A comparison of pension systems in Canada and Britain isn’t an apples-to-apples exercise — or even apples to grapefruits. But when it comes to pension reform, there are definitely overarching lessons for Canada.

Britain’s reforms, of which auto-enrolment is a signature component, got underway in October 2012 with the country’s largest employers mandated to automatically put employees into their workplace pension schemes.

Under the regulations, there are minimum contributions for both employers and employees (growing from 2% in 2012 to 8% in 2019) with a provision for employees to opt out. Contributions are split, with staff paying slightly more by 2018, between employees and employers. Since it’s a phased-in approach, more than one million small employers have yet to reach their staging dates.

Read: 4 ways to make the ORPP work

“Auto-enrolment has been a huge success, but the important caveat is so far,” says Henry Tapper, director of First Actuarial in Britain. “So far, we have taken about five million people via around 70,000 large employers into our pension system who may never have been in a funded pension environment. We are now going to try to do the next seven million people via around 1.8 million small employers. The logistical challenge changes completely.”

According to Britain’s Department for Work and Pensions, which is the government department behind auto-enrolment, millions of people aren’t saving enough for retirement amid increases in life expectancy. It echoes a familiar refrain here in Canada.

As the debate about adequate pension savings rages on in Canada and the introduction of the Ontario Retirement Pension Plan draws near, what lessons can Canada learn from a country that’s a few years ahead on the journey?

Lesson No. 1: Foster competition among pension providers

Central to Britain’s reforms is the National Employment Savings Trust (NEST), a trust-based defined contribution pension scheme set up by the government to help employers meet their auto-enrolment duties. Pension experts in Canada have drawn comparisons between it and the ORPP that will start collecting premiums as of Jan. 1, 2018.

Read: ORPP delay a ‘wise’ move

It’s worth noting that even though the government introduced NEST specifically for auto-enrolment, just one in three employers have actually used it to comply with the legislation, according to Tapper. Instead, many employers have embraced alternatives introduced by other defined contribution pension plan providers.

“Prior to the introduction of autoenrolment, the private sector refused to commit to providing a solution, so NEST’s public sector obligation to take on any employer in the U.K. seemed necessary,” says Tapper. “But without NEST, the innovation we are seeing from private providers might not have happened.”

State pension primer

Britain’s equivalent to the CPP is the state pension. On April 6, 2016, Britain will launch a single-tier pension to replace the current offering. Today, the maximum state pension for a single person is about £116 (about $225) a week. That’s expected to rise to about £155 (about $300) weekly.

Indeed, in a recent paper, Keith Ambachtsheer, director emeritus at the Rotman International Centre for Pension Management, says a main challenge remaining for the ORPP is to foster private sector competition and ensure it meets customer expectations in a cost-effective manner.

Lesson No. 2: Design a simple and straightforward pension plan

In the same paper, Ambachtsheer also suggests the provincial government should “be clearer about how contributions today become benefits tomorrow.” The ORPP is a collective target benefit plan in which individuals accrue pensions with amounts adjusted regardless of a person’s contributions. NEST, on the other hand, is simple and straightforward. Each person has an individual account.

By allowing employers to comply with auto-enrolment through a number of different pension plans, Britain has acknowledged not all people have the same needs and aspirations when it comes to retirement. That’s also true in Canada, says Bob Baldwin, an Ottawa-based pension consultant, so why should they have a single program with the same design for everyone?

Lesson No. 3: Prepare for administrative challenges

With auto-enrolment, another major challenge faced by both the British government and employers has been the significant administrative hurdles. The early years were less bumpy since the majority of the country’s largest employers either had a comparable pension plan in place or some form of a basic administrative mechanism to enrol employees and deduct contributions from payroll. That’s proving more challenging for smaller employers even though they’ve had many years to prepare.

Many of Canada’s large employers already provide a pension plan and the ORPP will account for that by ensuring any employee who’s already in a comparable pension plan won’t have to join. But there will still be administrative challenges because the Ontario government has to build the system from scratch.

Read: OCC calls for offset measures to support transition to ORPP

It’s worth appreciating that the federal government already has an administrative apparatus already in place for the CPP. Jean-Daniel Côté, a partner at Mercer, suggests the government should have considered outsourcing ORPP administration to Quebec, which already administers the Quebec Pension Plan. So far, the federal government has agreed to facilitate plan registration and data-sharing arrangements for the ORPP.

Lesson No. 4: Mind the gaps in financial advice

With any major change, it’s important to communicate the system properly and ensure people understand it. The introduction of auto-enrolment has highlighted a financial advice gap in Britain, especially as small employers reach their staging dates. “The big issue is to do with communicating to all these small companies that they have the same duties as the large companies,” says Tapper.

The issue of financial literacy has also arisen in Canada. When former federal finance minister Jim Flaherty wrote a letter in 2010 supporting an increase in CPP benefits and new measures to encourage retirement savings, he also included efforts around financial literacy.

Read: Government to launch consultations on enhanced CPP

“People need advice,” says Malcolm Hamilton, a pension expert at the C.D. Howe Institute. “We have a system where there are large numbers of people who need to save relatively small amounts intelligently. They need advice just as much as higher-paid people but they can’t afford to pay for advice. The question is how to fill that gap.”

Lesson No. 5: Pension reforms aren’t a quick fix

Along its auto-enrolment journey, Britain has learned it can’t paint the reforms as a quick fix for the country’s retirement savings challenges.

“There is concern in the pension world that we are mis-selling a comfortable retirement under the guise of autoenrolment when in fact it isn’t as easy as that,” says Tapper. “It’s not all doom and gloom, but any idea that auto-enrolment is a universal panacea for the poor and disenfranchised in the U.K. is a little bit naive and fanciful. It is a step in the right direction but it’s not there yet.”

British pension statistics

Britain had 4.9 million active members of private-sector workplace pensions in 2014, compared to 2.9 million in 2011.

92% of employees view auto-enrolment positively, but only 30% are actually aware of their retirement options.

Sources: Office of National Statistics and Hargreaves Lansdown

Canadian pension statistics

38.3% of Canadian families had a defined benefit pension plan in 2012, compared to 44.8% in 1999.

12.3% of Canadian families had a defined contribution or other type of pension plan in 2012, compared to 6.9% in 1999.

Just 10.7% of Canadian families had no registered pension plan in 2012, compared to 9.2% in 1999.

Source: Statistics Canada surveys of financial security for 1999 and 2012

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Jennifer Paterson is managing editor of Benefits Canada. She previously worked at a pension magazine in Britain.

Copyright © 2021 Transcontinental Media G.P. This article first appeared in Benefits Canada.

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