Although many countries — including Canada — are worried about how their pension systems will cope with aging populations, Britain plans to address the problem with a new system of mandatory personal accounts.

Billed as “a new way to save,” the proposal is an attempt to deal with the chronic lack of pension saving in Britain, particularly among lower-income households. And it could be of interest to policy-makers in Canada who are concerned about declining coverage of workplace pensions plans and a carry-forward of unused RRSP contribution room approaching $500 billion.

Building on the 2004 recommendations of the so-called Turner Commission, which was appointed to look at the workplace pension system as a whole, Britain plans to implement a national pension savings scheme to come into effect in 2012. The proposal represents a radical overhaul of the British private pension system.

Ian Fairweather, with Watson Wyatt Ltd. in London, summarizes the key features of the proposed system:

> All employees between 22 and the state pension age — currently 65, but scheduled to rise to 68 — will be automatically enrolled in a personal account or a suitable employer-sponsored program that meets certain minimum high-level criteria.

> Opt-outs will be permitted, even though an individual may have no other pension provision. Those who opt out will apparently be automatically re-enrolled after three years.

> Employers will be required to contribute 3% of earnings, within a specified band of earnings. Employees will pay a minimum of 4% of earnings — more if they want to — and the government will add a further 1% through tax relief, with an overall contribution ceiling (subject to consultation) of 5,000 pounds sterling a year.

> Both non-workers and the self-employed will be able to opt into PAs, but because they will not automatically be enrolled, there will be no minimum contribution, although the 5,000 pounds a year contribution limit will apply.

Mark Dowsey, also of Watson Wyatt, explains that following the recommendations of the Turner Commission, a single body will: collect the contributions through a central clearing house; contract with administration service providers to operate the individual accounts; and carry out the placement and review of contracts for fund management. The government believes use of this single body model “maximizes participation, by providing a simple effective scheme and minimizing costs,” he says. A key factor influencing the choice of a single body operational model, says Dowsey, is the expected low costs this will deliver.

Investment choices will be limited to a default “lifestyle” fund, a small number of core funds, and a selection of more specialized funds. Dowsey says this limited choice is to ensure that PA members are not swamped with excessive fund choice. The majority of PA participants are expected to make no choice anyway, he says: “Hence, a lifestyle-based fund will be the default.”

Mandatory PAs might not find favour with some pension experts in Canada. Actuary and pension consultant Steve Bonnar, a principal in the Toronto office of Towers Perrin, doesn’t like the idea of forced saving. “I’m much more interested in allowing people to make their own decisions,” he says. And Canada already provides minimum income guarantees for lower-income individuals.

Although the British proposal might be a possible policy option to address low pension coverage in Canada, Bonnar doesn’t see that there is the political will to do something on that scale in Canada now. As well, he adds, there would be jurisdictional problems, as both federal and provincial governments regulate pensions.

But internationally known pension expert Keith Ambachtsheer, director of the Rotman Inter-national Centre for Pension Management at the University of Toronto and founder of Toronto-based pension consultants KPA Advisory Services Ltd. , believes something like Britain’s NPSS would do much to address the problem of low pension coverage here.

For some time, Ambachtsheer has been advocating a system similar to the one Britain proposes. His most recent book, Pension Revolution: A solution to the pensions crisis, published by John Wiley & Sons Inc. earlier this year, outlines his proposal for “the optimal pension system” (TOPS) in some detail.

Ambachtsheer observes Canada already has a reasonably stable Pillar 1 structure with old-age security and the guaranteed income supplement. Problems in the next pillar of the system — earnings-related workplace pension plans — now have to be urgently addressed, he says. Pension plans in this part of the system should ideally cover most of the workforce, Ambachtsheer believes. Currently, registered workplace pension plans cover about 39% of employed workers in Canada, down from 45% in 1983.

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Being able to offer membership in a TOPS arrangement, he says, would be a “good thing” for employers who don’t offer any retirement income arrangements to their employees — and employers would not incur material additional financial or legal obligations, he notes.

As well, sponsors of existing workplace pension plans in both the public and private sectors should be actively thinking about how to move their defined-benefit and defined-contribution plans into TOPS/NPSS-type arrangements, Ambachtsheer says.

His TOPS proposal has six critical characteristics. But to address “human foibles” involved in saving for retirement he advocates:

> Automatic Enrolment And A Minimum Contribution Rate. “While mandatory contributions are a hard sell in some places,” he says, “you can go softer with automatic enrolment.” The British proposal to allow opt-outs, he says, will probably still be effective. Research shows in such systems, about 80% of those enrolled will stay in the plan. In systems in which employees are required to opt in rather than being automatically enrolled, only about 20% do so.

> Designing An Autopilot Savings-Investment Process. “A complex menu of investment choices creates choice overload, leading to choice paralysis,” Ambachtsheer says. He believes the British proposal has this right, too.

> Designing Autopilot Conversion Of Financial Capital Into Deferred Life Annuities. Ambachtsheer would make annuitization the default choice upon retirement, rather than the lump-sum withdrawal of the accumulated assets in retirement savings accounts, as is currently the case.

To address administrative costs, Ambachtsheer’s TOPS proposal would create single-purpose pension co-ops, foster good governance and organization design, and build economies of scale. Britain’s proposal for a single body to manage the accounts may fit into this model, although debate is still raging about this proposal, he says.

There are concerns about a single government agency being responsible for managing the accounts, but he suggests the question might be addressed through arm’s-length pension organizations having both expertise and scale. Canada has some very good examples, he suggests — in particular, the Canada Pension Plan Investment Board.

Ambachtsheer maintains a pension shortfall issue is evolving in Canada, largely for middle- and even higher-income individuals in the private-sector workforce. “Recent analysis at the Rotman ICPM,” he says, “shows many of these people have serious money in the mutual fund sector and they’re getting fleeced.” With fees in the range of 2%-2.5% and gross returns of 5%-6% “you can’t get anywhere.”

Canada could address this if it could create the kind of structures it has in the CPPIB and Ontario teachers’ pension plan, Ambachtsheer says. These plans have both the size and investment expertise needed for success. “We just need more of them,” he maintains. “Organizations like these should be covering millions of Canadians that are not members of any pension plan.”

But how can more such organizations be created? What’s missing, he says, are people to champion the cause. What if Alberta were to act as a catalyst for the idea, for instance? Instead of talking about opting out of the CPP, which is working well, it might build an occupational pension system for the province as an add-on to the public system, he suggests.

Ambachtsheer senses there is growing interest in fixing the pension system. In meantime, he says, he will “keep on preaching.” IE