Canada’s federal and provincial finance ministers are gathering on Monday in Victoria, B.C., to determine the fate of pension reform in Canada. The most constructive thing they could do is to make the current federal Pooled Registered Pension Plan proposal work better for Canadian workers who do not have a workplace pension plan.
PRPP success hinges on an agreement to do three things: First, require employer participation; second, specify a well-designed default option; and third, create a fit-for-purpose fiduciary oversight mechanism.
The federal government’s Bill C-25, tabled last month, and accompanying draft regulations released this week, create the legal framework for PRPPs. In its current form, however, the design blueprint falls short of the objective of a well-regulated, low-cost capital accumulation plan. Provincial leadership is now required to breathe life into the federal legislation, by requiring employers to offer PRPPs to employees, and provide well-thought-out default options and an independent PRPP-licensing system. These issues should be on the table when the federal and provincial Finance ministers meet in Victoria on Dec. 19 and 20.
As things stand, millions of private-sector workers employed by mid-sized or smaller firms, as well as the self-employed, are not members of employment-based pension plans. As a result, many of these workers will have difficulty maintaining their standards of living when they cease employment in the decades ahead.
Bill C-25 does not fully address the three key policy challenges posed by Canada’s pension coverage problem. Voluntary employer PRPP participation, as envisioned in the bill, will result in minimal actual PRPP uptake and the bill is virtually silent on the important questions of PRPP default option design. Finally, to say PRPPs should be low cost and to leave regulation to current, cumbersome processes would not directly address potential conflicts of interest and the need for plan administrators to pass on important information to enrolled workers.
Maximizing PRPP participation requires the design of an effective enrolment protocol that applies to all workers in Canada who are not members of an employment-based pension plan. Requiring employers to enroll their employees in a PRPP is not a radical departure from current pension practices – employers are already required to enroll their workers (and the self-employed to enroll themselves) in the Canada/Québec Pension Plans. This requirement would place, however, an additional burden on mid-sized and small-business employers, so governments may need to offer a modest one-time incentive payment for employers (or enrolment tax credit) per employee who remains “contributed” for a certain period.
As most PRPP participants will either choose or default into a plan’s default option, its design is critically important. The default option should have a logical and transparent contribution model: for example, a default contribution rate of 10 per cent, ideally, split 50-50 between employees and their employers. On the investment side, these requirements should focus on the design of both the accumulation of retirement savings and how they should be drawn down in retirement. For example, PRPP administrators should be able to explain how their investment programs integrate such factors as employee age into their savings and drawdown paths.
Cost-effectiveness should also be considered when designing the default option. The PRPP administrator should be able to demonstrate that its default offering has an eye on costs with respect to the investment management and plan administration. This does not mean that cheaper is always better. Rather, there should be a clear link between the fees participants pay and the quality of service they receive.
Effective oversight can best be delivered by an independent, expert PRPP licensing body with responsibility for monitoring “value for money.” Can the federal, provincial and territorial governments agree to a dedicated agency, thus avoiding the complex jurisdictional morass that characterizes pension regulation in Canada today? There is precedent in the CPP/QPP reforms of the 1990s that led to the creation of the CPP Investment Board. The same type of co-operative process should provide oversight of PRPP administrators and the products they offer. The licensing board’s mandate would be to ensure that PRPPs serve the financial interests of their members.
The message of Bill C-25 is that Ottawa wants – and the provinces should take – significant ownership of the PRPP project, particularly with respect to the issues described above. Once the issues noted above have been addressed, an implementation task force should focus on the details. The financial fate of millions of Canadian workers without pension plans is now in provincial hands. We encourage them to take up the challenge.
Keith Ambachtsheer is director of the Rotman International Centre for Pension Management, Rotman School of Management, University of Toronto. Edward Waitzer is professor at Osgoode Hall Law School and the Schulich School of Business, director of the Hennick Centre for Business and Law, York University, and senior partner of Stikeman Elliott LLP. Their study, “Saving Pooled Registered Pension Plans: It’s up To the Provinces,” is available at www.cdhowe.org.