Innovative Pension Reforms Provide Lessons for Canada

IRPP.org – Recent Release – Lessons from Abroad, Ideas from Home
September 28, 2010.   Patrik Marier.  Research program: Faces of Aging

Until now Canada’s retirement income system has done well in alleviating elders’ poverty and helping workers maintain their standard of living in retirement. But according to Patrik Marier, the latter achievement is threatened by problems in the coverage and governance of occupational pensions, and by the voluntary nature and high cost of savings alternatives. These issues, together with the limited generosity of public pension programs, mean that a significant proportion of today’s middle-income earners could face a decline in their living standards when they retire. Patrik Marier looks at pension reforms in Norway, Sweden, New Zealand, the United Kingdom and Saskatchewan to determine if there are lessons for Canada, and finds that all five systems have features that would complement Canada’s public pensions.

Norway mandated employers to top up its generous pay-as-you-go, public, earnings-related scheme with modest occupational pension coverage. Small businesses addressed the challenges this measure posed by forming a partnership between their national organization and an insurance company. About 600,000 workers gained new occupational coverage at a low cost to the state. Sweden expanded pension coverage by incorporating mandatory, modest, definedcontribution (DC) individual pension accounts into its generous public scheme.

New Zealand and the UK chose automatic enrolment with opt-out provisions for workers (employers must contribute if workers do). In 2006, New Zealand started enrolling new workers into DC individual pension accounts, and provided financial education and incentives. By mid-2010 coverage was achieved for 1.5 million individuals. By 2017 workers in the UK will be enrolled into either an occupational plan or a low-cost, DC, individual pension account, managed by an arm’s-length trust.

Canada would face obstacles in adapting foreign solutions. For instance, pensions are a shared federal-provincial jurisdiction, and the business sector is less structured than in Norway. As such, a national structure would have to be established, or subnational programs would have to be coordinated between jurisdictions in order to avoid impeding the free movement of labour. Individual accounts would have to supplement public programs; offer a low-cost, high-return “default” option to savers; and only be mandatory for workers without occupational coverage.

The voluntary, collective, DC Saskatchewan Pension Plan was initially successful, due to its financial incentives (subsequently eliminated) and low cost structure. Homemakers, workers and employers can make irregular contributions to a single pooled fund, and retirees receive regular annuities. Marier argues that with financial incentives and a higher contribution ceiling, this plan could be a model for a national plan to cover individuals without occupational pensions.

Whatever option Canada chooses, middle- to high-income earners will need better private retirement savings vehicles to supplement the limited replacement rate offered by the Canada Pension Plan and the Quebec Pension Plan.

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