According to a recent Broadbent Institute study, “the value of retirement assets of those aged 55 to 64 without an employer pension is wholly inadequate.” Since this is particularly true for private-sector workers across the country, Prime Minister Justin Trudeau’s young government has started to act, but the efforts fall short of what is urgently needed.
For example, although the federal Liberal government’s proposed solution is to expand the Canada/Quebec Pension Plan, thereby allowing individuals to transfer both their risk of outliving their savings and their risk of poor investment returns to the public scheme, it will take time to achieve the necessary provincial consent.
In fact, Ontario’s Liberal government is so doubtful about the outcome and timing of this consent process that they are pushing ahead with their “go-it-alone” Ontario Retirement Pension Plan to supplement the CPP. Ontarians themselves seem dubious as to the CPP expansion with 44% of the respondents to a recent Forum Poll of Ontario voters saying they approve of the ORPP.
Read: Ontario Budget: The ORPP pushes ahead, more details to come in spring
As the Broadbent Institute study concluded, most people are ill-prepared for retirement and are destined to remain so without changes to the current pension system. They are not saving enough and private-sector workers in particular lack adequate access to effective retirement risk pooling due to the decline of defined benefit pension plans.
A better approach for prime minister Trudeau is to promote his vaunted “Canadian resourcefulness” by more actively supporting the development of the target benefit pension (TBP) model in conjunction with his already-stated goal to expand the CPP.
TBPs are an innovative design that provide an alternative to traditional defined benefit and defined contribution pension plans. By decoupling costly employer “guarantees” from desirable risk pooling, TBPs give employers cost certainty and still allow employees to pool retirement risk.
Read: Ontario Budget: Government continues to consult on target benefit plans
Another advantage of TBPs is that the enabling framework is relatively straightforward to implement. For example, a single-employer TBP model already exists in New Brunswick. If the prime minister is concerned that TBPs threaten accrued defined benefits, he should make it clear that DB-to-TBP conversions will be subject to a rigorous, government-defined, member-consent process.
Federal support for TBPs could also prove crucial to the evolution of the pension system for all employees if the provinces follow Ottawa’s lead and establish their own similar legislation.
Based on the Broadbent Institute study conclusions, the prime minster needs to move quickly to improve Canadians’ access to retirement risk pooling. With the uncertainty of CPP expansion, immediate action must and can be taken to help private-sector employees address the problem of their retirement income inadequacy.
The answer is TBPs. The Federal Budget, on March 22, is the perfect opportunity for the prime minister to deliver.
Read: Are target benefit plans secure?
Ron Olsen is a senior vice president and consulting actuary in The Segal Group’s Toronto office. He has more than 25 years of experience and is an expert in the design, administration and valuation of pension plans. He can be reached at rolsen@segalco.com.