All pension investment portfolios, whether structured as defined-benefit plans, defined-contribution arrangements or simply RRSP plans, have been hit hard by the marked decline in financial asset values over the past year. For example, many defined-benefit plans have fallen well below fully funded levels, and for public sector funds in particular, the shortfall is in excess of $100-billion.
Private and public think tanks have proposed "super pension funds" to solve Canada's savings woes. This may be an opportunity to assist in retirement savings for Generation X but the baby boomers don't have that sort of time. Baby boomers are currently staying in the work force longer so that they can realize their retirement dreams.
WHAT ARE SUPER PENSION FUNDS?
Super pension funds are provincially or nationally administered pension savings plans that assist individuals who are not currently part of a public or private employer pension plan. Because of the financial crisis, in the past year there has been considerable discussion about the structural reform of pension arrangements in the private sector - particularly the merits of these types of funds. These mega funds bring the advantage of size and scope to drive economies of scale to lower costs and enable the hiring of experienced managers. The opposing view argues that the costs of restructuring, loss of investment flexibility and risk of taxpayer liability offset the advantages of scale.
WHY DON'T THESE FUNDS WORK FOR BABY BOOMERS?
Baby boom generation Canadians have been handicapped in their best income-earning years by low RRSP contribution ceilings, and have seen their savings decimated by the financial crisis. What these Canadians really need is the scope to contribute significant pretax income to their retirement portfolios to build savings and compensate for investment losses, not unlike the requirement for defined-benefit plans. Even if super funds can deliver cost efficiencies and improved returns for retirement portfolios, these benefits are long-term solutions and do little to help baby boomers immediately accumulate adequate savings to provide for a longer-lived retirement.
INSTEAD OF SUPER FUNDS, WHAT CAN GOVERNMENTS DO?
The federal government should increase the allowable maximum contribution to tax-sheltered RRSPs, not simply to supplement accumulated pension savings but also to compensate for losses from the financial crash. The optimal approach to provide maximum retirement saving flexibility is to redefine the allowable RRSP contribution in terms of the amount needed at retirement to provide an appropriate pension. Canadians could then contribute any amount of before-tax savings into their portfolios as long as the accumulated value does not exceed the defined target.
This approach neatly gives Canadians the scope to make up savings losses from the financial crisis. There are many ways to determine what this maximum threshold should be, but one of the fairest would be to set the accumulated amount at retirement equivalent to the accumulated value of the average public sector defined-benefit plan, estimated in the range of $1-million for a public servant earning $100,000. The upward adjustment in the allowable RRSP threshold to match the public sector pension valuation at retirement would achieve greater fairness in the treatment of private and public sector pension plans.
WHY IS THERE RESISTANCE TO RAISING RRSP LIMITS?
The resistance to higher RRSPs ceiling must be challenged. The argument that just because some Canadians don't use their full RRSP limit, therefore everyone should be denied the benefit is not valid. Many Canadians now take pension saving more seriously, given the proximity to retirement and the impact of the recent financial crisis, and would appreciate the increase in RRSP contribution limits. Canadians should have the ability to save as much as they want to ensure financial security and the government should assist with this. While the government will receive less tax if Canadians are saving more in their RRSPs, these monies will be taxed when withdrawn from RRSPs; as well, Canadians will be less reliant on government services when they retire.
HAS THE GOVERNMENT DONE ENOUGH?
While the government has moved incrementally to adjust RRSP ceilings, to raise the age limit for RRSP contributions to 71 from 69, and to modify the mandated minimum RRIF withdrawal for 2008, more still needs to be done.
For public sector defined-benefit plans that have taken a financial hit, the taxpayer will in effect be making up for the investment shortfall. Canadians dependent on RRSP plans to finance their retirement should be similarly entitled to make increased contributions from pretax income to compensate for the impact of market losses on accumulated pension savings.
Government should consider fundamental reform measures for the long term but should first concentrate on short-term reform measures to provide boomers with the opportunity to rebuild their retirement savings.
Ian C.W. Russell is president and CEO of the Investment Industry Association of Canada.
