Retirement savings system is falling short, CIBC boss warns

2/20/13 Retirement savings system is falling short, CIBC boss warns - The Globe and MailRetirement savings system is falling short, CIBC boss warnsGRANT ROBERTSON - BANKING REPORTERThe Globe and MailPublished Tuesday, Feb. 19 2013, 10:11 PM ESTLast updated Wednesday, Feb. 20 2013, 8:39 AM ESTThe head of one of Canada’s largest banks is proposing a dramatic overhaul of the country’s pensionregime, arguing that average Canadians need more certainty and simplicity from their savings thanexisting investment tools provide.Canadian Imperial Bank of Commerce chief executive officer Gerry McCaughey said Canada shouldreform the Canada Pension Plan to allow people to make voluntary contributions that are beyondwhat they already pay through their salaries.The move could give many Canadians something they do not have with RRSPs and other investmentvehicles tied to the markets: a predictable payout when they retire.Much as Canadians understand exactly how long it will take to pay off their mortgage when they buy ahouse, average earners should have a pension system that helps them forecast how much money theywill have at retirement, and allows them to accelerate their contributions, Mr. McCaughey said in aspeech to the National Summit on Pension Reform in Fredericton on Tuesday night.“It would give Canadians the choice to put aside more – a little at a time – with the confidence ofclearly knowing what benefits it will bring,” he said. “It would improve the future of Canadians whochoose to opt in – through forced savings and no withdrawals – over the arc of 40 years.”The country faces a looming pension crisis. Persistently low market returns and the erosion ofdefined-benefit pensions in corporations are leaving many people, particularly those in low tomedium income brackets, with less certainty about their future financial security. One analysissuggests that Canadians now in their late 20s and early 30s could see a 30-per-cent drop in theirstandard of living when they retire.A stronger, easier-to-understand pension system is better for the economy, Mr. McCaughey said,which is ultimately better for banks. While he still advocates the benefits of RRSPs and tax-freesavings accounts, he said CPP is more reliable and clear on how much it will provide, whichencourages saving. “This is not a solution that addresses every problem and meets every need,” hesaid. “But it’s a … starting point that gets to the heart of what a large number of Canadians need most –and that’s certainty of outcome.”www.theglobeandmail.com/report-on-business/economy/let-canadians-pay-into-canada-pension-plan-faster-cibc-boss-urges/article8876538/?cmpid=rss1&utm_… 1/2

2/20/13 Retirement savings system is falling short, CIBC boss warns - The Globe and MailPushing for a greater focus on the federally run CPP is remarkable coming from one of Canada’s topbankers, since the sector derives considerable revenues from investment products such as mutualfunds in RRSPs.But the suggestion comes at a time when Ottawa is concerned about falling savings rates. As Canadiancompanies scaled back their pension offerings over the past five years, the federal government haslaid the groundwork for the creation of Pooled Registered Pension Plans, or PRPPs, which areessentially private funds operated by financial institutions. Banks and insurance companies and otherfinancial institutions are expected to offer them once they gain provincial regulatory approval. InDecember, federal Finance Minister Jim Flaherty said he would work with the provinces in 2013 onways to expand CPP for all Canadians.Mr. McCaughey believes CPP is the best vehicle for boosting retirement savings, since it promises acertain payout on a specified date (age 65, or 60 if taken early at a reduced amount) and thecontributions are committed over a long period – meaning they can’t be withdrawn on a whim. Thisallows the funds to compound. However, banks cannot operate funds that deny customers access totheir money, leaving CPP as the best option, he said.Savings rates are falling in Canada, but home ownership is among the highest in the world. Mr.McCaughey believes this shows Canadians understand the value of putting money into a home.“Canadians go into a mortgage knowing that if they keep up their end of the bargain – if they maketheir payments – they are, on a specific date in the future, going to own that home free and clear. So,over the long term, housing has proven to be an effective vehicle for future savings,” Mr. McCaugheysaid. “Why does the home ownership system work so well? Because Canadians understand it. It’s datecertainand amount-certain. It’s predictable and transparent. There’s good governance. And theoutcomes are clear.”CIBC economists predict that Canadians now in their late 20s and early 30s can expect, on average, a30 per cent drop in standard of living when they retire, based on current savings rates.“We’re not talking about the normal reduction in income that individuals typically see in retirement,”he said. “We’re talking about a real and significant decline in living standards as measured byconsumption power,” Mr. McCaughey said.“Today, for many Canadians, there’s a bigger emphasis placed on investing – on rates of return – thanon the critical need to actually set aside money. Individuals are more focused on how they’reinvesting their money rather than on how much they’re putting away, and for how long.”www.theglobeandmail.com/report-on-business/economy/let-canadians-pay-into-canada-pension-plan-faster-cibc-boss-urges/article8876538/?cmpid=rss1&utm_… 2/2