Pension design innovation for the 21st century
Pension design innovation has been discussed, debated and promoted for several years now in the pension industry. We all seem to understand the need to expand pension coverage, stop the decline of workplace pensions and facilitate innovative plan design. The question is how?
If you go back in time more than 10 years ago to the Ontario Arthurs Commission Report from 2008, you will find chapters on promoting innovative plan design, and the future of defined benefit pensions and pension policy in Ontario. Those chapters include forward thinking recommendations like:
- “Innovation in plan designs should be promoted and facilitated by the proposed Pension Champion”; and
- “Pension policy and legislation ought to facilitate the growth and operation of large-scale pension plans or to enable and encourage cooperation among small- and medium-sized plans”
While there have been some legislative changes to promote consolidation, such as the rules to facilitate transfers from single employer pension plans to jointly sponsored pension plans (JSPPs), unfortunately there has not been significant change legislatively to promote and facilitate pension innovation. We still don’t have comprehensive target benefit regimes in many provinces. In addition, the federal income tax rules continue to be a significant impediment to plan design innovation.
Pensions need to be more of a political priority if we hope to have good workplace pensions, or any pensions for that matter, for us and our children. Without political courage to drive change, we will continue to see the decline of pension plans in favour of less desirable savings options like Group RRSPs or nothing at all. It’s important to remember that in Canada, unlike some other jurisdictions, employer sponsorship of or participation in workplace plans is generally voluntary.
At a recent Osler seminar, we featured four speakers, who discussed innovative pension products that have been created within the current legal framework. These products have the potential to expand pension coverage and bring better pensions to Canadians. Below, we highlight the innovative pension products discussed at our seminar (in alphabetical order):
Blue Pier Retirement Plan (Blue Pier)
The Blue Pier plan is open to virtually any employer, whether a professional corporation, small, medium or large sized employer. The employer joins the plan, makes certain choices and then the rest is done by Blue Pier - there is flexibility built into the design - employers can choose the contributions or benefits, eligibility provisions, etc.. Blue Pier is the delegated administrator – the employer just has to sign up, provide the necessary information and make the required contributions. The plan is registered in Ontario as a multi-employer pension plan.
Colleges of Applied Arts and Technology Pension Plan (CAAT)
CAAT recently added a new option to its plan known as CAAT DBplus. CAAT provides a defined benefit pension plan, which is registered as a JSPP in Ontario, available to employers in the private, public and not-for-profit sectors across Canada. Although the plan provides a defined benefit pension to members, by design employer contributions are fixed. Employers who wish to join CAAT may participate in the original CAAT Plan, known as DBprime or DBplus. CAAT is the administrator – any Canadian employer just has to sign up, provide the necessary information and make the required contributions.
Ideal Canadian Pension Plan (ICPP)
ICPP is a new pension plan that will soon be available, targeted to small and medium sized employers. It will be a multi-employer DC pension plan with specific benefit targets, administered by a management board, made up of qualified persons. The ICPP design will include collective defined contribution elements in the decumulation phase, so there will be pooling of certain risks, such as the longevity risk. The ICPP also plans to have a pooled registered pension plan (PRPP) element to serve self-employed members. Similar to the other plans, for the ICPP employers will just have to sign up, provide the necessary information and make the required contributions.
OPTrust Select is the new defined benefit product offering from OPTrust (an Ontario registered JSPP), designed specifically for organizations in Ontario’s nonprofit, charitable and broader public sectors. OPTrust Select was designed to address the specific needs of these sectors, providing the stability and security of a defined benefit pension, but at a stable cost through an innovative plan design. Similar to the other plans, the plan administration is managed by OPTrust so it is easy for participating employers.
These initiatives have some of the attributes heralded in the Arthurs Report – plan design innovation and consolidation. Leveraging the current legislative regime, they are innovative options, and are designed to consolidate multiple employers in each plan. Pooling multiple employers facilitates economies of scale in investment management, with expert/experienced persons administering the pension plans. This enables employers to offer workplace pensions to their employees while focusing on their core business.
It is encouraging to see large JSPPs like OPTrust and CAAT expand their offering to other employers and to see private sector initiatives such as Blue Pier and the ICPP. We encourage continued innovation in the pension industry to help preserve pension options for the next generation of workers. As set out above, leadership from politicians in the pension space to enable more design innovation and help increase pension coverage would also be welcome.