A proposed model for a universal defined contribution (“UDC”) pension plan:
• Mandatory employer participation at a minimum payroll administration level, unless the employer sponsors a registered pension plan (RPP): at a minimum, employers (who do not otherwise sponsor a RPP) would be required to provide UDC Pension Plan information to employees and enrol and administer voluntary employee contributions via payroll deduction. Self-employed persons would also be eligible to voluntarily participate, in the same manner as they can currently participate in the CPP.
• Employer contributions should NOT be mandatory: employers who choose to make UDC Pension Plan contributions should have the flexibility to set both employer and employee contribution rates.
• All contributions should be locked-in to provision of a retirement income: allows financial services industry to differentiate for “discretionary” savings.
• Contributions should be limited to a maximum for each year of plan participation, with a “catch-up” available for prior years of non-participation: this leaves open the opportunity for employers to continue to sponsor and financial services industry to continue to provide more generous plans, to enhance employee attraction/retention or for other purposes. The maximum should be sufficient to fund a reasonable level of retirement income over a working lifetime (e.g. perhaps in line with the basic financial planning principle of 10% of income).
The UDC Pension Plan represents a compromise to calls for a mandatory plan in that it makes access to the scheme mandatory but does not impose requirements on either employers or individuals to contribute to the scheme. Many Canadians value their current relationships with advisors and financial institutions, and may prefer to continue to invest their retirement savings directly with those organizations.
The lock-in provisions may also result in individuals preferring their own arrangements over the proposed scheme. Finally, the exclusion of retirement income delivery in the model provides for opportunities for Canada’s financial services industry to continue to participate in significant growth in the delivery of retirement income and savings programs.
For the UDC Pension Plan to be effective, a few more conditions must be met. Specifically:
• A sophisticated retirement planning tool must assist employees in setting their personal contribution levels: this will help to foster voluntary contributions at adequate rates relative to individual retirement income objectives.
• Contribution remittance must be simple, efficient and effective for both employers and employees: the same system currently utilized for payroll remittance of income taxes, employment insurance, Canada Pension Plan premiums, public healthcare funding, etc., would be used to facilitate contributions.
• Investment options should be offered, to a limited extent, to accommodate a range of personal risk profiles of members: the program should offer only asset allocation or lifecycle portfolios as investment options with a low-moderate risk default option for members who do not complete a risk profile. Limiting investment options in this way will provide the financial services industry the opportunity to continue to market broader alternatives for employers and individuals who would prefer more investment choices.
• Overall accountability of the scheme should be provided through a fiduciary body (e.g. a board of trustees) that must be independent of service providers, government and fund managers: relief of employers from fiduciary and administrative responsibilities will be a key component for success of the scheme.
• Private sector should have opportunity to bid on service requirements: recordkeeping and administration, custody and investment: private sector capacity currently exists, without the need for government or captive crown corporations to create new infrastructure and add a political element to the program.
• Taxpayers should not subsidize administration, or be exposed to underwriting risks in respect of the scheme: seed capital required for implementation should be structured as a loan to be re-paid to taxpayers over a time-frame not exceeding 20 years.
I believe that the UDC Pension Plan established against the criteria set out above, whether national or provincial in scope, will have the prospect of meeting the criteria in the JEPPS recommendation for the ABC Pension Plan of a total management expense ratio, including costs of administration of 0.50% per annum.
At the same time, the Plan would have the prospect of producing new and ultimately very large pools of capital for investment in relatively short time frame, as well as significant growth opportunities for the financial services industry. Finally, from a practical perspective, the UDC Pension Plan has the advantage of requiring very little in the way of changes to existing pension and tax legislation.
Greg Hurst is a principal with Morneau Sobeco in Vancouver.
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