Financial Planning

PRPPs with auto-enrollment, auto-escalation are one way to increase participation

By Megan Harman |

A combination of private sector and public sector solutions are necessary to improve the retirement savings system in Canada, experts said at the Conference Board of Canada’s Summit on the Future of Pensions on Thursday.

In a debate on various options for pension reform, speakers at the conference agreed that it’s likely not possible to find a single solution that would address the retirement savings shortfall for all Canadians.

“Improvements to our retirement system should try to target the weak points in the system, rather than trying to adopt a one-size-fits-all solution,” said Jeff Aarsson, vice president, GRS, sales and marketing at Great-West Life.

He applauded the government’s Pooled Registered Pension Plan proposal as an effective component of an overall solution. This proposal, which would be implemented by the financial services industry, would extend pension coverage to small and medium sized businesses and self-employed Canadians.

“Any actions that encourage bigger private sector savings, both inside and outside of a pension plan, will be an effective way to reinforce our system,” said Aarsson. “I believe a significant part of the way forward is surely to build on the highly competitive defined contribution infrastructure which the private sector in Canada has built over several decades.”

He said certain regulatory measures would be necessary to maximize participation and contribution levels in these plans.

For instance, Aarsson said it’s important that Canadians be automatically enrolled in PRPPs, unless they specifically opt out. Auto-enrollment has proven to be effective in other countries. He pointed to a U.S. study showing that when auto-enrollment was introduced, participation in a voluntary plan rose to 87% from 66%.

“That increased participation would really strike at the core of the income replacement issue for middle income earners in Canada,” Aarsson said.

Auto-escalation is another feature that would increase the effectiveness of PRPPs, according to Aarsson. Under this feature, plan members’ contributions would automatically increase over time as they approach retirement and their ability to contribute grows.

Patrik Marier, Canada Research Chair in Comparative Public Policy and associate professor at Concordia University, agreed that it’s critical for the government to take steps to ensure Canadians participate in a private sector solution.

Experiences in other countries, he noted, show that voluntary retirement savings plans typically have low rates of uptake. However, by giving citizens incentives to contribute to the plan, participation can increase substantially.

“To work well, they need very good incentives,” Marier said.

He pointed to New Zealand as an example, where the government provided a $1,000 contribution to individuals who chose to open a retirement savings plan. Participation in that retirement savings plan ended up exceeding the government’s expectations by a significant margin.

With or without incentives, however, Canadians don’t appear to be convinced that another voluntary private sector solution would help them better prepare for retirement. In a survey of older Canadians by seniors advocacy group CARP, a majority of respondents said they’d rather see an expansion of the Canada Pension Plan than the creation of PRPPs.

“They were not satisfied that they could just leave everything in the hands of the private sector,” said Susan Eng, vice president of advocacy at CARP.

Aarsson acknowledged concerns that financial institutions would have an inherent conflict of interest in providing of PRPPs on a for-profit basis, but he said these concerns are unwarranted, given the industry’s rigorous regulatory framework.

“Consumers would continue to have all of the protections of contract law, as well as the high standards of oversight and conduct required of and applicable to regulated financial institutions,” he said.

Still, Aarsson admitted that the creation of PRPPs wouldn’t alone improve the retirement savings system for Canadians. A “combination of other solutions” would also be necessary to address the at-risk cohorts of the Canadian population, he said.

IE