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The insurance industry has enjoyed tremendous profit on their retirement savings “products” for Canadians. The potential Canada Pension Plan (CPP) enhancement and the looming Ontario Retirement Pension Plan (ORPP) pose major threats to the industry. Keith Ambachtsheer and Edward Waitzer’s recent call for for private competition to the ORPP is yet another example of the industry’s resistance to a sensible, comprehensive public pension plan.
Before discussing the specific problems with the Ambachtsheer and Waitzer proposal, it is useful to look back at the financial industry’s continual resistance to reform on retirement security.
For decades, the industry and its advocates steadfastly denied that there was a problem with Canada’s retirement income system. It ignored the fact that in the private sector, pension coverage had never been above 50 per cent of employees and had been steadily declining. Today, only about one in eight private sector employees belongs to a defined benefit (DB) pension plan. It ignored the fact that savings through the registered retirement savings plans (RRSPs) fell far short of what would be required to provide an adequate standard of living in retirement. It brushed off concerns that Canada’s world-leading mutual fund fees — the fees charged by those financial institutions for managing our money — constituted an excessive drain on individual retirement savings.
The financial services industry ignored the changing reality of the Canadian workplace. Changes in Canada’s labour market have made it highly unlikely that an employee would work for the same employer for a working lifetime and retire from that employment.
When the late Conservative finance minister Jim Flaherty made the CPP expansion a political priority, Canada’s financial services industry and its advocates resisted. The Flaherty initiative ran head-on into the power of the industry, when then prime minister Stephen Harper abruptly terminated the process in December 2013.
But Canadians continued to demand adequate retirement income through the CPP. Unable to make the issue go away, the federal government created the Pooled Registered Pension Plan (PRPP) — a voluntary initiative that was supposed to solve the retirement savings problem but would largely benefit Canada’s insurance industry.
The fact that the PRPPs envisaged by the federal government were really no different from RSPs didn’t prevent the financial services industry from touting them as a “solution” that would render CPP expansion unnecessary. Despite the industry’s enthusiasm, however, PRPPs failed to gain any political traction. People looked past the excited boosterism to see the “jumped-up RRSPs” that PRPPs really were — pools of savings invested in mutual funds managed by Canada’s entrenched financial services industry. But there was no provision for an actual pension in retirement; no provision for inflation protection; no provision for portability from plan to plan as employers and jobs change. In short, a scheme that looked a lot like the system we already have — a system that we know does not work.
In the face of the Harper government’s opposition to anything that looked like CPP expansion, Ontario announced its ORPP — a kind of “CPP-lite” designed to fill the gap for Ontarians with no employment-based pension plan.
Predictably enough, the ORPP set off another round of resistance with two variants. One was the tried-and-true “we don’t have a problem, so why should we be doing this” approach. The other was the argument that it would be a bad thing if Ontario embarked on reform alone, and that the solution should be national, through the CPP — an odd development, considering the critique came from some of the biggest opponents of CPP expansion.
When it became clear that the “we don’t have a problem” gambit would not work, CPP expansion opponents — confident that the degree of consensus required by the CPP governance model would make expansion impossible — argued that the only thing we should be considering was CPP expansion; that anything that resulted in a fragmentation of the system would be unacceptable.
CPP expansion continues to hover in the shadows of federal-provincial relations, but it is becoming increasingly clear that anything more than a token level of CPP expansion is politically impossible at the national level. The only game in town remains the ORPP. Ontario continues to take concrete steps towards the creation of the ORPP and has recently incorporated into its legislation an option for other provinces to join at a later date.
And that solidification of the ORPP, predictably, has kicked off another round of bartering from the industry — this time in the form of a proposal from industry experts, Keith Ambachtsheer and Edward Waitzer, for a private sector pension model that would compete with the ORPP.
In their proposal, they argue that Canada’s financial services industry “should” offer a broadly based defined benefit pension plan to “compete” with the ORPP. These industry-led plans would offer benefits equivalent to or better than the ORPP, thus qualifying as “equivalent plans” that would be exempt from the ORPP.
There are some obvious problems with this proposal for private competition. First and foremost, there is nothing to prevent the financial services industry from offering such a product now through the “comparable plan” exemption and the PRPP.
The second problem with the competition proposal is that the type of plan proposed by Ambachtsheer and Waitzer could not possibly compete with a properly run public system.
The industry’s reluctance to kill off the golden goose of the current system is hinted at in Edward Waitzer’s comment that the industry would have to offer investment management services on a “wholesale” basis rather than the current “retail” basis. That’s code for the industry having to back away from the highest mutual fund fees in the world to fees that can compete with the much lower investment management costs of large pension plans. A similar comment would apply to the proposal for a guaranteed pension at the end of the savings period. Annuity prices in Canada are extraordinarily high. That’s why, despite all of the attention being paid to alternatives to CPP reform and the concern about defined contribution (DC) pension plan savers outliving their retirement savings, the industry has never suggested building annuities into their retirement savings vehicles. Experience suggests that they are not about to start.
But from the perspective of individual Canadians, the more important problem is that these hypothetical “competitors” to the ORPP would be unable to compete. They cannot offer benefit portability, as a public plan would. They cannot offer inflation-protected benefits at anything even close at a reasonable price. Due to their fragmentation, administrative costs would be substantially higher than those of a competitive ORPP. Because their investment funds will be smaller than the ORPP investment fund, their investment opportunity set will be reduced, and their returns correspondingly smaller. Because they face longevity risks that a more broadly based plan could manage, they will be forced to convert savings into pensions at a less favourable rate than would the ORPP. And for all of these reasons, the relationship between contributions and benefits offered in one of these hypothetical plans would not be able to compete with an ORPP.
The gap would be significant. The ORPP’s comparable plan rules hint at the magnitudes involved. Based on actuarial studies, the Government of Ontario has concluded that, to be considered equivalent to the ORPP, a DC pension plan would have to provide for total contributions of 8 per cent of pay. Set against the ORPP total contribution rate of 3.8 per cent, we see that a public plan like the ORPP will be more than twice as efficient as a DC plan in providing retirement income. The hypothetical plans envisaged by Ambachtsheer and Waitzer are simply large DC plans with an annuity add-on; as a starting point in the comparison, the ORPP has more than a 2:1 efficiency advantage over these hypothetical plans.
Far from demonstrating a case for “competition” between the financial services industry and the ORPP through the creation of plans that qualify as “equivalent,” the hypothetical plans advanced by Ambachtsheer and Waitzer highlight the most important weakness in the ORPP design: the provision for exemption for comparable plans.
The exemption has been justified as a protection for existing adequate plans. But that argument is really a red herring. Current DB plans could easily be protected by integrating the ORPP into their benefit design. Or the DB plan could provide a payout to the ORPP on a member’s pre-retirement termination equal to the commuted value of the benefit they would have earned in the ORPP had they not been exempt. And for current DC plans, the exercise would be even simpler. Contributions to the DC could be reduced by the ORPP contribution. The employer’s cost would not go up, and the employees would be better off.
The real reason for the exemption is, yet again, to protect a piece of the financial services industry’s retirement income cash cow. Set against the cost to future retirees, such a gift to the industry cannot be justified.
It is time for governments to call a halt to the self-interested lobbying of the financial services industry and move on to the task of repairing our badly broken retirement income system — ideally with a significant expansion of the Canada Pension Plan, but if not that, a robust and universal ORPP.
Economist Hugh Mackenzie is a research associate with the Canadian Centre for Policy Alternatives. Follow him on Twitter @mackhugh.
Photo: Gabriel Garcia Marengo/flickr
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