Ask the Expert: Malcolm Hamilton

What needs to change to make the Canadian retirement system sustainable?
Our system is like the Titanic: big, slow to turn and vulnerable to large obstacles looming just over the horizon. It may be among the best retirement systems in the world, but with an aging population, low interest rates and recurring financial crises, we need to make it better.

As a senior partner with Mercer, Hamilton specializes in the design and funding of employee benefits plans in both the private and public sectors, with particular emphasis on registered pension and savings plans, unregistered pension plans and retirement compensation arrangements.

Hamilton graduated from Queen’s University in 1972 as the Gold Medallist in Mathematics. He attended McGill University as a National Research Council scholar, receiving his Master of Science degree in 1975. Hamilton became a Fellow of the Canadian Institute of Actuaries and a Fellow of the Society of Actuaries in 1977. He is also a member of the Actuarial Standards Board of the Canadian Institute of Actuaries.

Hamilton is a frequent speaker at pension conferences and has had articles published by Canadian Investment Review, Benefits Canada and the Canadian Tax Foundation.

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The traditional defined benefit (DB) pension plan is not the answer. It worked well when pension plans were young and small, and in bull markets. It worked well when the sponsoring companies were growing, profitable and financially strong. But when struggling corporations with mature pension plans collide with bear markets, the losses are too big to conceal, too painful to bear and too expensive to hedge.

Employers are beginning to rethink their role. Should they be the guarantors of adequate retirement incomes for their employees or should they strive for something less heroic? Employers don’t mind collecting and remitting contributions to employee savings plans or matching employee contributions. But growing numbers of employers covet the role of interested bystander: wishing employees well, cheering from the sidelines. They no longer want to have their money at risk.

Pension reform must do more than improve the existing regulatory framework. It must create an environment where, driven by economic necessity, retirement savings plans can migrate from where they are to where they need to be.

Government must protect programs such as Old Age Security, the Guaranteed Income Supplement, the Canada/Quebec Pension Plans and Medicare—programs that guarantee elderly Canadians a decent standard of living, which may become unaffordable if governments ignore the aging population and allow debts to spiral out of control. And Canadians must learn that affordable, adequate pensions starting at age 65 are no longer the guarantee; they are the target. Sometimes, the target will be reached or exceeded. Sometimes, we will come up short. Our retirement system can help Canadians cope with economic disappointment, but it cannot insulate them from economic reality. Canadians are resourceful; now they must be resilient. If things go badly, they can delay retirement, reduce spending, increase savings, work after retirement and/or dip into home equity. Canadians are not helpless and should not be treated as such.

Defined contribution (DC) pension plans must become smarter. We need to experiment with auto-enrollment, smart defaults, lifecycle investment strategies and better products for managing longevity risk. We need to find a balance between education and advice, compulsion and choice, and savings and consumption. We must avoid mandatory one-size-fits-all solutions while recognizing that most people lack the knowledge, interest and skill to do the job. And we must keep fees low.

I believe that employers will play a smaller role in the future. We will need new institutions to effectively represent the interests of retirement savers. Government should act as the catalyst for creating these institutions while avoiding any suggestion of guaranteeing satisfactory outcomes.

As DC plans become smarter, DB plans must become more durable. They must become target benefit plans, taking risk intelligently on behalf of the beneficiaries who are ultimately responsible for bearing those risks through fluctuating benefits. Members cannot afford riskless pensions; shareholders and taxpayers should not be expected to provide them.

Our goal must be a system that is balanced, efficient, resilient and fair—a sustainable public safety net supported by smart DC plans and/or target benefit plans. We must avoid any suggestion of guarantees. And we cannot rely on corporations, governments, shareholders, taxpayers or future generations to bail us out. There will never be enough money for that. BC

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