Thursday, 16 December 2010

Flaherty Decides to Build Wading Pool for Pensions

Federal Finance Minister Flaherty's proposal today to set up something called Pooled Registered Pension Plans is a disappointing timid response to calls for improvements to Canada's pension system.

The proposal only suggests a few minor improvements:
  • small companies and self-employed workers would have access to portable group pension savings plans instead of being limited to personal RRSPs.
  • contributions would seem to be locked in for retirement only, unlike RRSPs where people can withdraw funds anytime
PRPPs would have the following deficiencies:
  • attempts to address only the first half of pension construction, the savings process and completely ignores how to turn those savings into a steady, reliable, inflation protected income that lasts as long as you live and pools those risks - that why it's more like a wading pool than a real pool
  • it sounds nice for the proposal document to say low costs are an objective but there is no evident mechanism by which overhead costs will be kept under control
  • the investment mechanism doesn't makes sense - how can the money be "co-mingled for investment purposes" with participants only having "personal accounts for record-keeping" alongside the idea that the plan administrators will offer a "manageable number" of "investment funds that permit a person to create an investment portfolio for his or her own objectives and risk preferences". I think the answer is that there will be a menu of mutual funds, like a DC plan, which, in fact, the draft document says on page 6. So the only real scale efficiency and risk sharing is what already exists in mutual funds. The proposal doesn't answer the critical question of who will be negotiating the lower fees with the portfolio managers and how the incentive scheme will make that happen.
  • no mandatory participation, each province can decide whether to do so or not, thus ignoring the very big issue that too many people simply don't sign up when given the choice
  • "tools" to enable people to make an informed choice. Har, har I can just see it now.... Mr Smith, would you like a Conservative Low-Risk Fund, a Balanced Fund or an Aggressive Growth Fund? On top of that, employers would have to figure out what contribution level to set for employees and themselves. How could employers have the knowledge and expertise to do this at all adequately? For the self-employed, they would have to do it themselves, or will this scheme include provision of expert personal financial advice supplied by advisors, working under fiduciary duty rules?
As the draft document says on page 8, PRPPs "will essentially be a new type of defined contribution RPP" catering to small companies and self-employed people. It's another addition to the already complex and confusing plethora of savings and retirement plans.

That this inconsequential and ineffectual proposal has been put forward tells us that Minister Flaherty has been convinced that there is no real widespread pension problem looming in Canada. Simple and straightforward CPP enhancement appears to have lost and if so, it will be business as usual for the financial services industry, which will continue to profit. Time to buy those shares again!

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