Securing Our Future: How Canada's Retirement System Can
Be a Role Model
Group Head, RBC Wealth Management and Insurance
Royal Bank of Canada
Economic Club of Canada
October 18, 2012
I want to begin my remarks by talking about something different
than finances. I'd like to talk about hurricanes.
It can be argued that meteorologists and bankers have a lot
We both face storms. We both know the importance of being
prepared. And we both operate in environments with a significant
number of knowns, known unknowns, and that really challenging
category, of unknown unknowns.
And, from the very beginning meteorologists have struggled
to really understand storms. How do they start? Why do they
choose one path instead of another? And why does one storm
fade away while another one gathers force to become a destructive
For bankers it is much the same because in some ways trying
to understand the economy is like trying to predict the weather.
Both challenges are enormously complex. Daily outcomes are
impacted by variables from around the world. And while we
know a lot about the science of each, unexpected events can
tip matters beyond our control or even our immediate understanding.
A big storm can escalate into a hurricane through sudden
shifts in wind and pressure just as an economy can tumble
into recession when a bubble bursts because of financial vulnerability.
That is why it's important that meteorologists and bankers
understand the importance of managing risks during periods
of calm when the weather is clear and the economy is sound,
so we turn financial firewalls into seawalls to meet challenges
before the worst arrives if unavoidable, or avoid the path
of the storm all together.
Now Canada's economy is in a strong position. We were better
prepared for and have recovered well from the global recession
of 2008/2009. We are in many ways the envy of the world -
certainly right now by our peers in Europe and the United
Canada was better prepared for the downturn and as a result
we had a better recovery.
Canada managed the financial storm of 2008 better than others
because we anticipated risks and acted proactively with public
policy foresight, responsible oversight of our financial industry,
and better decisions and performance by financial service
providers and our clients than was the case in other countries.
So we have much to be proud of but we cannot rest on our
laurels because a new, longer-term global storm is gathering
in the shape of under funded retirement obligations around
for millions of people in the developed world.
Again, Canada is in a much better position on this issue
than many other countries. We have a relatively robust savings
and pension regime. We have been ahead of the curve on retirement
planning for nearly two decades. And we have identified and
filled many gaps in our retirement system.
But our work is not done and we need to act to shore up our
defenses and complete this project before this new storm fully
Now, I have used the storm analogy to describe the challenge
in front of us because it really illustrates clearly the risks
of complacency and what we must be do today to secure a sound
financial tomorrow for all Canadians.
No one knows exactly what happens in the cradle of a hurricane
but we do know that often the smallest of factors can act
as a catalyst to a storm that builds in intensity as it crosses
the Atlantic and crashes ashore in North America.
We cannot control every aspect of our environment, but we
do know that managing known risks - managing known risks -
is the best way to prevent poor outcomes.
Consider the destruction of the City of Galveston, Texas
back on September 8, 1900. Galveston - for those of you who
are students of history - was the jewel of the Texas coast
and a potential gateway city for the southern United States
to the world. The city was on an island surrounded by the
Gulf of Mexico. It was dynamic. It was beautiful.
The City had plans to build a protective seawall around the
island but deferred them in the belief that what had always
been, would always be. But all that changed one morning when
the winds gathered force, the tides rose and a huge storm
swept the city and its spectacular future into the sea.
So, a risk management plan that ignored an emerging threat
led to the destruction of Galveston's economic power. A similar
risk is at large today in a world where many countries are
unprepared to meet their demographics future in the form of
the retirement needs of an aging population.
The current shift of the Baby Boomer bulge from work to retirement
presents a huge challenge to the world's policy markers and
the world needs to build its own financial seawall - a retirement
seawall -- to manage this issue.
It's been a century since Galveston had its reckoning with
fate but all of us here are keenly aware what a financial
storm can do and the long road to recovery after.
The world financial crisis triggered in 2008 demonstrated
clearly that reversals come suddenly and those left standing
will be those who were the best prepared. In Canada our prudent
approach to financial management protected us from the worst.
Canadian financial institutions came through the financial
storm extremely well.
There were no bailouts, no bank failures and we continued
to lend to Canadian businesses and consumers throughout the
crisis. We continued to manage clients' investment portfolios
and provide advice to focus on long-term returns and objectives,
rather than short-term fear.
As a result there was actually a relatively low rate of client
redemptions, especially relative to the tech bubble of 2000,
and importantly, clients participated in the subsequent increase
in the value of their investment portfolios by staying invested
as markets recovered.
In fact, over the past few years the stature of Canadian
banks has risen to a position of leadership in the Western
world. In 2012 the World Economic Forum recognized Canada's
financial services sector for the fifth year in a row as the
safest and soundest in the world.
The good news is our good fortune is not a matter of luck
but the result of good planning, strong oversight, solid well-managed
banks and wise decisions by our clients. As a result, our
economy is sound.
That's the good news.
The less good news is that when lightning struck during the
global financial storm
it illuminated a financial landscape that raised troubling
questions about our ability to weather the next storm that
is quickly emerging driven by demographics.
The silver lining in all this, however, is we know what needs
to be done.
Canada has a solid head start in building its own retirement
seawall to prepare for the coming surge in entitlements and
obligations. Our seawall is thick and has a solid foundation
but it is not quite high enough yet to meet our future needs
and that must be addressed now.
So what did we see when the lightning struck in 2008?
We saw that critical key indicators did not line up properly
to permit Canadians to treat retirement planning the same
way as their parents and their parents' parents did.
The days are gone when family breadwinners could expect to
work for one employer throughout their entire career, retire
on generous defined benefit pensions provided by that employer,
with the comfort of knowing that expenses in their golden
years would be securely funded by the deep pockets of government.
The new reality is a self-directed career with multiple employers,
personal responsibility to save adequately for retirement
and future living expenses in an extended retirement period
with less and less provided by government.
So the first critical key indicator we need to be aware of
is demographics. The Baby Boomer bulge that has defined so
many cultural and political milestones in our lives is now
about to really redefine retirement in a big way.
Look at the numbers.
Statistics Canada reports the number of people aged 65 and
older doubled between 1981 and 2009 and will double again
by 2036. The average 65 year old will live to age 84 and there
is a 40 per cent chance for married couples of that age that
one spouse will survive into their '90s.
In the next 10 years 4.4 million Canadians will graduate
into retirement, and 5.4 million more will retire in the decade
that follows. That means an average of 1,200 new retirees
for the next 20 years.
And furthermore, Canadians can expect to live 20 to 30 years
or more in retirement.
Sounds wonderful, but it should also be no surprise that
many Canadians believe living longer is their No. 1 financial
risk. They know they are not saving enough to retire at 65
and there is a real risk that many will outlive their savings.
But more concerning, and the principal target really for any
enhanced retirement system, is the relatively lower savings
rate and use of existing retirement vehicles by young and
RBC's Canadian Consumer Outlook Index found in 2012 that
37 per cent of Canadians are worried they won't have enough
money saved to be financially secure in retirement. The solution
for many will be to keep working, so it is no surprise that
26 per cent of Canadians believe they will have to work past
normal retirement age to make enough money to live.
Our RBC RRSP poll in 2011 determined that only half -- about
51 per cent -- of Canadians believe they are on target or
ahead of where they need to be in terms of retirement savings.
And that is lower than the level before the economic downturn
in 2008 when almost two thirds -- 63 per cent -- felt secure
about their retirement savings.
Importantly the poll also found that Canadians aged 18-34
actually trail Baby Boomers in RRSP ownership and contribution
rates with only 43 per cent of young people holding RRSPs
compared to 69 per cent of older Canadians, so there is an
urgent need to encourage and empower younger Canadians to
Now Canada is not Galveston without a seawall to provide protection
from the storm.
We have a retirement seawall in place - but we need to enhance
it - by giving Canadians the tools they require to fill the
savings gap and build the wall higher.
The Canadian retirement seawall has four key layers of bricks
- or levels -- that make up the wall:
- First and foremost level One is the Old Age Security
program including the Guaranteed Income Supplement -- a
means tested program financed out of general tax revenues.
- Level Two is the Canada Pension Plan, or the QPP in Quebec,
a universal savings program with compulsory contributions
by workers and employers.
- Level Three is composed of workplace savings plans such
as defined benefit or defined contribution plans.
- And finally, level Four is private individual savings
through tax-assisted vehicles like RRSPs and Tax-Free Savings
Accounts and other non-registered savings such as personal
investments and inheritances.
The Old Age Security and CPP are the responsibility of government
and we are fortunate that the Canadian government has been
farsighted and proactive in addressing its role in building
our retirement seawall.
However, the first level of that wall -- Old Age Security
-- already represents the federal government's largest single
expenditure. In the coming years the cost of OAS will increase
from $36 billion dollars a year today to a peak of $142 billion
a year in 2036.
So the next 25 years will create considerable stress on OAS.
And the federal government is actively looking at solutions
to ease the pressure. There is work to be done to strengthen
Old Age Security, but that is ultimately already underway.
In 1997 the federal government raised CPP contribution rates
to meet the challenge of paying a pension when there are fewer
Canadians paying into the fund. It was a really forward thinking
decision at the time - one that other governments didn't follow
- as the number of Canadians receiving retirement benefits
from the government will more than double between 2003 and
Now, David Denison and his team of professional managers
at CPP have done a great job building and managing the fund
and we have every confidence that distinguished track record
will continue under the new leadership of Mark Wiseman.
The CPP is solid and sound, but layering additional responsibilities
on what is already a large load on the retirement seawall
is not the right answer.
Contrast Canada with the United States where needed changes
to Social Security and other entitlement programs are held
hostage to ongoing political gridlock. Our country - with
respect to other government programs - looks like an oasis
of responsible and enlightened policy.
Canada is in better shape but government pensions are only
part of the picture.
The third and fourth levels of our retirement seawall need
Pressure is building in the private sector over the sustainability
of traditional workplace pension plans.
Interestingly, a recent study by the Canadian Institute of
Actuaries estimates that 11 million Canadians have no access
to a workplace pension plan. Furthermore, the percentage of
employees with workplace pension plans has actually declined
from 41 per cent to 34 per cent from 1991 to 2007.
In the latest figures from the Office of the Chief Actuary
the number of Canadians enrolled in a workplace pension plan
declined further from 34 per cent to 32 per cent by 2010.
In the case of private sector workers, the decline is even
more severe from just 28 per cent with an RPP in 2000 to 24
per cent in 2010.
It is critical we act now to stop this slide and rebuild
participation in workplace Registered Pension Plans, through
the introduction in all provinces of a Pooled Registered Pension
Plan or "PRPP". More on this later, but we need
to first reflect on the successes and challenges of the voluntary
individual retirement plan pillar to determine if the workplace
pillar is required.
The introduction of RRSPs in 1957 - yes, 1957 - was the first
big step in providing Canadians with investment tools to prepare
for their retirement and our current situation would be so
much the worse without them.
RRSPs are a wonderful tool but they are voluntary in nature
and require people to take positive action to save for retirement.
Now the program is a success, driven in part, by the provision
of financial advice by the private sector that has encouraged
savings and broadened access to long-term investment solutions.
Many Canadians - I mentioned 69 per cent of older Canadians
- have effectively used RRSPs to save and invest for their
retirement, and then effectively used the companion vehicle
of a Retirement Income Fund or "RIF" to fund their
But RRSPs alone, in our view, are not the solution, principally
because they are underutilized and their utilization is declining.
Again, latest figures from the Office of the Chief Actuary
show that the number of Canadians who contributed to their
RRSP has decreased from 29 per cent in 2000 to 24 per cent
That is why we support the initiative of the federal government
to develop a new pension reform and retirement savings instrument
called Pooled Registered Pension Plans or PRPPs. Bill C-25
which was created especially to help middle income Canadians
save for retirement received Royal Assent and will soon be
enacted into law.
We believe PRPPs are an essential new tool that can help
employers and individuals partner together to meet retirement
goals and we applaud the federal government for its leadership
on this issue.
PRPPs are designed to help Canadians who do not have access
to an existing workplace pension plan save for their retirement.
They allow employees (and employers if they choose) to contribute
to a pooled pension fund administered by a private sector
financial institution. It is an important evolution of RRSPs
and RPPs and a very welcome new layer needed to strengthen
and raise the third and fourth levels of the retirement seawall.
A Pooled Registered Pension Plan is designed to provide a
workplace savings vehicle with contributions flowing automatically
into a locked-in RRSP.
With PRPPs, employees may be automatically enrolled in the
savings plan and assigned a default contribution rate by the
financial institution administering the plan. The advantage
of PRPPs over RRSPs is the investment is automatically taken
off the top before an employee receives their pay. The asset
mix will evolve over time in agreement with the employee based
on a limited number of low-cost portfolio investment solutions,
and contributions are locked in until retirement.
Now employees will have the ability to "opt-out"
but studies show that once an individual is enrolled in a
program and forms that savings habit, they make adjustments
in their lifestyle and stick with the plan.
The bottom line is any new tool that helps Canadians build
their retirement nest eggs through convenient and systematic
savings through payroll deductions can have a powerful impact
on the eventual levels of retirement income and importantly,
the overall strength and stability of our economy and society
The decision to save for retirement needs to be simplified
by providing workplace plans that are portable, low cost,
easy to manage and most importantly make saving the favoured
option the easy option unless an individual chooses clearly
not to save.
And PRPPs deliver on this strategic imperative.
The presence of PRPPs in the workplace imply that saving
is good, that we have a shared commitment to each other to
encourage saving and a personal responsibility to contribute
to a secure future for our families and ourselves.
There are two opportunities implicit in the federal strategy
for PRPPs, one for us as financial institutions and one for
us as business owners:
- The government is looking to financial institutions to
create a low-cost investment vehicle and leverage our relationships
with business owners to inform, market and provide this
- Business owners can participate in a PRPP and then choose
a financial partner to provide it.
Importantly, the operating environment envisioned by Bill
C-25 makes it clear employers have few obligations under the
PRPP program and the administrative and fiduciary obligations
will be borne by the plan administrators - financial institutions
that have the experience in managing these risks and delivering
world-class investment solutions. So PRPPs offer an easy and
effective way for employers to enable employees to provide
for their retirement.
But three key factors need to be in place for PRPPs to be
- Regulations need to impose few costs;
- The legislation and regulatory regime needs to be harmonized
across all the provinces;
- And, employers and employees need to get behind this program.
The federal government is clearly headed down this path with
the introduction of Bill C-25 and actually, the Quebec government
had joined the road forward with the creation of new VRSPs
- another acronym that simply means Voluntary Registered Savings
Plans - similar to the PRPP model. But the legislation died
when the recent election was called in that province. We do
not know at this point what the new Quebec government's intentions
are with the VRSP concept but we hope they will move forward
as it was on the leading edge of efforts in this regard. Importantly,
the VRSP included a provision for automatic enrolment and
portability, two key features that are important to enable
a low-cost investment solution.
But the big question is how many provinces will join in.
Ontario did not act on the opportunity to mandate PRPPs in
its 2012 budget and eight other provinces are yet to state
So as we get closer to decision time on the PRPP opportunity
we are seeing the emergence of a healthy debate about the
focus on PRPPs in the context of other options. RBC clearly
is supportive of the government's efforts to deliver a low-cost
investment solution to participants and for our part, a zero-cost
solution to employers under a PRPP. As Canada's largest private
sector asset manager and largest commercial banker, we are
conscious of our ability and responsibility to make this program
a policy and practical success for Canadian governments and
So there are four levels in our retirement seawall.
They are interconnected as essential building blocks for
the future security of Canadians. The Canada Pension Plan
is strong and the federal government is strengthening Old
Age Security. Workplace and individual savings plans are areas
for improvement. They must be addressed and we believe PRPPs
are the solution.
- PRPPs will provide Canada with a balanced, diversified
approach that does not put all of our retirement eggs into
the CPP and OAS basket;
- PRPPs make it easier for individuals to take control over
their financial futures at the place they work where defined
benefit plans may no longer be available;
- PRPPs can be effectively administered and marketed by
the world's leading financial industry - Canada's. So why
not leverage a well-performing, well-respected private sector
recognized around the world?
We hope the provinces support this important national priority
and pass legislation enabling PRPPs as another vehicle to
enhance retirement savings strategies across Canada.
The need to introduce these plans as an essential and immediate
step required to strengthen our retirement plans.
We are world leaders among nations in identifying issues
and solutions required to provide a sound and secure retirement
system for our citizens.
But we can and need to do more.
Now it's interesting that Canada's international "Brand"
has evolved over recent years to increasingly incorporate
the attributes of a strong financial services sector and responsible
forward thinking public policy.
Canada's image on the world stage has grown considerably
in recent years and our actions in specific aspects of economic
policy are considered by many non-Canadians to be a role model
for other nations.
We work together in the public, private and personal sectors
to solve problems.
Our heritage and our geography have by necessity made us
more collaborative as people. We are a large country with
a small population. We have always had to work hard to keep
it together, protect it from threats and keep it sound. Collaboration
is part of our character and an attribute in our international
The road forward to secure the Canadian retirement system
will require the same engagement by all three stakeholders
in this issue - public, private and personal - to embrace
new responsibilities to meet the challenge.
Governments need to remain farsighted in policy decisions,
the private sector needs to provide access to new investment
tools for employees and individual Canadians need to start
And Canadians want to do their part.
Earlier this year in our Consumer Outlook poll, we asked
Canadians "who is primarily responsible for ensuring
your financial security in retirement?" and the answer
was: we are. 59 per cent of Canadians said the responsibility
belonged to the individual with 19 per cent saying it was
government and 10 per cent saying it was their employer.
The fact is all three have a role to play and the immediate
opportunity for all of us is to get together as partners in
building our retirement seawall is the introduction and implementation
of PRPPs as the single most important addition and solution
to Canada's retirement savings shortfall.
Employers can lead by making their support clear.
A PRPP is far easier to manage and administer than a defined
benefit or defined contribution plan and can provide employers
with flexibility to determine if they would like to contribute
to their employees' plans as part of an overall compensation
package. That's simply enabling access to a portable, workplace
pension plan will be an important contribution by employers,
one that RBC is prepared to enable, in turn, at zero financial
cost to employers of all sizes.
Employers need to join together with the federal government
and the financial industry to encourage the provinces to act
by stepping up to the challenge and enacting enabling legislation
across the country.
We're fortunate to have a strong financial industry with
many credible players who are prepared and capable to work
with governments at the federal and provincial level to implement
a solid PRPP program across the country.
We have been a world leader in retirement planning. We have
always been one step ahead of the curve. It's time for each
of us - policy makers, providers and businesses - to do our
part to help Canadians keep it that way.
Thanks very much for your attention this morning.