Robert Brown | March 21st, 2014
While a made-in-Ontario solution to pension reform is indeed a second-best alternative to a modest, targeted expansion of the Canada Pension Plan, there are ways the province can both provide enhanced retirement income security for future retirees and reconcile its approach with Ottawa’s now that the federal government has vetoed any CPP enhancement for the conceivable future.
Much of the public debate so far has focussed on two competing approaches to pension reform: the first, a mandatory, defined-benefit (DB) plan such as the CPP, which is favoured by Ontario, PEI and several other provinces – and the second, a voluntary defined-contribution (DC) pension, such as the federal government’s newly created Pooled Retirement Pension Plan (PRPP).
There is a middle ground approach, however, that would provide workers greater income security than they have today in their RRSP, while ensuring the new plan is affordable and manageable for employers.
Rather than establishing an entirely new scheme, with potential liabilities and administrative costs, there are three steps Ontario can take to achieve its objectives in a proven and effective manner.
The idea is to establish a pooled-target-benefit pension plan, such as I recommended in a paper published by the Institute for Research on Public Policy in 2012, borrowing from a similar model used throughout the broader public-sector in Ontario. Opting for such a model would extend to many Ontarians the benefits of a highly-effective retirement savings instrument similar to that which is available to members of the Ontario Teachers’ Pension Plan, among others.
The first step concerns the plan design. Contrary to other proposals to build a separate supplementary pension plan, I believe Ontario should use the PRPP framework as a platform for its plan, much as Quebec is in the process of doing. While the PRPP has many drawbacks, the virtue of the federal framework is that it provides provinces with maximum flexibility in designing their own. As Quebec has shown, it is possible to develop the PRPP into something much closer to a mandatory, universal pension plan than was originally envisioned by the federal government.
In adopting the PRPP framework, Ontario would have to make several adjustments in order to provide advantages beyond simply those of a pooled RRSP. Herein lies the critical second step.
Like Quebec, Ontario should ensure the plan is mandatory for all workplaces not currently offering a pension plan (PRPPs in Alberta, Saskatchewan and B.C. will be voluntary). But it should also go further by requiring matching employer contributions, as would have been the case under an enhanced CPP. Both elements are necessary if we are to close the major gap in pension coverage that leaves more than half of Ontario workers without a workplace pension plan.
Quebec’s plan, as all other PRPPs to date, adopts an exclusively DC design wherein pension benefits are not guaranteed. While there are advantages to this, policy-makers should be clear that unlike CPP (or any DB plan) it leaves workers with a certain burden of managing their own risks, particularly the risk of living beyond their accumulated capital. While default rules for savings rates and the structure of available investment products address part of this concern, it still doesn’t give workers a clear sense of what their capital will provide as a stream of benefits in retirement.
If Ontario’s intention in enhancing CPP is to ensure workers have the ability to better manage their retirement financial risks, this is a key problem that still needs to be solved.
To address this problem, and also to avoid employers with existing DB pensions from simply converting their plans into DC, a target-benefit design would be preferable. This is a middle ground between the current binary choice of DB and DC plans, which either place the risk entirely on the employer or the individual. Under this model, pension contributions are made in exchange for pension benefits within a target range that will vary based on market performance. If market performance falls outside this range, the plan adjusts either by raising contributions from members or reducing benefits. Workers gain access to a notional retirement benefit and employers receive certainty as to their pension costs and are shielded from the volatility of pension liabilities.
Many of the Multi-Employer Pension Plans in Ontario’s broader public sector are based on a similar hybrid model.
The final step is to ensure that this new pension plan has enough scale to keep administrative and management costs down for members. Pooling assets, as intended under the PRPP, is advantageous when there is sufficient scale of pooled capital, which my research suggests is at a minimum threshold of several billion dollars. Ontario could achieve this either by allowing the PRPP to be managed by an existing pension fund, such as Teachers, OMERS or HOOPP, or by requiring funds to meet pre-defined capital requirements.
Ontario need not complicate the pension reform process by creating a new entity that will make the current retirement income system even more complex. The building blocks are already in place to accomplish something truly meaningful.
Robert Brown is a former President of the Canadian Institute of Actuaries and in 2007-08 served as research chair for the Ontario Expert Commission on Pensions.