The Pensions Debate
My new colleague Chris Roberts has prepared an analysis of the pros and cons of the Canada Pension Plan andÂ the proposed Pooled Registered Pension Plans.
The following is taken from the introduction:
“Pooled Registered Pension Plans are privately administered workplace pension plans similar in many respects to a defined contribution (DC) workplace pension plan, or group Registered Retirement Savings Plans (RRSPs). Like these vehicles, PRPPs may be better than RRSPs in terms of cost and increasing amounts saved for retirement. However, as a mechanism for addressing the deficiencies in Canadaâ€™s retirement income system, PRPPs are greatly inferior to an expanded CPP. They will not have the same impact on total retirement savings, and the cost to individual contributors will be far higher.
Unlike the CPP (where employers pay one half of the premium cost), PRPPs will not require contributions from employers. Unlike the CPP and defined benefit (DB) plans, PRPPs will not provide a secure retirement income at a set replacement rate of pre-retirement earnings. Benefits will be entirely determined by uncertain investment returns. Unlike the CPP, PRPPs will not offer protection from inflation, and will not necessarily last a lifetime. Conversion of a PRPP into a lifetime, indexed annuity at retirement might be possible, but this would be at a very high cost.
Unlike the CPP, which is integrated with the great majority of existing workplace pension plans, PRPPs will do nothing to make the pensions of members of existing defined benefit (DB) workplace plans more secure. Indeed, they may provide employers with a greater incentive to shift from defined benefit (DB) to defined contribution (DC) plans.
By contrast to PRPPs, the CPP is a nationally administered, defined benefit, compulsory, earnings-related program for the employed and self-employed. It provides retirement, survivor and disability benefits, as well as benefits for children of deceased and disabled contributors. The CPP currently provides a retirement benefit of 25% of pre-retirement earnings on annual earnings up to a yearâ€™s maximum pensionable earnings (the YMPE), an amount equal to roughly the average wage and salary ($48,300 in 2011). The Canadian Labour Congress has proposed that the retirement benefit be raised to 50% of average earnings, which would take place gradually after a phased-in premium increase.
CPP investment funds are managed at very lost cost compared to RRSPs and workplace pension plans by the CPP Investment Board (CPPIB). Benefits are secure, predictable, protected against increases in the cost of living, and fully portable across jobs. CPP expansion has been accepted in principle by seven provinces, and has received the support of the Canadian Association of Retired Persons, a former chief actuary for the CPP, and a range of academic and private sector pension experts.
While large pooled plans could have a somewhat lower cost than RRSPs or individual defined contribution workplace pension plans, management and operating expenses of PRPPs will be significantly higher than the low costs of the CPP Investment Board.”