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CLHIA to Minister Hunter re: ORPP cost-benefit analysis

Release Date: 02/08/2016
Staff Reference: Leslie Byrnes

February 8, 2016

The Honourable Mitzie Hunter
Associate Minister of Finance (Ontario Retirement Pension Plan)
Ministry of Finance
6th Floor, Frost Building South
7 Queen's Park Crescent
Toronto, Ontario
M7A 1Y7

Dear Minister,

As Ontario continues to move forward with the implementation of the Ontario Retirement Pension Plan, the Canadian Life and Health Insurance Association wanted to add its observations on the cost-benefit analysis that had been submitted to the Ministry of Finance at the end of the year. Given that the government is relying on the assumptions and long-term indicators of the analysis, we wanted to draw to your attention areas where additional analysis may be warranted.

On a broad basis, we were surprised to see a 75-year projection horizon. It will take 40 years from implementation for ORPP to fully realize benefits to contributors, and it's not clear why an additional 30 years is added. Even the best-intentioned assumptions used over such a long horizon should, of course, be considered with some skepticism.

We found a surprising lack of information or, in some instances, incorrect information in the following areas:

  1. The set-up costs of the ORPP appear not to be included at all. From experience in other jurisdictions, like the UK's NEST program, we know these costs can be significant and can create increased costs for contributors (a surcharge in the case of NEST) and an imposition on taxpayers.

  2. There is little information about operational costs, although there is mention of a projected 20 bps annual cost on page 39. This appears to be based on an incorrect understanding of CPP's operating costs (which are actually 115 bps).

  3. The analysis only considers two options - an environment dominated by retail mutual fund-based RRSPs or the ORPP. It ignores the impact of PRPPs. It ignores the impact of the ORPP on Ontario workers with DC RPPs not considered comparable or non-pension workplace plans such as GRRSPs and DPSPs. And it ignores the $45 billion current asset base of TFSAs for Ontario residents and the estimated $6 billion contribution growth in such plans or related investment income.

  4. The analysis states that "public sector plans have substantially lower management fees than other investment tools". This is based on a misunderstanding of CPP's costs (115 bps) and ignores the fees of DC RPPs which are, on average, 60-80 bps, and considerably lower in some cases.

  5. The analysis assumes a 6% nominal net yield within the ORPP and a discount rate of 2.5-3.5%, both of which appear extremely optimistic, given the assumed persistent low interest rate environment, and given the very low long term yield history of CPP. This would require a 7.15% total long term yield (6% plus 115 bps operating costs, if using the CPP experience).

  6. DC plans with required employer contributions of 3% or more are assumed to increase contributions to become comparable; less robust plans will be wholly/partially replaced by the ORPP according to the paper. But there is no consumer impact analysis regarding the loss of existing plans.

  7. The paper assumes a 32% drop in RRSP contributions due to mandated ORPP contributions. ORP contributions for low-income workers are projected to "replace" non-existent RRSP savings, but are more likely to reduce necessary consumption such as food, housing and clothing costs. No consumption impact is included.

  8. There appears to be no consideration of increasing life expectancy. We know that life expectancy has increased about 1.8 years for each additional decade that has passed since the 1960s. This is not factored into the analysis with respect to withdrawal or drawdown patterns.

  9. It is not clear that the methodology appropriately considers the fiscal impacts for each income cohort, including lost transfers in GIS due to higher ORPP contributions for low-income individuals.
I hope you and your officials will find this analysis useful. We encourage the Ontario government to satisfy itself that all appropriate considerations and assumptions have been taken into account.

Yours sincerely,

Original signed by

Frank Swedlove