ORPP – More Details – More Concerns
I wasn’t planning on writing every week about the ORPP. But a lot happened last week and many of my readers have come to rely on my commentary to help them frame their thinking about the ORPP independently from the ‘sales pitch’ others are sending them.
I want to write about three events:
1. Ontario’s January 26, 2016 Technical Bulletin on The Ontario Retirement Pension Plan.
2. Associate Minister of Finance Mitzie Hunter’s speech to the Independent Actuaries Network on Tuesday night after the Technical Bulletin was released.
3. Keith Ambachtsheer’s presentation to the University of Windsor’s Odette School of Business on Friday January 29, 2016.
I want to take the moments above in reverse order and try to just hit the highlights. Here we go:
I don’t know Mr. Ambachtsheer personally, but anyone who has been in the defined benefit plan business for any amount of time surely knows who he is. If not, here is his bio.
Ambachtsheer’s presentation was titled ‘The Future of Pension Management: Integrating Design, Governance, and Investing’, which not coincidentally is the name of his recently published book. I haven’t read the book but I can tell you it is probably pretty good since the presentation exposed many of the ideas that have been rolling around in my head but that I haven’t written all in one place. The presentation was great – but rather than telling you everything he said, if you are interested you can get the book. Some things he said just might not be in the book so a quick summary:
- “Pension industry professionals tend to work in silos” — I agree which is why ASI spends so much time trying to make sure our clients are working with investment and legal professionals and that all of us are connected in discussions
- “Pillar I of our retirement system (CPP/OAS) is pretty good – Top 5 in the world” — wow, I haven’t done the work to look at worldwide social security systems but it is pretty reassuring to know that Canada has done a good job
- In speaking about the optimal design for add-on government programs, he pointed to the NEST program in the UK (which is a DC program) and said “that is what we should be doing” — I nearly fell out of my seat, as an advisor to Ontario on retirement security, I assumed (you know what happens when you assume) that he was pro-DB since that is where we ended up on the ORPP. His main point was that DB plans have sustainability and “multi-generational risk sharing that is nice in theory but doesn’t work in practice”. That was about the point when tears welled up in my eyes – finally someone else, who is widely recognized as an expert in pensions, understands what I have been saying.
- We all need to go back and read Chapter 12 of Keynes’ ‘General Theory of Employment, Interest and Money – Focusing Capital on the Long-term’ (don’t worry – I will go do it for you and write about it later)
I don’t know how politicians are supposed to spend their time, but I will give Associate Minister Hunter credit, she is out with the people of Ontario talking with them and listening to their concerns. I also give her credit to come out to speak to the Independent Actuaries Network likely knowing in advance we don’t sit back and listen to speakers – we debate them.
Here is what I took from the evening:
- Associate Minister Hunter understands all the issues that I previously assumed (you know what happens when you assume – lol) she couldn’t possibly have on her radar given her training and the direction that Ontario is headed. I was likely wrong – she appears to be on top of all the details.
- Notwithstanding all the outstanding issues, she appeared confident that Ontario would work out the necessary details with the Federal Government AND that the ORPP would go ahead January 1, 2017.
- The Federal Government might not be the most cost-effective provider of administration, which in my mind opens the door for a private sector third-party provider. One of my friends at Morneau Shepell asked me why I am picking on them – I told them all they need to do is issue a press release saying they aren’t interested in providing Ontario with a systems solution to administering the ORPP and I will leave them alone. Otherwise, that is how I have connected the dots (I know, I am making more assumptions).
My only comment on this is to repeat my main thesis that we do not need to pay for another system to administer retirement savings – we need to leverage one of the systems for which we have already paid. As a taxpayer I prefer if individuals leverage the existing DC system that we have in place and to me the second best choice is leveraging the existing CPP system which for the moment is DB.
Here are the new details:
- More details on ‘comparable plans’ – talk to your consultant if you are unsure whether you qualify
- How an employer can opt-in in addition to having a comparable plan — I can’t believe employers would want to do this but ASI might do it just to see the program from the inside.
- Eligibility: First Nations, definition of employment, post-retirement re-entry, non-resident workers — All good stuff and just an indication of the mind-numbing number of details that have to be spelled out.
- Benefits: 15% pension after 40 years, earnings between $3,500 and $90,000 — This one was interesting – many of us have wondered why Ontario wants such a low threshold on earnings – after all, the problem we are trying to solve is under-saving by ‘middle income earners’. The answer it appears, is to find a way to capture the individual that is working three jobs that each pay $10,000 a year and otherwise would have no employer pension.
- Survivor Benefits: Commuted value pre-retirement, Joint & Survivor 60% post-retirement on an actuarial equivalent basis — of course you get the CV pre-retirement, it is a registered pension plan (not a social program like the CPP). You get a survivor pension after retirement, but you pay for it yourself with a lower starting pension. Not sure what happens if you marry after you are retired – but by the looks of it there wouldn’t be a survivor benefit (add this to the list of mind numbing details still to be answered).
- Administration: funding, payouts, compliance, appeals, information and plan reviews — the bottom line: it isn’t clear if the ORPP is a target benefit plan or if there is some sort of minimum DB guarantee backed by taxpayers (one of my key arguments against a DB program). If we assume….wait, assuming things is killing me…Clearly the plan starts as a target benefit plan, reducing benefits and increasing contributions as needed to balance the funding. There is a footnote that if those changes are not enough then the government will consider ‘actions to return funding to sustainability’. Hopefully that won’t be writing a cheque from general revenues.
That is all I have for this round – stay tuned.