The Ontario pension ‘reform’ is tinkering, while the federal/provincial finance ministers’ modest and gradual CPP enhancement is insufficient. Private sector Defined Benefit plans are essentially dead, but existing commitments must be met. What is needed is new retirement income system architecture, to replace the current pension schemes which are in systemic failure.
What is missing from the proposals to deal with existing DB Plans?
– higher priority in bankruptcy for underfunded trust funded pensions (deferred wages),
– increased PBGF protection (Arthurs commission recommended an increase from $1,000 to $2,500),
– end to the paternalistic forced annuitization for bankruptcy driven Ontario pension plan wind up. Instead the government could work with the larger public sector pension plans to offer “Safe Haven” as in Quebec Quebec’s Bill 1
or provide the option to annuitize or receive commuted value, or establish a pooled investment fund of individual accounts based on commuted value and provide a systematic decumulation plan including a longevity insurance component
– change in pension plan valuation frequency from every three years to annually
– requirement for fiduciary responsibility for anyone providing financial advice (e.g. planners, brokers, insurance salesmen, etc),
What should be included in the strategy for implementing the PEI proposals?
– behaviourally driven mechanisms for enrolment (‘auto-enrolment’), for escalating contribution levels (‘save more tomorrow’ commitment) and default asset allocation (‘auto-investment’) (Auto-enrolment would be the default at some % of contribution, but an individual could choose to opt out completely or choose a different level of contribution.)
– government sponsored low cost (<0.5%) pooled investment management vehicles for individual DC accounts (with customized risk tolerance plus feedback mechanisms guiding savings rate toward target retirement income
– low cost (default) decumulation strategies in retirement –e.g. from a balanced portfolio annual withdrawal would be set at 4-5% of previous year-end portfolio value with or without and attached longevity insurance…there are other possibilities, including running it as a target benefit pension plan like CPP which is similar to a low cost annuity in that there is no residual estate
– low cost annuities and pure (without investment component) longevity insurance
The above changes can be implemented with market risk and (cohort) longevity risk being borne by participants.
Peter Benedek, is a Chartered Financial Analyst who authors RetirementAction.com http://www.retirementaction.com/ , a retirement finance education and advocacy website.
Keywords: pension reform