No matter who wins federally in 2015, pensions will improve
CPP may expand under Liberals or NDP. If the Tories win, Ontario has its own plan
The big divide between the provincial Liberals and federal Conservatives on the way to improve pensions and retirement security is a tale of two ideologies.
It will make for interesting times next fall as Canada goes to the polls in a federal election. If the Conservatives win, Ontario will go it alone with its own version of the Canada Pension Plan. But if the Liberals or NDP hold the balance of power, things get interesting. Expanding the Canada Pension Plan becomes a possibility and so Ontario doesn’t need to build a costly Ontario Retirement Pension Plan (ORPP) from scratch. The ideological differences are very clear. The federal Conservatives’ view is that Canadians don’t need help to save.
The Canada Pension Plan offers a good start and what we need is a bit more discipline to take advantage of available tax breaks.
If you don’t have a company pension, it’s up to you to set something aside in your Registered Retirement Savings Plan (RRSP). Put a little more into your Tax Free Savings Account (TFSA). Try the recently introduced Pooled Registered Pension Plans (PRPPs).
The Ontario Liberals see three million middle-income Ontarians who aren’t saving enough, at a time when company pension plans are disappearing. Either they won’t, or can’t save, given the day-to-day commitments of mortgages, car loans and school extracurriculars.
The Liberals say you can pretend otherwise, but tax incentives aren’t working and middle-income earners are in a bind. So the best way forward for those who do not have a company pension is through the ORPP. Yes, it is a forced saving, but it is your money, not a tax and creates a benefit that on retirement will be similar to the CPP.
That’s where things stand. When thinking about do-it-yourself retirement versus a pension plan here are three ways that pension plans come out ahead:
The cheque is always there: Stock markets rise and fall. If you had the misfortune to retire in 2008 or 2009, your outlook and sense of security suddenly changed. U.S. share prices dropped 54 per cent between Jan., 2007 and March, 2009. Canadians shares somewhat less. What to do? Something? Nothing? Stay working? Take Valium?
The answer was do nothing. Five years later markets are testing new highs. Pension funds with the luxury of time, just waited it out.
Don Raymond, chief investment strategist for the CPP Investment Board (CPPIB) made the point in an interview last year: “When (we) talk quarters, we’re not talking three months, but a quarter of a century,” he said. “That allows us to live through ups and downs.”
Lower costs: Fees are a killer when it comes to investment returns. The average mutual fund management fee is 2 per cent of assets. Jim Keohane, CEO of Healthcare of Ontario Pension Plan (HOOPP), which covers 286,000 people in the province, says HOOPP’s fee is 30 basis points, or less than a third of 1 per cent, to manage $51.6 billion in assets. That makes a huge difference over time.
If you invest $100 and the fee is 2 per cent, it costs $2 a year. If the fund’s profit is 5 per cent, or $5 a year, you’re left with a gain of $3. If you invest the same $100, but the fee is 0.30 per cent, that’s 30 cents a year. You keep $4.70, or 56 per cent more. Lower risk: One of the stresses of retirement planning is figuring out how much you you’ll need to live comfortably and how not to outlive your resources. But how long will you live. Will it be 75 or 95? Who knows. It could be well beyond that. Keo- hane says HOOPP has 52 pensioners who are over 100. Pension plan members sleep easy because they get a cheque for as long as they live. Their pension plans spread the longevity risk over tens of thousands of members. “(With a pension fund) you know you’ll never run out of money,” Keohane says. “On your own you have to assume you’re one of those people who will live to 100. You don’t want to run out of money when you’re 90.” Keohane is one of the experts advising the Ontario government on their plan, and believes that one way or another, enhancement of public pensions is coming. “I think people are awaiting the outcome of the federal election next year,” he says. “The Conservatives have indicated that they won’t expand CPP and the other parties probably would. So it all depends on who wins.” Adam Mayers writes about personal finance and pensions and retirement issues. Reach him at amayers@thestar.ca.