By

Jim-Leech“Because that is what this is all about – it’s about people. We have all the actuarial studies we need. We don’t need to crunch numbers anymore. This is a matter of saying, ‘what reforms can we best adopt to provide financial security for people.’” – Jim Leech


 

By John Devine

Frustrated by the direction the debate in Canada on pension reform was taking, Jim Leech, a man who knows a thing or two about pensions, decided the best way to influence the conversation was to put thoughts to paper.
And so was born the book, The Third Rail: Confronting Our Pension Failures, co-written by senior Globe and Mail business writer Jacquie McNish.
The debate, relates the President and CEO of the Ontario Teachers’ Pension Plan, was raging, but focused on areas that skirted the main issue of inadequate retirement income. Instead, energy was spent on the differences – strengths and weaknesses – of different pension models, and on a burgeoning resentment towards public sector workers who had an occupational pension, he continues.

“The real issue is that people are not saving enough for retirement, which is further aggravated by a low return environment that is going to here for some time, and those who think differently are kidding themselves,” Leech told ARIA during a recent interview.

Another issue that was being largely ignored was that of longevity – people are simply living longer than they once were, adding stresses to the provision of retirement income, either from personal savings or a pension plan, adds Leech.
“Those are the issues that need to be addressed: how do we get people to save significant funds for their retirement, given that we are in a low return environment and that we are all living longer?”
McNish was approached, explains Leech, because we “we needed someone who knew what she was doing … and kind of in the Teachers’ way, we went out and found the best.”
The book, he explains, was aimed at educated people who are intimidated, confused, and/or bewildered by this whole debate – they aren’t engaging in it because they don’t understand it. It was decided it wasn’t going to be “an economic tome with tons of graphs and charts and tables,” but rather a narrative that would connect with readers.
Three jurisdictions where reform had occurred were chosen, and the narrative told the tale of how reform happened, why it was needed, and also focused on the personalities who drove the change, says Leech.
“Because that is what this is all about – it’s about people. We have all the actuarial studies we need. We don’t need to crunch numbers anymore. This is a matter of saying, ‘what reforms can we best adopt to provide financial security for people.’”
In all three jurisdictions considered in the book – the Netherlands, Rhode Island and New Brunswick – political, labour, and business leaders had the courage to identify problems with their retirement system, and propose changes, acting as role models to others as to how it can be done, Leech says, adding it doesn’t necessarily hold that we rush out to emulate those models and reforms, but at least understand why and how it was done.
Pension experts like Leech caution that Canada is facing a retirement crisis driven by the collapse of the traditional three-legged stool of retirement provision: the safety net for low income Canadians (Old Age Security and the Guaranteed Income Supplement); the national public pension plan (Canada Pension Plan) and personal savings through workplace pensions or RRSPs.
“The first leg is in decent shape and has effectively reduced geriatric poverty. The second leg – CPP – is a bit wobbly and should be enhanced in a targeted way,” says Leech. “What is in bad shape is the third leg, our private savings.”
Today, it’s estimated that more than 60 per cent of Canadians lack an occupational pension and personal savings are, on average, insufficient to meet retirement needs.
The Third Rail identifies the source of the pension crisis, and offers solutions, all in a reader-friendly narrative that puts the issue of adequate retirement income into context by exploring a basic reality – that millions of Canadians are simply not adequately prepared for retirement. The book forwards three main recommendations to resolve this dilemma: enhancing Canada Pension Plan benefits, particularly for Canadians most at risk – those earning between $30,000 and $100,000; stopping the demise of defined benefit plans and/or the shift to defined contribution; and for the majority of workers without an occupational plan, the creation of some type of DC plan that would be mandatory, both in terms of contribution and participation.
Canada’s finance ministers came close to agreeing on an enhancement of the CPP, but federal finance minister Jim Flaherty ended up nixing the notion when the ministers met for a two-day session at Meech Lake recently. PEI finance minister Wes Sheridan had brought to the table his proposal for a modest expansion of the CPP, one that entailed almost doubling maximum benefits to about $24,000. The proposal had gained general acceptance among provincial finance ministers at an earlier meeting. (For an ARIA interview with Sheridan, click here).
The federal government’s response to the lack of retirement security is the Pooled Registered Pension Plan (PRPP) option, which has been largely derided by pension experts as a glorified RRSP, or as Leech says, “as currently structured it is just another four-letter word.”
The PRPP could become the type of workplace plan recommended in the book if it was reconfigured with three notable enhancements: mandatory participation, an emphasis on cost reduction and simplification of investment choices, and a forced requirement to commence annuitizing at some point during the savings period, to deal with longevity risks, details Leech.
Savings programs like RRSPs are being used by high income people for tax deferral purposes, “which is ok, because they were designed with that benefit in mind.” But they are not being used by those earning between $30,000 and $100,000, and it is this group identified as being most at risk; workers with high incomes have the wherewithal to put money aside for retirement, while the replacement rates of the CPP and other supports will see those on the low end of the income scale make just as much, or even more, in retirement as during their working years.

 “I am a free enterprise guy and I hated having to come to these conclusions, but the failure of the RRSP is overwhelming evidence that we have to make it mandatory.”

Another concern with PRPPs, says Leech, is that they are just too confusing. Like other personal savings vehicles, they offer too many choices that ordinary people can’t hope to understand. He spoke of a board he is on, and he had a look at the organization’s retirement plan, finding it overwhelming and confusing with more than 30 investment choices.”
“I looked at the description of these things and I couldn’t tell what most of them were about,” he recalls, adding investment options should be streamlined and simplified, perhaps with one asset mix.
As identified in a number of reports, including this one from the National Institute on Retirement Security and this from the Conference Board of Canada, the provision of adequate retirement income makes for good business sense and public policy, in that it maintains retirees as consumers contributing to the economy. Another study mentioned by Leech comes from the Boston Consulting Group, Canada’s Top Ten Pension Funds: Helping Drive National Prosperity, which includes Teachers, proving the economic value of adequate retirement provision.
“Defined benefit retirees spend about $64 billion in the economy … about $16 billion in taxes, and represent about 11.5 per cent of all the income of smaller communities. If you end defined benefit pensions plan membership, then you are gutting 11.5 per cent of income from every small community. It’s quite significant.”
The alternative to improving retirement options for Canadians is to rely on programs like Old Age Security (OAS) and the Guaranteed Income Supplement (GIS), both of which are directly funded through taxes.
“The GIS and OAS … cost the taxpayer a dollar for every dollar that goes out. Combined, they already account for the largest expense line in the federal budget … and the costs are expected to triple in the next 16 years.
Canada’s defined benefit model, such as the CPP and the big public plans, is an effective, efficient and low cost provider of adequate retirement income, states Leech, explaining that the vast majority of the benefit dollar comes from returns on investment; in Teachers’ case, 76 to 78 per cent is generated from investments, he says, “whereas the plan costs the taxpayers only 11 cents and the teachers themselves contribute 11 cents – this is a highly cost effective way for the employer to provide retirement security.”
But even as they remain the best approach to pension provision, the old line DB model is not immune to fiscal and societal pressures, including longevity risks, and as such, they need to adapt to the times, says Leech.
“Our recommendation is that DB pension plans must move towards a more sustainable position by finding ways to more equitably share risk between the three main players: the employer, the employee and the pensioner.”
A number of DB plans have already done that through higher contributions, delayed retirement, conditional benefits – such as cost of living allowances – and other such revisions. However, Leech says there is one change that should be avoided.
“We firmly belief the old legacy DB model needs to evolve … we’re not in this book trying to defend the old model. That model does need to shift, but it would be silly to shift to defined contribution.”
As for Leech’s own retirement plans, he is going to be a role model for those who believe retirement is merely life’s second act. Once he leaves his post at Teachers, he will take on a variety of jobs, including Chancellor of Queen’s University.
“And … one of the things I am doing with the military is an expedition to ski to the North Pole. I’m not going to get fat on the beach.”

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