Universal Access: All for One, Not One for All
Pension reform in Canada has been the subject of intense debate for over two years involving financial industry experts, government officials, pension legislators and other working Canadians. The focus of the debate has shifted several times – most recently centring on whether or not to raise the eligibility age for Old Age Security. But the key issue remains the same: What is the best way to help future generations of Canadians achieve retirement income adequacy?
Increasing pension coverage by offering all working Canadians, including the self-employed, access to a workplace retirement savings plan is one solution. Often referred to as universal access, it’s the premise behind the new Pooled Retirement Pension Plan (PRPP). The federal government recently passed legislation to enable this type of pooled pension plan, which will allow the 50 per cent of working Canadians who are currently not covered by private pension plans to save more for retirement. Quebec announced its own version of a pooled pension plan – the Voluntary Retirement Savings Plan (VRSP) – last March.
It’s important to understand that “universal” does not mean “uniform.” While some aspects of PRPP design need to be standardized to achieve affordability, universal access can take various forms. There is room to accommodate different needs and circumstances to the benefit of employers of all sizes.
Revising the Wheel
The idea of allowing all workers to save for retirement through the workplace is certainly not new – the Canadian Pension Plan (CPP), Australia’s “SuperPlans” and New Zealand’s “KiwiSaver” are examples of existing universal employment-based retirement savings plans with mandatory employer and employee contributions. The United Kingdom (U.K.) is currently in the process of launching its universal access plan for small and medium-sized business: The National Employment Savings Trust (NEST).
Our own government has determined that the CPP works well. The PRPP, an efficient workplace saving solution that builds on an established and proven delivery system, is the next step in increasing retirement income adequacy for working Canadians.
Making it Work for Small Business
According to a recent survey of owners of small and medium size businesses by the Canadian Life and Health Insurance Association (CLHIA), over 70 per cent showed support for the idea that all businesses provide their employees with access to a workplace retirement savings plan. Additionally, over 70 per cent of those interested in providing a PRPP to their employees agreed to look at ways to make employer contributions to those plans.
Employer contributions certainly help employees build their savings and would provide an incentive for employees to maximize the use of a PRPP. However, employers, and particularly small business owners, can experience economic volatility, which may limit their ability to contribute to retirement savings plans at times.
That’s why there is flexibility on this matter built into the proposed PRPP design. Universal access to a workplace retirement savings plan doesn’t mean that every employer offers an identical PRPP, especially when it comes to making employer contributions to the plan. Employers can choose whether or not to contribute and have complete flexibility over their contribution level.
Easing Transition with Graduated Access
An idea worth considering is being used in the U.K. – graduated universal access. While all employers are required to offer a retirement savings plan (the NEST plan, unless they already offer a qualifying plan) to their employees, compliance will span over six years beginning in 2012. Large employers, based on the number of employees, will need to comply first, with medium and smaller employers affected later. This approach allows for the resource challenges faced by many smaller employers.
It may even make sense to require universal access only for employers with a pre-determined minimum number of employees or annual revenues.
Universal Access + Auto-Solutions
Universal access to a retirement savings plan at work and auto-enrolment in a plan are two separate and distinct features, but together, they are a strong combination with proven results in many parts of the world where they are used.
Automatic enrolment works as the name suggests: when an employer makes a retirement savings plan available in the workplace, all employees are enrolled in it, and they can choose to opt out the plan. Automatic enrolment is widely used by many large employers today. The proposed PRPP, NEST and KiwiSaver each make use of automatic enrolment of employees to overcome inertia and start them saving earlier. When we combine universal access and automatic enrolment, the benefits for employees of saving at work are made available to the maximum number of employees.
Maximum Participation, Lower Cost
Maximizing plan participation is obviously good for employees and provides them with perhaps unexpected positives. The main driver of lower costs is the size of the average account balance and the number of plan members, which allows plan administrators to distribute fixed costs across a wider base.
Auto-escalation is a concept being used to help maximize plan participation and is seeing some success in the United States. It gets plan members to contribute a certain percentage of earnings to the plan and increases that amount gradually over a set number of years, unless the plan member opts out. Auto-escalation gets to the heart of retirement income adequacy by facilitating meaningful contributions.
PRPPs with auto-enrolment and auto-escalation features would have higher participation rates and growing balances per member, resulting in much lower costs over time. It’s important to note that low costs do not mean inferior products or services. Canada’s large pension providers currently provide excellent investment options and high-quality customer service. If investment options offered by PRPPs are limited to a small number of quality funds and plan administration is standardized across jurisdictions, a PRPP will deliver an economical and convenient option.
And the Debate Goes On
We’ve come a long way on the issue of pension reform. There is general agreement from provincial finance ministers on the idea of PRPPs, the framework has been established and Federal legislation enabling PRPPs is making its way through Parliament. There is also strong support outside government; recent CLHIA surveys show that the vast majority (90 per cent) of working Canadians and owners of small and medium size businesses who were polled also support the PRPP idea.
However, with most of the detailed regulations for PRPPs still to be finalized, the debate about how best to improve the retirement income system is far from over and provinces will need to take steps to make the PRPP a reality in their jurisdictions. By including but remaining flexible on key aspects such as universal access and employer contributions, PRPPs will be even more attractive to employers and ensure that we are creating a long-lasting solution that increases retirement income adequacy for generations of workers and millions of Canadians.
1 Stats Canada
2 CLHIA national online survey of 803 executives (senior manager level and up) from small and medium-size enterprises (SME’s) from December 6, 2011 to December 15, 2011.
3 Canadian Life and Health Insurance Association national online survey of 1,000 employed Canadians by Research House, collected between February 8 – 13, 2011
Tom Reid is Senior Vice-President, Group Retirement Services, for Sun Life Financial Canada.