Saturday, August 28, 2010

"Innovative" retirement savings plans

Over the past several years there has been a growing demand for "innovation" in retirement savings and pension plans. As the private sector reduces its commitment to defined benefit plans and people are placing more reliance on individual retirement savings, the feeling has emerged that innovative plan designs will allow individuals to replicate both the benefits and security previously afforded by traditional designs. These are good thoughts, but the question remains - how do we know that the new design will actually do the job? Here are a few questions that might help analysis:

- how should we measure the effectiveness of ‘innovation’ or what would be a minimum requirement for a credible innovation - increased benefit, lower cost, improved security, clearer communication/understanding/transparency?

- what might constitute an acceptable expense level? A minimum requirement for such a plan might be an annual cost of less than 0.5% of assets for a balanced portfolio (the CPP cost is of the order of 0.3%). A slightly higher cost might be justified due to smaller scale and some additional administrative costs - but the total has to be way lower the expenses typically charged today . Should the cost be federally or provincially regulated - say, by something similar to a rate board?

- what are reasonable income drawdown strategies during retirement? Does the innovative design allow for the construction of portfolios to achieve this? What are the trade-offs between investment risks and return? Can these be easily explained? When or should annuitization occur? Is the approach supported by the annuity marketplace?

- what tools could be made available to specify on an ongoing basis the required contributions to achieve some level of retirement income, as well as the expected retirement income given current level of contribution? Is guidance and feedback continuously available? Do the tools explain what are the risks and what can be done about them?

- is a longevity insurance option available to protect against exhausting assets if one lives too long? Should a new retiree purchase a life-contingent lifetime income stream starting at, say, age 85? Does the new design provide such an option or does it offer a better alternative?

- would TFSAs be a better choice than RRSPs (or RPPs) as a saving vehicle? Does the new design allow for such funding choices?

The intent of the above is to push the discussion from generalities to specifics. I hope others will take up the challenge.

Tuesday, August 3, 2010

Long-form census II

In a strange twist the Statistical Society of Canada has launched a petition to bring back the mandatory long-form census. Strange, because the long-form is not really a census, which by definition involves universal enumeration within a geographic area. The long-form is a survey, which, regardless of care, will introduce some bias into the results.

Surveys are much more than a statistical exercise. And, an important starting point is to note that all responses are voluntary regardless of whether the completion of the questionnaire is mandatory or not - if the survey is not user friendly it will, by its nature, introduce biases.

A fundamental question is whether the data collected is actually useful relative to an information need. Census information should focus solely on information to enable efficient and effective government. More than this is an abuse of the public. Just because a religious group would like certain information, to be able to better target its missions, does not create a need. The group can find other ways to get the information. It should have no say in the matter.

Canada's long-form has been around for some time. Some of the questions now sound dated and are open to interpretation. The survey perpetuates ethnic and social profiling and connects it to housing and incomes. Does this really measure social progress? The survey fails to deal with many important emerging issues including the financial, social and activity issues of pensioners, volunteer activities, early childhood development, adult educational, and so on. These issues could give a better indication of life in Canada than questions on commuting times or number of rooms in a house.

Is a mandatory survey the best way to get information or would special studies provide more? Many commentators support a mandatory survey because they feel we will lose coverage of low income earners, new immigrants, aboriginal peoples, people not fluent in English or French, and the elderly. However, one has to question coverage quality when all of these groups are faced with completing a very technical 40 page survey. I suspect that a large proportion of the surveys returned on behalf of these people were not completed by those targeted.

The survey is simply too complex. It assumes that all members of a household share freely information. It assumes that people keep detailed records of expenditures. It requires too much effort to complete. Unlike members of the Statistical Society, we perhaps don't get quite the enjoyment out of all this. I think that it is fair to ask why the information is so important.

Other countries have given up on long-form surveys. They are collecting data through special studies that focus on specific issues. Canada should do the same.