More details have emerged regarding Ontario’s new mandatory pension plan, the Ontario Retirement Pension Plan.
In an evening speech Wednesday to the Second National Summit on Pension Reform, the Ontario Minister responsible for the plan, Mitzie Hunter, described launching the mandatory workplace retirement plan by 2017 as “an ambitions, sometimes daunting challenge,”
The speech shed new light on a fundamental philosophical difference on pensions with the Harper Conservative government and business on one side and the Ontario Liberal government, the NDP, labour and senior’s groups on the other side.
The Federal Conservatives’ view is that Canadians don’t need help to save. In their view, the existing Canada Pension Plan offers a good start and what we need is a bit more individual discipline to take advantage of available tax breaks. If you don’t have a company pension, the Conservatives believe it’s up to you to set something aside in your Registered Retirement Savings Plan (RRSP).
On top of the long-standing RRSP’s, the Harper Conservatives have created the Tax Free Savings Account (TFSA) and the recently introduced Pooled Registered Pension Plans (PRPPs). PRPP’s would be sponsored by life insurers such as Sun Life and Manulife.
In contrast, the Ontario government, the NDP and allied groups see three million middle-income Ontarians who aren’t saving enough at a time when company pension plans are disappearing. Either they won’t, or can’t save, given the day-to-day commitments of mortgages, rent, car loans and putting food on the table.
While the Ontario Liberal government, the NDP and labour would prefer to see the federal government expand the Canadian Pension Plan, Ottawa has rejected this option, saying that employers simply can’t afford the mandatory premiums associated with the plan. The CFIB, Chamber of Commerce, insurance industry and big banks support the Harper position that the CPP should not be enhanced.
There are 3 good reasons that the Ontario government and other groups supporting a new mandatory plan are right and the Harper government and business, are wrong.
Firstly, the cheque will be there when you retire and you know what that checks going to be. Stock markets rise and fall. If you had the misfortune to retire in 2008 or 2009, your outlook and sense of security suddenly changed when share prices dropped 54 per cent between Jan., 2007 and March, 2009. When those shares dropped precipitously through no fault of your own, so did the value of that RRSP you were counting on.
Secondly, hidden fees are a killer when it comes to investment returns in private plans like RRSP’s. The average mutual fund management fee is 2 per cent of assets. In contrast, the Healthcare of Ontario Pension Plan (HOOPP), which covers 286,000 people in the province, says its fee is 30 basis points, or less than a third of 1 per cent, to manage $51.6 billion in assets. Other public plans have similar fees that are far lower than RRSP or private savings plans.
The difference in fees makes a huge difference over time.
If you invest $100 and the fee is 2 per cent as it is in an RRSP, it costs $2 a year. If the fund’s profit is 5 per cent, or $5 a year, you’re left with a gain of $3.
If you invest the same $100, but the fee is 0.30 per cent as it si in a public plan, that’s 30 cents a year. You keep $4.70, or 56 per cent more.
Finally, there is the danger of outliving your savings with a private plan. What happens if you live to 85 or 90 but only saved on the basis of living to 75?
Public pension plan members sleep easy because they get a cheque for as long as they live. Their pension plans spread the longevity risk over tens of thousands of members. That is not the case with an RRSP or the new Harper PRPP’s.
So the proposed Ontario plan simply makes a lot more sense than the Harper alternatives. It’s really a no-brainer.
According to Ontario Minister Hunter, the plan would cover the 3 million Ontarians not currently enrolled in a comparable workplace pension plan.
Employees would be required to pay 1.9 per cent of their annual earnings up to a maximum income of $90,000, matched by their employer.
A $90,000 earner will pay about $137 a month, while at $50,000 that drops to $79.
It is estimated that the Ontario plan will generate $3.5 billion a year in payroll deductions that would be channeled into investments.
There are still lots of details to be worked out, including who should be exempt from the plan, how to define “comparable” plans and who should run the system.
And perhaps, most ominously, the insurance industry, banks, and business are all out to kill the proposed plan before and make sure it never sees the light of the day. Above all, the banks and insurance companies don’t want to lose those billions of dollars in fees they will get from administering their RRSP’s and the new PRPP’s.
These very same groups pulled the same stunt in the mid-1960’s when they fought the introduction of the CPP every step of the way.
The big banks and insurance companies lost then and they should lose again.