The announcement that the federal government is going to study the option of allowing Canadians to voluntarily contribute to the CPP to supplement their retirement savings has supplied a lot of grist for my mill.

I have reviewed the somewhat thin media reports on the announcement and have the following comments to share with readers:

1. In the House of Commons on May 25, Minister of State for Finance Kevin Sorenson said, “Under our government, there will be no mandatory job-killing and economy-destabilizing pension tax hike for employees or, certainly, for employers.” Does this mean that the Minister of Finance Joe Oliver , with Wednesday’s announcement, is considering the proposal of a voluntary pension tax hike for Canadians? (bold emphasis added) A voluntary pension tax benefit would be much more attractive.

Read: Ottawa considers voluntary CPP expansion

2. There is huge devilry in the details of such a proposal, none of which were suggested in the announcement. Will voluntary CPP contributions translate into:

      i. additional fixed (or DB) monthly pension amounts, or
      ii. will they simply be invested by the CPP Investment Board and accumulate returns according to the performance of the CPP fund?

3. If 2(i) were to apply, it will be very difficult for the government to illustrate a value proposition that would beat out the Canadian insurance industry without having such benefits subsidized in some fashion (e.g., by taxes paid or CPP contributions made by those who choose not to voluntarily contribute)—this would obviously be extremely problematic for both practical and political reasons. Furthermore, there can be no doubt that the extremely effective and influential insurance industry lobby will be happy to make this point to Canadians.

Read: Proposed voluntary CPP expansion gets negative reaction

4. If 2(ii) were to apply, the value proposition will still be difficult to promote. Will the CPP fund be required to issue a prospectus to potential investors? Will the management expense ratio (MER) be as low as Canadians now believe? Last time I looked a couple of years ago it was more than 0.40% per annum, excluding the cost of administration of the CPP itself (not cheap, relatively speaking). A 0.40% MER is certainly is much cheaper than most mutual funds, but will certainly have to increase considerably to recover the costs of implementing and maintaining a whole new administrative infrastructure to provide a voluntary retirement investment solution. I expect the whole of Canada’s financial services industry would watch this closely and find ways to aggressively and effectively compete with the federal government on cost.

5. How easy will it be for Canadians to withdraw funds for purposes other than retirement savings? If it will be easy, this will add to administrative costs. If it’s not easy, take-up rates will be quite low as it’s my experience that most Canadians loathe government restrictions on access to their retirement nest eggs.

6. Would voluntary CPP contributions be tax deductible, and if so, would they reduce RRSP contribution room?

Read: The great CPP debate: Expanding the CPP is a golden opportunity

I have to conclude that this announcement is electioneering, with very little real substance. Are the Conservatives really seriously proposing to compete with Canada’s financial service industry in providing a CPP voluntary retirement savings alternative to add to RRSPs, TFSAs and PRPPs?

The whole point of the PRPP was to head off calls for CPP expansion/enhancement. I strongly doubt that this idea can possibly withstand the political pressure that would come to bear from the perception of a betrayal this announcement will spark in financial services industry. The Ontario Liberals have set the stage with the Ontario Retirement Pension Plan for a spirited pension debate about the CPP in the upcoming federal election. The Conservatives are the first to set sail on this debate, but under their deceptively bright spinnaker they are sitting in a very leaky boat.

Greg Hurst is a Vancouver-based pension consultant with Greg Hurst & Associates Ltd.

These are the views of the author and not necessarily those of Benefits Canada.

Copyright © 2018 Transcontinental Media G.P. Originally published on benefitscanada.com
See all comments Recent Comments

Neil Craig:

Certainly not as leaky as the ORPP boat, easy to comment from BC when you won’t have to fund the 500 million or so to set up the ORPP infrastructure. Voluntary CPP if set up DB style would likely appeal to all those who think most Canadians aren’t capable of saving for retirement.

Wednesday, May 27 at 7:11 pm | Reply

JayC:

IMHO Susan Eng of CARP otherwise known as the Zoomer Media Marketing Engine, has used their surveys effectively to convince Ottawa. They had to do something or at least look like they are because the senior votes they have coveted and have taken for granted are very upset with them. Perish the thought, but they might even vote against them.
IMO This is politically not policy motivated. The financial industry votes with their pocketbooks this year and those do not count in October.

Thursday, May 28 at 3:07 pm | Reply

JayC:

Greg is this another Flip Flop (back) from your CPP inevitable Expansion Article?

Thursday, May 28 at 5:00 pm

Kevin:

Not to mention the anti selection potential. Would I get the same DB benefit for contributing when I’m 55 as when I’m 30? If you try to make the DB benefit take age into account it could get pretty complicated.

Friday, May 29 at 11:20 am | Reply

Jim Cochrane:

I’ve reread your article and obviously missed the point. There is something in that West Coast NINO air. My insured product voluntary investments had a 375 basis point MER on a 6 figure investment. Although they have come down a little since then the Insurance Industry on the Group side will not even be interested in Voluntary at anything less than 4 times the current 40 levels. As someone who has spent the last 45 years intimately involved in the industry at all levels your faith is touching but reality teaches us something different.
The attention will however result in additional Income from tangential products as it has in every Government Intrusion since Hospital Care in 1957. Including CPP intro in 1966.

Monday, June 08 at 2:42 pm | Reply

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