Public Option for Pension Security?

A large pool also allows the administrators to purchase annuities for each beneficiary on a regular basis so that by the time of anticipated retirement, the target or promised pension benefit would be available (thanks that what insurance experts call ‘risk pooling’ a key ingredient for insurance markets to exist). The existing CPP makes the same promise but does not need to purchase annuities, relying instead on the actuarial predictions and adjustments that a massive fund and long term horizons offers to minimize risks.

In short, the key advantages of a true defined benefit plan would be coupled with the key advantages of knowing in advance what contributions are required. Historically, private insurers used to provide defined pensions in this manner in the 1950s and 1960s but ceased to do so because it required them to maintain regulatory capital on account of the fact that insurers were on the hook for pension promises. By transferring the underwriting risk to a large enough entity (the public funds), Canadians can have the certainty of a defined benefit promise without putting pressure on insurance companies. The key to this approach is the setting of actuarial assumptions very conservatively, thereby avoiding surprises.

B.C. and Quebec have adopted a similar model for car insurance in their provinces. This model works and Canadians in those provinces generally pay half the premiums Ontarians pay. Ironically, allowing a public alternative will introduce a healthy dose of competition for our pension dollars, something which is surely bound to benefit everyone by keeping private providers honest.

CARP isn’t the only one wondering why PRPPS should only be the exclusive domain of the private sector. Greg Hurst of Benefits Canada reports, A case for allowing pension funds to manage PRPPs:

Recently OMERS CEO Michael Nobrega suggested that pension funds should also be permitted to compete with banks and insurance companies when it comes to pooled registered pension plans (PRPPs). Benefits Canada followed up with an story and online poll asking “Should large pension plans be permitted to administer the new pooled retirement pension plans?” At the time of publication, 53% of respondents say “Yes” (including me), 23% say “No” and 25% say “There’s not enough information yet.”

If OMERS or other large pension plan boards are interested in competing with banks and insurers, I would like to suggest that perhaps they need not wait for the provinces and the federal government to flesh out the PRPP framework.

The trail that’s been blazed by the Saskatchewan Pension Plan (SPP) might represent an opportunity for other large pension funds to seek “specified pension plan” status from the federal government under the Income Tax Act regulations, and thus allowing them to compete in the PRPP space.

Recent Income Tax Act amendments made for the SPP including these two changes:

1. All instances of the term “prescribed provincial pension plan” were changed to “specified pension plan”. This could this be a hint that the federal government might be open to also bestowing specified pension plan status on plans without provincial government sponsorship.
2. The $600 annual contribution limit was removed and RRSP limits now apply. The $2,500 limit in the SPP is now only a function of that plan, not the Income Tax Act.

Any Canadian with employment income can apply to join the SPP. Unlike PRPPs sponsored by banks and insurers, the SPP has a fiduciary framework that is focused on the delivery of retirement plan services and income to plan beneficiaries without the possibility of conflicts with shareholder interests.