Session 2A – The Art of the (Im)Possible: Politics and DC Pensions
How governments might react to pension reform proposals.
By Ron Sanderson, Director, Policyholder Taxation and Pensions, Canadian Life and Health Insurance Association
Over the last several months, there have been multiple responses to the pension reviews conducted by governments across Canada. Among these responses, the recommendations of Canada’s life and health insurance industry have been labelled as self-serving. (See Session 2B for details.) But whether or not the industry’s suggestions constitute sound public policy seems to have been ignored.
All recommendations reflect the interests of those making them. Retirees seek government protection of their income benefits. Employees seek pension enhancements and ownership of DB plan surplus. Employers seek to minimize costs and legal liabilities. Each of these goals appeals to specific audiences. In politics, that audience is voters—to whom politicians must sell party platforms and values—so the ideas with the widest appeal typically win.
The challenge of electoral politics is that flawed but popular ideas can trump good policy. And in Canada, at least, voters seem conditioned to believe that government services are unbiased and cheaper than competing private sector options, even when the facts suggest otherwise.
Adding to this challenge is the complexity of Canada’s three-pillar retirement system. In classic Canadian fashion, we have crafted a compromise that incorporates both the strengths and weaknesses of simpler systems. Given our high ranking in the recent Melbourne Mercer Global Pension Index, it is hard to imagine a Canadian pension solution that deviates substantially from the current balance.
Based on these realities, governments may pursue a hodgepodge of retirement savings reforms that attempt to address the specific concerns of identifiable groups. For instance, consider the following:
• While lower-income Canadians achieve high income replacement levels from existing public plans, increasing the Guaranteed Income Supplement may be seen as necessary to address perceived poverty among seniors.
• Fixing the “Nortel problem” via the pension system is difficult. A tax system-based solution might be easier—perhaps a temporary refundable age credit for those with reduced DB benefits.
• Increases in traditional Canada Pension Plan (CPP) benefits would trickle down very slowly and would represent a major shift in the existing balanced model. Don’t expect this to happen.
• A gradual deferral of the normal retirement age under public programs seems probable. We start work later in life, are healthy longer and live much longer than even a few generations ago when public pensions began, so changing the timelines is crucial to benefit sustainability.
• Incenting employers to enrol new employees in pensions might help. Temporary waivers of payroll taxes or permitting “super deductions” for employer contributions may make sense.
• Allowing unused RRSP contribution room to be used within DC pensions is a real possibility, since it need not alter employer contributions but could significantly increase the cost-effectiveness of retirement savings.
• The imbalance between public and private plans is becoming serious. Governments must revisit the “rule of 9” (the means for equating the savings capacity of different plans).
• The public fiscal risk of adding a voluntary DC top-up to the CPP is unacceptable, but provincial pressure may make such an option inevitable. Also, expect governments to facilitate more broadly available, cost-effective and consumer-accountable private plans, causing a public add-on to wither over time.
Of course, private sector responses will also evolve. Guaranteeing benefit security is a key advantage within insurers’ DC plans—expect them to move beyond target date funds (TDFs) to focus on retirement income guarantees.
Canada’s pension challenge is solvable. To date, life insurers have been viewed as protectors of the status quo, yet they compete directly with public options at a low cost and low risk, providing fair advice and transparent governance for plan members. The industry’s proposals reflect their role as innovative guardians of consumers’ retirement security. BC
Continued on the next page…
Session 2B – Retirement Income Debate
Supporting a new way to save for retirement.
