(Originally posted Dec 21, 2010; re-hosted in March 2012)
In a nutshell
Given the limited granularity available in the PRPP (Pooled Retirement Pension Plan) announcement, we must conclude that this is an agreement to do nothing, except perhaps a handout to the financial services industry at the expense of the average Canadian. By taking advantage of the inertia of the gullible this guarantees more fees to the industry, but doesn’t solve the “systemic failure” of Canada’s pension system.
Real pension reform must address at least:
- The inadequate saving for retirement by Canadians- by requiring that the PRPP be offered but requiring those (employees and employers) who do not wish to participate to opt out (auto-enroll), insures that the gullible and those inclined to inertia will become the victims of the financial services industry’s ravenous fees. Auto-enroll, a potentially healthy approach, is turned a vehicle to channeling assets into likely suboptimal returns.
- Low-cost retirement portfolios- by forcing retirement assets into funds run by Canadian insurance and mutual fund companies known for corrosive fees will guarantee that only an inadequate share of the available market returns will end up in retirees’ portfolios.
- Low-cost longevity insurance option to deal with longevity risk and provide lifetime income, as well as low-cost decumulation strategies.
- The crisis facing those who earned their private sector pensions but their plan sponsors has gone bankrupt and lost much of their pensions while the government stood by and did nothing to protect them before/during/after bankruptcy
Based on the little information available at this time, the best that can be said is that the PRPP fails to deliver on all of the above four criteria. No compulsion or incentives to save, however apparent compulsion to invest savings in products of an industry famous for its greed, and no mechanisms to manage longevity risk. And not even a mention of protecting the earned benefits of private sector pension beneficiaries in case of sponsor bankruptcy. The best that can be offered to the PRPP is an F!
All that had to be done is to do: enable payroll deducted auto-enroll into self-directed RRSP/TFSA (and/or taxable accounts) with option to invest in low-cost passive/index vehicles with default (but investor adjustable) asset allocation and include a low-cost longevity insurance. This would go a long way to deal with the retirement needs of those more than a decade away from retirement. For those near or already in retirement need to have their already earned pensions to be protected in case their plan sponsor goes into bankruptcy and unable to deliver on pensioners’ deferred wages.