CLHIA Comments on Consultations on a Voluntary Supplement to the Canada Pension PlanRelease Date: 09/03/2015 Staff Reference: Leslie Byrnes
September 3, 2015
Ms. Catherine Adam
Federal-Provincial Relations and Social Policy Branch
Department of Finance
15th Floor, 90 Elgin Street
Ottawa, ON K1A 0G5
Dear Ms. Adam:
Re: Consultations on a Voluntary Supplement to the Canada Pension Plan
The Canadian Life and Health Insurance Association (CLHIA) appreciates the opportunity to comment on this paper.
Established in 1894, the CLHIA is a voluntary trade association that represents the collective interests of its member life and health insurers. Our members account for 99 per cent of the life and health insurance in force in Canada, and contribute to the financial well-being of Canadians by providing a wide range of financial security products such as life insurance, annuities and supplementary health insurance to about 28 million Canadians. About two-thirds of Canada's pension plans, primarily Defined Contribution plans for small and medium-size businesses, are administered by life and health insurers.
Canada has a strong, diversified retirement income system that is respected internationally and ranks among the best in the world. It is built on a balanced, three-pillar approach which has proven itself over six decades. When contemplating changes to any one of those pillars, we believe it is important to consider if and how changes might disrupt that balance so that the strengths of our system continue to be supported.
We believe there is no need for a voluntary CPP supplement. As your paper notes, most working-age Canadians are on track to maintain their standards of living in retirement. The under-saving problem relates to about 20% of Canadians, generally mid- to high-income workers who do not have access to a workplace plan and/or do not participate in one and do not have sufficient savings outside the workplace. This requires a targeted solution and one which we believe the private sector is well-positioned to provide.
Pooled Registered Pension Plans are an excellent vehicle to provide such a solution. They are low-cost, easy to administer and use "smart defaults" such as automatic enrolment with opt-outs and target-date default investments. But they need time to get established and demonstrate that they can make a difference in improving the retirement readiness of Canadians. To date, Ottawa and six provinces have passed PRPP enabling legislation. Other than Quebec, provinces are awaiting a multilateral agreement with Ottawa that will streamline supervisory processes and costs (currently under consultation) before finalizing their regulations and implementing PRPPs.
In introducing its PRPP version, the Voluntary Retirement Savings Plan framework, Quebec has taken significant action to allow its workers access to workplace plans. It requires all employers with five or more full-time employees to offer some form of workplace retirement plan, be it Defined Benefit, Defined Contribution, Group RRSP, Group TFSA, or VRSP. This very directly tackles the under-saving gap for those without workplace plans, and is an approach that we support.
Aside from the fundamental concern that a voluntary CPP supplement is not needed because the PRPP solution has just been introduced and needs a chance to get established, there are a number of practical issues that make a CPP supplement impractical. The fact is that CPP is not set up to handle a voluntary structure.
On the administrative side, providing DC-like services is very different than the DB requirements in the basic CPP, and would require a new infrastructure. Rather than simply tracking salary levels to determine DB entitlements, DC-style systems must maintain personalized contribution and account balance data, possibly with multiple investment options. Consumer reporting and income projections need to be customized. None of this leverages current CPP expertise.
Depending on plan design, there may also be investment management differences between a DC-style option and the underlying CPP. If a DC option permits consumer choice among investments, changes between investment allocations would require increased liquidity, which would typically reduce potential yield. If the plan were to permit transfers to other plans, this would similarly increase required liquidity.
To set up a separate CPP infrastructure to handle voluntary supplements would not only be costly but would detract CPP from its purpose, namely, providing a base level of retirement income for Canadians.
In conclusion, a voluntary CPP would:
• not allow PRPPs sufficient time to get established and undermine their impact and effectiveness,
• not provide any cost advantages due to CPP's lack of experience and infrastructure to run a DC-like plan, and
• detract CPP from its main responsibilities.
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