Sunday, December 19, 2010

Provinces Call for CPP Expansion

The Globe and Mail reports, Provinces call for CPP expansion ahead of finance ministers' meeting:

Federal Finance Minister Jim Flaherty is expected to face resistance over pension reform when he meets with his provincial and territorial counterparts Monday, with a group of six provinces calling on Ottawa to reverse course and expand the Canada Pension Plan.

Mr. Flaherty said last week he won't be proposing any expansion to the CPP because not all provinces were on board. Instead, he'll be pushing a new private-sector plan allowing small firms, employees and even the self-employed to pool resources on new, low-cost pensions.

But the finance ministers of B.C., P.E.I., Nova Scotia, New Brunswick, Manitoba and Ontario issued a joint statement Sunday asking Flaherty to keep CPP expansion on the table.

“Making progress on a moderate expansion of CPP is important for the long-term adequacy of Canada's retirement-income system,” B.C.’s finance minister, Colin Hansen, said in the statement.

“We need to keep moving forward in determining what that expansion should look like.”

The provinces said the federal government should phase in a “modest,” fully-funded expansion to the CPP, and make changes to provide more Canadians with low-cost pensions.

They said they weren't opposed to Mr. Flaherty's private-sector proposal, but insisted it shouldn't preclude Ottawa from also improving the CPP.

Mr. Flaherty's comments last week have prompted criticism from opposition parties, provincial governments and the labour movement.

The president of the Ontario Federation of Labour, Sid Ryan, has described Flaherty's comments as a “last minute betrayal.” On Friday, Ryan was among a group of protesters who occupied Flaherty's constituency office in Whitby, Ont.

Ontario's finance minister, Dwight Duncan, said last week that not expanding the government-backed pension system was a “serious mistake,” and he noted that Alberta appeared to be the lone holdout in supporting such a move.

In Sunday's statement, Mr. Duncan said Ottawa shouldn't choose between the CPP and private-sector pension reform.

“The CPP provides a secure, fully indexed, defined benefit pension to virtually all working Canadians,” he said. “While we fully support more private-sector pension innovation, it should not be used as a reason not to make progress on CPP.”

Mr. Flaherty wasn't immediately available for comment on Sunday to the provincial news release.

The federal finance minister has described the proposed private-sector pensions as a “Pooled Registered Pension Plans,” which, at the earliest, could be in place by the end of 2011.

Under the federal proposal, the pooled, low-cost plans would be based on defined contributions. They would be available to any type of employee, as well as the self-employed.

Ottawa and the provinces have been discussing how best to reform the country's retirement income system for well over a year.

Last June, the provincial and federal governments said they would look at a three-pronged reform: financial literacy, regulatory changes to give the private sector more freedom to offer low-cost savings options, and gradually enhancing the CPP.

I agree with Mr. Duncan, all Canadians should enjoy the benefits of a secure, fully indexed defined-benefit plan. Also, it's important to note that the federal government does not have the final say on CPP expansion. The provinces collectively have a say on changes to the Canada Pension Plan.

Finally, the Calgary Herald reports that Alberta Finance Minister Ted Morton will also be pushing for Ottawa and the other provinces to drop investment taxes he says have unfairly been levied on Albertans:

In a number of recent letters, Morton has asked federal Finance Minister Jim Flaherty to suspend both the GST and other provinces' harmonized sales tax (HST) on investment management services.

Since the HST came into effect for financial services in both Ontario and British Columbia last July, he said Albertans - who have no HST or provincial sales tax - are at times being forced to pay another provinces' taxes as they save for retirement.

"Taxes being levied in Ontario are being collected from Albertans," Morton said. "We will not accept Albertans having to pay provincial sales tax ... when they're purchasing services here in Alberta."

In letters, Flaherty has told Morton residents of Alberta - or Canadians from other non-HST provinces - are not included when determining the amount of HST charged on a mutual fund, and "investors in non-harmonized provinces are not unduly affected."

However, Morton said in many cases mutual funds take a "blended" approach, flowing their HST costs out to all investors in the pool equally. At times, Albertans and other non-HST provinces are lumped in with HST-province investors, particularly Ontario where most of Canada's investment management services companies are headquartered.

He said examining the situation for Albertans made him realize it's not a wise course to charge any consumptive tax on services meant to spur Canadians to save more. It's contrary, he said, to the whole push to boost the retirement income of Canadians.

"Why the heck are we turning around and then levying a tax on financial services which Canadians use to build savings?" Morton said.

It's unclear what support the Alberta minister will receive among his counterparts and Flaherty today - he acknowledges it's a non-issue for those provinces that have an HST.

However, his plan will likely garner broad support in the financial services industry.

Patrick Farmer of EdgePoint Wealth Management Inc. said his company has already established specific no-HST series funds for people in non-HST provinces, including Alberta, Saskatchewan, Manitoba, Quebec and Prince Edward Island. He said it makes the cost of investing significantly less in those provinces.

Farmer said that Morton's plan to cut the taxes is a good idea.

"At a time like this, when investors over 2008 had a very difficult year, and many of them are closer to retirement, the last thing you want is to be taxing savings," he said.

While Morton intends to bring the HST/GST debate to the table, today's meeting in K-Country will likely be dominated by discussions over Flaherty's surprise announcement last week to move to establish a new private-sector pension system. Flaherty also quietly dropped his earlier strategy in addressing what many believe is a looming retirement-income crisis for Canadians, which was to expand the Canada Pension Plan.

The move toward defined contribution Pooled Registered Pension Plans (PRPPs) has outraged unions and other public sector advocates.

On Sunday, the Alberta Federation of Labour held a protest outside the Delta Calgary Airport hotel as the finance ministers left to Kananaskis for the federal-provincial summit. Dressed as Santa, president Gil McGowan and a couple dozen others urged the ministers to reject the "lump of coal" plans for the private pension plans.

But the plan has been welcomed by financial and investment institutions, as well as Alberta, which has long been pushing for a private, targeted solution for the self-employed and middle income earners without pensions.

"We think again that any increase in the CPP is unnecessary," Morton said. "Anything you add to the CPP in terms of benefits obviously entails increasing payments. And not just employee payments, but employer payments."

Morton argues that companies, who can choose whether they offer PRPPs or not, will choose to participate to retain employees.

"If employees have a choice between working for companies that have some type of registered pension plan and ones that don't, other things being equal, most of them would take the registered pension plan."

But the debate hasn't died down.

Ontario's Finance Minister Dwight Duncan has said he approves of Ottawa's private plan, but is worried it will come at the expense of a "modest" expansion of CPP to ensure financial stability for Canadians in retirement.

Simon Fraser University professor Jon Kesselman, who focuses on public policy and finance, said the new federal plan ignores the fact that many businesses have already been eliminating or downsizing their company-sponsored pension plans.

"If it's a competitive advantage, why aren't they (companies) doing it now?" Kesselman said. "It puts it all back on the worker."

Kesselman said even though the PRPPs will be available to individuals on their own, most people don't know how much they need to save for retirement, don't have the investment skills, and using conventional approaches, find there's a big drag on returns due to Canada's high investment management fees.

"The returns for the individual investor are much less than the returns for the market as a whole, I presume meaning that it's the institutional investors and the wealthy individuals who do better than average," Kesselman said.

On the other hand, the CPP has lower operating costs, skilled managers and can invest anywhere in the world, he said.

In his letter to provincial ministers, Flaherty noted that today's meeting will also address provincial progress on accommodating the needs of potential Registered Disability Savings Plan (RDSP) beneficiaries with intellectual disabilities who lack contractual competence, and are prevented from opening a plan because they don't have a legal guardian.

I have my thoughts on the Registered Disability Saving Plan. They should increase the limit to $500,000 and make them more available and more flexible, forcing all financial institutions to advertise them so clients with disabilities or parents with disabled children are aware of this saving plan. For example, older parents with a disabled teenage or adult child should be able to transfer money out of the RRSPs right into a RDSP without any penalties instead of being forced to transfer it into a RRIF account. Even better, just have CPPIB or some other plan like HOOPP manage RDSPs for disabled Canadians so that they don't have to worry about managing this money (same problem as defined-contribution plans!).

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