Lessons for LWS

1. Pension Wealth in the Canadian Context: Lessons for LWSMichel Palardy and Catherine Van Rompaey Statistics Canada Luxembourg Wealth Study ConferenceBanca d’Italia, RomeJuly 5-7, 2007

2. Lessons for LWS • Harmonizing existing wealth survey data, to the extent possible, important first step • Next step is defining ideal wealth concept and moving towards harmonized measurement • International measures of pension wealth fraught with complexities and gaps • Effective measurement key to understanding distributional effects/responses as institutional structures evolve and the population ages • Critical to formulation of appropriate policy

3. Overview • The Canadian pension system and public policy • Pension wealth in Canada • Macro vs micro • Concepts, measurement • Impact of excluding pension wealth in Canada • Canada vis-à-vis the United States: an illustrative example

4. Canadian Pension System • “Three Pillars” • Government administered plans • Old age security/Guaranteed income supplement • Canada and Quebec Pension Plans • Employer-sponsored plans • Registered pension plans (defined benefit or defined contribution) • Group RRSPs (employer contributes to individual saving plan) • Other (Deferred profit sharing, retirement compensation arrangements) • Individual savings plans • Registered retirement savings plans (RRSPs, LIRAs, RRIFs)

5. Policy environment • Health of the defined-benefit pension system under intense scrutiny in Canada • Coverage ratios declining for employer-sponsored plans • Erosion of defined benefit system viewed as undesirable • Sponsors concerned about growing difficulty maintaining funds; actuarial deficits in wake of stock market crash • Provincial pension regulators flag “crisis” • Bank of Canada concerned, risks to financial system • Ontario Expert Commission on Pension Reform

6. Policy environment • Heightened demand for pension statistics • New regulatory data on actuarial liabilities (funded status) of pension plans and assumptions in valuation to come out this year • Pension satellite account in Canadian SNA

7. Macro measures: Pension Satellite Account in Canadian SNA • Pension wealth accounted for in the National Balance Sheet Account (as asset and liability) • New specialized “Pension Satellite Account” • Employer sponsored plans, government plans, individual saving plans • Wealth positions and associated flows • Critical to decomposing macro saving rates • SNA productive income concept includes accrued pension income, not benefits • Top priority of federal finance department • To be released experimentally this year, then implemented as a regular annual release

8. Pension Satellite Account in Canadian SNA

9. Micro measures on the Survey of Financial Security • Wealth surveys conducted irregularly by Statistics Canada • Long hiatus from 1984 Assets and Debts survey to 1999 SFS • Wealth value of employer-sponsored pension plans introduced subsequent to 1999 release • Extensive consultation, including federal policy departments and Canadian central bank • Methodology developed with assistance of an actuary • Part of featured net worth for 2005 SFS release

10. Pension wealth on the SFS • Pension assets • Do not include social security or government-administered plans • CPP/QPP considered in 2005 • Include employer-sponsored plans • Defined contribution and defined benefit (the largest share) • Include tax-deferred individual savings plans (RRSPs, RRIFs) • Large portion of financial assets held in this form

11. Pension wealth: SFS concepts and methodology • Present value of expected future benefits for employer pension plans • Valuation on a “termination” basis • “Going concern” valuation also produced (about 30% higher) • Some questions asked of respondent, not terms and conditions of plan • Calculation links to income tax data and Pension Plans in Canada database

12. Trends in pension coverage • Statistics Canada ’s Pension Plans in Canada Program • Regulatory information from provincial supervisory authorities • 15,336 Registered Pension Plans covering 5.7 million members as of 2005 • 39% of paid workers covered • Membership rising, but coverage rates declining, faster for men than for women • About 1/3 of families had no pension assets of any kind according to SFS 2005 • Majority had lower income from employment

13. Pension wealth Canadian pension assets by age group

14. Excluding pension wealth in Canada: considerations • LWS net worth only 42% of Canadian measure • Country rankings and portfolio composition • Employer pensions second largest asset : differential coverage across families • Financial assets held in individual retirement savings plans (RRSPs), designated as pension assets • Considering only “non-pension” financial assets is incomplete view of discretionary savings • 2005 SFS collected investment distribution of registered retirement savings plans; not available in 1999

15. Excluding pension wealth in Canada: considerations • Wealth concentration • Pension assets clearly have equalizing effect • Proportion of net worth held by highest decile higher • (58.2% vs 50.9%) • Gini coefficients higher and show different trends • (0.746 vs 0.688) • Trends in net worth for specific groups quite different • E.g., couples with children from 1999 to 2005 • 30.4% growth in median net worth including pension assets • 45.2% growth when pension assets excluded • Relevant to study net worth across age groups when savings for retirement excluded?

16. Canada vis-à-vis United States • Canada often compared to our neighbours to the South • Simple illustrative example to show coverage of different elements of pension system • Consider implications for interpretation of wealth measures, both nationally and cross-nationally • Could be expanded to look at other countries with different retirement income systems

17. Canada vis-à-vis United States retirement income system • Similar elements: “three pillars” • Have evolved in different directions at different rates • Unlike U.S., defined benefit system remains important in Canada, pension reform emphasizes its protection • Highlight elements missing in wealth surveys to study distributional effects • Pension reform debate lacks key insights

18. Pension wealth in national sources, Canada and US

19. Canada vis-à-vis United States Financial assets

20. Conclusions • Pension reform of heightened interest in Canada and elsewhere • Can only increase in importance as population ages • A cross-national database covering pension wealth would be an invaluable policy tool • International standards for micro measures could provide support for jurisdictions to develop estimates • Define ideal/expanded wealth concept in relation to essential practical concept • Enable micro-micro comparisons: increase coherence and analytical scope