There is a growing consensus in Canada that millions of middle-income workers without a workplace pension plan will face sharp reductions in their standard of living when they retire in the decades ahead. Unfortunately, there is no equivalent consensus on how to solve this looming problem. Two opposing solutions are being promoted. The ‘Big CPP’ proponents want to mandate a material increase in future CPP benefits. In the other camp are the ‘Little PRPP’ proponents who believe the private sector can solve the pension gap problem through a new form of voluntary pooled retirement savings vehicles called PRPPs. In my view, both approaches are problematical.
The ‘Big CPP’ option would have to be mandatory, which would raise a lot of hackles with ‘free choice’ Canadians. The fact that future benefits would have to be fully pre-funded prompts serious questions which ‘Big CPP’ proponents have not even begun to discuss. For example, what rate of return is being projected when costing the new accruing CPP benefits? Would these new benefits be guaranteed? If so, by whom? If not, how would the new benefits be adjusted for actual investment experience? With Mr. Flaherty’s announcement on Monday that the Conservative government will not support this option, all this becomes hypothetical.
The ‘Little PRPP’ option has its own set of problems. The Pooled Registered Pension Plan version already promulgated into law by the federal government is voluntary, and virtually indistinguishable from group RRSP plans which have been available to Canadian employers for many years. Also, the imperatives to create scale economies to control PRPP costs, and to create a not-for-profit organization structure to align participant-supplier interests seem to have been totally ignored.
The time has come to move beyond the current ‘duelling solutions’ impasse. This requires finding a middle way to Canadian pension reform. This ‘middle way’ must materially raise the retirement savings rate for middle-income workers not participating in a workplace pension plan without actually mandating such participation. It must operate with sufficient scale, as well as with expertise and a ‘for the common good’ philosophy, so that it can offer participants a truly innovative, simple, low-cost pension solution. As part of its suite of services, the ‘middle way’ must also be able to offer life-long pension guarantees to those older participants willing to pay ‘fair value’ for such guarantees.
I proposed such a ‘middle way’ solution in my 2008 CD Howe Institute study titled “The Canada Supplementary Pension Plan: Towards an Adequate, Affordable Pension for All Canadians”. This proposal was explicitly rejected by Finance Minister Jim Flaherty at the conclusion of the Federal-Provincial Finance Ministers’ Conference held in PEI in June, 2010. Ironically, a very similar proposal was accepted by the U.K. government in 2006. After a fertile period of design and planning, the U.K. proposal became reality last year in the form of the National Employment Savings Trust (NEST). In its first year of operation, NEST auto-enrolled 1.4 million U.K. workers without a pension plan. A surprisingly low 9 per cent of these workers exercised their option to dis-enroll themselves. Perhaps not surprisingly, most were higher-income workers close to retirement. Looking ahead, NEST faces the daunting task of auto-enrolling millions of additional U.K. workers over the course of the next two years.
Given all the above, Ontario’s recently announced resolve to lead a provincial effort to break through the current federal-provincial impasse on pension reform offers a new window of opportunity for Canada to address its looming pension challenges . A blueprint for a ‘middle way’ Supplementary Pension Plan (whether provincial, multi-provincial, or national) already exists. Also, many of its inevitable start-up challenges have already been identified and addressed in the design and implementation phases of NEST in the U.K. The time has come to give Canada’s middle income workers without pension plans a fair shake, and the time has come for Ontario to lead the way.
Keith Ambachtsheer is director of the International Centre for Pension Management at the Rotman School of Management, University of Toronto. He was a participant in the design and implementation of the CPP reforms of the mid-1990s.