October 22, 2013
TORONTO – Canadian retirees with defined benefit (DB) pensions are far less likely than other retirees to collect the government's Guaranteed Income Supplement (GIS), shows a study on the economic impact of DB pension plans.
The study, conducted by the Boston Consulting Group (BCG), confirms that an estimated 10 to 15% of DB beneficiaries collect the GIS, compared with 45-50% of other Canadian retirees. DB pensions reduce the annual pay out of GIS, a supplementary government benefit provided to low-income seniors, by approximately $2-3 billion a year. The study also finds that defined benefit recipients contribute $14 - $16 billion annually to government coffers across Canada through income, sales and property taxes.
The study was commissioned by a group of Canada's leading DB pension plans: Healthcare of Ontario Pension Plan (HOOPP), Ontario Municipal Employees Retirement System (OMERS), OPSEU Pension Trust (OPTrust) and Ontario Teachers' Pension Plan (OTPP).
DB pension plans are retirement vehicles under which the plan sponsor, typically a large employer, commits to a specified, predictable monthly benefit on retirement based on the employee's earnings, years of service and age. Both the member and the employer contribute, with the vast majority of pensions paid coming from investment returns on these contributions. An analysis by the four plans that commissioned the study found that as much as 80 cents of every pension dollar comes from investment returns – a testament to the sound funding and "best in class" investing of the pension funds.
Conclusions of the BCG analysis included:
- In the years analysed (2011 and 2012), DB beneficiaries spent $56-63 billion annually on durable and consumable goods;
- DB pension beneficiaries paid taxes estimated at $14-16 billion annually: about $7-9 billion in income tax, $4 billion in sales tax and $3 billion in property tax;
- DB pension benefits had the greatest impact on small towns, with DB pensions forming on average 9% of the total earnings in those communities versus 6% for large metropolitan areas;
- The impact of DB pensions was especially strong in Ontario, translating into $27 billion in expenditures on consumables and durables, shelter, recreation, and services; and generating $6 billion in taxes.
"The two most significant advantages DB plans offer members are pooling longevity risk and pooling asset risk. A DB plan allows members to save at a collective rate consistent with the average life expectancy or distribution within the group. Similarly with asset risk, DB plans can typically maintain an asset mix reflective of the group rather than any one individual. Both advantages provide stability for members, allowing for a consistent standard of living throughout their lives," said Michael Block, BCG Principal and project lead.
A separate analysis by BCG released in June found that Canada's ten largest public pension funds – which include the defined benefits plans in this new analysis - provide Canadians with one of the strongest retirement income systems in the world and also contribute significantly to national prosperity.
Among the key findings of the June study:
- In 2011, these pension plans collected more than $70 billion in contributions and in that same year, paid out $74 billion in retirement benefits to Canadians, or 49% of all non-OAS retirement benefits, and invested approximately 35 per cent – or $714 billion – of Canada's total retirement assets
- The Top Ten pension funds have invested roughly $400 billion in Canada, including $100 billion in real estate, infrastructure and private equity;
- They comprise four of the top 20 global commercial real estate investors and four of the top 20 global investors in infrastructure assets;
- They directly employ 5,000 professionals in the Canadian financial sector and an additional 5,000 employees in their real estate subsidiaries.
Bill Hatanaka, President and CEO, OPTrust said: "DB retirees can count on greater certainty in retirement with a stable monthly income based on the number of years they contributed to their plan, so they are more comfortable in spending what they receive, helping fuel the Canadian economy. Not only do they pay up to $63 billion annually for goods, services, and related sales and property taxes, they pay an additional $7-9 billion in income taxes every year."
Jim Keohane, President and CEO, HOOPP, said: "Most people aren't aware that up to 80 per cent of the funds used to pay defined benefit pensions come from returns on plan investments. Canadians should look at how we can replicate this success story for those without adequate, or in many cases any, workplace pensions."
Jim Leech, President and CEO, Ontario Teaches' Pension Plan said: "DB retirees are far less likely to rely on government social assistance in retirement, freeing up funds for other government programs or priorities. Their financial independence is a direct result of the pensions made possible by the asset management expertise in our DB pension plans."
Michael Nobrega, President and CEO, OMERS, said: "We need to change the conversation. We must not allow "pension envy" to define the debate on the reform of our pension system. Let's work together to fix what's really broken – the lack of adequate retirement savings among the majority of Canadians."
About the analysis
The analysis was conducted by the Boston Consulting Group and commissioned by a group of Canada's leading DB pension plans, including Ontario Municipal Employees Retirement System (OMERS), Ontario Teachers' Pension Plan (OTPP), Healthcare of Ontario Pension Plan (HOOPP) and OPSEU Pension Trust (OPTrust).
Disclaimer: Information in this document is sourced from a Study conducted by The Boston Consulting Group (BCG) and commissioned by Healthcare of Ontario Pension Plan (HOOPP), Ontario Municipal Employees Retirement System (OMERS), OPSEU Pension Trust (OPTrust) and Ontario Teachers' Pension Plan (OTPP). The materials excerpted by commissioners from the Study referenced are provided for discussion purposes only and may not be relied on as a stand-alone document. Additional analysis has been done to the data and analysis contained within the Study by third parties other than BCG. BCG has not independently verified this additional analysis and assumes no responsibility or liability for it.
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