A pension crisis looms in Canada. Today’s young couples are facing privation in their 70s—and, likely, 80s and 90s, as our lifespans expand dramatically. Compulsory saving regimens may be necessary to save us from ourselves.
So goes the familiar rhetoric, but Charles Guay tends to dial it back. The 41-years-young head of Montreal-based Standard Life Assurance Co. of Canada thinks words like “crisis” and “emergency” overstate the situation. In early 2012, the lanky and, at six-foot-four, very tall Quebecer took over as president and CEO of the oldest insurer operating in Canada. (It just turned 180.) Canada is its largest operation after the U.K., and responsible for an outsized share of profit. Group pensions are the biggest line of business here, followed by group insurance, but it’s the nascent wealth-management unit that Guay is most keen to grow. Amid much worry and conflicting proposals about how to fix Canada’s pension system, Canadian Business sat down with the two-decade veteran of investment product sales to find out how Standard Life plans to prepare Canadians for retirement.
You’re a life insurance company; that’s what your name says. But last year you stopped selling individual life insurance. Why the change?
Many life insurance companies are moving in the same direction. It’s a mix of factors. The pie of new life insurance policies is getting smaller because baby boomers are growing older, and they bought much of what they needed 10 to 20 years ago. Then there is our longevity—even actuaries are a bit surprised by how fast life expectancy is growing. With annuities, that makes life insurance a more risky business. Low interest rates are also a factor. When you make long-term promises to your policyholders, you have to set capital aside to make sure you can pay these liabilities 50 to 60 years down the road. As interest rates go lower, we have to set more money aside to satisfy regulators, who have tightened capital requirements since the financial crisis. So that ties up a lot of capital. Stock markets, meanwhile, have been volatile; the U.S. market has really been flat the past 12 years, so there’s little growth there.
So when you put all those factors together, it’s a lot of capital, volatility and risk, and not a lot of growth. Standard Life PLC has been moving to the more stable, higher-growth, fee-based business in managing investment savings, and it’s logical to follow that route in Canada. In the U.K., we’re now primarily known as a pension and asset manager. Part of my mission is to make us better recognized as an investment manager here.
Why would people go to a life insurer for mutual funds? Wealth management is already a crowded and fiercely competitive market.
It is. Canada is world-leading in vertically integrated financial institutions, which is less the case in Europe. But wealth management is still a fast-growing market. And banks don’t have insurance licences in terms of setting up group pension plans. We have direct, preferred access to this huge workplace retirement-savings arena, and a connection with all the employees. Not only can we supply workplace plans but complementary programs, and we can provide those at a much better price than in retail.
Ottawa’s proposed Pooled Registered Pension Plans will be aimed at those currently without workplace pensions. You argue that employers should be required to offer PRPPs, with automatic employee enrolment. That would be a boon to your business, right?
I’m not sure we’ll make money with it. It’s a lot of big systems meant for very small accounts. We’d have to put a plan in place for a network of five or six employees who will invest $40 a month each. In a fee-based business, it’s going to take a few years before you can even hope to make money. Which is one of the reasons why it will have to be a very basic offering, fully automated. Still, we think PRPPs will provide smaller employers an easy, low-cost solution, but the provincial governments are stalling on the legislation to allow PRPPs. One disappointment is that it seems, in all provinces except Quebec, it will be non-mandatory for employers to offer retirement group plans, whether it’s PRPP or something else. I think it should be mandatory for a basic offering.
We’ve been hearing a lot about a pension crisis in Canada. Do you agree with that view?
I believe Canada has one of the better pension systems in the world, with several pillars and a good balance between them. What’s provided in government pension schemes, with CPP and Old Age Security, is complemented by workplace savings programs [at large organizations]. Then you have individual plans like TFSA [Tax-free Savings Account] and RRSP or home equity. What’s not as good is the SME [Small and Medium-size Enterprise] side. Fewer than half of those employees have workplace savings programs, which is where I think the main problem lies. In Canada, 99.3% of businesses are SMEs. A group retirement plan is critical in a company’s value proposition in this tight labour market. Within SMEs, it’s the third-most-important criterion for employees, but employers’ perception is that it’s the seventh-biggest factor. It’s one reason that motivated our Pension in a Box, a flexible, easy-to-
implement group solution for companies of 100 to 500 employees.
What do you think of CIBC CEO Gerry McCaughey’s suggestion back in February of expanding the CPP to allow individuals to top up their contributions?
There are different ways to skin a cat. Recently in Quebec, the D’Amours Report suggested something similar: a longevity pension, where you could save additional amounts on top of existing programs, so at 75 years of age you would get an additional lifetime annuity. It would provide a minimum income so you don’t become state-dependent. But we have to be careful with mandatory, one-size-fits-all solutions. They’re good to an extent, but we’re close to the limit with those already in Canada. We’re not a communist or even socialist country, so we cannot go to extremes. I’m OK to expand CPP a bit, but we should leave room for each individual to decide what kind of saving and investment program they want to put in place. It’s like with children: we can do everything for them, but we also have to teach them to become responsible individuals.
My understanding is that McCaughey was suggesting purely voluntary measures, aimed at providing some certainty of payout and the ability to accelerate contributions, as people might do with a mortgage.
Of course, we’d all like guarantees of how much we’re going to get at retirement. But, as a society, there’s a cost to that. We don’t know what the future will look like. Will we have terrible markets going forward? How long will interest rates stay low? Will we add another 10 years of life expectancy that nobody expects? We should learn from the past, that as much as we’d like a guaranteed income, we may not have the means to ask for that today. Most of the government or private pension schemes that are defined-benefit are in deficits. It’s good to provide a minimum guarantee, but it’s the future generations who will bear the ultimate risk, as governments would have to raise taxes to supplement any deficits. And we already have one of the biggest tax burdens among industrialized countries, especially in Quebec.
Well, defined-benefit plans are pretty much dinosaurs in the private sector . . .
You say that, but there’s actually not been that much change in that in Canada. We have been talking about this defined-benefit to defined-contribution conversion, but it’s happening very slowly. For example, RBC has been the only bank so far to convert from a DB to a DC plan. But it’s true that employers who have DB plans are questioning whether they should close them.
So you agree that even in large corporations there may be changes. Are Canadians sufficiently prepared?
With growing life expectancies, people are not conscious enough of what their future needs will be, the amount of taxes we’ll pay, the cost of sending children to school, the cost of retirement if you don’t want to work for the rest of your life. Fifty years ago, people were retiring at 65, and life expectancy was less than 70, so we did not need a lot of money for retirement. Today, if you live in a couple, you have a 50% chance of living past 90. That means retirement that’s five times longer than 50 years ago. This is a new reality. It’s a social responsibility that we all have—governments, financial services businesses, employers—to make sure people have enough information to plan correctly.
We have to focus on promoting the notion of spending less, and procrastinating less on saving. Surveys are telling us that people are concerned whether they’ll have a decent lifestyle in retirement, but fewer than 25% have a written retirement plan. They know, but they still procrastinate. It’s a strange industry. First, you’re asking people to save for maybe later, because some people won’t make it [live to the full life expectancy]. Also, when markets plunge and prices are down 40%, people don’t want to buy—they want to buy when prices are at a premium. There’s a lot of education we have to do. I’m a big advocate of teaching financial literacy in school. So, it’s an issue we need to tackle, but it’s not in a crisis mode for now.