Closing the Canadian Pension Gap?

Frank Swedlove, President of the Canadian Life and Health Insurance Association, wrote a special for the National Post, Canada cannot afford to wait any longer to close the pension gap:
About one out of four Canadians are not saving enough for their retirement. These “under-saved” are mostly middle-income, private sector workers with no workplace pension plan. At the same time, persistent low interest rates have dramatically increased the amount of money they need to save to achieve financial security in retirement.

To close this gap, the recent debate has revolved around either expansion of the Canada Pension Plan (CPP) or the introduction of a new workplace savings vehicle called the Pooled Registered Pension Plan (PRPP).

However, these two approaches are by no means mutually exclusive, which explains why certain provinces are moving forward on PRPPs while still calling for a CPP expansion. Indeed, a key strength of Canada’s retirement income system is that it encompasses a mix of elements: government programs such as the CPP/QPP and OAS/GIS, public and private sector workplace pension plans, and individual retirement savings. The Ontario government, a strong supporter of CPP expansion, is nonetheless carrying out consultations with interested parties to determine how PRPPs should be implemented.

While some expansion of the CPP debate continues, we believe that moving quickly on PRPPs by all provinces should be a first priority. Since PRPPs are targeted at the 25% of Canadians who are under-saved, they impose no burden on the remaining 75%, such as low-income Canadians who are already well-served by existing government retirement programs (Canada has one of the lowest rates of poverty among seniors in the world); middle-income Canadians with adequate savings; and high-income Canadians who don’t need additional savings.

Some say that PRPPs won’t work because voluntary plans like RRSPs haven’t lived up to their potential. But this viewpoint ignores some critical differences.

First, PRPPs will be offered at the workplace, where saving is made effortless through payroll deduction. As a true pension plan, funds invested in a PRPP will not be available for withdrawal until retirement except under very specific circumstances such as loss of employment.

Second, RRSPs have not worked as well because contributions to them compete with all the other costs of day-to-day living. PRPPs, however, are deducted from pay at source. Contributions are made at a steady and easy rate, and will accumulate and be invested until retirement.

Third, due to their economies of scale, PRPPs will be delivered at low (i.e. wholesale) management fees while benefiting from skilled investment expertise and prudential management. Lower fees mean more money will accumulate towards retirement.

Finally, PRPP legislative frameworks have built-in features that will counter consumer inertia. Employees will be automatically enrolled. While they will have the choice to opt out, experience in other jurisdictions has demonstrated that very few will exercise this option.

Quebec has not only embraced PRPPs, but is moving to maximize participation by requiring all companies with five or more full-time employees to offer some form of workplace retirement plan. This will not be a burden on the employer as his or her cost to offer a PRPP will be negligible. We applaud this approach, which will have a profoundly positive impact on the future retirement savings of Quebecers. We urge Ontario and other provinces to follow suit.

Canada cannot afford to wait any longer to close the pension gap. Workplace savings plans, auto-enrolment and wholesale management fees constitute a winning combination that will help a great many people maintain their standard of living in retirement. We should implement PRPPs as soon as possible.
I agree with Frank Swedlove, Canada cannot afford to wait any longer to close the pension gap, which is why I am ecstatic to see Ontario is going it alone on a supplementary pension plan. And even though this new plan is raising questions, it's far superior to the silly PRPP proposal the federal government is banking on, foolishly pandering to the insurance and banking industry.

The insurance industry must be extremely nervous which is why they are writing articles in national newspapers desperately trying to promote PRPPs. Unfortunately, while I'm a little sympathetic to some of the arguments Swedlove raises, I feel it's my duty to systematically annihilate this article and kill off PRPPs once and for all.

First, the two approaches are not mutually exclusive but why the hell should we move quickly on PRPPs when we know they can't compete with our large, well governed defined-benefit plans? Importantly, PRPPs are not able to compete with Canada's top ten and the insurers and bankers know this, which is why they're desperately trying to ram through legislation to support PRPPs.

Second, even if I agree that saving for PRPPs is made effortless through payroll deduction, the same can be said about saving via increased contributions for the Canada Pension Plan. Increase CPP contributions, have the money managed by the Canada Pension Plan Investment Board or some new well governed public pension plan, and people will have peace of mind that their pension money is well managed and they will know they can retire in dignity and security because they will know what to expect.

The added advantage of raising CPP contributions is that all working Canadians will not have to worry about pension portability. They can move through the private sector or to public sector and their defined-benefit pensions aren't lost, especially if a company goes bankrupt.

And I just do not like anything voluntary. People will opt out the minute they need to and many won't look back. Canadians are terrible savers which is one reason why I'm short Canada and agree with Ontario Premier Kathleen Wynne that Canada is headed for a “huge economic crisis" if the provinces and federal government don't take action now to improve retirement incomes.

As I've stated plenty of times in this blog, good pension policy makes good economic policy. The benefits of defined-benefit plans are grossly underestimated and worse still, many people still believe in myths on public sector pensions.

I know Mr. Swedlove is just doing his job, promoting PRPPs on behalf of all insurers, but it's a lost cause. I highly suggest banks and insurers give up the charade and accept that PRPPs will never be able to compete with our large, well-governed defined-benefit plans. Once we kill off PRPPs for good, we can focus on closing the real Canadian pension gap between public and private sector workers, providing the latter with the same pension security the former enjoy. Enhancing the CPP is the only surefire way to cure pension envy.

Finally, the Healthcare of Ontario Pension Plan, the best defined-benefit plan in the country, invited me to an event taking place in Toronto discussing the impact of defined-benefit pension plans. Jim Keohane, HOOPP's CEO, will give remarks on presentations by James Tucker of and Michael Block of the Boston Consulting Group and David Herle of the Gandalf Group.

The event takes place on February 24th from 3:00 to 4:30 p.m. at the MaRS Auditorium, 101 College Street, Toronto. If you're interested in attending, contact Martin Biefer, HOOPP's Director of Public Affairs, by February 14th and see if there is any space available because it might be by invitation only (Martin's email is

Below, more garbage on PRPPs. Robin Pond of Buck Consultants shares insights from his sessions "Pooled Registered Pension Plans (PRPPs)" and "Pensions: Intergenerational Issues" while at the International Foundation's 2012 Canadian Annual Employee Benefits Conference.