CLR sits down with the president of the Ontario Teachers’ Pension Plan and co-author of The Third Rail: Confronting Our Pension Failures
Pension funding has taken a hit in recent years. What are the factors contributing to the growing gap?
There are three factors. One is that Canadians are not saving enough for their future. Pretty well all the reports — if you go to the C.D. Howe (Institute) report — it suggests you save between 11 and 20 per cent of your income over 35 years to get to what they were targeting — a 70 per cent replacement. Right now Canadians on average are saving about 5.5 per cent. So they’re not saving enough.
Number two is that the demographic longevity tables have totally changed. We’re living far longer, which means we’ve got to save. If we want to pay ourselves in retirement we need to save more, whether that’s in a pension plan or in an RRSP — you just need to save more.
The third one is, we’re in an environment where you can’t count on the double digit returns that we were able to two or three decades ago. We’re in a low-rate environment — you used to be able to take your retirement savings and money and put them in government bonds and that was it.
In 2012, the OTPP reported a 13 per cent return, pushing its net assets up to just under $130 billion. How has the OTPP managed that?
Over the years, teachers are saving more. Their contribution rate now is 13 per cent and not that long ago it was eight per cent.
Secondly we’ve had to adjust to the mortality, we’ve been adjusting that in our figures over the last number of years. That’s cost the plan close to $10 billion over the last decade, just recognizing that change, but it’s been recognized.
The fund is large, diversified — which allows you to hire professional management, have lower costs and exposure to various different, more diverse, asset classes that unfortunately individuals can’t do.
That said, how can good pension design be achieved?
First of all, we have to stop the two debates that everyone seems to be engaged in now. The first one is defined benefit versus defined contribution. It’s only black and white and nobody seems to have the imagination to think of grey. And that you can take the best attributes of defined benefit and defined contribution and meld them so you’ve got a solution that is far better.
The other is this whole pension envy that’s been going on, "You have a pension plan and I don’t, so I’m going to tear yours down." Where does that get us?
In my view, the move to shared-risk plans — sometimes they’re called target benefit, sometimes they’re called target ambition, they’ve all got different names. You’re able to use all the best attributes of the defined benefit plan — which is cheaper than defined contribution — but you can pool mortality etcetera. Share the risk, the risk of longevity, the risk of investment returns in an appropriate manner between the employer, the employee and the pensioners.
In the labour unions for example, that is a controversial statement. But that’s where you get to, when you follow the logic. So you’ve still got the benefit of defined benefit, but in the event of unforeseen things, like longevity changing dramatically, there is an appropriate risk sharing. It’s not appropriate to put everything on the employer, nor is it fair to put everything on the employee, and have the employees bearing the risk for previous generations.
Is this the death knell of defined benefit plans as we know them?
I’m an optimist.
Businesses understand the benefit from a workforce perspective of defined benefit. What isn’t quite well understood is how much less expensive — it’s less expensive to do defined benefit than it is to do defined contribution, I don’t think it’s really sunk in. They’ve got to be given the alternative. Right now, everything that’s written on DB and DC, it’s very difficult to find a hybrid. At the end of the day, the real issue is retirement security.
What impact do pensioners have on our economy?
People forget about the impact pensioners have in our economy. When we look at defined benefit plans in Canada, the recipients of those kind of spend $60 billion a year, they pay taxes of about $16 billion a year. And they represent, in the small communities in Ontario, that represents about 11.5 per cent of all of the income in those communities. That’s significant. It’s a major driver in our economy and should not be tampered with.
What would you recommend to employers struggling to fund their pension programs?
They need to engage with their employees with regard to how to ensure that the plan is sustainable. That has to be a collaborative discussion.
I point to and really applaud the leaders and labour leaders in New Brunswick who really came together and said we have a sustainability issue here, let’s come up with the most practical, least painful way to make sure these plans are sustainable.
Many of the DB plans in Canada, given demographic, given the change in return, are really not sustainable in the long term. The sooner people address that — together — the better it will be for everybody.
Tell us about The Third Rail.
We wrote it to get the debate away from this DC/DB debate or pension envy debate and on to the real issue of financial security. It’s aimed at educated people who have either been bewildered or frightened or totally confused by the debate to date. You get economists, actuaries, accountants, forecasters — it’s confusing.
So we wrote it purposely with no graphs — actually that’s wrong, there is one graph — one small graph, no economic tables, it’s not an economic tome.
It chronicles the story of New Brunswick, of Rhode Island and of the Netherlands, and then tries to draw lessons from those stories to what the future could look like for Canada. When you tell your children you’ve written a book on pensions, their eyes gloss over. It’s meant to be engaging.
I hear you’re going to retire at the end of this year. What have you had to keep in mind?
Fortunately I grew up in a savings ethic. It’s always a question of consume today, or save and consume tomorrow. I’ve been saying to people, that brand new shiny iPad version looks kind of neat, and you kind of get sucked into buying it. In some ways I’ve been able to resist that.
