Shelving CPP expansion, Flaherty pitches private-sector retirement plan

TheGlobeandMail.com – news/politics
Published Thursday, Dec. 16, 2010.   Bill Curry, Ottawa

The Finance Minister’s call for modest enhancements to the Canada Pension Plan is moving to the backburner as Ottawa was unable to convince enough provinces to get on board.

Instead, Jim Flaherty said there is a willingness to move ahead with a new privately-run option targeted at workers who are either self-employed or who work for a company that doesn’t offer a pension.

The minister said he hopes the proposed Pooled Registered Pension Plan will be attractive to companies that previously felt high management costs prevented them from offering their employees a pension.

“It’s a multi-jurisdictional challenge to get a consensus on CPP. It’s clear that we do have broad support for the private sector solution,” Mr. Flaherty told reporters on Parliament Hill Thursday.

“There are no quick or easy solutions on CPP. Several provinces have concerns that remain unresolved. We must keep in mind the implications of proposals on the larger Canadian economy and we’re not ignorant of that. What’s key here is taking the time to get this right and ensure it will be effective in improving retirement income while being economically sustainable.”

The proposed PRPP is described in a nine-page draft report prepared by the federal Finance Department and released Thursday morning. It comes ahead of a Sunday and Monday gathering of federal, provincial and territorial finance ministers in Kananaskis, Alta.

In addition to discussing pensions, Mr. Flaherty said he also hopes the provinces agree to a joint timeline for eliminating budget deficits. “The G20 at the summit in Toronto agreed to specific goals with respect to deficits and debts and I hope we’re able to agree on that as well at Kananaskis,” he said.

The PRPP would be administered by regulated private-sector institutions, such as insurance companies, and Mr. Flaherty suggested the rules may require companies that do not currently offer a plan to offer the PRPP to their employees. In that scenario, the employees may be automatically enrolled in the plan and would have to specifically opt-out should they not want to participate.

The focus on a new private-sector fund is only one of two options that a majority of the finance ministers agreed to when they last met in June in Prince Edward Island. The second option was to bring in “modest” enhancements to contributions and benefits under the existing, mandatory Canada Pension Plan.

But changing the CPP requires the support of two thirds of the provinces representing two thirds of the population. Even if that threshold could be met, It would also be politically and technically challenging to accomplish a major CPP change over the objections of individual provinces.

Mr. Flaherty’s embrace of CPP enhancements in June came as somewhat of a surprise and was embraced by labour unions, including the Canadian Labour Congress, who argue further voluntary options will not address the fact that some Canadians aren’t saving enough for retirement.

In June, Mr. Flaherty appeared to agree with the argument that enhancing the CPP was a better option because of its mandatory nature.

“We reject a voluntary plan because that would very much disturb the work of the Canada Pension Plan which operates on a different basis, but the plan can administer a modest, phased-in increase on the mandatory side,” he said in June, in comments that were aimed at dismissing a federal Liberal proposal aimed at adding a voluntary option to the existing CPP structure.

Mr. Flaherty reiterated Thursday that he does not support the Liberal proposal. “The federal Liberal Party doesn’t believe in private sector pension innovation,” he said. “Having government build a new pension plan from scratch would be hugely and unnecessarily expensive. I have no doubt that Canada’s financial institutions can do supplemental pension plans better than a massive new government bureaucracy.”

Alberta Finance Minister Ted Morton was the most vocal critic of enhancing the CPP. He argued that the private-sector option would better target the problem, which he said is primarily middle-income earners who do not have a workplace pension.

The Canadian Association of Bankers issued a statement Thursday welcoming the proposed PRPP option. “What a great holiday gift for the self-employed, small business employees and other Canadians who don’t currently have a pension plan at work,” association president Nancy Hughes Anthony said.

Catherine Swift, president of the Canadian Federation of Independent Business, also praised the move away from mandatory CPP increases. “Small businesses will be pleased to learn that finance ministers are concentrating on practical steps to improve retirement income vehicles for employees and employers, rather than approving an increase in mandatory CPP premiums.”

According to examples in the Finance Department report, the PRPP would benefit owners of small companies who feel they do not currently have the expertise or resources to set up a workplace pension. Under the PRPP, the private sector will handle the plan at a lower cost than what is currently available.

While the funds in the individual company plan would be tracked for accounting purposes, in practice, the money would be pooled with contributions from other companies. As a result, small and medium sized companies – as well as the self-employed – would be able to take advantage of the investment advantages of large retirement funds.

The plan would operate on a defined contribution basis. That means workers and employers contribute a defined amount but the amount available in retirement would depend on the success of the investments by the private sector administrator. That is in contrast to a defined benefit pension, in which the employer assumes the financial risks of the investments and is legally required to pay employers a defined amount in retirement based on a formula.

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