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Public Option for Pension Security?
Susan
Eng, Vice-President, Advocacy at CARP shared an interesting article she
worked on with the help of Jean-aPierre Laporte, a pension specialist at Bennett Jones. It discusses the federal government's Pooled Registered Pension Plans (PRPPs) and advocates more stating, Public Option for Pension Security - PRPPs not enough:
Pension
reform – where are we now. The seesaw drama of getting the finance
ministers to finally acknowledge that Canada’s retirement system needed
fixing took nearly two years. When they emerged from their shells last
June, they offered a two-track solution: “modest” CPP enhancement and
a commitment to have the private sector devise a product to fill the
rest of the savings gap. By December, CPP-enhancement was dropped and
the 'Pooled Retirement Pension Plan' or PRPP was announced.
CARP
members were not impressed with a voluntary fund run by the private
sector and said so in our survey - which we dutifully conveyed to the
junior federal minister of finance and his officials. Such
multi-employer plans are already permitted by federal law and in Quebec
(they are called simplified pension plans), but there has been very
little uptake over the last decade. So now the industry wants the
government to do its marketing for it.
Skeptical?
One of the questions at the recent PRPP consultation was whether
employees should be automatically enrolled in a PRPP of the employer’s
choosing. Our answer was: only if there’s a public option along with
the private sector run offerings.
Why? You can already
invest your money in Canada Savings Bonds or in private bonds issued by
corporations or banks. It follows that Canadians should similarly
have a public option for their pension savings. The antipathy towards
the financial services industry shown in the polling was likely shaped
by news of financial frauds, overcharging on fees and unnecessary
foreclosures.
What part of “retirement security” did the
federal government not understand? Even provincial premiers are calling
for a CPP expansion along with federal opposition parties.
A
practical solution is staring all of us in the face – allow people to
buy into a separate fund run by the existing not-for-profit pension
funds like the CPP, OMERS, provincial Teachers Funds and the like. With
their size and experience, they can offer low-cost, reliable defined
benefit pensions – which, coincidentally, is what we’ve been asking for.
Monies contributed by individuals and their
employers, would be invested in a diversified fund but separated from
the fund managers’ other holdings. These contributions would be pooled
with those of millions of Canadians participating in such public funds
and would benefit from huge economies of scale – a scale that a myriad
of private sector funds would not be able to achieve. And with such
economies of scale comes the advantages of lower fees and access to
lucrative investment options (private equity, infrastructure etc.) that
retail private funds cannot and would not be expected to offer.
A large pool also allows the administrators to purchase annuities for
each beneficiary on a regular basis so that by the time of anticipated
retirement, the target or promised pension benefit would be available
(thanks that what insurance experts call 'risk pooling' a key ingredient
for insurance markets to exist). The existing CPP makes the same
promise but does not need to purchase annuities, relying instead on the
actuarial predictions and adjustments that a massive fund and long term
horizons offers to minimize risks.
In short, the key
advantages of a true defined benefit plan would be coupled with the key
advantages of knowing in advance what contributions are required.
Historically, private insurers used to provide defined pensions in this
manner in the 1950s and 1960s but ceased to do so because it required
them to maintain regulatory capital on account of the fact that
insurers were on the hook for pension promises. By transferring the
underwriting risk to a large enough entity (the public funds),
Canadians can have the certainty of a defined benefit promise without
putting pressure on insurance companies. The key to this approach is
thesetting of actuarial assumptions very conservatively, thereby
avoiding surprises.
B.C. and Quebec have adopted a similar
model for car insurance in their provinces. This model works and
Canadians in those provinces generally pay half the premiums Ontarians
pay. Ironically, allowing a public alternative will introduce a
healthy dose of competition for our pension dollars, something which is
surely bound to benefit everyone by keeping private providers honest.
CARP
isn't the only one wondering why PRPPS should only be the exclusive
domain of the private sector. Greg Hurst of Benefits Canada reports, A case for allowing pension funds to manage PRPPs:
Recently
OMERS CEO Michael Nobrega suggested that pension funds should also be
permitted to compete with banks and insurance companies when it comes
to pooled registered pension plans (PRPPs). Benefits Canada followed
up with an story and online poll
asking “Should large pension plans be permitted to administer the new
pooled retirement pension plans?” At the time of publication, 53% of
respondents say “Yes” (including me), 23% say “No” and 25% say “There’s
not enough information yet.”
If OMERS
or other large pension plan boards are interested in competing with
banks and insurers, I would like to suggest that perhaps they need not
wait for the provinces and the federal government to flesh out the PRPP
framework.
The trail that’s been blazed by the Saskatchewan
Pension Plan (SPP) might represent an opportunity for other large
pension funds to seek “specified pension plan” status from the federal
government under the Income Tax Act regulations, and thus allowing them to compete in the PRPP space.
Recent Income Tax Act amendments made for the SPP including these two changes:
- All
instances of the term “prescribed provincial pension plan” were
changed to “specified pension plan”. This could this be a hint that the
federal government might be open to also bestowing specified pension
plan status on plans without provincial government sponsorship.- The
$600 annual contribution limit was removed and RRSP limits now apply.
The $2,500 limit in the SPP is now only a function of that plan, not
the Income Tax Act.Any Canadian with employment income can apply to join the SPP.
Unlike PRPPs sponsored by banks and insurers, the SPP has a fiduciary
framework that is focused on the delivery of retirement plan services
and income to plan beneficiaries without the possibility of conflicts
with shareholder interests.
Other
large pension funds would offer similar fiduciary frameworks, and many
can deliver at costs even less than the SPP through economies of scale
already established. OMERS has demonstrated this already in very
competitive pricing for their new voluntary contribution account
services for their current plan members.
Even if specified
pension plan status for other large pension funds is not forthcoming
from the federal government, the current pension statutory framework
does not preclude a willing pension plan board and sponsor from
amending a pension plan to extend participation to unaffiliated
employers. In this regard, it is noted that although there is a
minimum employer contribution requirement for a defined contribution
provision (1% of earnings), this is subject to the administrative
discretion of the Minister of National Revenue. Further, such rule will
have to be modified in any event, in some fashion, to accommodate the
PRPP principle of voluntary employer contributions.
In
addition to the advantage of fiduciary independence from shareholder
interests, large pension funds as competitors to financial institution
PRPPs would also have the following attractive features:
- participating employers would be relieved of any direct fiduciary obligations in respect of the pension plan (like PRPPs);
- an immediately competitive pricing regime, based on already established economies of scale;
- an established track record of investment results; and
- investment
offerings that are appropriately limited for a pension plan,
particularly when compared to the plethora of investments offered by
financial insurers which are very confusing for most pension plan
members.Perhaps most importantly, competition from large
pension funds can set a tough standard towards ensuring a pension
policy objective for PRPPs of realizing benefits from economies of
scale and delivering most of those benefits to better the retirement
income security for Canadians covered under such plans. Utilizing OMERS
new voluntary contribution account fees as an example, fund investment
management fees could be as low as 0.50% per annum (and possibly
less), along with a fixed administration fee of $23 per member account.
The
only question large pension funds really need to ask of themselves
concerning this kind of pension innovation is, “Why wait?”
I
couldn't agree more, why wait? The problem is that the private sector
knows it can't compete with OMERS, CPPIB, and other large Canadian
public defined-benefit plans when it comes to delivering well governed, cost effective
retirement funds that invest in both the public and private markets
(you can add HOOPP in the mix even if
it's a large private DB plan). That's why you'll never see Canadian
public DB plans compete in the PRPP space. Politicians will never allow
it. It's a shame because it makes perfect economic sense and despite
what banks, mutual funds and insurers think, I'm sure other corporations
would love to offer their employees a public option for pension
security.
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- advertisements -
"In Canada, large public DB plans have outperformed private DC plans."
All governments have a monopoly on power and taxation Leo...until they don't.
The question now arises...how did they outperform private plans?...was it from contributions by public employees who still had jobs backed by taxation as a worldwide recession/depression took hold and destroyed private sector jobs?
Give me the data to back up that claim, minus employee (if any) and government matching contributions...TIA.
@nmewn: "The question now arises...how did they outperform private plans?"
Easy question to answer. They pool billions, negotiate much lower fees, are governed much better (independent investment boards with no political interference), manage assets internally and externally invest in the best public and private market managers in the world. DC plans simply can't compete with a well governed large public DB plan. Period.
"Easy question to answer. They pool billions...manage assets internally and externally invest in the best public and private market managers..."
Well, I don't know how one "invests" in money managers, they are usually found in the expense report...but anyways...
So you're saying that the state, in essence, using it's accumulated wealth (derived from taxation of the private sector to pay it's employees wages to begin with...remember?) to drive market demand is a good thing?
If I had access to billions in the private sector, by my using it, because of it's sheer size (the scale of which the article sites as a positive for some reason)...it does not mean I'm using it intelligently or in the best interests of my clients (the private citizen or the public sector) long term...it is only bubble formation and misallocation....we fundamentally disagree, obviously.
The public sector worker needs to control their own retirement to guard against bubbles, not contribute to them...and I would submit the best way to do that is thousands of decisions made everyday by individuals...to sell, buy or stand pat.
There is nothing wrong with staying in cash outside of the decay of fiat over time...with interest rates about to spike it will be interesting to see the return on public sector bond portfolios at year end ;-)
I'm still waiting on your data...I suspect the bulk of what you are describing as "outperform" is really contributions...not return, which is how "performance" is rated...just sayin.
I'm still waiting on your data...I suspect the bulk of what you are describing as "outperform" is really contributions...not return, which is how "performance" is rated...just sayin.
Simply utilizing the "Beardstown Ladies" return calculation methodology. Guaranteed to outperform any benchmark.
I hadn't heard of that one (I looked it up)...good one, thanks.
Seems anyone can make a claim...backing it up is a completely different matter.
Why, it's almost like having a high goal or standard where the desired result does not comport with actual results...so you change the goal or standard to fit the result and voila'...LOL.
Take a look at CPP returns. They beat the heck out of SS in the US. The point is that the Canadian situation is different. Candianas are more willing to share and are not into the dog eat dog, evryone for himself American model.
That's why the US has 1% of its people in prisons (lousy equity in education), why it spends 6% more of GDP on health (can't share costs, so makes insurnace cos rich).
Leo is right. A shared, conservative assumptions, DBP is a good way to go.
I asked for the data that Leo is basing his claim of public retirement plans outperforming private plans in Canada...minus all contributions from government & it's workers...that would be considered principle, not return on.
You have not provided it nor has Leo...so I will consider the claim bullshit as I first suspected.
Now yours;
"Candianas are more willing to share and are not into the dog eat dog, evryone for himself American model."
I'll try and remember that the next time the stores are picked clean as the snowbird horde begins it's annual migration back north of the border.
"That's why the US has 1% of its people in prisons (lousy equity in education),..."
The only thing apparent is your lack of it...but you brought it up...sooo...
The problem with all federally funded, centrally planned, government education is...well, just that.
They breed bureaucrats whose main purpose is to find crap to do besides educating students...I'm going to pick on Illinois...but any other state would do, probably, as over 40 have signed on to this nonsense.
http://www2.isbe.state.il.us/ILDS/pdf/ildsdac_meeting_120810_1.pdf
In this pdf you (and others) will find what many of them spend their time on...data mining...of students, parents, teachers.
How many unemployed people in Illinois realize when they sign up for unemployment benefits they must consent first to the release and sharing of data collected through the school system?...(page 17).
How many know this data encompasses their (students & parents) attitude toward debt formation and why this would be of interest to "educators"?...(page 37).
I could go on...but you get the point...maybe ;-)
"why it spends 6% more of GDP on health (can't share costs, so makes insurnace cos rich)."
LOL...we have ObamaCare now and all it's waivers (over a thousand to date)...we'll be sending plenty of patients to Canada, instead of the other way around, in short order...don't worry about that.
as I said crumbs from the table for the tax paying dog - would I not be better off having lower taxes instead of subsidizing the half life of my local trash collector - last time I looked this was Omaha not Athens
Fuck you Leo; you're not funny anymore. Given the option, my ass. You need to be fucked until you give it up; you're a menace, and a disaster waiting to happen. Public pension plan my ass. You couldn't plan a lemonade stand.
:) Glad you feel the same way!
Leo Kockupalotis
there's fuk all chance of you "falling over your IQ"... your brain-dead cut and paste articles of other cronies work is duller than a Barney Frank monologue! Your articles live off other peoples backs Mr. 'Cut-n-Paste' ....takes all of your 3 brain cells working at Max capacity even to do that doesn't it you public sector zombie?
Be careful, you might trip over your IQ...