Pension innovation

Overshadowed by those headlines were three key points on which all the ministers agreed:
• to shelve the idea of a new government-sponsored voluntary supplementary plan;
• to involve financial institutions in further exploration of universal workplace savings options; and
• to focus on improving the financial literacy of Canadians.

It’s these three points that may have the biggest positive impact on the millions of working Canadians concerned about saving adequately for retirement.

Following the meeting, Federal Finance Minister Jim Flaherty said meeting delegates agreed to work together on “pension innovation” that involves the private sector making available multi-employer pension plans, which also cover the self-employed. The ministers have also agreed to look at changes to federal and provincial legislation that would remove barriers to offering such plans.

This is good news for everyone. Governments will be relieved of the economic and administrative burdens of setting up and running a new pension administration and distribution system. An effective, affordable system already exists. It’s one in which financial services companies have invested hundreds of millions of dollars over the past 25 years and continually enhance based on feedback from Canadians.

Under a multi-employer pension plan, the employer will be relieved of most administrative duties and the risks and responsibilities associated with being a plan sponsor. These are two of the barriers to small and medium-size businesses offering plans, according to a recent member survey by the Canadian Federation of Independent Business (CFIB).

But, the biggest barrier, according to the CFIB survey, is affordability. Almost half of the respondents said they can’t afford to offer a plan. While plan design innovation won’t put more dollars into the HR budgets of small and medium-size businesses, it can increase the efficiency of saving.

Affordability is naturally built into the design of multi-employer defined contribution (DC) arrangements. They provide the benefits of scale through pooled savings. Simplified investment options, offering one fund or a small number of funds, result in lower overall costs. A standardized plan design means lower administration expenses. Shared self-serve channels such as telephone customer care centres and Web tools add to the savings.

This isn’t a big leap for the DC industry because the structure already exists. The fact is, DC-style plans are the way to go in terms of affordability, and it’s the direction in which much of the world is moving. There is no going back to an environment where the financial fate of employees lies solely in the hands of employers or the government.

Governments are to be applauded for their efforts to improve financial literacy. Helping Canadians sharpen their financial acumen is one of the best ways to encourage the action and informed decision-making that leads to greater financial security.

Canadians are fortunate. This country’s retirement savings system ranks among the best in the world, and now it’s getting better. Increasing access to workplace savings plans will extend affordable coverage to millions more people. And, including proven options such as auto-enrollment can nudge Canadians further in the right direction while maintaining long-held values of choice and flexibility.

It’s good to see a course of action defined that builds on existing strengths and opens doors to new possibilities. There is still a lot of work ahead, but we’re certainly a step closer to creating a retirement future that makes choice and security possible for all Canadians. BC

Tom Reid is senior vice-president, group retirement services, with Sun Life Financial.
tom.reid@sunlife.com

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© Copyright 2010 Rogers Publishing Ltd. This article first appeared in the July/August 2010 edition of BENEFITS CANADA magazine.