In an aging world, a country’s retirement income system becomes an increasingly important determinant of its future social and economic performance.Brian Sprout
Keith Ambachtsheer is director emeritus of the International Centre for Pension Management, senior fellow of the National Institute on Ageing, executive-in-residence at the Rotman School of Management and co-founder of CEM Benchmarking and KPA Advisory Services. He is the author of a recent policy paper from which this column is adapted.
In an aging world, the design and management of a country’s retirement income system becomes an increasingly important determinant of its future social and economic performance.
The Mercer CFA Institute Global Pension Index ranks Canada’s system No. 11 out of 44 countries, ahead of many countries, but behind the Nordic nations, the Netherlands, Australia and Britain. What will it take for Canada to catch up with, or even surpass, these top countries in pension system quality? The answer is surprisingly obvious, but it will take extraordinary leadership efforts to get us from here to there.
It follows from Canada already having one of the best occupational pension systems in the world for its public-sector workers. Globally admired as “the Canadian pension-fund model,” it efficiently converts regular contributions into lifetime retirement income streams for its public-sector members. At the same time, investment organizations using the model are at the leading edge of converting retirement savings into sustainable, wealth-producing capital. This system needs to be expanded to everyone else.
The model originated from Peter Drucker’s 1976 book The Unseen Revolution. He foresaw the young, outsized baby boomer generation of the 1970s eventually becoming an outsized generation of retirees, and advocated creating pension organizations with two key features: legitimacy and effectiveness.
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On the legitimacy side, pension arrangements must be structured to always act in the best interests of the plan risk-bearers. This should be explicitly stated in their legal framing, and should be reflected in the composition of the plan’s oversight body.
On the effectiveness side, pension plans should have an accumulation pool that focuses on investment return generation, and a separate decumulation pool that provides lifetime income. Plan participants contribute to the return generation pool during their working lives, and their accumulated assets move to the decumulation pool as they approach retirement. In essence, plan participants contribute only toward their own retirement, not to that of an outsized, older generation.
A 2012 lead article in The Economist, titled Maple Revolutionaries, lauded the Canadian pension-fund model as “having won the attention of Wall Street, which considers them rivals, and of institutional investors, which aspire to be like them.”
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Making the Canadian model available to Canada’s private-sector workers and retirees would achieve three critical things missing in most Canadian private-sector workplace pension arrangements today:
- Adequate, steady contributions going into cost-effectively managed pension plans.
- Value-adding investment programs that turn retirement savings into wealth-producing capital.
- Lifetime pension payments that last as long as a retiree does.
If that had happened 30 years ago, most of Canada’s private-sector retirees would be receiving materially higher pensions today. While it is too late for that, shifting their accumulated and future retirement savings to the Canadian pension-fund model structure now would ensure that those savings would be managed effectively at low cost, and continue to pay retirement income as long as the retiree is alive.
How is this private-sector transition to the Canadian model actually going to happen? There are three possible paths, all of which have already been brought into play in some form:
- Existing Canadian pension-fund model organizations offer their pension management infrastructure to private-sector employers: This option is already being successfully implemented by the Colleges of Applied Arts and Technology (CAAT) pension organization.
- A government entity decides to create a Canadian pension-fund model organization for private-sector workers and retirees: Similar initiatives have been launched in a growing number of U.S. states and Britain.
- Private-sector financial services providers create one or more new Canadian model offerings: The Common Wealth and Purpose Investments organizations have both launched services and investment options consistent with the principles of the Canadian pension-fund model.
Exceptional leadership efforts were critical to designing and implementing the Canadian model 30 years ago. Such leadership efforts are required again if Canada’s private-sector workers are to become beneficiaries of its power to generate adequate pensions at a reasonable cost.