More ideas to solve Canada’s pension problems
‘The proposed PRPP is just a group RRSP’
Ottawa’s Pooled Registered Pension Plans may be a good start in helping the 60% of Canadian workers who lack workplace pensions save for old age but retired actuarial science professor Robert Brown thinks there’s a better solution.
His Pooled Target-benefit Pension Plans (PTBPP) are the focus of an Institute for Research on Public Policy paper being released Thursday. The paper, titled Pooled Target-benefit Pension Plans: Building on PRPPS, was co-authored with IRPP research director Tyler Meredith. Brown, 63, retired from the University of Waterloo in August 2010 and lives in the retirement capital of Canada: Victoria, B.C.
The pair believe the PTBPP could be implemented within the legislative framework created for PRPPS but would require co-operation from the provinces. They say the problem with the PRPP is it lacks mandatory employer contributions and, like other forms of Defined Contribution [DC] pensions, does little to reduce investment risks for individual participants.
“The only thing new about the PRPP is pooling,” Brown said in an interview, “It’s just a group RRSP is all it is. I honestly don’t think it will be successful expanding [pension] coverage and I was disappointed there was no legislation on maximum expense ratios.” If the PRPP is implemented in its present form, Brown predicts it will suffer the same fate as the superannuation schemes in Australia. “The financial institutions managing them will make lots of money and workers won’t be much better off except that they’ll be forced to save.”
Like the PRPP, Brown’s voluntary PTBPP would comingle assets among participating workplaces to provide low-cost economies of scale and manage actuarial risk. The plan would be managed by actuaries and investment managers rather than workers. By maintaining a minimum investment pool of $10 billion, investment management costs would be capped at 0.4% (40 basis points), compared to 250 to 300 beeps in most RRSPS and DC plans today.
Employers’ matching contributions would be mandatory but fixed, as in DC plans. But once they retire, plan members could expect benefits within a target range, a benefit that would vary to some degree with the performance of financial markets. The authors suggest such a plan would aim to replace 50% of working incomes, which would require slightly more in contributions than in many DC plans today.
Pension consultant Bob Baldwin, a former director with the Canadian Labour Congress, thinks Brown’s proposal is better than the PRPP. Could the PRPP evolve into the PRBPP? “The short answer is yes, it could be rejigged into Rob’s proposal.”
The PRPP was proposed as a response to two issues, Baldwin says: declining workplace pension coverage and the high cost of some retirement savings arrangements. “The two issues are connected. Unless you go to a compulsory savings regime or at least auto enrollment for all, the PRPP is not likely to change the pension landscape enough to hope for big improvement in costs in retirement savings.”
Also, Baldwin says it’s not yet clear what the full range of service providers will be for the PRPP. It’s been championed by the financial industry (chiefly banks and insurance companies) but “there are other potential service providers out there and it will be interesting to see if they’re allowed into the field.” These might include giant pension funds like the Caisse de depot, OMERS (the Ontario Municipal Employees Retirement System) or the Ontario Teachers Pension Plan. There’s no reason some of these couldn’t manage the PRPP or indeed “some large foreign pension plans and funds that have shown interest in providing services outside their homeland.”
The only thing new about the PRPP is pooling
PRPPS have been promoted as pure DC plans so individuals bear much of the financial risk. “Rob’s target proposal offers a little more certainty on benefits than a pure DC arrangement would,” Baldwin said, “That said, it’s not a pure Defined Benefit plan so under some financial circumstances accrued benefits might have to be reduced. I think Rob envisages a wider range of sponsors than commercial financial institutions.”
No government official has seen the report before Thursday, Brown says. He considers pensions to be primarily a provincial concern while the federal government only deals with pension plans of federally regulated industries like banking and transportation. “So to us, the PRPP is a template created by the federal government with the hope the provinces would buy in. Every province has a chance to tweak the PRPP.”
Internationally, the closest equivalent of the PTBPP is in Holland, Brown said. If the PTBPP were implemented, the more workers save in the plan the less contribution room they’d qualify for in traditional RRSPS. “I’m hoping there would be no Pension Adjustment and that the tax people treat it like DC plans. It’s a target benefit but day to day the operation is DC. Traditional multi-employer plans in the tax world are treated as DC plans.”