At their meeting in Prince Edward Island in June 2010, federal, provincial and territorial finance ministers decided to pursue three areas relating to pensions, one of which was to explore private sector plan design innovations that would allow financial institutions to offer broad-based defined contribution (DC) arrangements to multiple employers and the self-employed.
By combining the best features of traditional DC pensions and defined benefit (DB) multi-employer pension plans, Canada’s life insurers propose a transparent, accountable and effective product—what we have called a DC-MEPP—that addresses four key challenges of pension plans: unpredictable employer contributions, compliance burdens that are too onerous for small and medium-size employers, poor consumer engagement and exclusion of the self-employed. Here’s how:
DC-MEPPs would break the employment linkage between sponsors and members that underlies all registered pension plans. Regulated financial institutions would take on the role of sponsor and administrator, so accessing a pension plan would become a cost-effective option for employees of participating smaller employers—workplaces that typically lack the expertise and economies of scale to provide a plan on their own. All of the compliance obligations would shift to expert, well-governed organizations that would compete aggressively for business. Employers would simply choose a supplier, and then deduct and remit employee contributions and any optional employer amounts.
A second step would streamline plans dramatically. Legislation permitting default enrollment, automatically increasing contribution rates over time, and using “smart investment options” that tailor investments based on simple member profiles have been used internationally to maximize participation and savings levels. These approaches address the procrastination and lack of engagement often found among workers who view retirement saving as something to be done “tomorrow.” And since each of these strategies would permit individuals to “opt out,” they would preserve choice and the ability to customize savings to fit personal needs. Most importantly, they would leverage consumer behaviours to make saving simple.
The costs of Canadian DC plans are already competitive with those of many large DB plans, and are lower than those of comparably-sized DC plans in other countries.
Since DC-MEPPs would be offered by regulated financial institutions, the existing statutory oversight mechanisms that apply to those institutions—such as prudent matching of assets and liabilities and market conduct standards—would augment pension standards, providing additional consumer protections.
DC-MEPPs could also offer guaranteed retirement income options, with greater security and transparency than target benefit DB plans.
While not essential to facilitating DC-MEPPs, there are related issues where governments can enhance savings opportunities and efficiencies for Canadians. For example,
• Expanding the income base upon which pension contributions could be made. By definition, the self-employed have business income, not employment income, and are precluded from participation in a pension plan unless they incorporate, “hire themselves,” and pay themselves a salary. Allowing pension contributions to be made based on such self-employed business income would eliminate this costly and complicated process, encouraging greatly expanded pension plan participation.
• Deferring the date at which retirement savings must start to be drawn down, from age 71 to 73. This reflects both increasing longevity, which requires savings to last longer, and the desire among many Canadians to actively work past age 65. As well, longer educational periods and lower savings rates mean many Canadians may need more time in order to accumulate adequate assets to finance a comfortable retirement.
• Considering whether existing annual RRSP and pension contribution limits should be augmented or replaced by a lifetime lump-sum limit. This would allow greater flexibility for consumers to save when funds are available.
• Allowing employers to lock-in their contributions to group RRSPs. This would ensure those funds are used to provide the intended retirement incomes, and not simply spent.
The ministers also committed to consider a modest, fully-funded, phased-in approach to increase coverage and adequacy of Canada Pension Plan benefits. As the basis upon which comprehensive retirement income plans are built, periodic review of that program is reasonable. But drastic expansion of CPP beyond “modest” reform would lack the flexibility that Canadians need and deserve.
Of the options proposed, DC-MEPPs offer the best means of increasing consumer participation in secure, affordable and flexible pensions. They use existing provider infrastructure without cost to governments, and can be launched quickly. They also focus on middle-income Canadians without pensions, those most in need of enhanced retirement savings.
Canada’s finance ministers committed to explore this option when they met in June. At their meeting in Kananaskis, Alberta on Monday, Dec. 20, they should firmly commit to making the changes necessary to make DC-MEPPs a reality.
Frank Swedlove is the president of the Canadian Life and Health Insurance Association.
Related Links:
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- CFIB urges ministers to look at alternatives to CPP increases
- Pension, CPP debate fires up readers
- Is an eligibility increase the answer for CPP?
- Parties joust over pension reform in “take note” debate
- Pension reform and funding need attention in the Atlantic provinces