Canada’s great leap forward in terms of pension provision is taking shape. Pooled Registered Pension Plans (PRPPs) have now been adopted in a large number of Provinces and the rest are likely to follow quickly. However, the effectiveness of this innovation in saving is undermined by the purely support role that PRPPs are being allotted in the overall pension production, at least in the eyes of the majority of pension commentators.
Industry commentators constantly hark back to the gilt-edged model of defined benefit (DB) schemes as the golden age of pensions. The truth is more prosaic. DB schemes didn’t work. They were ultimately dependent on the ratio of contributors to recipients remaining stable and once that started to increase, the fallacy of using fixed amounts of income to support unknown liability levels was cruelly exposed. The vast majority of DB schemes are under water and even those that aren’t may not be able to pay out, as their future actual liabilities are unknown.
Deep down, commentators know that a shift back to defined benefit schemes is out of the question. No private employer is going to set up a new one or open one that has already been closed. So they are falling back on what they consider to be the next best thing, which is to get the taxpayer to take on these unfunded liabilities by calling for an expansion of the CPP/QPP schemes. An objective examination of this approach shows that it is just using the taxpayer to support a model that is fundamentally flawed.
Once this is accepted, a shift to DC schemes is the obvious answer. This would free up regulators to focus on preventing problems in this area rather than trying to prop up unsustainable defined benefit systems.
PRPPs could, if cleverly used, form the basis of a major revision of the savings attitude in Canada. However getting PRPPs up and running correctly is key to making them a success. Some provinces have made a good start by making the employer’s contribution voluntary. That may seem counterintuitive but the biggest problem in terms of pensions is making people realise that they are responsible for their own future income. Any suggestion that the employer has a role in providing income for employees after they cease employment militates against this realisation.
The only compulsion on the employer should be to facilitate contributions to the employee’s chosen pension scheme. Any compulsion in payment should be on the employees themselves for, just as they must contribute to their own defence, healthcare, and education via taxation, so also they must provide for their own future by saving for it.
PRPPS can make a big contribution to solving the problems of an ageing society. Embracing them would be a big step forward for the pension’s industry commentators.
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— Ampersand Advisory (@AmpersandAG) June 13, 2013