Facing at least four proposals to shore up Canadians' savings for retirement, the federal government's Jim Flaherty announced it would proceed first with defined-contribution pooled registered pension plans, aimed at providing pensions to small-business employees and the self-employed currently without any company pension.
Another proposal, to expand the Canada Pension Plan, has been moved to the back burner and may simmer there for some time while government deficits continue, according to new federal minister of state for finance, Ted Menzies of Calgary.
Any reform of pensions in the country revolves around a number of issues -- whose retirement income is it targeted to improve, who will manage it, who takes the investment risk, and will participation by employers and employees be mandatory or voluntary?
The proposed PRPP would be aimed at the 67 per cent of the labour force without corporate pensions. It would be administrated by regulated financial institutions, including trust and insurance companies, which naturally drew praise from the Canadian Bankers Association. As for participation, jurisdictions would determine if it's mandatory for employers, and it would likely be voluntary for employees.
For those who do join, the defined-contribution nature is a compromise -- employees would get an automatic 100-per-cent return through employer matching of contributions, but employees would have to take on the investment risk, with no fixed pension benefits.
"Reading between the lines, it would be portable and go across industry lines. Both of these aspects would be an improvement," said Russ Purdy, a retired labour-relations consultant in Edmonton. "The absence of a mandatory employer contribution will get a 'thumbs down' from the union movement and the NDP, of course."
Certainly many unions, including the Alberta Federation of Labour in a meeting with The Edmonton Journal editorial board, want pension reform to be universal and include their members. They also want the government to manage the plan and take the investment risk, with participation by employers to be mandatory. They want the so-called "CPP on steroids," where taxpayers take all the investment risk and employee benefits are guaranteed.
There are two obvious arguments against universality. One is that employees who already have a generous defined-benefit corporate pension shouldn't have an enhanced defined-benefit government plan at taxpayer peril. The second is that corporations, if forced to pay more into CPP than they already are, could reduce contributions to or eliminate their defined-benefit company pensions.
With small businesses, the question is whether they can afford to contribute to a corporate pension plan or a supplemental or beefed-up government plan of any sort, in addition to current CPP contributions. The price might be cutting jobs.
With the PRPPs, employee participation is another issue.
"I think the biggest problem will be the voluntary nature of the scheme," Purdy said. "There's a certain portion of Canadians who don't take advantage of the current voluntary schemes and adding yet another one doesn't seem to be particularly helpful, if these are indeed the people we are supposed to be helping."
In fact, just 55 per cent of Canadians have registered retirement savings plans, and only five per cent of all RRSP contribution room was used up as of 2008, when the average annual contribution was $2,700, according to last available data.
The PRPPs are a good start, aimed at the people who are most in need of savings for retirement. The next step is to increase the portion of their retirement income that is guaranteed, which continues to shrink as defined-benefit pensions disappear and low interest rates scare people with RRSPs from converting to life annuities. That can be done by having corporations or the government or insurance companies take on investment risk and by making saving compulsory.
Bob Baldwin, of the Institute for Research on Public Policy, noted that finance ministers will have to consider trade-offs, "such as those between respecting individual preferences and implementing broad-based instruments, achieving certainty of benefits versus certainty of contributions, and ensuring income adequacy versus plan affordability."
None of those decisions are easy.
One somewhat radical idea that has been floated involves a combination of a super-sized CPP plus corporate defined-contribution plans.
Under this scenario, everyone would belong to a giant CPP, run by the government with investment risk taken by taxpayers, with contributions by employers and employees increased from current levels, and defined benefits enhanced.
At the same time, corporate defined-benefit pensions would be eliminated and companies would instead offer scaled-down, defined-contribution pensions run by financial institutions, again with employer contribution-matching and with employees taking the investment risk. Participation would be mandatory for companies and voluntary for employees.
I, and my teenage sons, could live with that.
Edmonton Journal, Fri Jan 14 2011
Byline: Ray Turchansky