Focus and Clarity Needed to Guide Pension Reform

This is a guest blog from Keith Ambachtsheer, one of Canada’s foremost pension experts

As they tackle the pension reform question once again on December 20 in the Rockies, the greatest Season’s gift the country’s Finance Ministers could bestow on Canadians is focus and clarity.

For example, which of the following three goals guides their pension reform efforts:

1. Provide all Canadians with a good pension when they retire.
2. Solve a small number of specific problems in Canada’s current pension system.
3. Facilitate market-driven solutions to retirement income provision.

Achieving any one of these three goals requires a materially different strategy than the other two. For example, Goal 1 is best achieved through mandatory participation by all workers in a major expansion of the Canada/Quebec Pension Plans. In contrast, Goal 3 only requires bringing pension rules and regulations into the 21st Century.

While they have not directly said so, my sense is that the Ministers want to achieve Goal 2: solve a small number of well-documented, specific pension system problems. Why? Because these problems are real, and because the Ministers believe sufficient consensus can be built on how to solve them. Specifically, they have three problems in mind: 1. Millions of private sector workers do not have a workplace pension plan and many will experience significant declines in their living standards as they retire in the decades ahead; 2. There is a belief that the Guaranteed Income Supplement (GIS) could be more effectively designed as an anti-poverty measure; 3. Many pension rules and regulations have outlived their usefulness and must be updated and harmonized across Canada.

If these are indeed the problems the Ministers want to address, it would be very useful for them to explicitly say so. Such a statement would set the stage for designing targeted solutions to deal with them. For example, there are some four million middle-income, private sector Canadian workers without a pension plan. Specific questions like these three must now be resolved:

• What kind of supplemental (i.e., in addition to the basic C/QPP/OAS pension) formula best suits these workers? The time has come to bury the fruitless DB vs. DC debate. Discussions should focus on the target supplementary pension level, on the contribution rate structure, on retirement date flexibility, and on how investment, inflation, and longevity risks are to be borne.
• Through what mechanism(s) is that pension accumulation formula most cost-effectively implemented? Is it through the already-existing C/QPP infrastructure for salary deductions, investing and benefit administration? Or is it through the already-existing infrastructure built by our insurance companies and large-scaled public sector multi-employer pension plans? • What degree of compulsion is appropriate? Should participation be mandatory? Voluntary? Or is auto-enrolment with opt-out rights the best compromise between these two ends of the spectrum?
In short, the vague ‘modest C/QPP enhancement’ and ‘pension innovation’ options that came out of the Finance Ministers’ June conference in PEI may have been politically useful at the time. Now we must move beyond ambiguity and get to the heart of the pension reform matter.

Similarly, on the GIS redesign question, what is the most appropriate definition of ‘low income’ today? What ‘low income’ floor should be guaranteed to every Canadian? What should be the roles of means-testing for GIS eligibility? What role should incentives to work and save play? As for updating pension rules and regulations, what needs to be fixed in the Income Tax Act? Where does the balance lie between principle- and rule-based regulation? How are the impediments to sponsorship of large multi-employer plans best addressed? How to achieve pan-Canadian uniformity?

Please Ministers, give Canadians focus and clarity on where pension reform is going as they say goodbye to 2010 and say hello to 2011.