Canadians have had a number of suggestions for pension reform placed before them in recent months, including proposals to expand the Canada Pension Plan (CPP).
But another possible model seems to be gaining traction with the federal government. This proposal is referred to as Pooled Registered Pension Plans. These plans are a good idea for a number of reasons.
How would this work? In essence, the government would approve the creation of some very large asset pools or funds. Anyone could join one of these asset pools: small to medium sized employers, individuals, the self-employed, creating what is called a co-mingled fund. The assets would then be managed as a large pension plan would be. These asset pools would be very large, expected to exceed $10 billion.
Many advantages come from having a large asset pool. Administration and management costs are lower, and there are investment opportunities outside the stock market that exist for large funds that smaller funds can't make. (For example, the Canadian Pension Plan Investment Board owns toll roads and water utilities.)
If these plans are designed optimally, they will also manage the payment of retirement income to each participant. This means that individuals will not have to bear the risk of managing their own "draw down" of income (turning their retirement asset into monthly income), nor will they have to bear the high cost of friction in the insurance mechanism (agents' commissions, administration costs and investment management fees) if they chose to buy an individual life annuity.
Further, a large commingled fund has the advantage of pooling the mortality risk resulting in a more accurate estimation of the group's average life expectancy. Clearly, one can calculate the average life expectancy for 10,000 individuals more accurately than that of any given individual in the group.
Data tell us that large funds (in excess of $10 billion) can be managed for fees as low as 0.28 per cent while Individual RRSP Mutual Fund accounts often have fees in excess of three per cent. This is important. Fees of three per cent per annum will wipe out half of your retirement assets over a 35 year accumulation period. Or looking at it another way, in a world where interest rates are five per cent and inflation is two per cent, paying three per cent in investment fees means that you have effectively no real growth in your pension fund at all. You are just standing still.
Pooled Retirement Pension Plan assets could be managed by the private sector or by an arms-length government-sponsored investment board similar to the Canada Pension Plan Investment Board (CPPIB). Note that while the investment board might be government sponsored, it should not be government controlled or even government influenced (again, like the CPPIB). Whether the management of the funds is public or private is not as important as requiring (by legislation or regulation) very low total management expense fees -- lower than 0.35 per cent.
It would also be possible for the government to transfer "orphaned" pension benefits to these pooled funds (e.g., all the pensioners in Nortel after Nortel's bankruptcy). As stated, anyone could join a Pooled Registered Pension Plan. In fact, an individual could place his/her RRSP and TFSA Accounts in one of these pooled funds.
The essential element of Pooled Retirement Pension Plans is the commingling of individuals' and pension plan assets into very large funds, $10 billion or more, resulting in very low management fees, plus the advantage of commingling of the life expectancy risk.
If legislated and regulated prudently, these new Pooled Retirement Pension Plans could be a big step towards designing the retirement income security systems required for Canadians for the 21st century. And, this is very important given the continued decline of Defined Benefit pension plan coverage in the workplace. Only about 38 per cent of workers are covered by a Defined Benefit pension plan and, in the private sector, coverage is below 25 per cent.
Pooled Retirement Pension Plans are a good idea; one clearly worthy of pursuing. It is now time for the federal and provincial governments to pass legislation to allow for their existence.
Rob Brown was Professor of Actuarial Science at the University ofWaterloo for 39 years and a past President of the Canadian Institute of Actuaries. He is currently an expert advisor with EvidenceNetwork.ca, a comprehensive and non-partisan online resource designed to help journalists covering health policy issues in Canada.
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