Adapting Pensions to Changing Demographics
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Transcript of Adapting Pensions to Changing Demographics
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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
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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
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What happened?
• Demography • Lower interest rates • Stock market returns • Use of plan surplus
– Contribution holidays – Plan improvements
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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
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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
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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
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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
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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
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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
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Recommendations
Return to Financial Reality
Enhance Governance and
Flexibility
Reduce Deficiencies
through Restructuring
Reinventing the Role of Personal Savings
Longevity Pension: Additional
Financial Security
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Odds of Surviving from ages 65 to 95
Year Men Women
2009 9% 17%
2036 15% 28%
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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
$ ,
,
,
,
,
,
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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
$ ,
,
,
,
,
,
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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
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Recommendations
Return to Financial Reality
Enhance Governance and
Flexibility
Reduce Deficiencies
through Restructuring
Reinventing the Role of
Personal Savings
Longevity Pension:
Additional Financial Security
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Ratio of the number of people aged 15 to 24 to those aged 55 to 64
(Source: Statistics Canada, 2012: 9 Figure 5)
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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
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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)
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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
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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
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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
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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
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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
,
,
,
,
,
,
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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
,
,
,
,
,
,
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Recommendations
Return to Financial Reality
Enhance Governance and
Flexibility
Reduce Deficiencies
through Restructuring
Reinventing the Role of
Personal Savings
Longevity Pension: Additional
Financial Security
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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
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Recommendations
Return to Financial Reality
Enhance Governance
and Flexibility
Reduce Deficiencies
through Restructuring
Reinventing the Role of
Personal Savings
Longevity Pension: Additional
Financial Security
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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
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Recommendations
Return to Financial Reality
Enhance Governance and
Flexibility
Reduce Deficiencies
through Restructuring
Reinventing the Role of
Personal Savings
Longevity Pension: Additional
Financial Security
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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
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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
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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
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Appendix
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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
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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