The 30 Basis-Point Solution

Ambachtsheer's proposed retirement income fix.

February 26, 2014

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coin stackAs Ontario bruits a go-alone solution to supplementing CPP coverage for workers who haven’t saved enough to retire on (a likely item in the next provincial budget) one advisor suggests a 30 basis-point solution, to the consternation of the mutual fund industry.

The advisor is longtime pension consultant Keith Ambachtsheer, now director of the Rotman International Centre for Pension Management at the University of Toronto. His recommendation for Ontario: something like the Canada Supplementary Pension Plan he proposed in a C.D. Howe paper in 2008.

In global rankings of pension adequacy (combining state pensions and formal private savings schemes) Canada stands number six out of 18 countries. “Not bad but we can do better,” he told participants at a recent seminar sponsored by AIMA Canada in Toronto.

The issues are clear-cut: “the participation by private sector workers in employment-based pension plans has been on the decline for over 20 years.” Even now, he says, 15% of retirees experience a significant drop in their living standards once they leave work. For newer workers, those between 25 and 35, as many as 40% will see a significant decline if the pension system doesn’t change.

The problem is that only 20% of private-sector employees have a workplace pension plan. So, he asks, “is this a public policy issue or is it a caveat emptor?”

It’s not as if Canadians don’t have options, “We’ve got the contribution room for RRSPs out there; if people don’t max it out, well tough.” And, private assets in RRSPs and TFSAs nearly equal registered pension plan assets of $1 trillion.

But many people aren’t saving enough for retirement, which he considers a market failure that requires government intervention. Those who do may be paying too much because of “asymmetrical information between buyers and sellers. It’s a situation where, writ large, the buyers don’t know what they don’t know about the impact of not saving or the impact of saving without knowing the fees.”

His Canada Supplementary Pension Plan (CSPP) could enroll more Canadians in retirement plans while cutting the costs for those already saving. “There is a 30 basis-point solution for those people.”

As sketched in his CD Howe paper, it would involve mandatory pension schemes for employers without workplace pension plans, with an employee being able to opt out. The cost would be 6% a year split between employees and employers. The plan would have a default investment option based on the annuitant’s age and provide an annuitization option. And it would be managed by a major Canadian pension plan.

In Canada, he says, “ We actually know how to run really great pension organizations.”

Of course there’s pushback. Finance Minister Jim Flaherty  “voted it off the island” at a finance ministers summit in PEI.

Yet, he says the current two-way horse race between CPP and Pooled Retirement Pension Plans (PRPPs) doesn’t do it. Advocates of “Big CPP” face the challenge of pre-funding new benefits against low investment returns. “We’re talking about major bucks,” he says. “And the other thing, the underlying return assumption that we now use to cost those benefits becomes tremendously important.”  The assumption is 4% after inflation. But markets can change. “Who bears the risk when you don’t hit 4%. The answer is: the next generation,” he says.

As for “Big CPP, he admits, “I’m not a big fan. I was delighted to have Flaherty basically killed it last fall.”

As for the “Little PRPP” option he argues, “We’ve got lots of voluntary programs. That’s the problem. So it’s not a solution either.”

That makes something like his CSPP seem attractive to Ontario now, and well before that, to British Columbia and Alberta. “It’s nice that something that looks like it was dead has now arisen from the dead and is back alive again.”

It’s become alive in Britain, he notes, in the NEST scheme, but not without some time “to get things right.” he acknowledges.

“If this is going to work, a lot of people have to be onside.”

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JULES.LALONDE.1

It is my view that the "30 basis point" mark although a good marketing piece is in fact fictitious and non-inclusive of required services. The NEST program also has a 1.8% front end charge on contributions (the contribution charge) above their 30 basis point (annual management charge). Furthermore, it is unclear whether the funds used in this scheme are also be required to fund operating expenses and trading costs not included in the 0.30% annual management charge. Most importantly for CAP/DC style plans such as these, financial advice to the members is not included and must be born by the member as a separate fee for service. When these costs are included, they certainly cannot be called a 30 basis point solution. This structure may be more efficient than some retail options but is certainly not particularly competitive in contrast to well priced current DC programs offered through many Canadian sponsors.

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