Adapting Pensions to Changing Demographics

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

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

What happened?

• Demography • Lower interest rates • Stock market returns • Use of plan surplus

– Contribution holidays – Plan improvements

4

We Live Longer, We Retire Earlier

Life expectancy at age 65:

13 years Retirement

age 65 46 years of working life Age 19 1970

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

We Retire Earlier

59

60

61

62

63

64

65

66

Age

Evolution of retirement ages (1)

CanadaQuébec

60,1

61,6

(1) 5-year moving averages Source: Statistics Canada

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

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

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

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

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

Odds of Surviving from ages 65 to 95

Year Men Women

2009 9% 17%

2036 15% 28%

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Return to Financial Reality D

isco

unt r

ate

Member’s age Retirement 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

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

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

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

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

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

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

Appendix

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

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