Changing Canada’s pension plan system

Make available two types of portfolios — one more and one less aggressive. Target a 60% retirement income replacement rate with premiums set accordingly, and would allow automatic annuitization of up to one-half of each participant’s assets, bringing a level of certainty to pension income — less than defined benefit plans, but possibly more than […]

By Peter Drake | July 2, 2008 | Last updated on July 2, 2008
4 min read
  • Make available two types of portfolios — one more and one less aggressive.
  • Target a 60% retirement income replacement rate with premiums set accordingly, and would allow automatic annuitization of up to one-half of each participant’s assets, bringing a level of certainty to pension income — less than defined benefit plans, but possibly more than defined contribution plans.
  • Pool pension savings on a very large scale, by reducing the costs of investment management and improving returns, at least relative to smaller pooled pension funds, according to the author. While the author doesn’t specifically mention the mutual fund industry, he does claim that “…the high fees being paid by investors in many retail products could seriously hamper the efforts of some 5.5 million Canadian households with RRSP assets from achieving their retirement saving goals.”
  • Manage assets through an investment board modeled on the Canada Pension Plan Investment Board, and would operate at the same arms-length from government as the CPPIB.
  • Use current payroll deduction mechanisms (CPP), and the plan would operate under existing tax and regulatory regimes for pensions (e.g., the current maximum deductibility rule of 18% of earnings up to a maximum contribution of $20,000).

    Why should financial advisors become familiar with this proposal? Even though it is only a proposal, and in its early stages, the CSPP is a good first step and does help to address some of the retirement savings and income problems in Canada.

    It also draws on the experience of similar plans in other countries. For example, Australia has a superannuation fund in which employers are required by law to pay a portion of an employee’s salary and wages (currently 9%) into the fund, which can be accessed when the employee retires.

    As well, it should receive widespread attention from government policy-makers and, if implemented, the plan could materially change the relationship between financial advisors and their clients.

    It is this last point that financial advisors should pay the most attention to — how this proposal could materially change the relationship between financial advisors and their clients. By no means everyone enrolled in a CSPP is now, or ever would be, clients of financial advisors. But, a CSPP-type plan would reduce the need for Canadians to save for their retirement outside of the CSPP, which, in turn, could affect the role of the advisor.

    Advisors may even now be saying to themselves that there is no substitute for individualized financial and retirement planning, and the personal relationship between financial advisor and client. But we all know that the only constant is change, and therefore we in the financial advisory community need to understand the factors and ideas that could alter our business, and start thinking about how we will need to change accordingly. Even if the CSPP paper does nothing else, it will bring attention to the very important issue of encouraging Canadians to save for retirement.

    Peter Drake is vice-president, retirement & economic research, for Fidelity Investments Canada. With over 35 years’ experience as an economist, he leads Fidelity’s research efforts in examining retirement in Canada today. He can be reached at peter.drake@fmr.com.

    (07/02/08)

    Peter Drake

  • Allow members to change employers without affecting their plan membership. Membership in the plan would be portable, speaking to one of the long-recognized limitations of defined-benefit pension plans.
  • Make available two types of portfolios — one more and one less aggressive.
  • Target a 60% retirement income replacement rate with premiums set accordingly, and would allow automatic annuitization of up to one-half of each participant’s assets, bringing a level of certainty to pension income — less than defined benefit plans, but possibly more than defined contribution plans.
  • Pool pension savings on a very large scale, by reducing the costs of investment management and improving returns, at least relative to smaller pooled pension funds, according to the author. While the author doesn’t specifically mention the mutual fund industry, he does claim that “…the high fees being paid by investors in many retail products could seriously hamper the efforts of some 5.5 million Canadian households with RRSP assets from achieving their retirement saving goals.”
  • Manage assets through an investment board modeled on the Canada Pension Plan Investment Board, and would operate at the same arms-length from government as the CPPIB.
  • Use current payroll deduction mechanisms (CPP), and the plan would operate under existing tax and regulatory regimes for pensions (e.g., the current maximum deductibility rule of 18% of earnings up to a maximum contribution of $20,000).

    Why should financial advisors become familiar with this proposal? Even though it is only a proposal, and in its early stages, the CSPP is a good first step and does help to address some of the retirement savings and income problems in Canada.

    It also draws on the experience of similar plans in other countries. For example, Australia has a superannuation fund in which employers are required by law to pay a portion of an employee’s salary and wages (currently 9%) into the fund, which can be accessed when the employee retires.

    As well, it should receive widespread attention from government policy-makers and, if implemented, the plan could materially change the relationship between financial advisors and their clients.

    It is this last point that financial advisors should pay the most attention to — how this proposal could materially change the relationship between financial advisors and their clients. By no means everyone enrolled in a CSPP is now, or ever would be, clients of financial advisors. But, a CSPP-type plan would reduce the need for Canadians to save for their retirement outside of the CSPP, which, in turn, could affect the role of the advisor.

    Advisors may even now be saying to themselves that there is no substitute for individualized financial and retirement planning, and the personal relationship between financial advisor and client. But we all know that the only constant is change, and therefore we in the financial advisory community need to understand the factors and ideas that could alter our business, and start thinking about how we will need to change accordingly. Even if the CSPP paper does nothing else, it will bring attention to the very important issue of encouraging Canadians to save for retirement.

    Peter Drake is vice-president, retirement & economic research, for Fidelity Investments Canada. With over 35 years’ experience as an economist, he leads Fidelity’s research efforts in examining retirement in Canada today. He can be reached at peter.drake@fmr.com.

    (07/02/08)