The majority of Canadians lack retirement security and the federal government’s proposed pooled registered pension plan (PRPP) will do little to reduce risks for these individuals, according to a new study from the Institute for Research on Public Policy (IRPP).
The study, Pooled Target Benefit Pension Plans: Building on PRPPs, by Robert Brown, former president of the Canadian Institute of Actuaries, and Tyler Meredith, research director of IRPP, proposes an alternative to Ottawa’s controversial PRPP legislation—one which they say would be less costly than a DB pension plan and a more effective savings vehicle than a DC model.
The authors recommend a pooled target-benefit pension plan (PTBPP) in place of the PRPP. The PTBPP would involve pooling assets to maximize scale efficiencies in investment and manage actuarial risk.
Like the PRPP, the model would be voluntary but, for participating workplaces, employers’ matching contributions would be mandatory and fixed. The authors say their proposed model would protect employers from cost volatility, while providing employees with a reasonable expectation of retirement benefits.
“For many workers and employers this would be a vast improvement over their situation today,” said Brown. “The plan that we propose would provide better pension coverage, security in retirement savings and cost efficiency for members than would PRPPs or most current private group or individual plans.”
In their report, Brown and Meredith address five key criteria for the successful implementation of PTBPPs: asset and risk pooling, contribution rates and cost minimization, target benefits, risk management, and governance and investment management.
Asset and risk pooling
Like PRPPs, their proposed model is premised on the pooling of assets, which would be invested and managed globally across the pool, mitigating some of the investment risk. However, unlike PRPPs, PTBPPs would be required to maintain a minimum portfolio, in order to ensure that an efficient scale is reached. The authors suggest a minimum of $10 billion, which they say is large enough to generate cost efficiency.
Contribution rates and cost minimization
For employers, the PTBPP would operate as a traditional DC plan, with mandatory contributions for both plan sponsors and plan members. However, the authors suggest that the employer’s contribution should be fixed, with a minimum rate set according to the target benefit provided in the plan and employee contributions matched by the employer up to a set rate.
Target benefits
The authors suggest a target benefit structure in which plan members make contributions based on a set earnings replacement objective.
“For workers who contribute to their retirement savings solely through personal investments or as part of a traditional DC plan, having access to this type of plan would move their retirement income prospects beyond mere hope to a reasonable expectation (although not a guarantee) of a defined benefit,” says the report.
Risk management
The authors propose two methods for addressing longevity risk. The first is for the plan to purchase deferred life annuities for members as they approach retirement. The second is for the plan to move retirees into a group annuity program while maintaining working members in an actuarial pool.
The report also suggests that the PTBPP use a target indexation in which the plan only guarantees an annual inflation adjustment within a range slightly below the Consumer Price Index. This approach is similar to what’s offered by the Ontario Teachers’ Pension Plan, British Columbia’s public sector pension plans and the Nova Scotia Teachers’ Pension Plan.
Governance and investment management
Lastly, invested funds under the proposed PTBPP would be managed by arm’s length investment managers.
“Taking over these responsibilities from individual members will greatly improve the investment capabilities of the plan and provide a significant advantage for participating workers and small businesses,” says the report. “They no longer would be expected to manage their own assets and the associated investment and actuarial risks.”
“[T]his plan is a timely proposal with the potential to address many of the limitations of the PRPP within the existing framework of Bill C-25,” said Meredith. “Given the uncertainty surrounding the future of pension reform in Canada, it should be viewed as a practical step forward.”
For more information on PRPPs, visit benefitscanada.com/prpp.