Pension Pioneers?

Bruce Johnstone of the Regina Leader-Post reports, Pension Pioneers:

The province that introduced medicare and public auto insurance to Canada -- could soon be leading the way in pension reform as well.

The Saskatchewan Pension Plan, which has been around since 1986, may well be the model for the pooled pension plans that the country's finance ministers proposed last week in Kananaskis, Alta.

The federal and provincial finance ministers agreed to introduce legislation to allow the creation of pooled registered pension plans (PRPPs), targeted to employees of small-and medium-sized businesses.

The PRPPs would be 'low-cost' private pension plans that would be available to employees without a company pension plan or even an employer, in the case of self-employed people. Employee participation would be mandatory, unless the employee opted out of the plan.

The closest thing we have to a PRPP in Canada today is the Saskatchewan Pension Plan (SPP), a voluntary pension plan to which employees, self-employed individuals and/or their spouses can contribute up to $2,500 annually.

Originally designed for homemakers or self-employed people without access to a pension plan, in less than 25 years, the SPP has grown to more than $268 million in assets and 31,000 members.

"We're the 26th largest defined- contribution pension plan in Canada,'' said Kathy Strutt, general manager of the SPP, in a recent interview.

"We don't have the billions that the public employees pension plan or the co-op superannuation plan have. We're small compared to other government plans, but we're not small when you look at the DC (defined-contribution pension) world.''

Not bad for a pension plan based in Kindersley, where the SPP was relocated in 1990, with no sales force and, until recently, a $600 a year contribution limit.

Strutt said the changes announced earlier this month should help increase the profile and public participation in the SPP, which was developed and introduced by the Devine PC government.

With the increased contribution limit to $2,500 a year, participants could potentially save $100,000 over 30 years, based on an average six per cent rate of return, she said.

The SPP, which has an independently managed portfolio of stocks, bonds, real estate, mortgages and T-bills, has generated an average return of 8.4 per cent (12.7 per cent in 2009).

The $100,000 savings in the SPP could be turned into an annuity, which could pay $668 a month, or just over $8,000 per year, Strutt added. Participants can also roll the money into a registered retirement income fund (RRIF) or locked-in retirement account (LIRA).

In addition, the SPP payments are now eligible for the $2,000 federal pension income credit, which tax shelters the first $2,000 in annuity income. In addition, the SPP allows for income splitting between spouses.

"Spousal contributions are allowed,'' Strutt said. "That's not a huge part of our (pension plan business), but we do have 700 or more members who do make a spousal contribution.''

Strutt said the changes will benefit current plan holders, who have an average of $30,000 to $40,000 in their plans, but the real beneficiaries are those participants who are just starting out.

"Even at $2,500 (a year), it's not going to be a full work-based (income) replacement from some people ... But it's still a supplement and time is the best friend of a savings program.''

Dave Wild, chairman of the Saskatchewan Financial Services Commission, participated in the discussions in Kananaskis between the federal government and other provinces on the issue of PRPPs. And he agrees that the SPP could be the model for the roll-out of PRPPs across Canada.

"I think the SPP was heavily influential in developing the framework for the pooled (registered pension plan) arrangements,'' said Wild, who's also the province's superintendent of pensions.

In fact, Wild has been involved in a working group on "pension innovation" since June to demonstrate how pooled pension plans, similar to the SPP, could provide benefits to individuals without a company pension.

"Saskatchewan Pension Plan is broad-based," Wild said. "Any employer and any employee can participate."

Specifically, the SPP can cover employees of small and medium-sized businesses or self-employed individuals, who otherwise wouldn't have a company pension. "The SPP was developed to serve a niche that was not being well-served by the pension industry."

Of course, there are differences between pooled pension plans and the SPP, Wild added. Namely, pooled plans would tend to be privately operated by insurance companies, mutual fund managers, banks and other financial institutions, while the SPP is a public sector, non-profit organization, albeit operating at arm's length from government.

"They left the door open to other third-party administrators, which is where the SPP would fit in. But I don't think the finance ministers had a particular model in mind that was government-administered,'' Wild added.

"I don't know if we'll see something exactly like the SPP set up in other jurisdictions, but it's very close to the vision of the ministers -- to have a broad-based pooled arrangement, very easy for people to participate, very low cost,'' he said.

"Saskatchewan Pension Plan has got a number of features that the ministers found very attractive and would like to see replicated.''

Not everyone is convinced that PRPPs are the answer to the Canada's pension problems, however.

Deputy Liberal Leader Ralph Goodale said the concept of PRPPs is fine as far as it goes, but reform of the Canada Pension Plan (CPP) is still required.

"(PRPPs) provide a relatively small portion of the solution ... There are several other things that are bigger and more important," the Wascana MP and former federal finance mininster said last week. "Certainly, expansion of the CPP is the core piece."

Goodale note the previous Liberal federal government fixed the CPP in 1997 with changes to contribution limits and investment management functions, with the creation of the CPP Investment Board. But he conceded more changes are needed to bring CPP benefits in line with pensioners' current and future income needs.

While the CPP is actuarially sound and well-managed, most experts agree that CPP should be expanded, by raising the yearly maximum pension earnings (YMPE) to $60,000 or $70,000, or increasing the income replacement rate from 25 per cent to 30 or 35 per cent.

Currently, the maximum payout from the CPP is about $11,800 per year, which is roughly one-quarter of the average industrial wage of $48,000.

But even an expanded CPP would still need to have supplemental plans, like PRPPs and the SPP, that fill in the cracks the system. And the pooled pension plans provided a way forward for the finance ministers on pension reform, where the proposed CPP reforms did not.

"I really don't know where CPP reform will go,'' Wild said. "It's a bigger step (to reform the CPP) in that it's a mandatory program. (With) the pooled pension arrangements, there will be an encouragement of participation, but certainly it's not a requirement. No one can opt out of the Canada Pension Plan.''

"The pooled pension arrangement is more flexible, which I think is what allowed ministers to move forward on it, where they want to move a little more cautiously on CPP reform. It's a more serious decision, a complicated decision.''

Wild said the pooled pension plans also offer a lower cost alternative to CPP reform or private investment plans. "There will some interesting discussion around how we encourage low-cost pooled arrangements," Wild said.

"SPP is clearly a low-cost alternative in Saskatchewan. Whether the insurance industry or mutual fund industry will offer similar low-cost products is a point of debate.''

Is the Saskatchewan Pension Plan (SPP) the way forward? It has some advantages over private pooled registered pension plans (PRPPs), but I still think it can't compete with expanded CPP (or other large defined-benefit plans) in terms of fees, performance and governance. Importantly, the biggest drawback to this system is it's based on voluntary contributions. At a time when Canadians aren't saving enough for retirement, it's ridiculous to think that any defined-contribution plan will make a significant difference in bolstering the retirement system. I still maintain that bolder steps need to be implemented or we risk falling well short of meaningful reforms to our pension system.