Pension reform options currently on the table will do little to address the retirement problems facing the vast majority of middle-class Canadians without an employee-sponsored pension plan, experts from Mercer say.
Neither the introduction of the new Pooled Retirement Pension Plan (PRPP), nor enhancements to the Canada Pension Plan (CPP), will be enough to fill the gap in retirement income, Paul Forestell, a senior partner at Mercer consulting, told a crowd of investment managers in Toronto on Thursday.
In the private sector, 75% of companies offer no pension plan at all and only 38% of Canadians contributed to a RRSP in 2009, according to Statistics Canada.
In December, Finance Minister Jim Flaherty announced he was moving ahead with the PRPPs. The plans will offer defined contributions administered by a third party, probably a financial institution. The savings vehicle is supposed to be relatively low-cost because of its sheer size and simplicity.
With low fees, prudent management and a flexible nature, PRPPs are hard not to support, Forestell said.
“It sounds great and, if implemented, will be a positive step for retirement savings in Canada, but probably just a very small step.”
The notion that small businesses will join a PRPP because it’s simpler than existing employee-sponsored options is a bit of pipe dream, he suggested.
“I’m not certain that this will be enough incentive for employers who do not currently provide any retirement savings options to join a pooled RPP.”
That’s because many of the defining characteristics of the PRPP can also be attributed to the typical RRSP or the tax-free savings account, and many small business owners simply don’t have the time or money to offer such a plan.
Those who already offer group RRSP or a defined contribution pension plan may opt to switch to a PRPP and that could dilute retirement income of plan members.
Under the new regulation, provinces can choose to mandate PRPP automatic enrolment for small businesses and the self-employed, but that’s unlikely to happen, Forestell said, since setting base-line contribution level would be nothing short of a nightmare.
If it’s too low, the plan won’t do much to address the funding gap. It it’s too high, employees are more likely to withdraw from the program.
“It’s starting to sound a lot like the story of Goldilocks and the Three Bears. You need to set a contribution plan ‘just right’ to make a mandatory plan work.”
The “just-right” contribution level, of course, depends on age, income, retirement needs and other factors.
Increases to the CPP have also been discussed.
Combined CPP, government income supplement and old-age security payments do a pretty good job of replacing the pre-retirement wages of low-income earners.
It’s the middle-income earner that’s the problem.
If the maximum pensionable earnings were were doubled from to $48,300 to $96,000 and employers and workers made larger contributions based on higher earnings levels, coverage issues for middle-income Canadians would be at least partially addressed.
Still, the changes would take 25 years to have much of an impact and that’s too little, too late considering the country’s massive baby boom generation is now entering its golden years.
“Probably even more problematic is that changing the CPP is not a simple task,” Forestell said.
It requires approval from at least two-thirds of the provinces, representing two-thirds of the population. With Alberta and Quebec vehemently opposed to changes, that seem unlikely.
Pension reform will remain at the top of the agenda in 2011, 2012 and beyond, Forestell said.
On Wednesday, I had a discussion on PRPPs with Jean-Pierre Laporte, a lawyer at Bennett Jones who is an expert on pension issues. Jean-Pierre sent me the Liberal Party's white paper on pension reforms. He isn't for mandatory contributions because he thinks that people shouldn't be forced to contribute more to their pensions, especially if they can put the money to better use such as paying down a mortgage. He alluded to the success of tax-free savings accounts (TFSAs) and told me that voluntary plans can work. Moreover, a voluntary enhanced or supplemental CPP is better than any TFSA or RRSP, so people might opt out of these tax-free savings vehicles to get into a better managed fund that offers them true diversification across public and private markets.
We both agreed was that PRPPs are no substitute for large defined-benefit plans and they're just a giveaway to banks and insurance companies. But here is the kicker: if banks and insurance companies really wanted to make more money -- a lot more money -- they would have asked the Conservative government to opt for enhanced CPP and figure out a way to compete for a piece of the pension pie. In the end, they got what they wanted, but in my opinion it wasn't thought out properly at all (remarkably shortsighted).
And these pension reforms are not filling the retirement gap. I consider pensions an apolitical issue. I can sit down with representatives from all major parties and show them exactly what needs to be done to bolster our retirement system without hurting the economy. Politicians need to recognize that Canada has some of the best public pension plans in the world and build on their success. Only then will they address coverage in a serious and meaningful way.