Third pillar must drive retirement savings innovation

The pooled retirement pension plan (PRPP) scheme announced last year represents a positive first step toward ensuring all Canadians have sufficient opportunity to save for retirement, according to Christopher Brown, president of the Association of Canadian Pension Management. But, he says, this has to be just part of the solution.

“Governments are clearly engaged in [retirement savings-related] issues today to an extent that we have not seen in at least 25 years,” Brown told the audience at an Economic Club of Canada breakfast in Toronto this morning. He called the recent efforts of Canada’s federal and provincial governments to work together to examine pension reform and develop the PRPP framework “historic.”

But, he said, it is imperative that employers and those in the financial services community continue to work with governments to develop additional solutions to make saving for retirement an easier and more attractive option for all Canadians.

Brown said that the first two pillars of Canada’s retirement system—CPP/QPP and OAS/GIS—are providing sufficient protection for Canadians in retirement. While debate continues on whether to increase CPP benefits, Brown said the resulting increase in employee contributions and payroll taxes from such a move would not be economically wise. Instead, he said, expansion of retirement savings options for Canadians should come from the third pillar, the private sector-driven voluntary savings element.

“Before we consider taking on these drastic changes to the [government-funded retirement] system, why would we not roll up our sleeves and do the heavy lifting that we know is needed to fix the problems that we know are fixable?” he asked. “We need to give solutions in the third pillar a chance to work before we go down that path.”

Brown said that new retirement solutions must recognize that employers and individual Canadians all have different needs and realities. But, he said, all viable solutions should adhere to the six key principles identified by the ACPM: they must be simple, affordable, respect choice, provide economies of scale, provide opportunities for risk pooling and be developed on a pan-Canadian basis.

“The greatest chance to successfully address the challenges is to provide options that address these key principles. A one-size-fits-all approach misses elements of choice, flexibility and innovation that are needed to meet the divergent needs of Canadians,” he told those in attendance.

But before new third-pillar retirement savings solutions, Canada needs to ensure it has a regulatory environment that encourages private sector innovation, he said.

To that end, the ACPM proposed a five-point plan in 2010 for effectively addressing Canada’s retirement income challenges. Those points are:

1. Remove barriers to coverage, especially for self-employed Canadians and those without access to workplace pensions. Brown said this could be achieved through expansion of the categories of income that are eligible to be pensionable to include the self-employed, expanding the definition of the types of entities permitted to provide pension plans, and by removing the requirements for minimum employer contribution in order to bring new group retirement products to market for Canadians.

2. Ensure defined benefit (DB) pension plans continue to be viable options. “For many employers and working Canadians, the defined benefit model has worked well and continues to suit their circumstances,” said Brown. “But the regulatory and legal systems… have brought the defined benefit system almost to its knees.”

He said governments need to tailor a balanced funding regime that appropriately weighs benefit security and funding flexibility for employers, and that regulations must also permit flexibility in benefit design for DB plans.

3. Enable more innovation. “The current rules in our country are so prescriptive and so detailed that they prevent creative solutions from being brought to market,” he said, adding that a more flexible regulatory structure would encourage competition, and by extension, innovation. Brown suggested permitting the expansion of multi-employer pension plan and target benefit solutions, both of which have proven to be innovative and viable solutions.

4. Promote simplicity in plan administration. “The regulatory system is such a patchwork quilt across this country, of federal and provincial statutes that it becomes virtually impossible to operate a pension plan across provincial boundaries,” which affects the ability for multi-jurisdictional employers to offer attractive pension options, said Brown. He also said the legal obligations of employers in this area need to be clarified, so employers can properly understand how to fulfill those obligations in an efficient manner.

5. Increase incentives to save, especially for those who are self-employed or lack access to workplace pensions. Brown said this is especially important because the opportunity to save varies with individuals’ unique situations over time. Expanding the annual contribution limit, considering a lifetime contribution limit roughly equivalent to the commuted value of a DB plan in the public sector, and allowing plan members to deduct plan expenses on their income taxes are three examples of such incentives, according to Brown.

“Employers and employees both need to see benefit from whatever solutions we implement,” he said. “Their circumstances vary, so the solutions presented to them have to vary to meet those circumstances.”