(July 2008) The C.D. Howe Research Institute recently published a paper on a proposal to change Canada’s pension system that deserves attention from every financial advisor in Canada. The paper discusses the Canada Supplementary Pension Plan (CSPP) proposal, created by pension expert Keith Ambachtsheer. If implemented, this plan could radically change how Canadians save for retirement and generate retirement income.

First off, it must be stated that the CSPP is only a proposal, and the author acknowledges that the plan still needs work before it can be acted upon. But all those connected with the economics of retirement should acquaint themselves with this proposal, as it highlights some of the real and perceived problems with Canadian retirement savings and pensions.

The CSPP wouldn’t affect the first two pillars of the Canadian retirement system— Old Age Security/Guaranteed Income Supplement and the Canada/Quebec Pension Plans. It would fit into the ‘third pillar’ — up till now consisting entirely of private retirement savings, e.g., company pension plans and RRSPs and related vehicles. In brief, the CSPP would:

  • Cover all Canadian workers not part of a workplace pension plan, filling the huge gap that presently exists in pension coverage in Canada.
  • Automatically enroll all eligible workers in the plan, addressing the gap between the availability of workplace pension coverage and actual enrollment. There would be provisions for opting out of the plan by employers and individuals. Similar types of provisions on automatic enrollment were included in the 2006 Pension Protection Act in the U.S., and in general retirement savings amongst Americans has increased.
  • 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)