# Would you buy an annuity from the gov't?



## Larry6417 (Jan 27, 2010)

An editorial in the NY Times suggested just that. The U.S. gov't could receive funding at a lower cost and retirees could have more assurance than with a private firm (if you believe the editorialists). I don't know that I'd trust the U.S. gov't (or CDN gov''t), but I'd be interested if the CPP investment board offered annuities.

www.nytimes.com/2011/02/26/opinion/26Hu.html


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## andrewf (Mar 1, 2010)

Honestly, the Canadian government would never need to default on a non-indexed annuity. CPPIB could default. Simply because the Canadian government can print Canadian dollars.

I'm not sure the government should get into annuities. There is plenty of risk of mispricing. Beyond that, I suppose the government already is, to the extent that annuities have implied government backing. It's hard to imagine the government would allow significant losses on annuities.


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## HaroldCrump (Jun 10, 2009)

Larry6417 said:


> An editorial in the NY Times suggested just that. The U.S. gov't could receive funding at a lower cost and retirees could have more assurance than with a private firm (if you believe the editorialists). I don't know that I'd trust the U.S. gov't (or CDN gov''t), but I'd be interested if the CPP investment board offered annuities.


We've discussed along similar lines before.
To me, it makes a lot of sense to have govt. backed/guaranteed pooled retirement plans like a defined benefit plan.
It might make sense to expand the scope of CPP to enable all working Canadians to use it like a full-fledged employer provided DBP.
Merge all the different public sector DBPs into the CPP.

That substantially reduces the demand for annuities.
I'm not sure if the govt. should compete with the private sector to offer annuities.
After all, the govt. will have somewhat an unfair advantage because they can underprice the private sector substantially and can always print more money to cover any shortfalls or poor investment returns.

However, if they expand CPP and if the demand for annuities reduces substantially, we can leave the private sector to continue to offer annuities to those that are outside the scope of CPP.


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## OptsyEagle (Nov 29, 2009)

If the government did that it would quickly change from a business to a entitlement program for the poor and unfortuneate.

I mean, what does EI have to do with maternity. What does CPP and disability have to do with each other.

This is what happens when the governments get involved in insurance businesses. They lose money. Actually, they lose our money.

I will pass on that idea.


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## Brian Weatherdon CFP (Jan 18, 2011)

As for the U.S. I understand nearly 92% of American tax dollars will be funding seniors' medicare and pensions (aside from the fact taxes there will have to rise - and benefits will have to shrink). No country can afford such a situation. So I wouldn't count on the US Govt offering annuities...and I wouldn't trust it if they did. 

I appreciate the thought above, that govt-based annuities would further the "entitlement" culture. No place for that! A govt that promoted that idea would hear from all of us, and I for one would vote against it.


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## olivaw (Nov 21, 2010)

I'd buy an annuity from the government. Theoretically both the Canadian and US governments could set up revenue neutral annuity programs. It probably makes more sense for Canada than our unsustainable OAS and GIS programs.

My fear would be politicians using annuity contributions buy votes through untimely tax cuts or "free" social programs. 

We probably shouldn't be throwing stones at the US. We've a few long term problems of our own.


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## Brian Weatherdon CFP (Jan 18, 2011)

Hi Olivaw, you're right, we needn't throw any stones. Greenspan, Paul Volker, and Bernanke in their due course have said as much. 

It's an issue hitting all countries with aging demographics, sizable debt, and citizens who are anxious to remain financially secure through their silver and golden years. 

Cheers!
BW


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## MoneyGal (Apr 24, 2009)

andrewf said:


> I'm not sure the government should get into annuities. There is plenty of risk of mispricing. Beyond that, I suppose the government already is, to the extent that annuities have implied government backing. It's hard to imagine the government would allow significant losses on annuities.


What's the risk of mispricing unique to the feds?

And what's the implied government backing on annuities now? Assuris (the annuity insurer) is not government-run.


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## Eclectic12 (Oct 20, 2010)

MoneyGal said:


> What's the risk of mispricing unique to the feds?
> 
> And what's the implied government backing on annuities now? Assuris (the annuity insurer) is not government-run.


Perhaps a better question is what's the risk that an appointed politician through inexperience or desiring political gain - interferes with the pricing or the running whatever plan?

I can remember putting as much money as I could spare into Canada Savings Bonds back when they were priced well in advance of sales - when there was no clause to allow reducing the interest paid. The net result of the mispricing was that the CSBs were about five percent higher than anyone else was offering, for the life of the bond. A much higher than normal number for that series made it to maturity.


Cheers


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## andrewf (Mar 1, 2010)

MoneyGal said:


> What's the risk of mispricing unique to the feds?
> 
> And what's the implied government backing on annuities now? Assuris (the annuity insurer) is not government-run.


Mispricing risk due to government incompetence or political interference.

The implicit government guarantee is that the government would not allow defaults on annuities, and would backstop them, AIG-style. Assuris is not government-run, otherwise the guarantee would be explicit.


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## MoneyGal (Apr 24, 2009)

CPP (for example) is a form of (forced) annuity. 

The payout rates for men and women are identical, although they are not actuarially equivalent. 

Is this political interference or a mispricing or something else?


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## andrewf (Mar 1, 2010)

There's other possibilities. Let's say that an annuity offered by the government is lower risk and therefore should have lower yields than from private insurers. I can imagine the feds offering rates similar to private insurers, which would be underpricing the annuity.

Edit: and I would call that political interference. I imagine it was done for equity reasons. I have no particular objection to the CPP, but I can imagine legitimate cases for it being unfair.


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## HaroldCrump (Jun 10, 2009)

MoneyGal said:


> CPP (for example) is a form of (forced) annuity.
> 
> The payout rates for men and women are identical, although they are not actuarially equivalent.
> 
> Is this political interference or a mispricing or something else?


I caught a news blip a few days ago that a UK court has ruled that auto insurance companies cannot discriminate on the basis of sex of the driver.
So a female and male driver must have the same insurance premium, all else being equal.
I think it's nuts.

I agree that in the case of CPP, it is unfair too, given the difference in life expectancy.
That mis-pricing aside, as I said above, I do not support the govt. getting into the annuities business when we already have CPP, which as you rightly said, is like a "forced" annuity.
I'm more in favour of expanding the CPP to cover a wider net of the working population and merging all federal and provincial DBP into the CPP.
I don't see the benefit of having dozens of govt. defined benefit pension plans, each of which is a behemoth, and each guaranteed/backed by the various levels of govt. in one way or another.

Expanding the scope of the CPP and cannibalizing all these plans into it would eliminate a lot of waste and the members won't lose anything.
It will also level the playing field between the unpensioned private sector workers and gold-plated public sector workers.


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## Brian Weatherdon CFP (Jan 18, 2011)

HaroldCrump said:


> merging all federal and provincial DBP into the CPP.


Thinking of Caisse de depot et placements du Quebec in 2008.... merging plans could infer higher risk & loss when ill-conceived management arises. 

Competition protects the public -- even in field of pension management.


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## HaroldCrump (Jun 10, 2009)

Brian Weatherdon CFP said:


> Thinking of Caisse de depot et placements du Quebec in 2008.... merging plans could infer higher risk & loss when ill-conceived management arises.


That risk always exists, whether it's one plan or many.


> Competition protects the public -- even in field of pension management.


But right now there isn't any.
Teachers are locked in with OTPP, health care is locked in with HOOPP, federal workers with the federal plan.
Each city has their own (like OMERS in Toronto).
And then the rest of the full-time folks have CPP.

If any of them is mis-managed, those workers get to eat the dirt.
So there is no safety in diversification.
Each of them has separate management, separate portfolios, etc.
And each is protected by the govt. one way or another.

It's nuts to have so many.

Aggregate them under one umbrella.
Also, those with CPP, allow them to contribute more and make it like a true full fledged DBP.
I don't understand why such a large section of the working population is being denied and deprived of a govt. backed, inflation indexed, lifetime pension.


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## Sampson (Apr 3, 2009)

HaroldCrump said:


> I don't understand why such a large section of the working population is being denied and deprived of a govt. backed, inflation indexed, lifetime pension.


I'm starting to believe it's because it is an unsustainable model.


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## HaroldCrump (Jun 10, 2009)

Sampson said:


> I'm starting to believe it's because it is an unsustainable model.


Fair enough, then _stop_ the entire madness.
Give all the members the commuted value and let them loose to invest on their own.
At least, the playing field will be leveled then.


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## Larry6417 (Jan 27, 2010)

*Odd historical footnote*

I wasn't aware of this until recently, but until the 1970s the gov't of Canada did sell annuities to individuals or employers on behalf of their employees. A branch of the CDN gov't still administers these annuities. See www.servicecanada.gc.ca/eng/cs/ga/030.shtml

Points raised in this forum are well taken. Giving gov'ts more revenue is like giving Charlie Sheen more coke. If a gov't receives *X* in revenue, the temptation is to spend multiples of *X* to buy votes. That's why I'd trust the CPPIB more so than the federal gov't; it operates at arms length from the gov't. The CPPIB already prices annuities (or does something very similar).

I believe (but am not completely sure) that mispricing of DBP-like plans, including CPP, (i.e. men and women receive equal payments) is the unintended consequence of well-meaning legislation to protect gender equality. One potential advantage of allowing employers to purchase annuities (gov't sponsored or not) for employees is that the employee can receive DBP-like security while the employer offloads the risk for that plan to the annuity provider.


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## andrewf (Mar 1, 2010)

Companies can do that now. The reason they don't is that annuities are expensive. The promise of a guaranteed stream of inflation-indexed payments is a lot pricier than most companies are willing to pony up for. Imagine funding your retirement through GICs. Possible but costly.


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## Brian Weatherdon CFP (Jan 18, 2011)

andrewf said:


> expensive


You're right Andrew. Life Annuities seem very expensive today....unless one is already in their 70s or beyond (in which case the mortality credits permit a very healthy cash flow, whether indexed or not). Today's annuity rates probably don't suit many people currently in their 60s (when they're making the decision to retire).


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## Larry6417 (Jan 27, 2010)

andrewf said:


> Mispricing risk due to government incompetence or political interference.
> 
> The implicit government guarantee is that the government would not allow defaults on annuities, and would backstop them, AIG-style. Assuris is not government-run, otherwise the guarantee would be explicit.


You think the gov't would save private annuity providers but allow CPP to default? If anything, politics dictates the opposite. Also, the CPPIB is deliberately designed to minimize gov't interference.


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## Larry6417 (Jan 27, 2010)

Harold, the two of us are splitting hairs. You support a greatly expanded CPP i.e. gov't (or gov't sponsored enterprise) takes in contributions then returns the invested proceeds in the form of periodic payments. The article I cited proposed gov't backed annuities i.e. gov't (or a GSE) takes in contributions then returns the invested proceeds in the form of periodic payments. It's funny what changing a label does. One label is considered bizarre, even dangerous while the other label is considered desirable.

During the last media debate about "big" CPP, one pension expert (I think it was Malcolm Hamilton) proposed an interesting compromise: allow individuals to "purchase" more CPP. Higher contributions would lead to correspondingly higher CPP payments. The greatly expanded role you want for CPP will almost certainly never happen. However, allowing individuals to "purchase" higher CPP payments (taking into account self-selection) could happen relatively quickly (with the support of the provinces). A lump-sum purchase of higher CPP payments would not be that different from purchasing a gov't sponsored annuity.


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## andrewf (Mar 1, 2010)

Larry6417 said:


> You think the gov't would save private annuity providers but allow CPP to default? If anything, politics dictates the opposite. Also, the CPPIB is deliberately designed to minimize gov't interference.


The government wouldn't allow a full default of the CPP, but there could be a partial default in the form of benefit reductions. Indeed, if the CPP falls short of its investment targets, don't be at all surprised to see adjustments in eligibility age or benefit rates.


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## Larry6417 (Jan 27, 2010)

I agree with you there. In fact, CPP has already changed to reward later retirement and punish earlier retirement. I don't think that's a bad thing. It's just prudent management to ensure CPP's long-term survival. See www.hrsdc.gc.ca/eng/oas-cpp/changes.shtml


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## andrewf (Mar 1, 2010)

Seems to me that the retirement age shouldn't be fixed but a function of expected years in retirement. As life expectancy rises, the retirement age is automatically pushed out (but perhaps not one year for one year) so we don't have recurring political struggles every time the issue needs to be addressed.


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## sags (May 15, 2010)

Large pension plans have largely recovered nicely from the recession. 

As an example, the HOOPP plan was underfunded by 25% and it is now in overfunded status. A combination of increased contributions, elimination of an early retirement transition benefit, and a revamp of their portfolio, put them in good shape going forward.

All in all, DB pension plans are doing quite well. Their actuarial calculations use the same longevity scales as life insurance companies. 

All the angst over DB pension plans is unfounded.

An annuity type of scheme means looking forward to 30 years of worrying about it.


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## Eclectic12 (Oct 20, 2010)

sags said:


> Large pension plans have largely recovered nicely from the recession.
> 
> As an example, the HOOPP plan was underfunded by 25% and it is now in overfunded status. A combination of increased contributions, elimination of an early retirement transition benefit, and a revamp of their portfolio, put them in good shape going forward.
> 
> ...


Angst over DB pension plans unfounded? All in all doing well?

Maybe for the gov't and strong company ones. I doubt that the Nortel pensioners would agree. 


According to Mercer the problem existed long before the market crash as:


> 71% of Canadian defined benefit pension plans were in a solvency deficit position at the end of 2007.


So unless the affected companies were able to not only recover but fund extra contributions - they are likely still in trouble.
http://www.cga-canada.org/en-ca/Res...terest/Pensions/Pages/_ca_pensions_index.aspx

Then too, with a market that is moving all over the place, the deficit/surplus can also be all over the map:
http://www.hewittassociates.com/Int...room/PressReleaseDetail.aspx?cid=8503&print=1


So without more details to convince me otherwise - I'm not so sure.

Bear in mind that as people live longer, the bulk of the boomers retire etc., there are a lot of pressures for the db pension.


Cheers


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## HaroldCrump (Jun 10, 2009)

Larry6417 said:


> Harold, the two of us are splitting hairs. You support a greatly expanded CPP i.e. gov't (or gov't sponsored enterprise) takes in contributions then returns the invested proceeds in the form of periodic payments. The article I cited proposed gov't backed annuities i.e. gov't (or a GSE) takes in contributions then returns the invested proceeds in the form of periodic payments. It's funny what changing a label does. One label is considered bizarre, even dangerous while the other label is considered desirable.


Well, there _are_ differences between a DBP plan like CPP and an annuity.
Other than the technical differences, an indexed lifetime annuity is a lot more expensive to buy, esp. these days.
One of the fundamental issue with the annuty based retirement model is that of "primitive accumulation" i.e. how to acquire the lump sum investment required to buy such a luxurious annuity in the first place.
CPP doesn't have that issue - contributions are deducted from the paycheque at source and you never see the money.

If all the DBP have-nots decided today to buy themselves a nice, juicy indexed lifetime annuity, how many would have the $1M+ required to buy it in the first place?



> During the last media debate about "big" CPP, one pension expert (I think it was Malcolm Hamilton) proposed an interesting compromise: allow individuals to "purchase" more CPP. Higher contributions would lead to correspondingly higher CPP payments. The greatly expanded role you want for CPP will almost certainly never happen. However, allowing individuals to "purchase" higher CPP payments (taking into account self-selection) could happen relatively quickly (with the support of the provinces). A lump-sum purchase of higher CPP payments would not be that different from purchasing a gov't sponsored annuity.


I don't think what your Mr. Malcom Hamilton is suggesting is fair for everyone.
The issue with voluntary CPP contributions is that you will end up getting adverse selection.
It won't give you the true benefits of a pooled pension plan that the CPP is right now.
I realize that certain provinces are blocking that type of move for their own political reasons, and that's unfortunate IMO.
However, at this time, I do not see any other reasonabe alternative to mandatory expansion of the CPP.
Annuities (whether govt. provided or private sector provided) is not going to have a widespread impact.
The DBP inequality is going to continue, and get worse over the years as private sector DBP plans go the way of the oozlum bird.
The only DBPs left will be the public sector ones, which their sponsor (i.e. the govt.) is able to provide purely because of its ultimate and undeniable taxing power.


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## olivaw (Nov 21, 2010)

HaroldCrump said:


> The only DBPs left will be the public sector ones, which their sponsor (i.e. the govt.) is able to provide purely because of its ultimate and undeniable taxing power.


Personally, I'd prefer a government run plan, but can't private employers accomplish the same thing through a private insurer? 

The federal public sector defined benefit pension plan is going to be 60% funded by the workers and 40% by the taxpayers (the employer). Workers will contribute 6.4% up to the maximum set by the CPP and 8.4% beyond that. The government will contribute less. 

http://www.tbs-sct.gc.ca/pubs_pol/hrpubs/pensions/psppg-corprfp-eng.asp

My own company matches my RRSP contributions. 20 to 35 years of steady contributions will mean that I have enough to purchase a suitable annuity. I may be a DBP have-not but the more that I think about it, the more that I realize that I'm going to be in good shape. I can choose to purchase an annuity, or I can choose to leave all my money to the whims of the stock market. My choice. 

Couldn't my employer have chosen instead to set up a pension plan with a private insurer at roughly the same cost? 

I'm not arguing in favor of private plans. In fact, I prefer the public option because it would be 100% transferable and mandatory. Expansion of the CPP might even be the best solution. 

What I am arguing is that we shouldn't claim that civil servants have become a special class who have been given a benefit that isn't available to other Canadians. A public or private system can be readily funded with steady contributions from both employers and employees.


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## HaroldCrump (Jun 10, 2009)

olivaw said:


> Personally, I'd prefer a government run plan, but can't private employers accomplish the same thing through a private insurer?


Apparently not, as evidenced by the Nortels and the Enrons and the GMs.
Leaving aside obviously bankrupt companies like the above two, even regular, functional private enterprises have trouble keeping up with DBP pension obligations.
There was an article in Money Sense a few months ago on private corporations that offer DBPs and the solvency of each.
Not a pretty state.
This included solid companies such as PWF, TransAlta, etc.
Many analysts have been saying for a while that this model is unsustainable.
The only reason the public sector ones are working is because of it's sponsor i.e. the govt. which has ultimate power to correct any underfunding or losses.


> My own company matches my RRSP contributions. 20 to 35 years of steady contributions will mean that I have enough to purchase a suitable annuity. I may be a DBP have-not but the more that I think about it, the more that I realize that I'm going to be in good shape. I can choose to purchase an annuity, or I can choose to leave all my money to the whims of the stock market. My choice.


A group RRSP is not the same as a pension.
I know you surely know that.
So I'm just saying that it's not fair to compare them.

Savvy/lucky investors may be able to make their RRSPs grow to the extent that they can "buy" themselves a DBP in the form of an indexed lifetime annuity, but it's clearly not happening.


> Couldn't my employer have chosen instead to set up a pension plan with a private insurer at roughly the same cost?


No, the costs are dramatically different.
Witness the huge shift in large traditionally solid companies increasingly moving from DBPPs to DCPPs or group RRSPs.
The main reason is the cost.
I don't know who your employer is, but I doubt a true DBPP would cost them the same as a GRRSP.



> I'm not arguing in favor of private plans. In fact, I prefer the public option because it would be 100% transferable and mandatory. Expansion of the CPP might even be the best solution.


So, we agree 



> What I am arguing is that we shouldn't claim that civil servants have become a special class who have been given a benefit that isn't available to other Canadians.


It isn't - not at the same cost at least.


> A public or private system can be readily funded with steady contributions from both employers and employees.


Not at the same cost.
What you are suggesting seems to be the exact same thing that the Finance Minister proposed a couple of months ago - i.e. a private pension system managed, operated and insured by the private financial industry i.e. banks/insurance company.
It completely absolves the govt. of all responsibility, maintains the edge of public sector workers, and simply plays into the hands of the financial industry, which is looking to replace lost revenue from mutual funds and the investment advisory business.
It does nothing to ensure/protect the retirement of non public sector working Canadians.

I assume you are then in support of the Finance Minister's proposal?


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## olivaw (Nov 21, 2010)

HaroldCrump said:


> I assume you are then in support of the Finance Minister's proposal?


I think the Minister's proposal is financially sound, but I don't happen to agree with his specific proposal. Theoretically the defined benefit pension would be revenue neutral for the government or profitable for private insurers. The debate should be about who can deliver the service more efficiently, securly and fairly. I believe that insurance is one of things that government is good at, so I'd prefer the government option. However, a private program would be better than no program at all. 

The old private pension plans were poorly regulated. Employers were not required to set the money aside and turn it over to an independent organisation. They often invested that money back into the business. When the business faltered, so did the pension plan. 



HaroldCrump said:


> A group RRSP is not the same as a pension.
> I know you surely know that.
> So I'm just saying that it's not fair to compare them.
> 
> Savvy/lucky investors may be able to make their RRSPs grow to the extent that they can "buy" themselves a DBP in the form of an indexed lifetime annuity, but it's clearly not happening.


My own investment strategy hasn't been terribly remarkable. It consists of steady savings. Forgetting inflation. $1,000 per month invested at a modest 3% for 35 years comes to about $741,500 that can be used to purchase an annuity. 


> No, the costs are dramatically different.
> Witness the huge shift in large traditionally solid companies increasingly moving from DBPPs to DCPPs or group RRSPs.
> The main reason is the cost.
> I don't know who your employer is, but I doubt a true DBPP would cost them the same as a GRRSP.


Aren't the costs dependant solely upon the benefit. If my employer wants to offer me a 70% lifetime guarantee (including CPP) after 35 years, then we'll need to contribute an amount sufficient to accomplish it. 

I think we more or less agree. The only thing that I challenged was the idea that civil servants have something that cannot be made available to all Canadians. Not only is it feasible, it may be a necessity because OAS and GIS are unsustainable. Regardless of whether it was run by the government or private corporations, I believe that pensions must be fully funded. No corporation or government should carry such an important obligation as an unfunded liability.


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## HaroldCrump (Jun 10, 2009)

olivaw said:


> The old private pension plans were poorly regulated. Employers were not required to set the money aside and turn it over to an independent organisation. They often invested that money back into the business. When the business faltered, so did the pension plan.


Which is why it makes sense to consolidate everything under the CPP umbrella.
It brings all working Canadians on the same playing field.
Public sector workers, private sector, etc.



> Aren't the costs dependant solely upon the benefit. If my employer wants to offer me a 70% lifetime guarantee (including CPP) after 35 years, then we'll need to contribute an amount sufficient to accomplish it.


The cost comes from the guarantee, not just the employer contributions.
There is also a cost associated with other "gold plated" features like inflation indexation, survivor benefit, etc.
A group RRSP or DCPP is much cheaper since it has none of these features. 



> I think we more or less agree. The only thing that I challenged was the idea that civil servants have something that cannot be made available to all Canadians. Not only is it feasible, it may be a necessity because OAS and GIS are unsustainable. Regardless of whether it was run by the government or private corporations, I believe that pensions must be fully funded. No corporation or government should carry such an important obligation as an unfunded liability.


I totally agree.
I have two key points in this matter : one, I don't believe the answer to pension poverty is as simple as telling people to "just buy an annuity".
Secondly, I don't see the need for scores of plans, and pension management boards, when we can have one single entity take care of this.
And why look elsewhere (public or private) when we already have the CPP organization.
Until we can have a homogenous solution for all working Canadians, the public sector workers will continue to enjoy a priviledged position vis-a-vis other full-time employed Canadians, and that priviledge is based solely on the ultimate power of their employer, and not their superior skills/productivity vis-a-vis the rest of the workers in society.


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## Eclectic12 (Oct 20, 2010)

HaroldCrump said:


> [ ... ]
> 
> The cost comes from the guarantee, not just the employer contributions.
> There is also a cost associated with other "gold plated" features like inflation indexation, survivor benefit, etc.
> ...



The costs are far more complex than strictly the guarantee and "gold-plated features".

Consider the a regular business such as Canadian Tire or a steel mill. They are going to pay a much higher price to pay someone to manage their pension dollars than say a bank or financial institution who will get cheaper trading fees and likely already have a relatiionship will the top pension managers.

Then too - if a pension manager is doing something strange, the financial institution has the skills/computer systems in place to detect the issue long before a regular company would notice.

Another factor is economies of scale also give more leverage to end up with cheaper costs.


And while a Group RRSP or DCPP are definitely cheaper (no guarantee, no actuaries to hire to figure out if the plan is fully funded, no money required to make up for a shortfall etc.), if there are few employees and the company is not spending the time to negotiate a reasonable deal, it may not be as cheap as it seems.

One DCPP that I was in that was fortunately optional - had four mutual funds. One money market, one Canadian equity, one Canada-US balanced and one Canada-US bond fund. I'm sure it was cheap for the company but with it's sole focus on North America, I wouldn't have wanted to depend on it for retirement.


Consolidation may or may not be good - one plan is definitely simpler but if it is mis-managed, everyone is in the same boat. Conversely, if it is well managed, it's good that everyone would be in the same boat.


Cheers


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## HaroldCrump (Jun 10, 2009)

Yes, I realize that there are several other aspects to total costs than the ones I listed.

My point is that the cost to company for a DBP is (almost always) higher than the cost of GRRSP.
More and more private sector enterprises are moving away from this model, primarily due to the costs, overhead and hassle.

In today's economy, there is no longer the perception that a company needs to offer gold plated pension plans to attract talented, highly skilled workers.
With outsourcing and commoditization of many skills and entrie industries, that is no longer the requirement.
The only employer that continues to provide that benefit is the public sector.

And it is able to do that primarily because of the ultimate power that its sponsor (the govt.) weilds over the rest of the income earning population (private sector, self employed, businesses, etc).


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## Brian Weatherdon CFP (Jan 18, 2011)

Eclectic12 said:


> One DCPP that I was in that was fortunately optional - had four mutual funds. .... .... one plan is definitely simpler but if it is mis-managed, everyone is in the same boat. Conversely, if it is well managed, it's good that everyone would be in the same boat.


Good summary Eclectic. 

As I've mentioned before, the Caisse' experience shows the potential danger for everyone. And the big financial institutions were NOT immune.

As an aside....you also mention DCPPs we hate seeing with pathetic narrow range. It costs little to include dividend, mid-cap, and Intl exposure. 

BW


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## Brian Weatherdon CFP (Jan 18, 2011)

Hi Harold, right! The power to tax all the rest of us.
B


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## Eclectic12 (Oct 20, 2010)

HaroldCrump said:


> Yes, I realize that there are several other aspects to total costs than the ones I listed.
> 
> My point is that the cost to company for a DBP is (almost always) higher than the cost of GRRSP.
> More and more private sector enterprises are moving away from this model, primarily due to the costs, overhead and hassle.
> ...


Good that you know there are more factors - the post I read made it sound otherwise.


Hmmmm ... I'm not so sure that the economy has changed that much
but more importantly, when you say: 


> The only employer that continues to provide that benefit is the public sector.


If the benefit is a DB pension, I have to disagree. I don't work for the public service and I have a DB plan. My previous two employers are also private and I'm sure they still offer DB plans. I'll fire off an email to confirm but I'm sure I would have heard before now if the DB pension was shutdown.

As well, this StatCan article from 2008 pegs the decline at 10% in a decade.
http://www.statcan.gc.ca/daily-quotidien/100525/dq100525c-eng.htm

It also reports the 2007 to 2008 change in private sector plans at -0.7%.
http://www.statcan.gc.ca/daily-quotidien/100525/t100525c1-eng.htm

I'm sure the financial crisis has had an impact and more recent information would be nice but it seems clear that private DB pensions still exist.


Then too, I found this interesting article where an university economist suggested that companies facing skills shortgages will try to use the DB pension to attract staff.
http://pensionpulse.blogspot.com/2010/11/demise-of-defined-benefit-pensions.html


Cheers


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## Eclectic12 (Oct 20, 2010)

Brian Weatherdon CFP said:


> Good summary Eclectic.
> 
> As I've mentioned before, the Caisse' experience shows the potential danger for everyone. And the big financial institutions were NOT immune.
> 
> ...


I'm sure it doesn't cost a lot to add more funds. However, that's what the company contracted for so there wasn't a choice. I don't know if they have improved the choice since.

Though - if one is stuck with such limited choice, one can use other accounts (ex. non-registered, RRSP) to help make up for it.


At the end of the day, it is puzzling why an international company would contract for such limited choices. Just about any other DCPP I've heard of or had the option of has broadened the choices dramatically in comparison.


Cheers


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## HaroldCrump (Jun 10, 2009)

Eclectic12 said:


> If the benefit is a DB pension, I have to disagree. I don't work for the public service and I have a DB plan. My previous two employers are also private and I'm sure they still offer DB plans. I'll fire off an email to confirm but I'm sure I would have heard before now if the DB pension was shutdown.


Private sector DBPs are on the decline - that was my point.
The recession and the underfunding issue is accelerating that process.
I didn't mean that there is not even a single private sector DBP plan in existence, and I did refer to several in the posts above.
However, the public sector DBPs are not declining and there is no evidence that any level of govt. is even considering it.
That is where the lopsided inequality between private sector and public sector is coming from.


> Then too, I found this interesting article where an university economist suggested that companies facing skills shortgages will try to use the DB pension to attract staff.


Absolutely, it is a valid form of compensation.
However, the key is the term _company_.
A private business that is run purely for profit (there is no other motive for running a business) is free to compensate it's employees by any means that the shareholders approve of.
DBPP, stock options, bonuses, cruises, strip club memberships, whatever works.
However, the public sector is NOT a company.
Some crown corps like BDC, CBC etc. do generate substantial profit however the bulk of the public sector is not a private business being run for profit.
It is a governing, administrative, services body.
Had this been a private corporation, such benefits would long have been voted out by shareholders.
The reason the public sector is able to do this is not because of its financial success (as is the case with the private sector) but because of the ultimate revenue generation power of the sponsor (the govt.).


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## Brian Weatherdon CFP (Jan 18, 2011)

Eclectic12 said:


> I'm sure....... if one is stuck with such limited choice, one can use other accounts (ex. non-registered, RRSP) to help make up for it.


You're right Eclectic. If DCPP has poor selection of fund choices the employee may put only the minimum contribution to attract the maximum employer matching. 

Employee in another RRSP can aim at the mid-cap, emerging, or other sectors as needed/desired. And subsequently also in TFSA & non-registered accounts. 

So yes, plan-member can achieve desired total asset allocation objectives. However how much easier if dcpp allowed sufficient choice, so assets held inside and outside the dcpp would each appear reasonably considered. 

BTW the DCPP can add funds by amendment after inception. If assets have accumulated, cost may not even rise.

Cheers!
BW


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## sags (May 15, 2010)

My wife just got the news that her union is now holding the funds for the small workplace RRSP type of pension they have. There are about 40 people involved.

The Scotiabank used to administer the fund, but handed the money over to the Union and told them there wasn't enough money involved for them to continue. All they basically did was hold and record the funds, and deal with withdrawals. They charged fees for virtually any changes made.

It doesn't look to me like banks are going to be particularly receptive of administering small pension plans.

This is one weakness in the Flaherty plan. The other is at the other end.

How many choices will there be offering annuities, say 30 years down the road.


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