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Maximizing Pension Wealth: Insights from Canadian Context

Learn about the Canadian pension system, policy environment, macro and micro measures, and trends in pension coverage. Gain insights into pension wealth in the Canadian context to optimize financial planning.

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Maximizing Pension Wealth: Insights from Canadian Context

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  1. Pension Wealth in the Canadian Context: Lessons for LWSMichel Palardy and Catherine Van Rompaey Statistics Canada Luxembourg Wealth Study ConferenceBanca d’Italia, RomeJuly 5-7, 2007

  2. Lessons for LWS • Harmonizing existing wealth survey data, to the extent possible, important first step • Next step is defining ideal wealth concept and moving towards harmonized measurement • International measures of pension wealth fraught with complexities and gaps • Effective measurement key to understanding distributional effects/responses as institutional structures evolve and the population ages • Critical to formulation of appropriate policy

  3. Overview • The Canadian pension system and public policy • Pension wealth in Canada • Macro vs micro • Concepts, measurement • Impact of excluding pension wealth in Canada • Canada vis-à-vis the United States: an illustrative example

  4. Canadian Pension System • “Three Pillars” • Government administered plans • Old age security/Guaranteed income supplement • Canada and Quebec Pension Plans • Employer-sponsored plans • Registered pension plans (defined benefit or defined contribution) • Group RRSPs (employer contributes to individual saving plan) • Other (Deferred profit sharing, retirement compensation arrangements) • Individual savings plans • Registered retirement savings plans (RRSPs, LIRAs, RRIFs)

  5. Policy environment • Health of the defined-benefit pension system under intense scrutiny in Canada • Coverage ratios declining for employer-sponsored plans • Erosion of defined benefit system viewed as undesirable • Sponsors concerned about growing difficulty maintaining funds; actuarial deficits in wake of stock market crash • Provincial pension regulators flag “crisis” • Bank of Canada concerned, risks to financial system • Ontario Expert Commission on Pension Reform

  6. Policy environment • Heightened demand for pension statistics • New regulatory data on actuarial liabilities (funded status) of pension plans and assumptions in valuation to come out this year • Pension satellite account in Canadian SNA

  7. Macro measures: Pension Satellite Account in Canadian SNA • Pension wealth accounted for in the National Balance Sheet Account (as asset and liability) • New specialized “Pension Satellite Account” • Employer sponsored plans, government plans, individual saving plans • Wealth positions and associated flows • Critical to decomposing macro saving rates • SNA productive income concept includes accrued pension income, not benefits • Top priority of federal finance department • To be released experimentally this year, then implemented as a regular annual release

  8. Pension Satellite Account in Canadian SNA

  9. Micro measures on the Survey of Financial Security • Wealth surveys conducted irregularly by Statistics Canada • Long hiatus from 1984 Assets and Debts survey to 1999 SFS • Wealth value of employer-sponsored pension plans introduced subsequent to 1999 release • Extensive consultation, including federal policy departments and Canadian central bank • Methodology developed with assistance of an actuary • Part of featured net worth for 2005 SFS release

  10. Pension wealth on the SFS • Pension assets • Do not include social security or government-administered plans • CPP/QPP considered in 2005 • Include employer-sponsored plans • Defined contribution and defined benefit (the largest share) • Include tax-deferred individual savings plans (RRSPs, RRIFs) • Large portion of financial assets held in this form

  11. Pension wealth: SFS concepts and methodology • Present value of expected future benefits for employer pension plans • Valuation on a “termination” basis • “Going concern” valuation also produced (about 30% higher) • Some questions asked of respondent, not terms and conditions of plan • Calculation links to income tax data and Pension Plans in Canada database

  12. Trends in pension coverage • Statistics Canada ’s Pension Plans in Canada Program • Regulatory information from provincial supervisory authorities • 15,336 Registered Pension Plans covering 5.7 million members as of 2005 • 39% of paid workers covered • Membership rising, but coverage rates declining, faster for men than for women • About 1/3 of families had no pension assets of any kind according to SFS 2005 • Majority had lower income from employment

  13. Pension wealth Canadian pension assets by age group

  14. Excluding pension wealth in Canada: considerations • LWS net worth only 42% of Canadian measure • Country rankings and portfolio composition • Employer pensions second largest asset : differential coverage across families • Financial assets held in individual retirement savings plans (RRSPs), designated as pension assets • Considering only “non-pension” financial assets is incomplete view of discretionary savings • 2005 SFS collected investment distribution of registered retirement savings plans; not available in 1999

  15. Excluding pension wealth in Canada: considerations • Wealth concentration • Pension assets clearly have equalizing effect • Proportion of net worth held by highest decile higher • (58.2% vs 50.9%) • Gini coefficients higher and show different trends • (0.746 vs 0.688) • Trends in net worth for specific groups quite different • E.g., couples with children from 1999 to 2005 • 30.4% growth in median net worth including pension assets • 45.2% growth when pension assets excluded • Relevant to study net worth across age groups when savings for retirement excluded?

  16. Canada vis-à-vis United States • Canada often compared to our neighbours to the South • Simple illustrative example to show coverage of different elements of pension system • Consider implications for interpretation of wealth measures, both nationally and cross-nationally • Could be expanded to look at other countries with different retirement income systems

  17. Canada vis-à-vis United States retirement income system • Similar elements: “three pillars” • Have evolved in different directions at different rates • Unlike U.S., defined benefit system remains important in Canada, pension reform emphasizes its protection • Highlight elements missing in wealth surveys to study distributional effects • Pension reform debate lacks key insights

  18. Pension wealth in national sources, Canada and US

  19. Canada vis-à-vis United States Financial assets

  20. Conclusions • Pension reform of heightened interest in Canada and elsewhere • Can only increase in importance as population ages • A cross-national database covering pension wealth would be an invaluable policy tool • International standards for micro measures could provide support for jurisdictions to develop estimates • Define ideal/expanded wealth concept in relation to essential practical concept • Enable micro-micro comparisons: increase coherence and analytical scope

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