Following the deci-sion by federal, provincial and territorial finance ministers this past December that Canada doesn’t really have a pension crisis, the ministers are apparently now working on ways to improve pension coverage for future seniors. This includes the possibility of establishing some kind of national pension plan to supplement the Canada Pension Plan.

Under consideration are the possibilities of increasing the benefits payable from the CPP or creating a Canada Supplementary Pension Plan — a voluntary, defined-contribution tier that would be added to the CPP.

Both options are explored in detail in a new report, issued in late January, intended as “an aid to ministers to determine whether there is sufficient consensus to recommend proceeding with the development of one, or a combination, of the options.”

British Columbia Finance Minister Colin Hansen, who chaired the steering committee that produced the report, says the finance ministers “will undertake further analysis of these two options and consider other ideas for improving the retirement income system.” They will report in August. (The finance ministers are scheduled to meet again in May).

Hansen makes it clear the finance ministers do not view the options in the paper as the only ones under consideration. As well, he adds, the options — as well as others that are being analyzed or that may be proposed — are not mutually exclusive. In fact, he says, “Some combination of options may provide the best solution to improve Canada’s retirement income system.”

Some observers of the pension scene suggest the Hansen report may seem at variance with the report of a research working group, presented to the ministers at their meeting in Whitehorse in mid-December, that had concluded: “Canadians are doing relatively well in ensuring they have adequate savings for their retirement.”

Jack Mintz, research director of the working group, said at the time that the retirement income system is performing well, “providing Canadians with an adequate standard of living upon retirement.”

Based on that report, the ministers had decided there was no pension crisis after all. But the Hansen report says that “calls for pension reform are mounting, with pension coverage and benefit security rapidly becoming pressing public policy issues for Canada.”

Debate is necessary, says Greg Pollock, president and CEO of Advocis: “It’s timely and important. We welcome any discussion that’s going to assist Canadians in terms of retirement adequacy.”

The Hansen report cites studies showing that two-thirds of Canadians in the private sector earning between $30,000 and $100,000 annually, and who are planning to retire in 20 years, will not have sufficient income to cover necessary living expenses. As well, the report is critical of the investment industry in its attempts to meet the needs of this market.

“The Canadian investment industry appears vibrant and profitable, with a large number of insurers and mutual fund providers,” the report says. Nevertheless, it adds, “The industry has had little success in filling the gap in retirement savings among the middle- to high-income group. Where the industry has been successful, such success has been accompanied by some of the highest [management expenses] in the world — particularly mutual funds.”

Keith Ambachtsheer, director of the Rotman International Centre for Pension Management at the University of Toronto, agrees, noting, “High fees being paid by investors in many retail products could seriously hamper the efforts of some 5.5 million Canadian households from achieving their retirement saving goals.”

According to the Hansen report: “An individual saving for retirement through RRSPs [or other private savings using mutual funds and advisors] must set aside almost half as much again to achieve the same retirement savings target as one that saves in an efficiently run pension plan.”

A national plan is seen as a way to provide better pension coverage to more people at a lower cost. And in response to objections from the insurance industry and others who have said they don’t want to see a “government-run” plan, the Hansen report notes: “Proposals for a government-facilitated supplementary pension plan do not preclude a significant role for the private sector in the provision of services such as administration, investment management, custodianship and annuitization.”

However, the report adds, “The insurance industry’s notion that it could create a large-scale, low-cost model that would be equivalent to the ABC plan may not be realistic.” (The “ABC plan” is the centrally managed national DC plan proposed by the Alberta/B.C. Joint Expert Panel on Pension Standards.)

@page_break@However, the insurance industry has put forward proposals to create a legislative and regulatory environment that would facilitate and encourage options such as multi-employer plans for employers who don’t currently have a workplace pension plan, says Tom Reid, senior vice president, group retirement services, for Sun Life Financial Inc. in Toronto: “Then, we could have more savings accumulating in the lower-cost structures that are available through the insurance industry.”

Reid supports the idea of automatic enrolment for members of pension plans and automatic participation for plan sponsors so that employers would automatically be in a multi-employer pension plan. “[Plan sponsors] would have to offer a multi-employer pension plan unless they consciously opted out,” he says, noting that evidence from the U.S. shows this is “working remarkably well” to improve participation rates.

However, Reid adds, “The concerns we would express around the CPP and the supplemental pension plan are about concentration of risk, which is not necessarily in the best interest of investors.”

The expansion of the CPP, he believes, “would significantly increase the percentage of Canadian savings that are invested through that one vehicle.”

The CSPP, discussed in the Hansen report, is based on the multi-employer, DC top-up to the CPP originally proposed by Ambachtsheer. It would be available to all employers and all workers — including the self-employed — who are not otherwise covered by a workplace pension plan. There would be automatic enrolment, with the choice of opting out. It would be regulated under the existing regulatory framework for pensions and income taxes. A non-profit board of trustees with relevant experience and representation would be the fiduciary of the plan and would operate independently of government.

There would be limited or no individual investment choices. This would be developed by the trustees, who would rely on investment managers to recommend specific investments. Contributions would not be payable on income below $30,000, and the proposed combined employer/employee contribution rate of 10% would be expected to achieve a target replacement rate of 70%-75% of pre-retirement earnings — although no particular retirement pension would be guaranteed.

Expanding the current CPP — the other option, explored in some detail in the Hansen report — could be done through increasing the level of earnings covered by the plan, increasing the replacement rate of the benefits, or both. Currently, the retirement benefit replaces 25% of adjusted average annual earnings, up to a maximum limit roughly equivalent to the average wage.

According to the Hansen report: “As a national, mandatory [defined-benefit] pension plan, the CPP can significantly mitigate and facilitate intergenerational risk-sharing by pooling longevity, investment and timing risks among all contributors and beneficiaries.”

However, the CPP Act now requires that all changes in the benefits be fully funded, so contribution rates would have to increase. But the Hansen report points out that due to the CPP’s existing infrastructure and scale, startup costs for the expansion model would likely be considerably lower than those anticipated for a CSPP.

Some of the possibilities for CPP expansion include increasing the replacement rate for CPP retirement pensions, as well as extended CPP coverage on income up to the same limit as the RRSP income threshold ($116,667 for 2009).

Maximum pensionable earnings for the CPP in 2009 were $46,300. The Hansen report explores three possible expansion options. In all three variations, the CPP expansion would be aimed at improving income-replacement ratios for Canadians earning up to 1.5 to two times the current average wage. But it must be noted that because the changes would have to be fully funded, expanded benefits from the CPP would have to be phased in over a period of about 40 years. In other words, these changes would benefit younger workers, but not those now close to retirement. IE