We should remove barriers to multi-employer plans
by Frank Swedlove
As we draw closer to the meeting later this month between Federal Finance Minister Jim Flaherty and his provincial counterparts, the debate about Canada’s retirement savings system is heating up. There’s no question we need to enhance Canadians ability to set aside more for retirement. But one of the great dangers of a crisis state-of-mind is the tendency to over-react and create new problems.
Canada has one of the world’s best retirement savings programs, according to the Melbourne-Mercer Global Pension Index. Ours works because it balances public-sector and private-sector roles, offers choices for Canadians and manages costs. However, it can be made better and this is an opportune time to make adjustments. But we must undertake a smart evolution, not a revolution.
One proposal for reform is creating a government defined-contribution pension plan with options for Canadians to select contribution rates and investment policies. We have to be realistic about the costs and implementation challenges of this concept. A defined-contribution program is very different to operate from the existing Canada Pension Plan (CPP). It would require high levels of service to manage individualized investment options, education, and customized features. Where does the expertise and efficiency already exist to run such programs? In the financial services sector where Defined Contribution programs have been administered for more than 20 years.
A new government program would be created on the taxpayer’s tab while failing to match the cost and service efficiencies of the private sector. It’s mistakenly assumed that the public sector can deliver retirement savings plans more cost-effectively, but the governments own data show that the primary determinant of cost is actually plan size, not provider. Even a medium-sized group retirement plan can be delivered by the private sector at a typical cost of 50 to 70 basis points, which is competitive with the cost structure of any government-sponsored plan.
Consider the U.K.’ s new government program, the National Employment Savings Trust (NEST). It’s expected to impose a 2% surcharge on contributions, on top of the annual management costs already incurred, in order to recoup its considerable set-up costs.
Latest estimates put the computer costs alone to administer NEST at £600-million ($927-million). It’s taking seven years to establish and some employers will not participate for at least another seven years after launch. We should not mirror that approach in Canada.
Another proposal would increase employer and employee contributions to the CPP and raise maximum contribution limits. For example, a doubling of pension benefits under the CPP would require an incremental payroll tax of 6% — a significant burden for employees and employers. Plus, participants would not be able to enjoy full benefits for 40 years — a very long wait, indeed.
The requirements for an improved retirement savings system have to include cost-effectiveness and adequacy while reaching a broad base of Canadians. The infrastructure, expertise, capacity and proven cost-efficiency to meet those requirements already exists in the private financial service sector’s workplace-based retirement savings programs, including pensions, group RRSPs and deferred profit-sharing plans.
These capital accumulation plans have grown 70% in eight years and the potential for increased participation is clear. Environics Research Group found 89% of Canadians want workplace programs made available to all workers. Fifty-six per cent of those not in plans are interested in joining one, with younger workers particularly keen.
Currently only about 50% of Canadian private-sector workers take part in workplace savings programs. Participation is constrained by tax and regulatory red-tape that create administrative burdens for employers, particularly small and medium-sized businesses.
But this can be corrected relatively easily and with immediate and quantifiable benefit. If legislation were amended to permit any employer (including the self-employed) to participate in a Multi-Employer Pension Plan, this would remove almost all administrative costs for employers, as it would be handled centrally by the managing financial institution.
In addition, if all businesses with 20 or more employees were required to offer a pension plan, group RRSP, or access to a Multi-Employer plan, this would mean more than 80% of Canadian workers would participate in an efficient, cost-effective way to save for retirement.
Public pension programs were never intended to be the sole monopoly source of retirement income. There has always been a clearly designated role for the private sector and we need to retain that important role as we move to enhance Canada’s retirement system for the decades ahead.
What Canada needs is not the creation of more retirement savings programs, but better access and use of the programs we already have. That’s not a dramatic solution — but the benefits certainly would be.
Frank Swedlove is president of the Canadian Life and Health Insurance Association.