Like most western countries, the level of pension savings in Canada is a major issue for the government, and increased life longevity is driving concerns about how Canada can provide for its senior citizens in the future.
Canada has a three-pillar approach to pension provision, which consists of a basic non-contributory pillar (Old Age Security Pension, Guaranteed Income Supplement), a second pillar of statutory contributions (CPP, QPP) and a third voluntary pillar (group pension plans, RRSPs).
Given the dramatic increases in longevity to date—and the fact that these increases are forecast to continue—Canada needs to look at its options to ensure that an ever-increasing section of the population does not sink into pensioner poverty.
In order to extend pension savings among the populace, the majority of western countries are considering hard or soft compulsion. In Australia, they have already made superannuation contributions compulsory, with employers contributing 12% of each employee’s salary into a superannuation fund to be drawn on in retirement. In the UK, they are auto-enrolling all workers into pension schemes, with the opportunity for the employee to opt out.
Are the Canadian authorities headed down the same route?
Enter the PRPPs
The arrival of the Pooled Registered Pension Plans (PRPPs) brings a dramatic change in the pension savings landscape. The essence of the change is to make it possible for those in smaller firms and among the self-employed to receive the benefits that are enjoyed by members of larger pension schemes, thereby encouraging them to join. This should result in better returns, enticing more people to start saving for their own retirement rather than relying upon the state.
PRPPs can significantly expand the numbers saving, particularly because employers must facilitate savings via payroll deduction into the plans, which makes it much easier for employees to contribute and to maintain their contribution level. Another positive aspect of the PRPP regulation is that employer contributions, which have been shown to drive wages down, are not required. In effect, the employee always pays and making the system easier to understand gives employees more ownership of their pension—hopefully making them focus more on the pension provider’s performance.
But the question remains: Will the provision of better-value pension products be sufficient to increase the numbers saving for a pension, or will the federal government and provinces be required to take stronger action by moving to a compulsory or semi-compulsory system?
Is product enough?
The establishment of PRPPs puts the foundation in place for moving to a semi or fully compulsory system. But of course, having the correct product is not sufficient for compulsory pensions to be accepted by the general population. Forcing people to pay into pensions feels like taxation, so the pension providers will need to engage the individual employees to ensure they take ownership of the products and realize the importance of building a substantial pension fund to live on in retirement.
The regulations for PRPPs allow individual provinces to introduce auto-enrollment, and Quebec has already announced a decision to take this line. Quebec is following the UK model, allowing employees to opt out of the scheme and hoping that the general lack of interest in pensions will mean that the majority stay in the scheme by default. However, this means that the Quebec government is taking the approach that those who are not sufficiently engaged will be relaxed enough to permit the deductions to be made. Is it not far more likely that they will immediately seek to opt out from something they don’t understand, particularly when the direct cost to them is so high? Surely the general population will see this as a special tax for living in Quebec, unless the other provinces follow suit quickly.
An alternative to compulsory pensions is later access to pensions, which is one way to bolster the current system without increasing funding. However, there does not appear to be any major desire in Canada at present to follow the U.S. example, where they aim to increase the retirement age to 67 by 2024. The state cannot afford to plug the gap—which means it is going to be very tempting for the provincial and federal governments to move to compulsory pension savings as the only way to prevent a dramatic increase in pensioner poverty.
PRPPs complete the jigsaw for the Canadian third pillar for pensions, but whether the take-up is sufficient without compulsion remains to be seen. Given the scale of the problem in funding pensions and the fact that longevity increases are not going to stop, it is hard to see how Canada can avoid merging pillar two and pillar three during the next decade, resulting in a fully compulsory system.
The full white paper is available for download at exaxe.com/exaxe-white-paper-pooled-retirement-pension-plans-gateway-compulsory-pensions.
Tom Murray is head of product strategy at Exaxe.