thousands of financial advisors who daily serve Canadians all across the country.
Our industry is prepared to work with governments, with business and with individuals to promote a retirement savings system that is truly Canadian, a system that is both practical and affordable and that excludes no one.
Thank you ladies and gentlemen.