If Canada’s minister of
finance has his way, all self-employed Canadians and those working
for small companies will soon have access to pension schemes
offered by financial institutions. But despite this seemingly
logical step, reform faces opposition from labour organisations.
Robin Arnfield reports.
Go deeper with GlobalData
Reform of
pensions is sweeping the world, and Canada is no exception. Canada
is also no exception when it comes to pension reform causing
controversy with political parties, labour organisations and
businesses in the country divided on the proposals.
The first step in the reform
process came in December 2010, when Canada’s Minister of Finance
Jim Flaherty, in agreement with Canadian provincial and territorial
finance ministers, announced a framework for the introduction of
Pooled Retirement Pension Plans (PRPPs), managed by regulated
financial services companies. PRPPs would be open to multiple
employers across different industries.
Flaherty is proposing PRPPs
because of concerns about the inadequate level of retirement saving
by Canadians. In particular, he has in mind employees of small
businesses, who do not benefit from an employer-sponsored pension
plan, and the self-employed.
Currently, self-employed
Canadians and employees not in an employer-operated pension scheme,
can contribute to personal pension plans known as Registered
Retirement Savings Plans (RRSPs). The two most significant
drawbacks with RRSPs are that they have high management fees and
the fact that the plan-holder’s employer cannot contribute to
them.
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By GlobalData
Worrying
data
In 2010, the
number of Canadians aged 18 to 34 who had RRSPs dropped to 39%,
which is the lowest number in a decade and a five percentage-point
drop from 2009, reveals a survey by RBC Royal Bank of
Canada.
The shortfall in Canadian
pension provision was also highlighted by Canada’s CD Howe
Institute, which specialises in independent, non-partisan public
policy research.
“If recent trends continue,
44% of current 25- to 30-year-olds and a substantial majority of
people in the two upper-income quintiles would risk a marked
reduction in their standard of living after retirement,” noted the
CD Howe study, entitled ‘Canada’s Looming Retirement Challenge:
Will Future Retirees Be Able to Maintain Their Living Standards
upon Retirement?’
The Institute emphasised that
its forecast contrasts with the current situation, where only 16%
of recent Canadian retirees are faced with a substantial reduction
in their post-retirement standard of living.
Flaherty sees PRPPs as
increasing the range of available retirement saving options for
Canadians. The primary intention of his strategy is to facilitate
the creation of large pooled funds with low investment management
costs.
A Department of
Finance briefing document states: “PRPPs will make it more
attractive for employers, particularly SMEs, to offer pension plans
to their staff because a third-party administrator will take on
most of the responsibilities that employers bear in existing
pension plans.”
“Minister Flaherty wants the
design of PRPPs to be straightforward, so that administrative costs
can be minimised,” a Department of Finance official told
LII. “The legislative framework is intended to be largely
harmonised across different Canadian [provincial and territorial]
jurisdictions, which would also facilitate lower administrative
costs.”
According to the framework,
administrators will generally be responsible for performing all of
the required management and operational functions of a plan
operating as a PRPP. Flaherty wants funds to be invested in the
best interest of plan members, with a facility for easy transfer
between different employer plans if workers change jobs.
Employers who choose to offer
a PRPP will be responsible for selecting a particular plan for
their employees and enrolling their employees into the plan. The
employer could make direct employer contributions to the plan and
also remit contributions from the employee to the
administrator.
“The self-employed and
employees of a firm that doesn’t offer a PRPP will also be eligible
to set up PRPPs,” the Department of Finance document states. “These
individual members (to contrast them with ‘employed members’ whose
employer provides a PRPP) will be responsible for the tasks that
would otherwise be borne by an employer, including enrolment,
selecting contribution rates and remitting contributions to the
plan.”
Polarised
opinion
In October 2010, the Canadian
House of Commons Standing Senate Committee on Banking published a
report on pensions. A key recommendation was that multi-employer
pension plans (MEPPs) should be made available on a voluntary basis
across Canada. The report also recommended that Canadians be
allowed to contribute to their RRSPs until age 75, up from the
current age limit of 71.
The committee said that
participating in a Canada-wide voluntary plan would enable Canadian
workers “to benefit from the lower fees and shared risk that may
result from membership in a group”.
The Canadian Life and Health
Insurance Association (CLHIA) gave the report its full
support.
“There seems to be a
consensus building around the opportunities that MEPPs provide for
Canadians to save more effectively in the workplace,” said CLHIA
president Frank Swedlove.
However, support for reform
proposals is far from unanimous. The publication of Flaherty’s
framework drew a hostile response from labour organisations,
including an occupation of the Finance Minister’s constituency
office in Whitby, Ontario by Sid Ryan, the Ontario Federation of
Labour’s President.
“Flaherty’s proposal is
nothing more than a glorified savings plan for Canadians,” Ryan
stressed. “If the financial services industry was capable of
delivering secure pensions to Canadians, it would have done so 50
years ago.”
Canada’s opposition Liberal
Party and New Democratic Party would prefer to see an expansion of
Canada’s state-operated Canada Pension Plan (CPP). Established in
January 1966 by Liberal Prime Minister Lester Pearson, the CPP at
present forms the mainstay of pension provision for most
Canadians.
The CPP is a defined-benefit
social insurance programme, unlike the defined-contribution PRPP.
Contribution to the CPP, by employers, employees and the
self-employed, is compulsory.
By contrast, employer
contributions to PRPPs would be voluntary, and the Provinces have
yet to decide on whether employees will be able to opt out of
contributing to their PRPP once they have been enrolled in
it.
Gil McGowan, president of the
Alberta Federation of Labour, is also critical of Flaherty’s
decision to favour privately-administered PRPPs ahead of the
expansion of the CPP.
“These funds would be nothing
more than glorified RRSPs,” he wrote in an article for the
Calgary Herald newspaper.
“Real retirement security can
only be achieved through an expanded CPP,” the OFL’s Ryan said.
“Any plan that enables banks and insurers to cash in on the backs
of working people is a betrayal.”
Ken Georgetti, president of
the Canadian Labour Congress, is “disappointed that Flaherty’s
remarks appear to favour new private-sector pension plans rather
than improving the CPP”.
CPP
climb-down
Flaherty had, until recently,
favoured expanding the CPP. However, he gave way in the face of
opposition from businesses as well as the two Provinces of Alberta
and Quebec, whose support would have been necessary for expansion
of the CPP.
“Finance Ministers
[Provincial, Territorial and Federal] agreed that, considering the
fragile economy, it isn’t the right time to impose additional CPP
contributions on workers and businesses,” the Department of Finance
official told LII. “They agreed that their officials
should continue their work on the CPP and that they will discuss
options and concerns at the June 2010 meeting of Finance
Ministers.”
The decision not to expand
the CPP was applauded by the Canadian Taxpayers’ Federation
(CTF).
“Creating a voluntary private
programme is a much better approach than the CPP hikes others have
been proposing” says CTF federal director Kevin Gaudet.
Pension industry
support
The financial services
industry has been quick to voice its support for Mr Flaherty’s
proposal for PRPPs.
“Standard Life looks forward
to working with governments and being part of this new
development,” said Joseph Iannicelli, president and CEO of Standard
Life Canada.
“Offering PRPPs would
increase the availability of pension plans to working Canadians,
especially those employed by smaller companies,” said Bill Kyle,
Great-West Life’s executive vice-president, wealth
management.
“This is a terrific step in
the right direction,” Tom Reid, senior vice-president of group
retirement services at Sun Life Financial Canada, told
LII. “The government has taken an important first step to
incentivise employees and pension providers to provide pensions for
the 65% of Canadian workers who don’t have access to a pension plan
at work.”
Reid continued that although
low-cost group retirement products are currently available from Sun
Life, employers sometimes lack the human resources and financial
expertise to take full advantage of these products.
He continued: “Currently, the
employer has to act as the group pension plan sponsor. This means
taking fiduciary responsibility for educating plan members about
pooled fund investment choices and also communicating with plan
members.
“The intent of the new
legislation is to transfer this responsibility to financial
services providers. The employer’s responsibility would be to
provide remittances in a timely manner.”
Harmonisation
The next step in making PRPPs
a reality is to create the harmonised regulation across the federal
and provincial governments that will be necessary for the creation
of large pools of capital.
The potential tax changes
that will be required to accommodate these plans will be developed
and implemented by the federal government. Provincial governments
will need to legislate for matters such as opt-outs, lock-ins
(where employees cannot access funds until retirement), and plan
withdrawals.
Two important provisions of
PRPPs are the automatic enrolment of employees into PRPPs and the
automatic escalation of contributions in line with pay increases,
Reid said. In order for these provisions to take effect, there
would need to be a change to the Employment Standards Act, which
currently requires the express permission of employees for such
actions. Legislative changes would have to be made at provincial
levels, and, ideally, legislation would be uniform across the
provinces, Reid added.
“The introduction of an opt-out provision would make PRPPs
more appealing because people have conflicting financial
priorities,” Reid concluded. He expects PRPPs to become available
in late 2012 or in 2013.
