Keith Ambachtsheer is director emeritus of the International Centre for Pension Management at the Rotman School of Management, University of Toronto. Edward Waitzer holds the Jarislowsky Dimma Mooney Chair in Corporate Governance, is director of the Hennick Centre for Business Law at Osgoode Hall Law School and the Schulich School of Business, York University, and is a senior partner at Stikeman Elliott LLP.
There is evidence that an element of employer compulsion is required to ensure that Canada's private-sector workers are covered by a functional workplace pension plan. That reality should be tempered by careful thought about strategies to minimize the potential negative impacts of compulsion.
One strategy is to encourage healthy private-sector competition through the "comparable plan" principle that Ontario has adopted in its Ontario Retirement Pension Plan (ORPP) initiative. Competition could foster much-needed innovation in workplace pension design and management in Canada, and is an opportunity for the financial sector to assert its social utility.
A 1994 World Bank study suggested that the ideal national retirement income system has three pillars: a universal pillar providing a basic pension to all, a workplace-based pillar providing supplementary retirement income and an individualized pillar permitting people to create their own "add-on" piece. This model flags a serious Canadian problem. More than three-quarters of Canada's private-sector work force has no access to a well-designed, cost-effective workplace plan. This means many are undersaving and thus will not achieve their retirement income aspirations. Others will fall short because they are saving inefficiently through high-cost investment vehicles.
These consequences impose significant costs on future generations. One solution is to expand the Canada Pension Plan/Quebec Pension Plan or another provincial version. Specifically, Ontario's ORPP initiative was announced in 2014 and the ORPP Act was passed in 2015. As an alternative solution, we proposed in 2011 requiring employers to enroll their employees into a qualifying pooled registered pension plan (PRPP) offered by an approved financial institution.
The ORPP Act contemplated these solutions by requiring Ontario employers to enroll workers into the ORPP or offer a "comparable plan." Current wording leaves room for interpretation of what that is. This window creates a private-sector opportunity for competition with the ORPP. It could also pre-empt the need for future CPP/QPP expansion if other provinces also require "comparable plans."
What should a 21st-century workplace pension plan look like? It has (a) the ability to compound returns over long investment periods to make a decent pension affordable, (b) the ability to provide lifetime payment assurance and (c) a transition mechanism that shifts plan participant exposure from return compounding emphasis to payment safety emphasis as they age. To date, very few countries have been able to offer access to this kind of workplace plan due to lack of innovation and outmoded legislation and regulation.
Fortunately, there is a global effort under way to address these barriers. Northern European countries, Britain and Australia have already made workplace pension-plan participation mandatory. Ontario leads the way in North America, but Saskatchewan has been offering its Saskatchewan Pension Plan since 1986. (The SPP offers most of the 21st-century plan features set out above, but because participation has been voluntary, it lacks the scale to be truly cost effective.)
Ontario's commitment to the ORPP can be a game-changer for Canada. It creates the opportunity for financial institutions to offer SPP-type plans from coast to coast, and even beyond Canada's borders. Let's call them PRPPs. Here's how they could compete with the ORPP:
The target pension benefit: A PRPP would be comparable to the ORPP's target benefit at the ORPP's 3.8-per-cent contribution rate. However, with the PRPP, the employer would have the option of choosing a higher target benefit with a higher contribution rate.
Risk mitigation: The PRPP design recognizes that the major risk facing workers is lack-of-return compounding risk, and the major risk facing retirees is payment-for-life uncertainty. This leads logically to its two-instrument approach. We understand that the ORPP design will not distinguish between the differing risk preferences of workers and retirees.
Wealth transfers: The PRPP design ensures that no systematic wealth transfers take place between current and future workers, retirees and taxpayers. To date, it is unclear how the ORPP will ensure this.
Open architecture: The PRPP will be able to accept already accumulated retirement savings and move them into the same return compounding-to-safety life-cycle process as will be used for new pension contributions. Our understanding is that the ORPP will not.
Surely employers and employees would benefit from the option of a PRPP with the features sketched out above.
A final thought. Leadership by policy makers and financial institutions can help demonstrate that regulation is about more than protecting consumers from deceptive products and practices. Rather, it is to ensure that society is well served and that consumers get "value for money" – a fair deal. This should encourage financial innovation (as a substitute for government market intervention) and a better articulation of public stewardship responsibilities throughout the financial services supply chain.
This article is based on a KPA Advisory Services paper.