ORPP should compete with private sector, advocates say

Canada's largest financial-services companies should develop a new type of pension fund offering that could compete with the proposed new Ontario government pension plan, according to two pension plan advocates.

Pension-policy advocate Keith Ambachtsheer and Toronto lawyer Edward Waitzer argue that the new Ontario Retirement Pension Plan (ORPP), which is being created by the Ontario government to provide retirement income for workers who don't have workplace pension plans, should have "healthy private sector competition" from insurers or banks or other companies that are able to create rival pension fund services.

The government's proposed ORPP model, which is expected to launch in 2018, would require employers to sign up with the ORPP and submit contributions from employees that would be pooled and managed by a new ORPP office of investment experts, similar to the way Canada Pension Plan money is managed by the CPP Investment Board.

But Mr. Ambachtsheer and Mr. Waitzer argue that companies should instead be able to sign up with a private financial company to provide the same pension management service, and not be compelled to use the ORPP.

"If it's a value-for-money thing, monopolies are not the best way to go by giving a mandate to one organization to do this," Mr. Ambachtsheer said in a meeting Wednesday with The Globe and Mail's editorial board.

Britain's National Employment Savings Trust pension scheme, which launched in 2012 to provide coverage to workers without company pension plans, has competition from private-sector service providers, which Mr. Ambachtsheer said has forced the managers of NEST to manage costs and services.

Mr. Waitzer said competition to the ORPP would foster innovation in the pension sector and help ensure pension fund managers are motivated to keep administration costs low. He said new private-sector entrants have helped keep administration costs down for Chile's worker pension plan.

The ORPP legislation will allow private-sector companies to compete, he added. The ORPP Act exempts employers from having to participate in the ORPP if they already offer their employees a pension plan that is generous enough to meet established criteria.

Because companies with a "comparable" pension plan can opt out of the ORPP system, Mr. Waitzer said it should be possible for financial firms to develop a qualifying comparable pension plan that is similar to the ORPP model.

Mr. Ambachtsheer and Mr. Waitzer have outlined a proposed model for a competing private-sector plan in a discussion paper, recommending private companies create both a "return compounding" pool to earn returns from pension contributions while employees are still working and an "income-for-life safety pool" that would provide steady annuity income once workers retire.

The stumbling block, Mr. Waitzer believes, will be convincing financial companies to compete on management fees with the not-for-profit ORPP manager, which would require "wholesale" pricing that is far lower than the "retail" pricing they offer on products such as mutual funds.

"Here's an opportunity for the financial sector to redo its business model for a big slice of consumer needs, essentially moving from a high-cost retail business model to a low-cost wholesale business model," Mr. Waitzer said. "But because of the economies of scale, they should be able to offer essentially the same kinds of products at a fraction – a tenth – of the [retail] price they're offering now."

Mr. Waitzer said companies offering pension management services should have independent oversight body to monitor conflicts of interest and ensure pension plan members are getting a good deal.

For example, companies should not be allowed to choose a pension fund manager with higher administration fees – which reduce employee returns – in exchange for a "collateral benefit" such as a discount on the premiums the company pays for health insurance benefits.