It does not just apply to seniors, but it applies to pensioners, many of whom are not yet seniors depending on what age one says one becomes a senior. The other thing we did that was significant this year was when we recognized that there was a solvency deficit in some of the pension plans and we went ahead and made some provisions for an orderly return to full funding while protecting the security of benefits. That was primarily by allowing more time.
Is this something your government will be looking at in the coming year?
JF: We’re going to continue to watch the situation. The opinion of the Superintendent of Financial Institutions is that the current situation facing defined benefit plans is manageable, and we are seeing a stabilization of the estimated solvency ratio. And the number of pension plans on the watch list has stopped growing.
How do we reverse the solvency problem?
JF: We can do that over time now. There was a time when it was substantially the other way. And we think that this can work out over time. The other thing we are noting is that the trend away from defined benefit plans and toward defined contribution plans is quite clear. And that’s not only in Canada but elsewhere among comparable countries.
Do you have a thought on that—the movement from DB to DC?
JF: I think it’s realistic and likely to continue.
Realistic, meaning it’s the better way to go?
JF: Yes. Given affordability issues and given the nature of the workplace today, where it’s more likely that more people will have different jobs in their lives, the traditional defined benefit plan grew out of a time when it was common to spend most, if not all, of their working life with one employer. And that’s just not as likely today as it used to be. In fact, it’s unlikely today.
Do you think there should be something that helps create more DB plans?
JF: I don’t think it’s necessarily the direction we need to go in. I think some change with respect to pension plans toward defined contribution plans is, and has been, likely.
In 2001/02 there were 422 [defined benefit plans], and in 2005/06 there were 432, with a little bit of fluctuation in between.
Defined contribution plans, clearly there are more of them, although they are not as large.
[There were] 773 [DC plans] in 2001/02, and there were 872 in 2005/06. So there has been some significant growth there.
But defined benefit membership in 2001/02 was 477,000, and in 2005/06 it was 482,000.
Defined contribution membership in 2001/02 was 80,000, and in 2005/06 it was 94,000. Similarly, the assets under management reflect those numbers. There are large differences in the numbers of people involved.
But there are those who think DB is still more secure for retirement?
JF: As long as it is adequately funded—then yes. I went through this when I was Minister of Finance for the Government of Ontario where I saw the Algoma situation. We were very concerned at one point about the Dofasco situation as well.
We bailed out the Algoma plan with government money. But there’s only so much of that around. We have to make sure that no matter what kind of plan it is, but particularly in the defined benefit plans, that it is managed properly and is adequately funded. Otherwise, the promise of secure benefits is not going to be fulfilled.
Do you see more public/private partnerships to create infrastructure projects for pension investment?
JF: In the [government] economic plan [announced in December], for the first time we made a commitment of substantial infrastructure funding for national economic projects that would be done as public/private partnerships.
Is there a dollar figure attached to it?
JF: The total investment is $16.5 billion through 2009/10 for infrastructure, some of which would be done as P3s, national economic projects. Some of it would be small-scale municipal projects, which would not be suitable, usually for P3s—they are simply not big enough—unless we bundle some of them.
But in the absence of doing that, in order to get the kind of attention and competition one wants on public/private partnerships, you need to be a size of project that attracts world attention in capital markets. And that’s where we intend to go.
The Canada Pension Plan Board is interested in public/private partnerships in Canada and is making investments abroad of that type. That includes a waterworks in England.
We want to create the negotiating facility here in Canada, and we are going to create a Federal office of public/private partnerships to facilitate this type of pension investment in long-term infrastructure that helps build our country.
Of the $16.5 billion, how much of that do you estimate is in the P3 category?
JF: Several billion dollars. And I can’t be more precise than that because that part of it is actually in the infrastructure department and not in my department. But we are talking about large-scale projects. Some of the Western gateway infrastructure, which is port infrastructure, highways, it’s bridges, [is all part of the investment]. We’re talking about Detroit/Windsor and the crossing there—[its] tunnels and bridges. [These are] very large-scale projects in Canadian terms and in international terms.
Pension plans have looked to you as someone who has taken away potential returns by taxing income trusts. What do you say about all of this? Any plans to revisit it? How do you look at it now?
JF: As the right thing to do. It’s something that had to be done for tax fairness in Canada. We were in a situation where we had too much of a good thing, really. We had a tax rule that was designed, originally, for resource development that was being used in all kinds of business in Canada—including the telecommunications industry. It had already been used to create Bell-Aliant in Atlantic Canada. Northern Telecom was going, BCE announced it was going, [and] we had a rapid growth in trust creation in 2006 in Canada, not only in quality but in quantity.
So this was a clear and present danger for the Canadian economy. We were looking at a situation, including those conversions that we knew were coming that a year from now would have been untenable for the next generation of Canadians. They’d be inheriting a coupon- clipping passive economy in a young, dynamic country like Canada.
It was absolutely the wrong thing to continue with. Now, what to do about it in terms of people who have invested in income trusts—some are seniors and some are pensioners? So to help we brought in pension splitting at the same time.
Fortunately, most people do not put all their eggs in one basket, and most people didn’t have all their money in income trusts. Most people who are invested in income trusts are not looking at a capital loss but at a smaller capital gain than they would have had before October 31. So one has to be realistic about these things.
I look at the issue and I regret, as I have said publicly, that inevitably there would be some investors who sold who would suffer some losses. Fortunately, most people would not suffer a capital loss. We have also allowed the distributions to continue and income trusts to continue for a full four years during which time they will be allowed to grow to continue to attract investors.
There was mention of putting surplus into CPP in the last budget. But what do you say to critics who say when that door opens perhaps money can come out as well?
JF: The proposal we had put out for discussion in the last budget was to allow the Government of Canada to use part of its surplus each year to put it into CPP/QPP. And that’s an intergenerational equity issue. Why should the younger generation have to bear more of the funding burden of CPP/QPP than the generation before? We have other intergenerational equity issues in Canada. And I think most Canadians don’t want to burden their children or grandchildren unnecessarily.
So that was the proposal and there was the concern expressed by some that ‘if you can put money into the CPP then you can take money out.’
There’s no logic to that, actually, and there is no authority to do that. Having said that, the idea will not go ahead because there was that concern expressed, so we won’t do it.
So it’s a dead proposal?
JF: That’s right.
Can you talk about the prospects for a national securities regulator? Any plans?
JF: I’m relatively optimistic about the creation of a common securities regulator in Canada. Not a federal regulator, but a common securities regulator, which would be one regulator with governance involving each of the federal government and all of the provinces and territories.
No one jurisdiction would have control. There has been some progress, and there was some initial resistance, which one would expect. It is not in Canada’s best interest to have investors wanting to come into Canada with IPOs, for example, and when they cross the border they’re being told ‘alright, you have to file 13 sets of forms, pay 13 sets of fees to access a market of 32 million people.’ We have to be more realistic. We’re an international player in trade, and given the free flow of capital, we really don’t want to set up impediments to investments in this country.
So I am encouraged by my discussions with my provincial colleagues. They’re not all there yet. They’ve worked hard on their own passport system, but the problem with that system is that you still have 13 regulators, 13 sets of forms and 13 sets of fees. So there are some encouraging signs.
Are there any formal proposals?
JF: We support the recommendations that have been made by the Crawford panel, the panel led by Purdy Crawford and the report that he did.
It made the point that this is not an Ontario initiative, which is often the fear expressed by other provinces. That they don’t want the Ontario Securities Commission nor Bay Street to be the sole controlling force in securities regulation in Canada. The headquarters for a new securities commission could certainly be outside of Ontario.
The key here is that the administration would be one, a set of rules would be one, and we would have to have some accommodation for the derivatives exchange in Montreal, which Mr. Crawford’s panel anticipated and talked about. So this is always a challenge, to do something like this in Canada without many jurisdictions. But it doesn’t mean you don’t face the challenge.
I’ve spent a lot of time with the finance ministers talking about the economic agenda for Canada and what we need to do to maintain our standard of living and quality of life. And it’s not just talk; these are certain steps that we need to take if we are going to have a more rational economic federation in Canada.
How do you feel about a national pension guarantee fund?
JF: You know that one in Ontario would not cover all the losses that could happen. And I know it very well. We used it in Algoma. So it’s not much of a guarantee fund when you can’t guarantee them all.
We’re fortunate in that the restructuring of the CPP/QPP has been quite successful, and I give the provinces full credit for this that they did it with the government of Canada, and our publicly funded pension plans in Canada, according to the chief actuary of Canada, are funded for at least 70 years. So we’re doing well there.
Joel Kranc is managing editor of BENEFITS CANADA. joel.kranc@bencan-cir.rogers.com
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