Thanks to our partners :

1Thanks to our partners:

David MitchellPresident & CEO Canada’s Public Policy Forum

2

Welcome

Second National Summit on Pension Reform

David LaibsonRobert I. Goldman Professor of Economics,Harvard University

3

Nudge economics and retirement savings


David Laibson

Robert I. Goldman Professor of Economics

Harvard University

Behavioral Economics and Behavior Change


October 2014

Behavioral Economics

Improves economic analysis, by incorporating psychological factors that influence economic behavior.

Identifies optimal policies:– Nudges (soft paternalism): changes in the choice

architecture that influence behavior without eliminating any options

– Taxes– Strong paternalism (e.g., the savings rate in the CPP)

5

Opt-in enrollment

UNDESIRED BEHAVIOR:

Non-participation

DESIRED BEHAVIOR:

participation

PROCRASTINATION

Opt-out enrollment (auto-enrollment)

START HERE

Active Choice

UNDESIRED BEHAVIOR:

Non-participation

DESIRED BEHAVIOR:

participation

PROCRASTINATION

START HERE

Must choose for oneself

UNDESIRED BEHAVIOR:

Non-participation

DESIRED BEHAVIOR:

participation

PROCRASTINATION

Quick enrollment

START HERE

UNDESIRED BEHAVIOR:

Non-participation

DESIRED BEHAVIOR:

participation

PROCRASTINATION

Quick enrollment

START HERE

Improving DC participation

0% 20% 40% 60% 80% 100%

Opt-in enrollment 40%

Quick Enrollment(“check a box”)

50%

Active choice (requirement to choose)

70%

Opt-out (Auto-enrollment)

90%

Participation Rate (1 year tenure)

Madrian and Shea 2001; Choi, Laibson, Madrian, Metrick 2002; Choi, Laibson, Madrian 2009Carroll, Choi, Laibson, Madrian, and Metrick 2009

Have we cracked the savings code?

11

Automatic enrollment (opt-out)Re-enrollment (opt-out)Target date funds (opt-out)Savings rate escalators (opt-out)Quick enrollment (opt-in)SimplificationEducationMatching

Assumptions for simulation

6.5% guaranteed return 2% inflation rate 6% DC saving rate 100% employer match No leakage Start working at age 22 First job: $35,000 Start saving at age 22 1% real wage growth 50% Soc Sec replacement “4% rule” in retirement

12

At retirement:103% replacement ratio

$719,275 DC assets(+ house + Social Security)

Laibson (2011)

2004 2005 2006 2007 2008 2009 2010 $-

$20

$40

$60

$80

$100

Taxable withdrawals from retirement accounts among households <55

Source: Argento, Bryant, and Sabelhouse (2014) 13

Leakage grew 17% in 2010

Billions

For every two dollars that go into the retirement system about one dollar simultaneously leaks out (before retirement)

14

For every two dollars that go into the retirement system about one dollar simultaneously leaks out (before retirement)

15

Replacement DC

Ratio Assets

Original scenario 1.03 $ 719,275

2.5% balance leakage 0.78 $ 380,584

40% don’t have access 0.68 $ 249,283

Match rate is 0.5 0.64 $ 192,195

Net return is 5.5% 0.61 $ 152,672

20% with access don’t participate 0.59 $ 125,463

Start saving at age 30 0.58 $ 103,644

Soc Sec replacement rate lower 0.53 $ 103,644

A little more realism

16

Among those households age 65-74:

Median holding of financial+retirement assets: $72,000.o includes all retirement accounts, savings and checking

accounts, CD’s, mutual funds, brokerage accounts,…

17

Source: Survey of Consumer Finances; 2013 wave

18

Net National Savings Rate: 1929-2013

Table 5.1, NIPA, BEA

1929

1933

1937

1941

1945

1949

1953

1957

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

2005

2009

2013

-10

-5

0

5

10

15

20

19

Net National Savings Rate: 1929-2013

Table 5.1, NIPA, BEA

1929

1933

1937

1941

1945

1949

1953

1957

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

2005

2009

2013

-10

-5

0

5

10

15

20

Psychological origins of undersaving

Would you like to have

A) 15 minute massage now

or

B) 20 minute massage in an hour

Would you like to have

C) 15 minute massage in a week

or

D) 20 minute massage in a week and an hour

Choosing fruit vs. chocolate

TimeChoosing Today Eating Next Week

If you were deciding today,would you choosefruit or chocolatefor next week?

Read and van Leeuwen (1998)

Patient choices for the future:

TimeChoosing Today Eating Next Week

Today, subjectstypically choosefruit for next week.

74%choosefruit

Impatient choices for today:

Time

Choosing and Eating

Simultaneously

If you were deciding today,would you choosefruit or chocolatefor today?

Time

Choosing and Eating

Simultaneously

70%choose chocolate

Impatient choices for today:

Immediate events get full weight.

Everything else gets half weight.

Present bias

Phelps and Pollak (1968), Akerlof (1991), Laibson (1997)

Procrastination

Exercise has effort cost 6

Delayed health benefit of 8

Exercise Today: -6 + ½ [8] = -2

Exercise Tomorrow: 0 + ½ [-6 + 8] = 1

Akerlof (1991), O’Donoghue and Rabin (1999)

Joining a Gym

Cost of membership: $75 per month

Number of visits: 4

Cost per visit: $19

Cost of “pay per visit”: $10

Della Vigna and Malmendier (2006)

Saving intentions vs. saving behavior

Out of every 100 surveyed employees

68 self-report saving too little 24 plan to

raise savings rate in next 2 months

3 actually follow throughChoi, Laibson, Madrian, Metrick (2002)

If you recognize your own self-control problems…

You’ll be willing to tie your own hands Force tomorrow’s self to do what today’s self isn’t

willing to do– Personal trainer– Exercise class– Exercise partner

29

How to design a commitment contract

Participants divide $$$ between:

Freedom account (22% interest)

Goal account (22% interest) –withdrawal restriction

Beshears, Choi, Harris, Madrian, Laibson, Sakong (2014)

Initial investment in goal account

FreedomAccount

FreedomAccount

FreedomAccount

Goal Account10% penalty

Goal account20% penalty

Goal accountNo withdrawal

35% 65%

43% 57%

56% 44%

Summary

People have trouble saving because of present bias and other psychological barriers.

We can get 90% of people to “voluntarily” save using auto-enrollment and other nudges.

But half of this money leaks out of the system before retirement.

It’s not yet clear whether nudges are enough.

One more depressing fact: financial education barely moves the needle (even when it’s offered in real time).

32

Moderated by:

Rob CarrickPersonal Finance ColumnistThe Globe and Mail

33

In conversation with David Laibson


David DodgeSenior Advisor, Bennett Jones

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"Guaranteeing" retirement income for Canadians


Presentation by David Dodge at the PPF Summit on Pension Reform

Toronto, October 9, 2014

"Guaranteeing" retirement income for Canadians

36

• Adequacy of future retirement income is made very problematic by longer life expectancy, population aging, and possibly permanently lower real returns on pension assets

• Increased savings and better returns through new pension arrangements and delayed retirement would improve retirement income adequacy

Retirement income issue

37

• Review of demographic trends over the next decades

• Macroeconomic case for more saving and investment

• General implications of demographics for pension arrangements

• Sharing of risks and responsibility for saving between workers, employers and governments

Outline

38

• Two key features of demographics with implications for pensions in Canada: – longer individual life expectancy – aging of population as a whole

• Life expectancy at 65 will continue to rise although by how much is uncertain. Current projections call for slower gains in life expectancies than in the past half-century (Graph 1).

Demographics to create stress on pension systems

39

Source: Office of the Chief Actuary, Mortality Projections for Social Security Programs in Canada, April 2014.

Graph 1: Male and female life expectancies at age 65 in Canada

40

• Longer life has at least 2 implications:

• Risk of lengthening of retirement life relative to working life and/or later retirement. In 2014, retirement age would have to be about 74 years for male labour force participants and 71 years for female participants in order for them to have the same retirement life expectancies as the 65 years of age had in 1966 when the CPP was launched. This compares with an average retirement age of 63 years in 2013

• Escalating spending for the fragile elderly. Such spending per capita rises dramatically with age. Persons 80+ years of age will increase steadily relative to persons 15-64 of age (see Graph 2) and, from the mid-2020s onwards, they will also increase relative to persons 65-79

Two implications of longer life expectancy

41

• Source: Statistics Canada

Graph 2: The population of old-age persons will increase steadily relative to the working-age population

20132014

20152016

20172018

20192020

20212022

20232024

20252026

20272028

20292030

20312032

20332034

20350.04

0.05

0.06

0.07

0.08

0.09

0.1

0.11

0.12

0.13

Projected ratio of persons 80+ years of age to persons 15-64 years of age, Canada

42

• Canadian population of 65+ years of age to rise to 24% of total population by 2035 from 15% in 2013 as exceptionally large baby-boom cohorts get older

• Because of the much faster growth in the population of seniors (65+ years of age) than the working-age population (15-64 years of age), the number of working age persons for each senior person will fall from 4.5 in 2013 to 2.3 by the late 2050s (see Graph 3). This compares with a peak of 7.8 around 1970. Much of the fall occurs over the next 20 years

Population aging as baby-boom cohorts get older

43• Source: Statistics Canada, Canadian Demographics at a Glance, June 2014.

Graph 3: Ratio of working-age persons to seniors cut by half to 2.3 over the next half century

1961196619711976198119861991199620012006201120162021202620312036204120462051205620610

1

2

3

4

5

6

7

8

9

0

1

2

3

4

5

6

7

8

9

Number of persons 15-64 of age for each person 65+ of age, Canada, 1961 to 2061

Low-growth scenario High-growth scenario Medium-growth scenario

ProjectedObserved

ratio

44

• Exceptionally large baby-boom cohorts, population aging and continued rise in life longevity will lead to much slower growth in the labour force than in the population of 65+ years of age.

• As a result, the ratio of labour force participants to retirees will fall by around 40% from 4.3 in 2013 to around 2.7 in 2031. This cut will occur under a wide range of scenarios about future labour force participation rates. See Graph 4

Projected steady decline in the ratio of labour force to retired elderly population

45

• Source: Statistics Canada, Canadian Demographic at a Glance, June 2014.

Graph 4: Projected steady shrinkage of labour force relative to retired population in the next several decades

19811983

19851987

19891991

19931995

19971999

20012003

20052007

20092011

20132015

20172019

20212023

20252027

20292031

0

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7

Ratio of labour force participants to retirees under two scenarios, Canada

Constant participation rates (2008) High-growth scenario

Observed Projected

ratio

46

• Demographics and, possibly, protracted modest returns on pension assets greatly darken the prospects for adequate retirement income in the decades to come at current saving rates and retirement ages.

• Fundamental challenge is how to provide for adequate retirement income for the future population of elderly people without imposing undue burden of taxation on the working population and the business sector

• The solution to generate more retirement income in the future is to start now saving and investing more, and doing so more efficiently

• Higher household saving rate would underpin higher retirement income directly through larger accumulated household wealth while higher investment rate in physical and other forms of capital would underpin it indirectly by boosting growth in productivity, real income and government revenues

The macroeconomic case for more saving and investment

47

• Since 1997, household saving rate has averaged 3.5% (Graph 5). In the last decade or so, households have elected to invest massively in housing, financed by borrowing, rather than in financial assets for retirement. Low interest rates provided a strong incentive for household current consumption and disincentive for saving.

The need for more household saving and delayed retirement

48

Graph 5

• Source: Statistics Canada.

Modest household saving rate since 1997

19811983

19851987

19891991

19931995

19971999

20012003

20052007

20092011

20130.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00

Household net saving and non-financial in-vestment as % of disposable income

Net saving Non-financial capital acquisition

49

• To increase household saving for retirement requires:– Higher household saving rate in the working population– Delaying retirement

• Delaying retirement would significantly improve the adequacy of retirement income by shortening the retirement period and permitting a larger accumulation of pension assets

• Average retirement age in Canada has steadily increased from 61.4 years in 2008 to 63 years in 2013 and is expected to rise much further

• Even with increased age of retirement, a higher retirement saving rate will be required, especially if real interest rates remain low

The need for more household saving and delayed retirement

50

• An increase in the household saving rate will have a small negative effect on aggregate demand in the very short run, an effect which will automatically be offset in part through the exchange rate and fiscal stabilizers and which should be offset by an easier monetary policy and/or increase in public sector or agency borrowing to finance infrastructure investment.

• In the longer run, higher household saving will enhance growth of real income and support more adequate retirement income

Small negative effects of higher saving rate in very short run but net benefits in the longer run

51

• For most employers with DB plans, demographics imply that the number of retirees will rise relative to the number of contributors and probably exceed it in many cases. This will require major adjustments to contributions and/or benefits and/or minimum retirement age in order to sustain solvency

• Given current accounting, tax and regulatory rules, there is a huge incentive to close DB plans

General implications of demographics for pension arrangements

52

• For participants in other pension arrangements (DC plans, RRSPs…) to achieve adequate retirement income in the face of longer life expectancy and relatively modest returns on pension assets will require:1. postponing retirement by several years, 2. increasing their saving rate, and 3. participating in new pension arrangements that would

provide higher real returns on contributions (or at least lower MERs) and some pooling of longevity risk


53

• Demographics will put public finances under increasing stress. Government spending on income support programs (OAS and GIS) and old-age care (including both home care and health care) is set to increase substantially under current arrangements. New fiscal arrangements, including tax and transfer provisions that provide better incentives for persons to work longer and to save more for their retirement, are clearly warranted.

• To alleviate increasing pressures on the current programs of pay-as-you-go transfers to the elderly financed by taxation (OAS, GIS, medicare, social assistance), governments may need to "force" lower-income households to save more before retirement through mandatory participation in public (CPP) or private pension arrangements


54

Issue:– What are the most efficient ways to share responsibility for

meeting goals with respect to retirement income adequacy and plan sustainability between workers, employers and governments, given inherent uncertainties with respect to life expectancy and market returns?

– The burden of coping with deficiencies would ultimately fall on governments, and then would get shifted to the general population, and in particular the working population, in the form of higher taxes and lower program spending

Key issue: risk sharing and responsibility sharing between workers, employers and governments

Moderated by Paul Ledwell, Executive Vice President, Canada’s Public Policy Forum

Tom Reid, Senior Vice-President, Group Retirement Services (GRS), Sun Life Financial Canada

Robert Brown, Retired Professor, Department of Statistics and Actuarial Science, University of Waterloo

Driving equilibrium:Workplace pension plans


Moderated by Barbara Shecter, Senior Business Writer, Financial Post

CONVERTING PUBLIC SECTOR DB TO DC:The Experience So Far and Implications

Robert L. Brown, PhDFCIA, FSA, ACAS

AndCraig McInnes

Summary of Findings

• % of labour force covered by DB plans dropped from 39% in 1986 to 29% in 2010

• Most of the drop in the Private Sector• Only 12% of Private Sector have DB Plans• 12% have DC Plans• 76% have Nothing• 81% of Public Sector have DB (most with COLAs)• Creates Pension Envy

Summary of findings• DC Plans are more expensive for the same level of

benefits as DB plans• Main cause is level of net investment returns• But also high admin costs in DC• And ability of DB plans to pool longevity risk• Switch to DC would mean higher contributions from

employers (taxpayers) and employees

Convert Public Sector DB to DC: Hope is Win Win

• Hope is to lower costs and run down existing liabilities

• In Private Sector, Only Stakeholder is Shareholders• Goal is Profit• Focus is Short Term• Impact on the rest of Society is not of concern

Convert Public Sector DB to DC: A Lose Lose

• Legacy Liabilities go up, not down • Because investments move to shorter-term, more

liquid assets that earn lower returns• Legacy Liabilities will be around for 70 or more

years even with a “Hard Freeze”

Freeze Existing DB Plan

• For the model $10 B Public Sector DB Plan, costs to government would rise 38%

• Could be met with a one-time payment into the plans of $3.29B


• History of Conversions bears evidence:--Alaska--Michigan--Nebraska--West Virginia--Saskatchewan


• Other Jurisdictions have carefully studied the implications of DB to DC and rejected the idea:– Minnesota– Nevada– New York City– Texas– Wisconsin

DB Model An Effective and Efficient Mechanism

• Consider a DB Plan with 50/50 Cost and Risk Sharing (Common)

--75.0% of Benefits funded by Investment Income--12.5% by Employer contributions--12.5% from Employee contributions


• Consider an Individual Account DC Plan(Common because of CRA Rules)

--55.0% of Benefits funded by Investment Income--22.5% by Employer contributions--22.5% by Employee contributions


• Large “Pooled” DC Plans could mitigate partly but are virtually non-existent in Canada


• A DB Plan will Produce Significantly (up to 77%) more income than a DC Plan with Equal Contributions

• In Reality, only way to Lower Costs through DC is through Lower Benefits

DB Plans Provide Dependable And Adequate Retirement Income by Pooling Risk

• A DC Plan transfers significant risks to worker who is not equipped to manage that risk– Investment Risk– Longevity Risk– Expense Risk– Interest Rate Risk– Inflation Risk

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

-15%

0%

15%

30%

45%

60%

75%

90%

Replacement rate obtained from personal account savings of workers who invest in alternative portfo-

lios

100% stocks 50% stock / 50% bond 100% bonds

Source: Brookings Institution in Burtless (2009)

Investment Risk in DC• Financial Advice is Expensive• MERs easily 2 to 3% (200 to 300 bp)• Each Additional 100 bp over a 40-year period

reduces final assets by 1/5• No evidence that Active Management Out-performs

Passive Management• DC/CAP lost 20 to 30% of value in 2008/09 • Resulted in drop in replacement ratio of almost 10

percentage points

Longevity Risk• In a pooled DB Plan, you share Longevity Risk with

all members of the Plan, Active and Retired• In an Individual Plan, you must Account for your Life

Expectancy plus a Margin• Two Outcomes:

– Draw down income slowly and live poorly– Draw down income rapidly and run out

• Either way, need more liquid assets with• Lower rates of return and lower monthly income

Mitigation of Longevity Risk:Buy a Life Annuity

• With low “i” life annuities are expensive• Life annuity price assumes 5-star life expectancy

--Must cover Anti-Selection • Hard to get true inflation protection• Insurer in business to make a profit• So, now face interest rate risk and expense risk

DB Plans Provide Dependable and Adequate Retirement Income

• Retirees with Inadequate Income will fall back on Welfare Transfers (e.g., GIS and Provincial Plans)

• Also has Impact on Cost of OAS (Clawback)• Government Responsible for Protecting Future

Taxpayers from Workers not Saving Enough for Adequate Retirement Income

• Concerns are not Solely Net Profit • Focus is Rightly Longer Term

Public Policy Needs to Have Long-Term Focus

• Do the Research• Understand Longer-Term Impact of Conversion• Lots of Real-World Case Studies to Learn From

One Case Study

• 2011 Texas Study showed that if DB Plan Replaced with DC and Self-Directed Investments:--Only 8% of plan members would do better--92% would do worse--2/3rds would do significantly worse (less than 60% of Current Benefit)

Second Case Study

• New York City Study showed that it would be 57-61% more expensive to deliver the same benefits under a DC plan than under DB

DB Plans Create Patient Capital • Public Sector DB Plans in Canada manage $900B• 35% of this invested in Alternative Classes (Private

Equity, Infrastructure, Real Estate)• Extremely Well Managed Funds• Low Expense Ratios• Low Liquidity Requirements• Contributes to Financial Stability (Patient Capital)• Employ 10,000 professionals• Help to improve Corporate Governance

Human Resource Impacts

• Good Pension Plan can Attract Talent• Can incent Early and Later Retirement as Needed• Gives Employees True Retirement Income Security• DC Plans Create Perverse Labour Force Incentives

– When Economy Hot, Workers Can Afford to Retire– When Economy Cold, Workers Stay at Work

In Conclusion

• “If you look at the DC plans that are out there now, they are likely to produce less benefit per dollar contributed than you would get out of a DB plan, and in that sense they are less efficient … they are small, offer less investment choices, and you have the wrong people making the investment decisions.”

Canadian Pension expert Bob Baldwin


Tom Reid, Senior Vice-President, Group Retirement Services (GRS), Sun Life Financial Canada

Robert Brown, Retired Professor, Department of Statistics and Actuarial Science, University of Waterloo

Driving equilibrium:Workplace pension plans


Moderated by Barbara Shecter, Senior Business Writer, Financial Post

Fred Vettese, Chief Actuary, Morneau Shepell

Bernard Morency, Premier vice-président, Déposants, stratégie et chef des Opérations, Caisse de dépôt et placement du Québec

Fabrice Morin, Principal, McKinsey Canada

Creating equilibrium:At-risk groups


Moderated by Janet Ecker, President & CEO, Toronto Financial Services Alliance


Hassan Yussuff, President, Canadian Labour Congress

Malcolm Hamilton, Senior Fellow, C.D. Howe Institute

Moving to Action: Defining a Long-Term Approach


Moderated by David Mitchell, President & CEO, Canada’s Public Policy Forum

Carol W. Geremia, President, MFS Institutional Advisors and Co-Head, Global Distribution, MFS Investment Management

Paul Moist, National President, Canadian Union of Public Employees

Mark Prefontaine, Assistant Deputy Minister, Financial Sector Regulation and Policy (FSRP) Division, Alberta Treasury Board and Finance

Finding solutions:Sustainability in the public sector



Canada’s Public Policy Forum

Identifying the Solutions:

Defined Benefit Plan Sustainability in the

Public Sector

Paul Moist, National PresidentCanadian Union of Public EmployeesOctober 9, 2014 │ Toronto, Ontario

Big Picture

•Canada’s #1 pension issue is the lack of workplace coverage.

•Half of middle class baby boomers looking at steep drop in living standards when they retire (Wolfson) and problem projected to get worse with each successive generation (CIBC).

•Combined employee/employer contributions to all mandatory social security programs of 20 advancedEconomies; Canada ranks 2nd last.

(source: World Bank 2010)

• Need to be careful with this term.

• Employer and employee definitions of “sustainability” differ.

• Sustainability can’t be a goal on its own.

• Benefit security and adequacy also have to be key goals.

“Sustainability”

“Sustainability”• CUPE rejects notion that DB plans no longer work.

• DB the best way to meet real set of pension goals:

1) secure, adequate, predictable benefits

2) sustainability

• We recognize demographic trends and have been making changes to plans.

• Plan funding improving.

“Sustainability” │CUPE’s View

DB the Real “Shared Risk”• JSPPs, conditional plan elements (indexing) share risk

automatically.

• Beyond this, CUPE has strong record of working with employers facing funding challenges to find reasonable deals.

• Employer pension costs often downloaded to members during wage bargaining.

DB the Real “Shared Risk”

Selling “Shared Risk”Selling “Shared Risk”

• Media and governments largely repeat message that these plans share risk between workers and employers.

• Employers face virtually no real risk in “Shared Risk” – only risk shared is between active and retired members.

http://www.google.ca/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&docid=EdtdouwekN4xuM&tbnid=KBm2krroEFk1OM:&ved=0CAcQjRw&url=http://www.tibco.com/blog/2013/11/07/encouraging-a-risk-taking-culture-with-data-discovery/&ei=xOcyVKjFJpCYyATK-IKAAw&psig=AFQjCNGJROTZfSA9HReAz0Yd2Qrxr0T28w&ust=1412708651665385

NB Gov’t to PSSA Plan Members:

• “My pension is protected better than ever before.”

• “Your pension will be more secure under an SRP.”

• “Members can have confidence that their base benefits are protected better than before and that their benefits will be protected against inflation.”

92

NB Auditor General Report, 2013 v 1 ch 3

NB Gov’t to Auditor General:

• Is this double-speak politically sustainable?

• If plans require big cuts to benefits of actives and retirees (and all employers have to do is pay a tiny bit more), plan members will be angrily asking:

I thought we shared risk with our employer?

Selling “Shared Risk”

• “Shared Risk” plans and others (QC, PEI) allow past promises to be re-opened.

• Unprecedented outside of insolvency: are we now treating all plans as though they are bankrupt?

• Governments continue to make good on debt obligations to other creditors like bondholders

• Aren’t we a country where a deal is a deal?

Broken Promises

Another Story on DB

• Not “gold plated”

• Largely paid by investment returns, remainder of reasonable cost shared between workers and employers

• Macro-economic effects: positive job, GDP relationships

• Lowered demand on social and income support programs

• Source of macroeconomic strength and “sustainability”

Carol W. Geremia, President, MFS Institutional Advisors and Co-Head, Global Distribution, MFS Investment Management

Paul Moist, National President, Canadian Union of Public Employees

Mark Prefontaine, Assistant Deputy Minister, Financial Sector Regulation and Policy (FSRP) Division, Alberta Treasury Board and Finance

Finding solutions:Sustainability in the public sector




Peter Neilson, Chief Executive, Investment Savings and Insurance Association of New Zealand; Former Cabinet Minister, Government of New Zealand

Will Sandbrook, Director of Strategy, Research and Analysis, NEST (United Kingdom)

Keith Ambachtsheer, President & Founder, KPA Advisory Services Ltd. And Director Emeritus, Rotman International Centre for Pension Management

Finding solutions:Enhanced individual savings


Moderated by Dana Flavelle, Business Writer, Toronto Star

0

20

40

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120

-10 0 10 20 30 40 50 60 70 80 90 100 110

Net

rep

lace

men

t rat

e fo

r av

erag

e in

com

e w

ork

er

Percentage of retirement incomes from earnings related (tier 2) schemes

Net replacement rate for average income earner Source: OECD 2011

public schemes

private tier 2 scheme

public& private tier 2 scheme

Dot size proportional to replacement rates for people on 1.5 times average income

AUNZ

IRE

AUT SLVSPN

POR

CAN CHL

CZE

DEN

EST

BEL DEU FRA ITY NOR POL SVK SWE SWZ

GREHUNICE

ISR

JAPKOR

LUX

MEX

NTH

TUR

UK

US

New Zealand, Ireland and the UK: The OutliersAmongst OECD countries only New Zealand Ireland and the UK combine low net replacement rates compared to average incomes and rely on a Tier 1 basic old age pension with Tier 3 private savings for a minority of employees.

Basic problem Examples OutcomeSelf Control People find it difficult to

implement decisions to save. People are tempted to spend when they want to save.People procrastinate even when they know what needs to be done.

Insufficient saving.

Regret Attitudes to losses depend on whether a person was responsible for a decision.

People blame themselves for bad outcomes.People avoid risk when managing their own money.

Poor investment choice.

Loss Aversion Attitudes to risk depend on how investments are framed.

People avoid risk if framed as a loss to current consumption standards.People create special accounts with different reference points to manage money.

Poor investment choice

Poor Judgment People have biased estimates of investment returns.

People over-rely on past history.People rely on anecdotes, not statistics.People are misled by irrelevant information

Incorrect calculation of required saving. Poor investment choice.

The behavioural economic revolution has changed how we view retirement savings issues which auto-enrolment is designed to overcome.

Biases that Distort our Savings and Investing Behaviour

Source: Andrew Coleman, MOTU Research

The Success of KiwiSaver continued…• At November 2013, 56.7% of all New Zealanders 18+ were enrolled.

Consisting of:• 57.4% of women 18+ and 56.2% of men 18+

• Prior to KiwiSaver only a minority were in Superannuation Schemes and they were disproportionally male, employed in either the public sector or the largest corporates and were from higher income households.

By Household Income<

$20,000$20,001

to $30,000

$30,001 to

$50,000

$50,001 to

$70,000

$70,001 to

$100,000

$100,001 to

$150,000

$150,001 to

$200,000

> $200,000

Don’t know/Prefer not to

say

34.9% 53.9% 50.7% 63.4% 66.1% 56.8% 69.8% 64.7% 60.4%

Peter Neilson, Chief Executive, Investment Savings and Insurance Association of New Zealand; Former Cabinet Minister, Government of New Zealand

Will Sandbrook, Director of Strategy, Research and Analysis, NEST (United Kingdom)

Keith Ambachtsheer, President & Founder, KPA Advisory Services Ltd. And Director Emeritus, Rotman International Centre for Pension Management

Finding solutions:Enhanced individual savings


Moderated by Dana Flavelle, Business Writer, Toronto Star

Paul LedwellExecutive Vice PresidentCanada’s Public Policy Forum

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Concluding Remarks



Documents

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