Revamp the CPP?

One much discussed reform option – boosting the Canada Pension Plan (CPP) to take up the some of the slack – has been strongly advocated by politicians of various stripes, organized labour and other groups. This notion recently received an unexpected endorsement from Gerry McCaughey, president and CEO of Canadian Imperial Bank of Commerce (CIBC), but the jury is still out on whether the proposal is practical.

McCaughey told the Summit on Pension Reform in Fredericton in February that Canadians should have the opportunity to make additional, voluntary contributions to the CPP, or a CPP-like plan, to provide more certainty for their savings than is provided by the current investment tools. His proposal is based on the premise of simplicity and a predictable payout at retirement.

As it now stands, Canadians near retirement today are in “reasonable shape” to maintain their standard of living when they stop working, McCaughey said. But Canadians in their late 20s and early 30s can expect to face, on average, a “real and significant” decline of 30% in their standard of living when they retire, according to CIBC economists.

Unable to earn enough to buy a home and reap its financial benefits, McCaughey said, these younger Canadians also won’t be able to realize fully the tax benefits of current savings vehicles such as RRSPs and tax-free savings accounts.

“More important,” he added, “these vehicles lack the certainty of outcome that these Canadians so desperately need.”

McCaughey’s proposal calls for voluntary contributions to the CPP or a CPP-like plan, above and beyond what Canadians currently pay from their salaries. The proposed plan, he said, would be simple and easy to understand: keep the money locked in for as long as 40 years to maximize returns and provide a predictable income stream at retirement.

Although there are not a lot of details in McCaughey’s idea, pension actuary Malcolm Hamilton, a senior fellow at the Toronto-based C.D. Howe Institute, says there are features in the proposal that he likes, especially that the voluntary contributions would not have to be matched by employers and that contributions would not be taxed or subject to clawback.

But Hamilton draws the line when it comes to McCaughey’s suggestion that the plan would “deliver scale, date certainty and real dollar amount certainty.”

“That’s completely unrealistic,” Hamilton says. “There is no ability to foresee how much money somebody’s contribution is going to accumulate to in the CPP over 40 years, or how much of a pension that will provide. We don’t know what life expectancies will be in 40 years; we don’t know how fast salaries will grow [over the next] 40 years.”

@page_break@Frank Swedlove, president of the Canadian Life and Health Insurance Association Inc., says McCaughey’s proposal is unclear regarding whether the government would provide a guaranteed return for the voluntary portion of contributions and, therefore, take on added risk in terms of paying out at retirement.

“As well, the CPP Investment Board is rapidly becoming the largest pool of funds in the country,” Swedlove says, “and if it was responsible for a large pool of the voluntary fund, then it would be massive. One would have to wonder about all that money in the hands of one organization.”

Revamping Canada’s pension system has been front and centre for some time as the number of defined-benefit pension plans dwindles and savings rates dip amid low interest rates and high personal debt loads.

Canada’s insurance industry has been pushing for a different kind of retirement plan – the pooled registered pension plan (PRPP), which was introduced by Ottawa about two years ago after much debate among it and the provincial governments about how to reform the country’s pension system to broaden coverage.

The PRPP is aimed at Canadians who don’t have employer-sponsored pension plans, including the self-employed. The goal of the PRPP is to allow small and medium-sized companies to provide their employees with a pension by using the expertise and resources of a financial services institution, such as a bank or insurance company. The concept of PRPPs is moving forward, Swedlove says, with some provincial ministers of finance indicating their support in December.

Recently, British Columbia said it soon would be introducing legislation on PRPPs. And the Quebec government also has announced its intention to do so.

“We’re confident that it’s going to be established,” says Swedlove. “And it will be very successful because it will create a vehicle for people who don’t have pensions to now have pensions – and at a cost that is as low as anything that is in the marketplace today.”

Whether it’s expansion of the CPP or the growth of PRPPs, Hamilton says, both plans need a lot more work before they truly can be rated: “An expanded CPP can be made to work, but most of the proposals made so far have not been good. PRPPs could probably be made to work; but if you look specifically at the kinds of things they’re talking about doing, they’re not the right things, either.”

McCaughey’s comments came on the heels of a couple of new surveys reiterating the sad state of predicted future retirement in this country.

Toronto-based Sun Life Financial Inc.‘s annual Canadian Unretirement Index survey found that the number of Canadians who expect to be retired at age 66 has dropped to 27% from 51% five years ago. More Canadians are expecting to work past age 66 – and not because they want to, but because they have to.

Meanwhile, a study released by Vancouver-based HSBC Bank Canada indicates that Canadians will outlive their retirement savings. The survey says the average retirement in Canada is expected to last 19 years, but average retirement savings are expected to last only 11 years.

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