Once again, the Canadians are showing how to tackle fundamental problems by using a large dose of common sense and sweating the assets you already have.
Following on from their brilliant but obvious approach to transferring pension risk to individuals and then teaching them to cope with it (see blog - http://wp.me/pn0vi-3S), they now seem certain to proceed with the introduction of PRPPs – Pooled Registered Pension Plans.
This rather clever new product is a response to the lack of access that 50% of Canadians have to workplace based pensions, either because they are working in small firms in the private sector or are self-employed. In essence sets out to solve the same problem that the auto-enrolment / National Employment Savings Trust sets out to do in the UK.
The product removes the need for an employer- employee relationship for membership of the plan and allows for the pooling of all contributions from the employees of many small firms and self-employed individuals. The size of the resulting plans allows economies of scale to be achieved similar to the plans of the large employers, delivering better value to the individual pension contributors.
It also facilitates employer contributions without making them mandatory for plan membership, increasing the flexibility of the scheme to fit all size employers. And the Canadians have put in the auto-enrolment / opt-out features of the UK’s auto-enrolment programme.
However the fundamental difference is that the PRPPs will be set up and administered by the existing regulated financial institutions, removing the operational overhead from the small employer and putting the fiduciary duty firmly in the hands of those who are accustomed to managing it and already have all the systems in place to do so.
By leveraging their existing sophisticated financial frameworks, the Canadian approach makes far more sense than the UK’s riskier approach of setting up a non-governmental quango in order to provide for the smaller employers. After all, the Canadian Life and Pensions industry has a long and successful tradition and only has to make minor changes, whereas the UK will not know for a long time whether the NEST will be successful.
Overall, given the problem of an ageing population which is afflicting all the western economies, the Canadians have shown an intelligent and straightforward way to tackle it without taking excessive risks; by building on their successful existing life and pension industry they are in a better position to achieve success in an area where the ultimate consumers –the pensioners – cannot afford the solution to fail. And all this without penalising employment with forced levies from employers.
The other big difference is that the Canadians have avoided the UK regulators implicit condemnation of the industry they regulate – after all what other message can savers take from the setting up of NEST to ensure low costs.
The Canadians’ implicit trust in their Life and Pension institutions is far more likely to encourage people to save than the endless regulations pouring forth from the UK regulator.