Together, we can achieve a secure retirement for all

TheStar.com – Opinion/Commentary – We need a mandatory, low-cost pension plan that provides everyone with secure and predictable retirement incomes.
Apr 17 2014.   By: Murray Gold

What will we do when we retire? How much income will we need? How much will we have and will it be predictable and secure?

Our pension system has been designed to replace about 70 per cent of our pre-retirement income through a combination of sources. Some are public — Old Age Security, the Guaranteed Income Supplement and the Canada/Quebec Pension Plan — while some are private — workplace pension plans or RRSPs and tax-free savings accounts.

But the patchwork retirement income system is failing to deliver for two main reasons. First, the private system is voluntary and people aren’t using it. The second is fees and expenses. RRSPs in particular are burdened with fees that corrode the retirement incomes they are supposed to provide.

For individuals, saving for retirement instead of spending for today’s needs and wants is difficult and for too many it is impossible. But at the collective level, we know with much greater certainty what we need to save. We may not know how long any individual will live, but we know our average, collective life expectancies and we know what we have to do to plan for retirement incomes that will cover all of us for all of our lives.

So, saving for retirement makes much more sense when we do it collectively than when we approach it individually.

The second major reason for a collective approach is for a dramatic reduction of costs and fees. Annual investment expenses for the Canada Pension Plan are only 0.27 per cent of assets; on an individual basis, most of us pay closer to eight times that much — 2 per cent or more of the money we invest in our personal RRSPs.

This difference in costs makes a huge difference to the pension we can eventually expect, especially so due to the power of compounding returns.

Check any pension calculator: a difference of 1.7 per cent in fees (the difference between CPP’s investment expenses and typical RRSP charges) every year during a 35-year period of saving can make a whopping 30-per-cent difference in the amount of savings a person has when they retire. And the fees and expenses can keep coming after retirement. Not so with the CPP, where expenses are strictly controlled both before and after retirement.

The CPP is the obvious solution to our looming retirement income crisis. Butthe federal government has nixed CPP reform in favour of the financial industry’s Pooled Registered Pension Plans (PRPPs).

So Ontario has decided to take the lead and address the problem without Ottawa, albeit with the support of other provinces.

What should a provincial plan look like?

Simply put, as much like the CPP as possible. We need a mandatory, low-cost plan that provides Canadians with secure and predictable retirement incomes. It must be mandatory because we need to be disciplined. It must be low cost because otherwise our hard-earned retirement savings are frittered away in expenses and fees. And we need it to be secure and predictable because it’s hard to retire if we don’t know our incomes at retirement.

As always, there are lots of alternative proposals. Here is how to evaluate them:

  • Do they charge 0.27 per cent to invest in a high-quality portfolio that includes expensive asset classes like real estate and private equity? If not, they are too expensive and not fit for our purpose, and should be rejected.
  • Do they cover all working Canadians? If they don’t, they will be solving one problem but leaving others behind.
  • Do they provide a secure and predictable income in retirement? Savings plans like defined contribution plans, group RRSPs and the PRPPs favoured by the federal Conservatives don’t produce a regular, predictable income for one’s lifetime. They only get half the job done and then often after way too high expenses. A CPP-style pension plan gets the retirement job done efficiently, inexpensively and reliably.

We have a special opportunity now to make a difference for ourselves and our children. It isn’t complicated, although it can be made to sound quite complex. It is achievable.

We need political leadership from Queen’s Park. We need other provincial capitals to weigh in and support reform. Eventually, Ottawa will get the message.

Murray Gold is managing partner at Koskie Minsky LLP, a leading pension and benefits law firm, and a member of Ontario’s Technical Advisory Group on Retirement Incomes.

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