Helping Ontario workers build retirement nest eggs: Toronto Star Op-Ed

With the lack of federal-provincial agreement on how to solve the problem, the Ontario government has announced it wants to develop a made-in-Ontario solution for its citizens. Other provinces, including P.E.I. and Manitoba, have expressed willingness to take part in the discussions.

In a new report released by the C.D. Howe Institute, I suggest the province should consider a “middle way” solution between the two current competing visions for reform: an expanded Canada Pension Plan (“Big CPP”) or reliance on voluntary Pooled Registered Pension Plans (“Little PRPP”). In my view, both these solutions have significant drawbacks.

The “Big CPP” option would have to be mandatory, raising the hackles of “free choice” Canadians. Then there’s the question of targeting: a mandatory one-size-fits-all solution would “help” a lot of people who don’t need help — those who already have enough for a comfortable retirement.

Further, the fact that future benefits would have to be fully pre-funded prompts serious questions that proponents of a “Big CPP” have not even begun to discuss. What rate of return would be projected for setting the contribution rate for the new CPP benefits? Would these new benefits be guaranteed? If so, by whom?

The “Little PRPP” option has its own problems. The Pooled Registered Pension Plan version already enacted by the federal government is voluntary and shares many similarities with Group RRSP plans that have been available to Canadian employers for many years. The likely lack of PRPP uptake is not the only issue. Others include uncertainly around the level of management fees and the difficulty small employers would have choosing among competing commercial providers selling PRPP management services.

Instead of these two options, I recommend an Ontario Supplementary Pension Plan (OSPP), designed to top up existing retirement benefits. This plan would set a target pension and a realistic contribution rate to achieve it.

For example, my report suggests a pension target to replace 60 per cent of middle-income family earnings, and estimates it would take an additional 6 per cent of pay contribution rate (above the 9.9 per cent CPP contribution rate) to achieve it. As in the CPP, the additional 6 per cent would be split 50/50 between employees and their employers. It would be phased in over a number of years.

Here’s an example of what this might look like: a family earning $70,000 can now expect about $30,000 a year from OAS and CPP when they retire. Under the new OSPP, they would contribute an extra 3 per cent of their pay (matched by their employer). That would get them an extra $12,000 a year — bringing their retirement income up to $42,000 or 60 per cent of what they were making while they were working.

Participants in this plan would have full ownership of their own pension pots, which would be managed at low cost by an expert pension organization with a strong independent board, operating at arm’s-length from government. All Ontario workers without a workplace pension plan would be automatically enrolled in the OSPP, though they could opt out if they wanted.

Ontario would not have to pioneer this pension model, as the National Employment Savings Trust (NEST) is already successfully implementing it in Britain. After two years, a surprisingly high 92 per cent of British workers have chosen to remain in the plan.

For Ontario to pursue this path successfully, it needs to answer several questions:

• Is the province prepared to require employers not already offering a qualifying pension arrangement to enroll their employees in such an arrangement, as Quebec has done?

• Is the province prepared to appoint an expert task force charged with designing details of the pension model and create a new arm’s-length body to administer it?

• Will it find an acceptable way for commercial vendors to participate in this newly created market for pension services?

If the answers are “yes,” there are three lessons the province should keep in mind from the successful British initiative. First, articulate a viable, explainable vision to address the pension coverage problem. Second, muster the political will to see it through. And third, institute a properly resourced, effectively-led effort to implement it.

Canada’s emerging pension coverage problem was already well-defined when I first set out my “middle way” solution in 2008. Sadly, too little has been done over the subsequent six years. Through Ontario’s new pension initiative, a new window of opportunity has opened. The “middle way” solution, now bolstered by the British experience, offers the basis of a viable way forward.

Keith Ambachtsheer is director of the International Centre for Pension Management at the Rotman School of Management, University of Toronto. He is a member of the Ontario government’s Technical Advisory Group on Retirement Security.