Canada’s been facing a pension reform debate for quite some time now. A recent report out of C.D. Howe Institute provides an analysis into this conundrum.
There are millions of Canadians in the private sector who are employed by mid sized or smaller firms and self-employed, who are not members of employment based pension plans. The report states that many of these workers will have difficulty maintaining their standards of living when they cease employment in the decades ahead. The report states that members of the academic and financial institutions have two different solutions to play with:
1) Some believe the answer for pension reform lies in expanding the universal target-benefit-based Canada/Quebec Pension Plans.
2) Others believe the goals of improved coverage, portability, and reduced costs can be achieved with a new low-cost, fit-for-purpose group savings plan to be offered through employers. Out of this comes the design for a Pooled Registered Pension Plan (PRPP). On November 17, the Tory government introduced Bill C-25 to address pension reforms.
Bill C-25 envisions the following features:
- PRPPs could be offered by any corporation approved by the Office of the Superintendent of Financial Institutions (OSFI), which would have the power to issue PRPP licenses.
- PRPP administrators (whom are distinct from employers) – would be subject to a “prudent person” standard of care. They would be required to offer PRPP participants a menu of risk/reward investment choices, as well as a default option. They would also be required to manage the PRPP “at low cost” and provide participants with PRPP account values on a regular basis.
- PRPP administrators would set the contribution rates
- Decisions by employers to offer their employees’ access to a PRPP and by employees to participate would be voluntary.
- PRPP contributions would be locked-in except in cases of disability or death
- Provinces would be able to override any Bill C-25 feature and will need to intro enabling legislation to make PRPPs available where employment relationships are governed by provincial law
But according to Keith Ambachtsheer and Edward Waitzer, PRPP Bill C-25 has to address the 3 policy challenges posed by Canada’s pension coverage problem:
1) Maximizing PRPP participation. The voluntary employer PRPP participation, as envisioned in the bill, will result in minimal actual PRPP uptake
2) Default option design. Bill C-25 in its current form, is virtually silent on the important issues of PRPP default option design, which most participants would either choose or default into
3) Fiduciary Oversight. Leaving PRPP regulation to current regulatory processes would not directly address potential conflicts of interest and informational asymmetry between enrolled workers and PRPP administrators
The report maintains, that maximizing PRPP participation requires the design of an effective “enrollment protocol package” that applies to all workers in Canada who are not members of an employment based pension plan. Bill C-25 would require employers to enroll full-time employees (who would be able to opt out) should the employer voluntarily decide to offer a PRPP.
The report suggests that a new requirement for employers to offer a PRPP, would place an additional burden on mid-sized and small business employers, so some form of “quid pro quo” for these employers to act might be part of the PRPP implementation package. The authors suggest, that this could take the form of a modest one-time incentive payment for employers (or enrollment tax credit) per employee who remains “contributed” for a period of time.
Part of the other enrollment design element – is the opt out process for employees who don’t wish to participate and under Bill C-25, auto enrolled full time employees can opt out within 60 days of enrollment. While the design of a default option should include a matching employer contribution, employers should also have an opt-out option as seen in Bill C-25. The report also states that
“although pre-retirement access to PRPP funds should be limited, the restricted access proposed in Bill C-25 would be unfair to low-income workers and could be a significant deterrent to participation”
According to the authors, the solution for fiduciary oversight can be an independent, expert PRPP licensing body with ongoing “value for money” monitoring responsibilities. The PRPP licensing board would have the following features:
-Roles and responsibilities such as licensing PRPP adiministrators and establishing a license review process to permit new PRPP administrators to receive licenses.
-Strong organization structure with the board being governed by a competent, credible board of directors
-financing – while repayable government funding will be requiredi n the start up phase, the board should eventually be self-financing through modest deducations from PRPP contributions
Bottom Line – Bill C-25 provides for a new type of tax sheltered savings plan for Canadians called a PRPP which could be rolled out to millions of Canadians without a current pension plan who can begin to save for retirement. The bill as it stands today, falls short of its primary objective to ensure that the majority of Canadians who do not have a workplace pension will have access to a well-regulated, low cost, private sector capital accumulation plan. Also, provincial leadership is necessary in order to bring the federal legislation to bear fruit by requiring employers to offer PRPPs to employees and to provide well-thought out default options, as well as an independent PRPP licensing system.