Keith Ambachtsheer tabled a pension model sponsored by the C.D. Howe Institute which may potentially turn a new page in Canada’s pension system. You can read the proposal in its entirety at “The Canada Supplementary Pension Plan (CSPP): Towards an Adequate, Affordable Pension for All Canadians”. It is an easy, interesting and informative read of about a dozen pages.

This proposal is a significant not only because it is comprehensive in scope, but also because it will help put Canada’s pension crisis on the political agenda. I also tried to help get a similar, though less comprehensive, proposal onto (Ontario’s) political agenda with my November 2007 submission to the Ontario Expert Commission on Pensions; The Commission is expected to issue its report later on this year, but its mandate appears only focused at fixing current DB plan issues, rather than tackling the future of pensions in Ontario/Canada in general. By the way the Ambachtsheer proposal meets all seven criteria specified on page 8 of my submission.)

Ambachtsheer starts by reviewing the adequacy of Canada’s pension system from the ground up. (The situation is likely even worse than he suggests as many of the existing DB pension plans are significantly underfunded and therefore the assumed/expected benefits are at risk. For a list of current DB plan issues see my above mentioned submission).

The report suggests rules of thumb for a pension system: Pillar 1 (universal GIS/OAS) and Pillar 2 (work-based CPP/QPP) would be considered adequate if they jointly replace30-40% of the median national income and a Pillar 3 (private workplace RPP and individual RRSP) should lift the total income replacement rate to a range of 50-70% with no ceiling.” Canada’s Pillars 1 and 2 meet income replacement rate rules of thumb for low income Canadians. Members of the public sector Defined Benefit system also achieve the upper end of the proposed rules of thumb with typically indexed 70% income replacement after 35 years of service. However middle and higher income Canadians working in the private sector fall far short of the proposed rules of thumb in participation, access to cost-effective accumulation and decumulation options.

Why is the proposal good? The proposal takes a holistic approach not only to the root causes of Canada’s unraveling pension system, but also tables workable solutions. The elements of the proposal are: – mechanisms for (pre-retirement) accumulation and (post-retirement) decumulation – (potentially) universal coverage and portability – “pension delivery institutions that are transparent and cost-effective and operate solely in the best interest of the people they are meant to serve”

I encourage you to read the details of the report, to understand both the crisis that we are in and the simple solutions that can protect the retirement of the next generation. He also addresses the ideological question of further government meddling in the affairs of private citizens. He quotes James Buchanan 1986 Nobel Prize winning work that “private-choice model should always get preference providing it produces acceptable results. If it does not, move to the public choice model if it can be demonstrated that it will likely produce better outcomes.” There is no question that the private-choice model for pensions in Canada has failed the vast majority of its citizens who are not employees in the public sector! The failure is a combination of misguided government policies/regulations, agency costs, lack of even basic financial education of Canadians, and the result is the impoverished retirement of Canadians.

Who is the CSPP proposal good for and why? -Canadians: (1) are enabled to a higher level of retirement savings which is more consistent with their future needs, (2) can approximately double their retirement income for a given level of savings with the proposed cost structure, as compared to RRSP accessible retail mutual funds, and (3) portable pension (accumulation) system more consistent with the increasingly mobile workforce -Government: forestalling the political unsustainability of the growing gap between those who are and are not eligible for an inflation indexed “public sector” pension of up to 70% of final years’ salary; i.e. gap between those who are beneficiaries of public sector pensions and the vast majority of taxpayers who pay (at least in part) for the benefits, yet cannot partake in them. -Employers who are DB plan sponsors: can transfer additional pension risk (market, inflation, longevity) from their balance sheets to employees (many have already done so by cancelling or capping DB plan participation, providing little or no inflation protection.)
What are obstacles to and questions about implementation?

First a couple of potential obstacles mentioned by Ambachtsheer in an interview with Bill Hanley -Obstacle: ideological acceptability to the current Conservative government of “meddling” in the affairs of individuals (Ideally this should be tackled in a non-partisan multi-party approach, but any party could get an edge in the upcoming election by proposing to address the current pension crisis. A simple way would be to endorse the CSPP as the basis of pension evolution in Canada) -Obstacle: Bay Street may not be overly supportive if they lose their billions of management fee income from mutual funds charging 2-3% annual fees

-Question: while the proposal specifically addresses RRSPs (in that there should be a mechanism to transfer the assets into CSPP), there is no mention on how to deal with the problems associated with the existing Defined Benefit plans. (There is no doubt that most DB plan sponsors would be delighted to offload their pension plans if a workable transition plan was made available to them.) -Question: while proposal does provide for annuitization option, I suspect a longevity insurance (delayed payout annuity) option may provide a more efficient (tying up a smaller proportion of an individual’s assets) approach for a given level of lifetime income.
What action should you take now?

One could ask what are the highest value elements of the proposal that can be implemented quickly by legislation as initial steps, without requiring agonizing public debate, while the full proposal is debated and operationalized? The bulk of the benefits of the proposal could be implemented with simple non-coercive legislation requiring: 1. all employers provide a DC/RRSP framework that automatically enrolls all employees at 10% contribution (with option to opt-out) and that 2. all DC/RRSP plans also offer now available low cost (<0.3%/year) ETF/index funds (or even similarly priced balanced funds with a range of risk levels). An even better outcome would be if no legislation was required, but employers/sponsors/administrators would implement these simple steps as part of their fiduciary duties to employees/plan-members/customers! (I can’t see why this would not be done immediately). Ambachtsheer’s C.D. Howe paper ends with a call for action by individuals and associations to approach their provincial and federal elected representatives to tell them that they “care passionately about maintaining their standard of living in retirement”. It also calls on governments to reform Pillar 3 of Canada’s pension system. The current proposal is both the basis to start the discussion and it contains the framework for the solution. It deserves our support and advocacy. Write to your Members of Parliament (Federal and Provincial), your DB plan sponsor and to the Prime Minister!