When is a glass half full really half empty? That‘s the best way to look at pension reform post-Kananaskis – where the federal and provincial finance ministers held their semi-annual meeting.
To understand what we got, let’s see what we wanted. Two years of steady prodding got Canada’s finance ministers to agree that Canadians were not saving enough for their retirement and those without workplace pensions – two-thirds of working Canadians – needed a safe, affordable and reliable retirement savings vehicle.
After their June meeting in PEI, the ministers even said government had a role to play: they would consider “modest” CPP enhancements and allow the private sector to develop multi-employer pension plans to fill that savings gap.
We should have focused on “consider” rather than jumping to the conclusion that they wanted to make real change.
The “modest” CPP enhancements were never going to amount to a vast improvement in retirement security but they would have increased the secure, mandatory, defined benefit element within the whole portfolio of retirement savings options. A supplementary plan would still be needed to provide a secure retirement.
And financial security is top of mind for Canadians after the economic turmoil of late. Think tanks are even publishing learned tomes using “sophisticated simulation tools” telling us what we can see with our own two eyes: people are not going to be able maintain their standard of living in retirement. But their conclusions are still sobering.
According to the C. D. Howe, recent retirees are managing adequately – which mirrors our CARP ActionOnline survey results. However, fully 44 percent of current 25- to 30-year-olds risk a significantly reduced standard of living after retirement mainly because OAS benefits do not keep pace with household earnings and fewer private sector workers have workplace pension plans.
C.D. Howe “Canada’s Looming Retirement Challenge: Will Future Retirees Be Able to Maintain Their Living Standards upon Retirement? C D Howe commentary No. 317, December 2010. Download the paper, here
Hence the point of pension reform. CARP members strongly support improving the retirement landscape not for themselves but for their children and grandchildren. And they give us the benefit of their wisdom when they say that there should be a universally accessible and affordable plan that provides an adequate pension and is large enough to be professionally managed and withstand demographic and economic body blows.
Did we get that after Kananaskis? The proffered Pooled Retirement Pension Plans will pool risks (check!), have professional managers hired by the banks and insurance companies given the monopoly to offer these PRPPs (check!) and be available to the self-employed as well as employees (check!). That’s the good news.
But what about fees? The big issue with most investment offerings are the management fees. We pay 2% or more for individual advice with our RRSPs whereas the large pension funds pay less than 1%. High fees erode returns. PRPPs are supposed to be very large funds and therefore should be able to charge lower fees but there’s nothing in the proposals that sets a fee cap.
And risk taking? A large private sector multi-employer plan for people working in supermarkets and the like was recently in news because risky investments meant they either had to cut benefits or increase contributions.
The most difficult issue is conflict of interest. The proposal says that there will be fiduciary rules but how will that work? Will the banks and insurance firms who administer PRPPs not be permitted to invest the funds in all those investment products they sell themselves? Or are they so established as to be above reproach?
Clearly, investor protections are needed. And now is the time.
Canadians now contribute about $40 Billion to their RRSPs but that still leaves an estimated $80 billion in RRSP “tax-deferral room” that has not been taken up. The proposal contemplates tax rule changes to include contributions to the new PRPPs in the category of deductible pension contributions. The potential business for the private sector administrators of the new PRPPs is enormous.
Now is the time to stipulate fee caps, risk management rules and fiduciary obligations – when the private sector is eyeing billions of dollars in new business, not after they have our money.
The CPP Investment Board, like the large workplace pension fund managers, has managed to keep costs low. Unlike them, CPPIB is independent of any employer or group or employers that might pressure them to reduce contributions or increase risks. And it has a legislated mandate to manage “in the best interests of the contributors and beneficiaries” and invest “without undue risk of loss, having regard to … the ability of the (CPP) to meet its financial obligations on any given business day”.
So, along with mandatory employer matched contributions and defined benefits, the CPP is designed to succeed. Which is why even a “modest” enhancement set pre-retirees’ hearts aflutter.
Any CPP change requires the agreement of two thirds of the provinces with two thirds of the population so we need all the finance ministers sitting together in the same room. But it also gives Alberta and Quebec together a veto – which they exercised presumably to the applause of their hometown crowd. So the rest of us missed the opportunity for CPP enhancements – twice so far.
So, politics trumped fulfilling promises. In an election year, shouldn’t it be the other way around?
Keywords: pension reform, CPP