Pooled Target-Benefit Pension Plans: Building on PRPPs

SummaryMore than 60 percent of working Canadians currently don't have a workplace pension. For those who do have one, it does not guarantee them retirement security. With employers increasingly opting for defined-contribution (DC) rather than defined-benefit (DB) pension plans, the burden of managing the risks associated with a pension - such as longevity and the market performance of assets - has shifted to the worker.While this shift may have curtailed pension costs for businesses, as Robert Brown and Tyler Meredith argue, it has also left workers more vulnerable financially, since many do not have the wherewithal to plan effectively for retirement. In this study the authors explore ways to improve pension coverage and better manage risk for pension members, while also providing cost predictability for employers.With respect to the policy reform proposals currently on the table, they find that although expanding the CPP/QPP would be worthwhile, it is unlikely to be undertaken in the current economic and political environment. Meanwhile, the pooled registered pension plan (PRPP), recently introduced by the federal government, lacks mandatory employer contributions and will do little to reduce risks for individuals.The authors instead propose a voluntary pooled target-benefit pension plan (PTBPP). It would involve commingling assets across all participating workplaces to maximize scale efficiencies in investment and manage actuarial risk. Employers' matching contributions would be mandatory but fixed, as in a DC plan. As with the PRPP, it would be available to individuals and the self-employed.Most importantly, upon retirement, members could expect a benefit within a target range, depending on market performance. The authors suggest a minimum benchmark of 50 percent income replacement, requiring a slightly higher contribution rate than in many DC plans today.While the target-benefit design would not eliminate the risk that benefits decrease due to market underperformance, the model proposed includes mechanisms to mitigate this risk. The plan would be managed by actuaries and investment managers, instead of by workers. To curtail administrative costs, the PTBPPs would be required to maintain a minimum pool of $10 billion, with management fees capped at 40 basis points, which would be considerably more cost-efficient than are most DC plans and RRSPs today (250 to 300 basis points).In sum, for employers the proposed model would provide protection from pension cost volatility, and for employees it would offer more effective retirement saving through low administrative costs and reasonable retirement benefits. For many workers and employers this would be a vast improvement over their situation today.Brown and Meredith conclude that the PTBPP could be implemented within the legislative framework recently created for PRPPs, but this would require concerted action by the provinces.ResumePlus de 60 p. 100 des Canadiens actifs n'ont pas acces a un regime de pension en milieu de travail. Par ailleurs, la securite de la retraite de ceux qui cotisent a un regime d'employeur n'est pas non plus garantie. Le fait que les employeurs optent de plus en plus pour des regimes a cotisations determinees (RCD) au lieu de regimes a prestations determinees (RPD) transfere aux travailleurs la gestion des risques lies notamment au rendement des actifs et a la longevite.Bien que ce changement permette aux entreprises de reduire leurs charges de retraite, il rend bon nombre de travailleurs plus vulnerables, car ils n'ont pas les competences financieres necessaires pour planifier leur retraite. Robert Brown et Tyler Meredith examinent dans cette etude differents moyens d'ameliorer la couverture en matiere de pensions et de mieux proteger les adherents contre les risques, tout en assurant aux employeurs une previsibilite des couts.Parmi les propositions de reforme envisagees, ils jugeraient interessant d'elargir le Regime de pensions du Canada et le Regime de rentes du Quebec, mais doutent que la conjoncture economique et politique le permette. …

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