When Minister of Finance Joe Oliver announced in May that the federal government would consider allowing voluntary contributions to CPP, the financial community was caught by surprise. After all, his predecessor, Jim Flaherty, had publicly stated that the government looked into a voluntary CPP proposal in 2010 but declared it unworkable.
All politics aside, the idea of a voluntary CPP is appealing. After all, the CPP is a trusted brand. It, along with Mounties and Medicare, has a Canadiana feel that leaves few people untouched. Giving Canadians the option to top up their basic (and frankly, for high earners, much too low) pension benefit with additional retirement fuel seems sensible at first blush.
Read: Would voluntary CPP expansion change the way Canadians save?
The fact that a portion of the CPP funds are managed by quasi-public servants who have a strict fiduciary mandate to grow the national piggy bank does satisfy many Canadians who have come to distrust the financial sector with the stories of hidden commissions, inflated trailer fees and lacklustre performance.
The CPP is national (except in Quebec) in scope and portable. Vesting is immediate, and it even offers a disability benefit in some cases. Those who favour a mandatory increase also trumpet that it’s a great way to ensure forced savings take place—thus helping those who can’t help themselves.
So what form would a voluntary CPP take? Minister Oliver gave almost no indication except to say employers would not be forced to contribute to it.
One model that may garner attention is the one proposed by pension expert Keith Ambachtsheer in his May 2008 C.D. Howe Institute paper on a Canada Supplementary Pension Plan. In short, it’s a plan with auto-enrollment with a right to opt out, similar to the pooled registered pension plan here or the NEST plan in the U.K. The Ambachtsheer proposal would require a conscious effort on the part of all employers across Canada to first offer participation in this new plan and then put administrative systems in place to police the opt-out. Given the current federal penchant for minimal state intrusion, even this halfway measure might be seen as too interventionist.
Read: Is the voluntary CPP add-on DOA?
The first voluntary CPP model was proposed by myself and Reena Goyal in November 2004. It simply stated that a supplemental CPP (SCPP) account be created to accept voluntary contributions by employees (and, where appropriate, employers) above the current statutory limits imposed by the current CPP regulations. The assets of the SCPP would be administered by the CPP Investment Board and the earnings on such additional contributions would supplement the basic benefit currently offered by the CPP.
By having the contributions to the SCPP collected using the already-existing CPP machinery, and the benefits administered by the federal bureaucracy already in place, the original SCPP idea was to deliver immediate value without incurring significant costs. The value would stem mainly from the immense economies of scale that can be generated by having a single account receiving contributions from potentially millions of Canadians.
While the basic idea is simple enough to grasp, employers should understand how the SCPP reform would actually work in practice. First, a purely voluntary initiative has a number of immediate benefits. One, it empowers those who are serious about retirement without creating a new bureaucracy as contemplated by the Ontario Retirement Pension Plan. Two, it avoids economic distortions when a payroll charge is imposed on employers by mandatory measures. And three, it avoids economic disruptions for employees who might have better uses of money than putting it aside for retirement.
Unfortunately, the accepted wisdom has always been that voluntary measures don’t work and that Canadians must be forced to save for retirement or else won’t do it. By extension, this means that the SCPP is bound to fail much like its Saskatchewan distant relative, the Saskatchewan Pension Plan, which has had a very low take-up rate over the years and doesn’t really help with the objective of enhancing pension coverage.
Read: Ontario slams voluntary CPP proposal
Ironically, the ultimate voluntary measure, the tax-free savings account, has been wildly popular since its inception in 2009. The Canada Revenue Agency says more than 10.7 million Canadians had opened a TFSA by the end of 2013, thereby transferring billions of dollars into them—a trend that is bound to eventually replace the RRSP as the vehicle of choice to save for retirement. Even the Ontario government admitted that voluntary savings can fluctuate. For example, in 1981, the Ontario household savings rate was 22.7% of disposable income even though no mandatory regime was in place. That high watermark is well above what experts typically call for as a sufficient savings rate.
The fact is, most Canadians, if given the proper incentives, will make rational decisions. When interest rates hit an all-time low, many decided to use cheap credit to invest in residential real estate, fuelling a housing boom that still reverberates across cities such as Toronto and Vancouver. In short, to simply state that voluntary savings do not work is to ignore the evidence around us.
How then, should the SCPP be structured for it to be efficient, and how might it impact employers across Canada?
Read: Ottawa seeks feedback on voluntary CPP
At its core, the SCPP is a true pension plan; namely, a vehicle to set aside assets with the view of replicating earnings in retirement. This, coupled with its voluntary nature, strongly advocates for SCPP contributions to be locked in. Protecting locked-in assets from the claims of creditors is one way of ensuring sustainable pensions for retirement. It also makes the administration of the SCPP easier since it does away with any selection bias and liquidity crunches that afflict many mutual funds where redemptions can undo the investment strategy of the fund managers.
If the SCPP has no other purpose than to grow the assets of the contributors, then it can be used to convert the incoming defined contributions into defined benefits, much in the same way insurance companies used to offer fully insured pensions in the ’50s and ’60s. The creation of a partial, deferred annuity market for SCPP assets could be the result of an SCPP benefit structure imitating the solutions of the past. While reliance on an insurance market is one possibility, having the SCPP self-annuitize is another option.
An SCPP does not preclude the involvement of the private sector either. In fact, prudent fiduciary stewardship of the SCPP assets would suggest that sub-advisors with proven track records of delivering consistently high risk-adjusted returns should be hired for their expertise to manage tranches of the SCPP across multiple mandates. After all, that is exactly what many large, well-governed pension plans currently do to discharge their fiduciary obligations to plan members. Why wouldn’t this also be the case for the SCPP?
Read: Ottawa considers voluntary CPP expansion
The end result for employers? Minimal disruption to existing processes with no fiduciary risk to sponsor an SCPP option for the workplace. For very small employers, where an increase in labour costs can translate into job losses, the SCPP is a welcome change from mandatory, one-size-fits-all proposals that have saturated the media since pension reform became fashionable in 2008.
Perhaps, more importantly, the SCPP would automatically put downward pressure on the fees found in traditional mutual fund RRSPs where deferred sales charges and imbedded commissions remain the twin sales engine of the industry. Without even participating in the SCPP, all employers and their employees would indirectly benefit from having a large, scalable and competitive public competitor enter the financial services arena.
Jean-Pierre Laporte is a pension lawyer and the CEO of INTEGRIS Pension Management Corp. The views expressed are those of the author and not necessarily those of Benefits Canada.
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