Officials mull expansion of Canada Pension Plan

Canadians could see an expansion of the C$188.9 billion (US$180.6 billion) Canada Pension Plan, Ottawa, under a proposal being discussed by federal and provincial officials.

The proposal was put forth by Wes Sheridan, finance minister of Prince Edward Island, and is supported by the Ontario provincial government — with Ontario Premier Kathleen Wynne suggesting Ontario would consider creating its own supplemental plan if the federal government won't broaden the CPP.

On Nov. 1, provincial finance ministers agreed on a set of principles to expand the CPP, including full funding of any enhancements, improving retirement incomes of middle-income earners and protecting lower-income workers. They also said they would continue to press the Ottawa government for CPP expansion.

Despite the agreement, the CPP expansion proposal is still in the formative stages, said Ian Markham, Toronto-based senior consulting actuary at Towers Watson. In general, however, the proposal would increase the formula for CPP participant benefits to 30% of a participant's average wage from the current 25%.

“In theory, (the CPP) would enhance the benefits,” Mr. Markham said.

The proposal is one of two to enhance Canadians' retirement savings. A proposal for employers to offer a pooled retirement plan was approved by the federal government in 2011 but still requires approval from each of Canada's provinces. Under Canadian law, two-thirds of the provinces representing two-thirds of the Canadian population must approve the changes.

The proposals stem from discussions that began in 2010 when a federal government white paper showed there was a need to “modernize the pension system in Canada,” said Karen Tarbox, senior retirement consultant at Towers Watson & Co., Toronto. “The intent is to expand coverage to more Canadians and to target middle-income Canadians.

“The concern is that in the future, people won't save enough for retirement, so (the government is) looking for higher levels of pension benefits,” Ms. Tarbox said. “Ultimately, (the government wants) to encourage higher levels of savings for retirement.”

“But the devil is in the details,” Mr. Markham added, with issues such as whether higher-paid participants would get higher replacement ratios and the potential for “intergenerational inequality” where younger participants could foot the bill for retiree benefits.

“Questions involve who would contribute and how much,” he said. “There's no panacea for this.”

The pooled retirement plan, if implemented, would be required of employers, but participation by employees would be voluntary, Mr. Markham said. Funding would be similar to that of Canada's current registered retirement savings plans, with pretax contributions similar to 401(k) plans. Mr. Markham said the proposed pooled plan would be tantamount to “a group” individual retirement account in the U.S. and would have lower fees than individual RRSPs.

The discussion over pension changes has split along political lines, with the current conservative government in Ottawa concerned any move to tax-sheltered retirement arrangements would drain economic growth in the country, while more liberal political parties see the CPP expansion proposal as broadening DB access for everyone.

In a statement Oct. 30, Kevin Sorenson, Canada's minister of state (finance) and junior finance minister, said, “We share the concerns of small business, employees and some provinces of increasing costs during a fragile global recovery. We continue to discuss ways to improve the Canada Pension Plan with the provinces. We are working with the provinces to introduce pooled registered pension plans, which are employer-sponsored private pension plans that help to leave more money in the pockets of retirees.”

In Ontario, a survey released Oct. 26 by public policy analysts Forum Research Inc., Toronto, showed when given the choice between expanding CPP benefits and adding an Ontario-based supplemental plans, 46% want the CPP enhanced vs. 23% for the provincial plan.

David Barnabe, spokesman for the Canadian finance ministry, said Canadian Finance Minister Jim Flaherty's position is essentially unchanged from last December when he told reporters: “There's no consensus on a CPP expansion at this time. ... We'll discuss it and we'll review it and we'll see where the economy is at.”

As to what will shake out from the current discussions, Towers Watson's Mr. Markham said, “I'd put a small amount of money on expanding CPP five years from now, with participant income supplemented” by the pooled retirement plans.

“I think (federal and provincial governments) will try to support existing DB plans while they open the door for new retirement plans and further reform,” Ms. Tarbox added. n