March 11, 2011 – Pension reform – where are we now. The seesaw drama of getting the finance ministers to finally acknowledge that Canada’s retirement system needed fixing took nearly two years. When they emerged from their shells last June, they offered a two-track solution: “modest” CPP enhancement and a commitment to have the private sector devise a product to fill the rest of the savings gap. By December, CPP-enhancement was dropped and the ‘Pooled Retirement Pension Plan’ or PRPP was announced.
CARP members were not impressed with a voluntary fund run by the private sector and said so in our survey – which we dutifully conveyed to the junior federal minister of finance and his officials. Such multi-employer plans are already permitted by federal law and in Quebec (they are called simplified pension plans), but there has been very little uptake over the last decade. So now the industry wants the government to do its marketing for it.
Skeptical? One of the questions at the recent PRPP consultation was whether employees should be automatically enrolled in a PRPP of the employer’s choosing. Our answer was: only if there’s a public option along with the private sector run offerings.
Why? You can already invest your money in Canada Savings Bonds or in private bonds issued by corporations or banks. It follows that Canadians should similarly have a public option for their pension savings. The antipathy towards the financial services industry shown in the polling was likely shaped by news of financial frauds, overcharging on fees and unnecessary foreclosures.
What part of “retirement security” did the federal government not understand? Even provincial premiers are calling for a CPP expansion along with federal opposition parties.
A practical solution is staring all of us in the face – allow people to buy into a separate fund run by the existing not-for-profit pension funds like the CPP, OMERS, provincial Teachers Funds and the like. With their size and experience, they can offer low-cost, reliable defined benefit pensions – which, coincidentally, is what we’ve been asking for.
Monies contributed by individuals and their employers, would be invested in a diversified fund but separated from the fund managers’ other holdings. These contributions would be pooled with those of millions of Canadians participating in such public funds and would benefit from huge economies of scale – a scale that a myriad of private sector funds would not be able to achieve. And with such economies of scale comes the advantages of lower fees and access to lucrative investment options (private equity, infrastructure etc.) that retail private funds cannot and would not be expected to offer.
A large pool also allows the administrators to purchase annuities for each beneficiary on a regular basis so that by the time of anticipated retirement, the target or promised pension benefit would be available (thanks that what insurance experts call ‘risk pooling’ a key ingredient for insurance markets to exist). The existing CPP makes the same promise but does not need to purchase annuities, relying instead on the actuarial predictions and adjustments that a massive fund and long term horizons offers to minimize risks.