who's risk is it anyway?

Who’s Risk Is It Anyway?

May 27, 2015

Henry TapperSimon Nelson

Four Worries and a Funeral

De-risking or re-risking?

Can we democratize ownership?

Does choice equal freedom?

Is the State provider or facilitator?

And did this man kill British pensions?

Questions for Today

1. Is there a retirement design that better balances a guaranteed pension and a pension delivered through ‘best intentions’?

2. Can we ‘nudge’ people towards better behaviours when it comes to their financial security in retirement? How much choice do they need, want and can cope with?

3. What can Canadians learn from Britain’s experiences (and vice-versa)?

Challenges with Traditional DB PlansLow interest

rates, volatile equity markets, maturing plans,

increasing longevity

Volatility and asymmetrical risks for plan

sponsors

Mark-to-market accounting

Becoming a public sector

employee ‘perk’?

Relief measures are short-term solutions; don’t

address underlying

issues

Complex regulatory

environment

Challenges with Traditional CAP Plans

Predictable costs, but unpredictable retirement

benefits

Members exposed to significant risks, especially

in retirement

Complex decisions left to plan members; ‘choice

overload’

Few ‘decumulation’ products

Few efficiency benefits from pooling of costs and

risks

First ‘cohort’ of career-DC employees yet to reach

retirement

1. De-risking corporate pensions

But who will take on the risk?

Discussion #1

2. Democratising Pension Ownership

1. Triple lock on state pensions guarantees a minimum 2.5% pension increase p.a.

2. Public sector DB subject

3. Private sector DB protected by pension protection fund

4. Auto-enrolled DC pensions for 10m new workers

1.2m DC pensions to be set up in next 3 years

But can employers help transfer the risk?

1.2m new employers set up workplace pensions

Where is Canada today?

1. Private Sector and Not for Profit

2. Public Sector

3. Multi-Employer Trades


Private Sector and Not for Profit• Legacy mode for DB, with

freezes and derisking

• Continuing trend towards fixed cost DC

• Unions still (are they the last?) DB stronghold


Public Sector (with solvency exemptions)

• Municipal, Hospitals, University and Education sectors

• Generally unionized environments

• Trend towards design and governance changes

• Beginning trend of consolidation of plans


Multi-Employer Trades• Temporary solvency

exemptions

• Still a strong DB landscape

• Looking for permanent funding rule solutions in most jurisdictions

Legislative and Regulatory Response

1. Minimum Funding

2. Traditional Multi-Employer Plans (MEPPs)

3. Termination Benefits

4. Hurdles for Innovation

Legislative/Regulatory Response

Minimum Funding• Not much

permanent help for traditional DB

• Solvency relief and exemptions for some

• Slow progress towards alternative funding regimes

Traditional MEPPs• Temporar

y solvency exemptions

• No permanent solutions yet

Legislative/Regulatory Response

Termination Benefits• Concepts

of being ‘asset share based’

Hurdles for Innovation• Regulator

y change takes time

• Legal concerns; litigation in New Brunswick

• Many issues surround conversion, consent and funding

Discussion #2

Where is Britain headed?

Freedom and choice• Drawdow

n• Cash • Annuity

State funded guidance• Pension

Wise

3. Granting pension freedoms

Plenty of information

But does Information equal knowledge?

Where is Canada headed?

Workplace Plans• Innovative

Designs

State Plans• Better

Coverage

Workplace Plans: Innovation

Push for regulators to be open to new types of

pension deals and transitional approaches

Jointly trusteed arrangements

Consolidation of plans and/or assets

Workplace Plans: Target Benefit Plans

TBPs, or ‘defined ambition’ plans, aim to combine the best of DB and DC (and remove the worst of both)

Typical features:1. Fixed contributions2. Provide a target DB-type benefit, with very few

guarantees3. Benefits may be adjusted up or down to balance

funding

Not currently accommodated by many jurisdictions’ regulations

Discussion #3

4. The State and British Pensions Providing -

Single state pension – simpler but less ambitiousA safety net for insolvent DB covenants

Compelling –employers to auto-enrol staff in workplace Insurers to manage legacy and improve governance

Protecting– the consumer with charge caps

Educating - at retirement– Pension Wise

Facilitating risk sharing – Not New Brunswick (yet)Encouraging reluctant employersEnabling collective decumulation

State Plans

Hot political issue

Significant debate over extent of Canadian retirement crisis

Importance of state plans in Canada stems from:Poor usage of existing retirement savings

vehicles (RRSPs)Few employees covered by workplace pension

plansLimited government support programs for

middle class

State Plans - CPP

Enhance Canada Pension Plan (CPP)

2013 efforts to enhance CPP stalled

Likely to be part of 2015 Federal election platforms

Provincial support is needed (but is mixed)

State Plans - ORPP

Development of Ontario Retirement Pension Plan (ORPP)

Belief that Ontario would prefer CPP enhancements; stalls have led to proposal of “Made in Ontario” MEPP-like mandatory public pension plan for Ontario employees

Target is to replace15% of an employee’s earnings in retirement

Would supplement existing pension arrangements, personal savings, CPP, OAS and GIS

Grappling with questions on implementation and design– particularly breadth of scope, earnings thresholds and self-employed

citizens

Discussion #4

Wrap Up

Who’s risk is it anyway?