The pension puzzle: Public or private?

Unfortunately, there is little co-ordination among these programs, which tend to reflect the policy perspectives of the governments involved. For example, the federal government has emphasized reliance on voluntary and private savings programs, such as the tax-free savings account (TFSA) and the pooled registered pension plan (PRPP), which companies can choose to offer employees.

Some provinces, on the other hand, are leaning toward mandatory programs, such as Ontario’s registered retirement pension plan (ORPP) for employees with no pension plan (about two-thirds of workers in the private sector), or pension plans the government considers inadequate.

For the investing and financial planning industries, the result is a morass that provides little certainty of retirement security while potentially reducing the private funds available to allocate to individual saving.

At the same time, it’s apparent that the future of the retirement landscape will be a troubled one if answers are not found.

“[Current] retirees are doing well because they likely participated in an employer plan as well as CPP and OAS,” says Paul Forestell, senior partner at Mercer Investment Consulting Inc. in Toronto. “But we have a new generation of workers who won’t have much. And I think that’s what everybody’s trying to address.”

Here’s a closer look at the saving and pension innovations currently at play in the Canadian retirement landscape:

ORPP

The ORPP, to be introduced in January 2017 (with many details still to come), is meant to provide a predictable source of income in retirement for people at risk of not saving enough – in particular, middle-income earners who have no workplace pension. But recent research has highlighted concerns about the ORPP’s potential impact on private savings.

For example, those already enrolled in so-called “comparable” workplace pensions won’t be required to participate in the ORPP. But the definition of “comparable” is unclear. Ontario has indicated that the preferred approach would be for defined-benefit (DB) or so-called “target-benefit plans” (TBPs) to be comparable, but not defined-contribution (DC) plans and other savings vehicles.

However, many companies are switching to DC plans, while DB plans are on the wane.

“There’s been a lot of pushback on that [point],” says Jana Steele, partner, pension and benefits group, with Osler Hoskin & Harcourt LLP in Toronto. “If you’re a small employer and you have a DC plan for your employees, and then the ORPP comes along and says you’re not exempt, you have to contribute to the ORPP in addition to your DC plan. Is there a risk then that people may start to look at closing their [DC] plans? Absolutely.”

The Investment Industry Association of Canada (IIAC) also has concerns. According to a recent IIAC statement: “If existing savings plans for employees, such as group RRSPs, are not deemed to be ‘comparable plans’ to the ORPP, the result will be reduced flexibility and choice for employers and employees, and an overall weakening of the Ontario financial services sector – a negative economic impact that will be felt across all of Canada.”

A January survey conducted by Environics Research Group on behalf of the Canadian Life and Health Insurance Association Inc. of 401 Ontario companies that have DC plans or group registered retirement savings plans found that 78% of survey participants would be likely to reduce contributions if a mandatory ORPP were introduced. In addition, 66% would consider eliminating their plans completely.

IIAC managing director Andrea Taylor points to the IIAC’s three key concerns: is the ORPP the best measure for closing the gaps that exist; has the Ontario government considered and quantified the full costs of the ORPP and identified all of the potential indirect costs and negative consequences that the ORPP could create if it’s implemented; and has Ontario considered other alternatives that could be made to existing savings programs?

Taylor questions the ORPP’s impact on the investment industry and investment in Canada generally: “One of the spinoff effects of this would be creating, in effect, what we’re calling a ‘retirement savings monopoly’ in Ontario, where the ORPP will displace a lot of these existing savings programs and funnel the savings and investment dollars into the ORPP.”

TFSA

The TFSA has been attacked recently as being too generous and a potential liability for the tax system as a whole. A Broadbent Institute report suggests that higher limits ($10,000 per year has been suggested by the federal government) would largely benefit wealthy Canadians while costing the country billions of dollars in lost tax revenue. The Parliamentary Budget Office projects the TFSA’s fiscal impact to be $1.3 billion this year and, if the contribution levels were doubled, annual federal revenue would decline by $14.7 billion by 2060 and the shortfall to the provinces would be $7.6 billion during the same period.

TBP

TBPs, which combine elements of DB and DC plans, are being considered by several provinces. Contributions to a TBP are fixed or variable within a narrow, predetermined range, similar to a DC plan, giving plan sponsors cost certainty. In addition, TBPs provide a DB-type of pension.

But, unlike a DB plan, benefits under a TBP may be adjusted if a company’s fortunes change for the worse. If, for example, a TBP faces dire circumstances and cannot satisfy risk-management tests, then benefits may be reduced in accordance with the plan’s terms.

PRPP

The federal government initiated PRPPs in January 2013 to provide extended retirement savings for federally regulated employees who don’t have a workplace pension. Five life insurance companies now have federal PRPP licences – Sun Life Financial Inc., The Great-West Life Assurance Company, Manulife Financial Corp., Standard Life Assurance Co. of Canada and Industrial-Alliance Insurance and Financial Services Inc. – and have been registered with both the Office of the Superintendent of Financial Institutions and the Canada Revenue Agency. These registrations are the final steps in launching these new savings vehicles.

These voluntary pension arrangements are intended to make participating in workplace pensions easier for small businesses and the self-employed. PRPPs are not, however, intended to replace existing registered pension plans and individual savings vehicles such as RRSPs and TFSAs.

CPP

Recent changes to the Canada Pension Plan (CPP) are designed to encourage Canadians to work longer, in order to reduce the costs of funding the CPP. The monthly CPP pension amount will increase by a larger percentage if taken after the age of 65 but will decrease if taken before then.

“The reality is that people are living longer,” says Steele. “[That has] a real impact on pensions, so it makes sense that people would work longer before they start to collect pensions because the number of years that you’re having to pay into a plan has to somehow support the lifetime benefits to be paid from the plan. There’s only so much money.”

Despite the lack of co-ordination among the various initiatives, Canada’s retirement system remains one of the world’s strongest, receiving a “B” rating in the 2014 Melbourne Mercer global pension index.

Notes Mercer’s Forestell: “Some of the weaknesses that were identified that prevent Canada from getting top marks are around coverage and locking in for retirement – meaning we have a lot of voluntary programs in which people can take the money out before they retire. So, that hurts the score.”

Editor’s Note: This is part three in a three-part series on what’s new in pensions.

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