CARP made its latest submission on pension reform to the Nova Scotia Department of Finance with the help of CARP Nova Scotia. Titled, Supplementary Pension Plans as Mechanisms for Reaching Retirement Savings Adequacy, the submission is a response to a Nova Scotia Consultation Document seeking input from key stakeholders on CPP expansion and multi-employer pension plans that were announced by the Finance ministers following their meeting in PEI this June 2010. The submission details CARP’s positions and recommendation on CPP expansion and Universal Pension Plan design.
On CPP Expansion
CARP reiterated its position that moderate CPP expansion alone will not help more than 8 million Canadians without occupational plans save adequately for retirement. Given the expected retirement income levels associated with the three pillars of Canada’s retirement system (OAS/GIS, CPP, RPP/RSSP/TFSA) Canadians close to the median income levels or higher face a significant risk of savings inadequacy in retirement. For individuals below the median income level, the 60 to 70 percent savings adequacy may be more achievable, but in absolute terms, $16,000 to $19,000 annually – the maximum current range of benefits for retirees with no personal savings – is inadequate.
Doubling the replacement rate far exceeds the proposed modest approach to CPP expansion. Yet, even a doubling of the replacement rate, as the Canadian Labour Congress advocates, would only raise maximum CPP benefits from $11,800 to $23,600. Doubling the replacement rate would cost, at the highest level, an additional $216 per month in contributions split between the employer and employee. While affordable, even doubling the CPP replacement rate would leave most Canadians without the required 60 to 70 percent income replacement rates.
The submission recommended, therefore, that the CPP expansion be made at a level that will substantially improve on the adequacy of retirement income now provided by the CPP and that it be supplemented with OAS/GIS and private pension savings plans improvements to provide adequate levels of retirement income. CPP Expansion is a welcome advance in providing more income security on a universal, mandatory and defined benefit basis. However, the modest levels of increase proposed alone cannot provide the 60 – 70 percent that is considered the acceptable replacement rate for middle-income earners.
On Multi-employer Pension Plans (MEPP)
The core goal of any country’s pension system is to provide an adequate system available to the full breadth of the population that is sufficient to prevent poverty in old age. It must be affordable by the employers and employees and other participants and robust enough to withstand major shocks, including economic, demographic and political volatility. Recent events have demonstrated that Canada’s retirement system is not meeting this goal in part because of inadequate pension coverage.
Since the Nova Scotia Consultation focused specifically on MEPPs as the most likely new supplementary savings vehicle, CARP’s submission insisted that certain features are necessary to ensure universality, adequacy, and fairness:
1. Newly created supplementary pension plans should be universally available to the employed, self-employed, and even the unemployed, regardless of whether the employer has enrolled in the plan. Similarly, the plans should be mandatory or based on auto-enrolment, with the possibility for individual opt-outs.
2. Savings adequacy should be an integral goal of a multi-employer pension plan.
3. Supplementary MEPPs should offer defined benefits, which are superior to defined contribution plans in cost/benefit and resistance to market fluctuation.
4. Supplementary MEPPs should operate under regulated maximum Management Expense Ratios (MER) and have governance and accountability mechanisms that properly balance the interests of employers, employees, and retirees.
5. Supplementary MEPPs should be of a sustainable size and offer benefit portability to plan participants.