Submission: Submission

Canadian Life and Health Insurance Association

February 27, 2009

The Honourable Dwight Duncan
Minister of Finance
Attention: Comments on Report of the Expert Commission on Pensions
c/o Pension and Income Security Policy Branch
5th Floor, Frost Building South
7 Queen's Park Crescent
Toronto, Ontario
M7A 1Y7

Dear Minister:

Response to A Fine Balance: The Report of the Expert Commission on Pensions

I am writing on behalf of Canada’s life and health insurance companies in response to two specific recommendations contained in A Fine Balance, the Report of the Expert Commission on Pensions: the possible introduction of a government-operated, registered pension plan for private sector employers and employees in Ontario, and the creation of an Ontario Pension Agency. Given that cost-effective parallel options already serve the needs of Ontarians well, the economic and public policy rationales for these initiatives seem questionable.

The Canadian Life and Health Insurance Association (CLHIA), established in 1894, is a voluntary trade association that represents the collective interests of its member life and health insurers. The Association's membership accounts for 99 per cent of the life and health insurance in force in Canada. CLHIA member companies are significant participants in the pension and retirement savings and income sector, administering about two-thirds of Canada's pension plans. The industry has a particular focus on defined contribution (DC) pensions and group registered retirement savings plans (RRSPs), as well as providing Canadians with complementary individual retirement savings and income products and services. In total, over 8.3 million Canadians have all or part of their employment-based retirement income arrangements managed by Canada's life and health insurance companies.

The central objective underlying the Commission's recommendations is to increase the number of Ontario residents who participate in employment-based pension plans, and thereby enhance the expected retirement incomes of Ontarians. CLHIA members share the Commission's goal of expanding pension enrolment and income security among all Ontario workers, and congratulate the Government of Ontario and the Commission on the completion of this review. The industry believes that the extensive research undertaken in support of the Commission's mandate will help inform an ongoing, comprehensive, national stakeholder discussion aimed at enhancing participation in efficient pension and retirement savings options by employers and individuals throughout Canada. CLHIA and its members will continue to be active participants in that dialogue.

The industry also wishes to endorse the Commission’s recommendations to adopt a more principles-based approach to pension legislation and supervision and to enhance the ability of regulators to focus supervisory efforts on plans at heightened risk of failure. These measures reflect the more positive outcomes attainable within a broad procedural framework relative to prescriptive processes, mirroring increasing international recognition of principled approaches as both efficient and prudent. Canada’s life and health insurance companies believe that such approaches serve the public interest far more effectively than models that are purely rules-based, and can better facilitate rapid regulatory response to changing circumstances.

Stimulating Pension Participation

Despite our support for expanding pension participation, Canada's life and health insurance companies recognize that some potential strategies to increase pension membership would require significant legislative and regulatory changes, and could have adverse economic impacts on employment in Ontario. Such measures could also impose substantial logistical and cost challenges for governments, regulators and other stakeholders. For instance, imposing mandatory pension participation with required employer contributions would effectively increase payroll taxes, thereby discouraging both the creation of new jobs and the preservation of existing ones. Canada's life and health insurance companies believe that such measures would be unacceptable to government, employers and electors.

In contrast, Recommendation 9 - 3 of the Commission's report suggests the enactment of legislation and regulations to encourage the creation of voluntary pension plans that would not be tied to specific employers and would enhance economies of scale. The industry supports this approach, and encourages your government to enhance structures within the existing pension framework to facilitate further development of low cost, simplified pension plan models to encourage expanded voluntary pension participation. Specific measures are described more fully below.

While Canada's life and health insurance companies support measures to voluntarily grow pension membership, the industry's extensive experience with employers considering retirement plan options for their employees suggests that failure to implement a pension plan is rarely if ever primarily driven by issues such as differential investment management and compliance costs between pension and alternative plans. Rather, the decision to not establish a pension plan is frequently rooted in the employer's salary-based funding commitment. For small businesses in particular, cash flow and profitability can be unpredictable, making it difficult for an employer to commit to a long-term funding liability such as a pension plan. For these employers, group RRSPs are likely to remain the retirement savings vehicle of choice.

Enhancing Pension Asset Accumulation

Much of the Commission's Report focuses on the development of "target benefit" pension plans. These are often characterized as defined benefit plans where the benefits payable are subject to downward adjustment if underlying assets are inadequate to deliver the intended income levels. Target benefit plans might equally be described as defined contribution plans under which investment strategy and the consequential investment performance are pooled under professional management.

Target benefit plans differ from the current dominant model for defined contribution plans in which each plan member has the ability to control investment selection, albeit normally within a restricted range of offerings selected by the sponsor and its advisors. As with any defined contribution plan, the income payable would be contingent on rates of return available at the time of income commencement if benefits are guaranteed via an annuity, or on ongoing yields, where benefits are payable from the pension fund. This latter option provides potential increases in retirement income if investment performance exceeds predicted levels, but also risks reductions in those payments, if investments fail to achieve the hoped-for levels.

While much of the Commission's Report considered "jointly governed" target benefit plans in a collective bargaining context, joint governance is not generally practical in a non-unionized context. However, the Commission suggests that target benefit plans could be offered more generally and, in Recommendation 9 - 4, that a publicly organized plan could be made available to employers and individuals who might not otherwise be willing or able to bear the costs and compliance burdens of a traditional single employer pension plan. Such a plan might be structured as a second tier to the Canada Pension Plan or perhaps, consistent with the Report's general preference, as a target benefit plan.

In fact, defined contribution pensions and group RRSPs are already moving in the direction of target benefit plans. The majority of DC plans provide individual members with investment discretion, but the continuing development of investment decision-making tools, guaranteed return investment options, reliance on automated asset allocation models and changes to default investment options that have a longer-term focus are some examples of how existing products already "de-risk" plans for individual participants, addressing needs identified by the Commission. On the income side, products are currently offered that provide guaranteed lifetime income payments, with potential for increased income based on the performance of an underlying investment portfolio, effectively improving on the target benefit model. Development of such “de-risking” products continues. Furthermore, by restricting the range of available investment options and pooling those options between multiple pension plans, group and individual RRSPs, Tax Free Savings Accounts and other products, service providers achieve low investment management costs that are competitive with those of medium and large defined contribution and defined benefit plans. Even when all of these features and benefits are incorporated, costs remain competitive; the industry's experience is that arguments that group RRSPs and DC pension plans are expensive are simply unfounded.

Canada's life and health insurance companies believe that the DC challenge is not one of developing appropriate and accountable retirement income products, but rather one of legislative and regulatory limits that may interfere with the most efficient offering of such products to the pension market. Clarifying that regulated financial institutions can offer "off the shelf" participation in pension arrangements to unrelated employers, or directly to individuals, would remove much of the compliance burden from the shoulders of employers, further enhance the administrative economies of scale within pension plans and expand access to such plans, since individual participation might not be contingent on employer participation. Such measures could allow low costs to be driven even lower.

To facilitate these advances, the industry suggests three specific initiatives:

  1. Where a life and health insurance company establishes a pension plan and makes participation in that plan available to unrelated employers and individuals, the industry considers that arrangement to fall within the definition of "group insurance" in section 171 of the Insurance Act. In order to provide greater certainty to all stakeholders, confirmation that such a broadly-offered pension plan would not offend this definition of "group insurance" could facilitate the expansion of such plans.
  2. Ensuring enrolment of new employees within employment benefit programs can be problematic. With respect to pensions, a statutory mechanism to facilitate mandatory enrolment with an ability for the employee to "opt out" could be incorporated into section 31 of the Pension Benefits Act.
  3. Similarly, an employee's pension contributions are frequently frozen based on historical amounts because section 13 of the Employment Standards Act, 2000 generally prevents modification of deductions from salary without the employee's explicit consent. Amendment of section 13 to facilitate an employer's adjustment of pension contribution deductions in response to increased salary or seniority would significantly enhance the effectiveness of existing pension regimes.

In light of these evolving products and simple changes to the legislative framework, it is unclear that there is a compelling case to be made for the creation of a government-operated pension plan for private sector employers and employees. When development and operating expenses of such an initiative are considered, it seems unlikely that such a regime would operate on a cost-competitive basis relative to existing private sector offerings. And to the extent that any portion of those costs might be borne by Ontario taxpayers who do not participate in the plan, this would appear to represent an unreasonable competitive position vis-à-vis privately offered plans, particularly as other governments act to support domestic industries as a result of the ongoing credit crisis. With 71 of the 105 Canadian life and health insurance companies headquartered in Ontario and almost 60,000 people employed in Ontario by these companies, a competing government-run pension plan’s potentially negative impact on employment in Ontario’s insurance sector should not be discounted.

Managing "Stranded" Pensions

In Recommendation 5 - 2, the Commission proposes the creation of an Ontario Pension Agency "to receive, pool, administer, invest and disburse stranded pensions in an efficient manner".

As with the Commission's suggestion that creation of a government-run pension plan be considered, the Commission's proposal for this Agency would effectively duplicate and inappropriately compete with existing options, be they structured as locked-in retirement accounts, life income funds or annuity purchase options.

The "stranding" of pension entitlements is largely a result of disruptions in the flow of information between employers, individuals and service providers. Increasing labour mobility, resulting in comparatively small pension benefit entitlements being scattered amongst multiple plans, compounds this challenge, and aggregation of those amounts by service providers could significantly streamline benefit administration and payments. While individuals may not realize they have benefit entitlements, pension administrators and record keepers will always have that information. It is the difficulty that administrators and record keepers have in accessing current information regarding individuals that interferes with the consolidating these small entitlements and payment of stranded pension benefits. Rather than creating a parallel, asset management structure, all governments should ease pension administrators' access to information that would facilitate their obtaining instructions in order to fulfill benefit payments. Where assets sourced in pension plans have been transferred to successor products, similar access to consumer information is crucial to delivery of the promised benefits.

As indicated above, existing arrangements for administration of locked-in amounts already benefit from pooling in terms of the administrative and investment management costs, as well as the obvious pooling aspects of mortality. Moreover, vigorous competition means that individuals have the security and protection that comes from product and investment diversification amongst a multitude of suppliers, all of which are regulated financial institutions.

It has been suggested that existing annuity options restrict investment choice by former plan members, and limit flexibility. It is unclear how the proposed Agency would offer investment choice while still providing the cost benefits of investment pooling. Similarly, allegations that annuities are too expensive or that there is inadequate capacity for such offerings may reflect a poor understanding of the price - and value - of the fully guaranteed income provided by an annuity, as opposed to the potentially diminished income provided by a fund that is tied to a fluctuating asset value. The annuity market in Ontario is large and vibrant. This is evidenced by the competing bids that have been tendered when large pension plan wind-ups requiring annuitization have been taken to market, in tranches or otherwise.

Pensions in Canada started as annuities. Canada’s life and health insurance companies are expert in the provision of these evolving arrangements, and the industry is firmly committed to continuing to provide millions of Canadians with affordable, flexible, safe and secure retirement incomes through this robust vehicle.

Thank you for the opportunity to address these critical issues arising from the Report of the Expert Commission on Pensions. Representatives of Canada's life and health insurance industry look forward to meeting with you and your officials to discuss these issues more fully in the weeks ahead, and to consider a variety of strategies for encouraging appropriate retirement income security plans among Canadians generally, and Ontarians in particular. We will be contacting your officials in the coming weeks to try to arrange that meeting. In the interim, our industry stands ready to provide any further information or clarification regarding these issues.

Yours sincerely,

Original signed by

Frank Swedlove