Ambachtsheer on pensions

Award-winning pensions expert Keith Ambachtsheer discusses the state of pensions in Canada

Last month, Keith Ambachtsheer, president and founder of KPA Advisory Services in Toronto and director of the University of Toronto’s Rotman International Centre for Pension Management, was awarded the Outstanding Industry Contribution 2007 award at the Investments & Pensions Europe (IPE) European Pension Fund Awards in Austria. Canadian HR Reporter talked with him about the state of pensions in this country and his ideas on how to fix the system.

Q: How is Canada doing on the pension front?

A: We’re ahead and behind. We have some of the best pension-delivery organizations in the world. Our national pension reserve fund, the Canada Pension Plan (CPP) investment board, is touted as a global model in how to do it, so in that sense we’re leaders. But in terms of the fact that we still haven’t figured out how to provide coverage for a good part of the private-sector workforce — that’s a problem.

Q: What do you think of the recent suggestion by the National Union of Public and General Employees that employers not offering a pension plan should pay higher CPP premiums?

A: There is wealth sharing going on in that system, and if you don’t treat everybody by the same rules, it’s problematic. I think the system needs to create a default supplemental pension element that would work in the CPP space but be basically an additional contribution to get you an invested pension account that has an annuitization back into it.

The idea of using the CPP or the Quebec Pension Plan (QPP) mechanism to do deductions seems to have a lot of merit because it’s already in place. But I don’t think you can start turning that into pension accruals according to some formula and blend that in with what already exists.

Instead, take an additional three, four, five per cent of pay and create pension accounts and have that money managed by a CPP-investment-board-like organization.

Q: Can you talk about your suggestion to the Ontario Expert Commission on Pensions in October to look beyond defined-benefit (DB) and defined-contribution (DC) plans and address the coverage issue with a supplementary pension-plan arrangement?

A: A lot of academics think the markets will sort out the delivery mechanism and I’m saying, well, no. You’ve got market failure in this area because you don’t have a level playing field between the buyers and the sellers. So you have to create mechanisms that level the playing field. But if that’s the principle, how do you apply it?

Large employers can do this themselves, you don’t need government necessarily, and various types of industry groups could do this themselves. But you always need the default — even if you take care of the first two groups, you’re still going to end up with a whole bunch of workers out there who are not going to be covered and you need this coverage element for them.

Q: What do you think of the growing trend by employers to match retirement savings plan (RSP) contributions, as they phase out traditional pension plans?

A: It raises questions about what individuals do with these RSPs, what kind of decisions they make, what kind of things they get involved with. Is it appropriate for where they are in their life cycle, is there an effective annuitization tail-end for them? These are all the unanswered questions.

What it requires is intellectual buy-in, where enough people say, “Now I get it. We could really do this.” You kind of have to break through. And of course you’ve got a whole for-profit financial services industry out there that doesn’t want to hear this, so they’re not exactly on your team, which makes it more difficult. Ultimately you’ve got to get enough politicians seeing that as a winning political thing to get on the bandwagon with.

Q: Can you tell us about the premise of your recent book, Pension Revolution: A Solution to the Pensions Crisis?

A: We need to look at the design of the occupational pension plan system, give it a second look. Both DB and DC pension plans are dysfunctional and we need to create a hybrid out of both of them. The other thing is you have to deliver this cost-effectively, you can’t charge people two to three per cent for the privilege of being part of your system because then it just doesn’t work.

The Australians have had compulsory membership in occupational pension plans since 1991, but it’s getting much bigger, over $1 trillion in retirement savings assets, so they’re starting to ask the bigger question about where it needs to go from here. They’re kind of “lump-summers” so they need to figure out how to annuitize. The same is true for the United States, with big balances in these DC systems. People are starting to realize you can’t just think about the accumulation phase, you also need to think about the “decumulation” phase and how you deal with longevity risk, other than to pool it, in a life annuity context. And then the question is, where’s the pooling mechanism coming from, can the insurance industry provide it cost-effectively or do we need to create a new pooling system?

Sarah Dobson is editor of Canadian Compensation & Benefits Reporter, a sister publication to Canadian HR Reporter that looks at total rewards. For more information, visit

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