EXCERPT FOR 2013 SASKATCHEWAN BUDGET TABLED MARCH 20, 2013
Improving Saskatchewan’s Retirement Income System
The retirement income system in Canada is considered to be one of the best in the world, consisting of a blend of public and private programs. Canada’s retirement income system is comprised of three elements, often referred to as “pillars” by the federal government.
The first pillar consists of publicly funded income support programs, namely Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). These programs are intended to provide a minimum level of financial support to Canadian seniors.
- The second pillar consists of the Canada Pension Plan (CPP), which is funded through earnings-based contributions from employees and employers. Participation in the CPP is mandatory for all employed and self-employed Canadians.
- The third pillar consists of private retirement savings, including occupational pension plans and registered retirement savings plans (RRSPs). Participation in some occupational pension plans is a requirement of employment. Participation in other private savings plans is entirely voluntary.
In addition to the three pillars, there are other savings vehicles that can provide support in retirement including home ownership, equity in a business and other financial assets.
Retirement Income Adequacy
Over the past several years, federal, provincial and territorial governments across Canada have been discussing retirement income adequacy. The work began in 2009 with the appointment by the federal Minister of Finance of the Research Working Group on Retirement Income Adequacy. The Working Group covered a range of research areas including: the role of government in the retirement income system; an assessment of how current retirees are faring and how future retirees may fare; risks to adequate retirement savings; and an assessment of Canada’s retirement income system in the international context.
The Summary Report on Retirement Income Adequacy Research, prepared by the Working Group’s Research Director Jack Mintz, concluded that the existing retirement income system enables most Canadians to maintain an adequate standard of living in retirement; however, it noted that:
“There is, however, evidence that not all working Canadians are saving enough to obtain the same level of consumption in their retirement years as in working years. These estimates suggest that one fifth of Canadians may not have sufficient registered pension plan and RRSP assets to replace at least 90 per cent of their pre-retirement consumption, with higher degrees of inadequacy especially for modest- and middle-income Canadians.”(p.26)
Based on the findings from this report, and other supplemental research, the continuing work on pension reform by Canada’s Finance Ministers has focused mainly on two areas:
- Pension Innovation – broad-based, defined contribution pension arrangements for employees and the self-employed; and,
- Canada Pension Plan – options for a modest, phased-in, and fully funded
expansion of the CPP.
Pension Innovation – The Introduction of Pooled Registered Pension Plans
In December 2010, Canada’s Finance Ministers agreed on a framework for a new pension product – Pooled Registered Pension Plans (PRPPs). PRPPs are intended to improve the range of retirement savings options available to Canadians by providing a low-cost retirement savings opportunity for employees—with or without a participating employer—and the self-employed.
Following consultations with the public, stakeholders and provincial and territorial governments, the federal government introduced PRPP legislation in Parliament in November 2011. At the federal level, the complete regulatory framework for PRPPs came into force in December 2012, comprised of the Pooled Registered Pension Plans Act and associated regulations, as well as the tax rules for PRPPs under the federal Income Tax Act.
While the federal PRPP legislation created a framework for all provinces to follow, on its own it makes PRPPs available only to employees of federally-regulated industries (e.g. air and rail transportation, banking and telecommunications). Since pension regulation is primarily an area of provincial jurisdiction, it is necessary for provinces to implement enabling legislation in order to make PRPPs available to all workers.
Saskatchewan Introduces PRPP Legislation
Saskatchewan has been supportive of the federal government’s efforts to strengthen Canada’s retirement income system through the introduction of PRPPs. In order to make PRPPs available to all Saskatchewan employees and the self-employed, the Government will be introducing The Pooled Registered Pension Plans Act in 2013.
The design of PRPP legislation in Saskatchewan will closely mirror the federal PRPP legislation, with modifications as necessary to align with existing provincial pension rules. As with the federal legislation, PRPPs will be a voluntary option for employers, allowing them to choose whether or not to offer a PRPP to their employees. Where an employer chooses to adopt a PRPP, employees will be automatically enrolled but given the opportunity to opt out. While automatic enrolment for employees of participating employers encourages saving for retirement, providing employees with the ability to opt out ensures they retain the freedom to set individual financial priorities.
As under federal legislation, administrators of PRPPs in Saskatchewan can be any eligible Canadian corporation that meets the licencing requirements under PRPP legislation. Financial institutions and life insurance companies are the most likely potential administrators, however other corporate entities that have the necessary expertise and experience may also qualify.
The simple design of PRPPs is intended to encourage participation by small and medium-sized businesses who may not currently offer an employer-sponsored pension plan to employees due to cost or administrative complexity. While participating employers will not be required to contribute, they will be permitted to make direct contributions to a PRPP on an employee’s behalf. Under the changes to the federal Income Tax Act, these direct contributions to a PRPP will be excluded from salaried compensation and thus will not be subject to CPP contributions and Employment Insurance premiums. This feature may make PRPPs more attractive to employers than existing group RRSPs.
Upon retirement, it is anticipated that employees will have the same options for decumulating assets from a PRPP as are currently available for decumulation from a defined contribution pension plan in Saskatchewan. In particular, the options on retirement are a registered retirement income fund, a variable pension benefit or a life annuity.
Evolution of the Saskatchewan Pension Plan
Saskatchewan is home to the Saskatchewan Pension Plan (SPP) which was created in 1986 to provide a unique retirement savings vehicle for individuals with little or no access to employer-sponsored pension plans or other retirement savings arrangements. In 2010, federal and provincial legislative changes were made to increase the annual contribution limit to the SPP from $600 to $2,500, subject to an individual’s available RRSP contribution room. The changes enabled SPP to better serve its clients, allowing contributors to establish a more meaningful level of retirement savings.
During the national discussion of PRPPs over the past few years, SPP has repeatedly been profiled as a working model of the simple, low-cost, voluntary defined contribution pension plan that was envisioned in the initial PRPP framework. The introduction of PRPPs provides an opportunity for the SPP to continue to evolve in serving Saskatchewan residents and businesses by becoming a PRPP provider. Along with the introduction of provincial PRPP legislation, Saskatchewan will be introducing changes to The Saskatchewan Pension Plan Act. These legislative changes will enable the SPP to take the necessary steps to meet licensing requirements in order to offer a PRPP.
Canada Pension Plan
Since the outset of national discussions on retirement income adequacy, Canada’s Finance Ministers have examined options for modest and phased-in enhancements to the CPP and considered the impact such enhancements may have on the economy.
While Saskatchewan continues to actively participate in these discussions, the Government is not supportive of a CPP enhancement at this time. In addition to having concerns about imposing an increase to mandatory CPP contributions on employers and employees at a time of relative global economic uncertainty, Saskatchewan also recognizes that moving forward with a mandatory CPP enhancement and a voluntary PRPP program simultaneously will diminish the likelihood of success for PRPPs. Employers and employees facing mandatory increases in CPP contributions would be less likely to participate in a voluntary PRPP.
The Government encourages all Saskatchewan residents to examine their financial priorities, recognizing that individuals need to set aside sufficient amounts of savings over their working lives in order to provide an adequate level of income in retirement. The introduction of provincial PRPP legislation will provide more Saskatchewan workers with a simple, low-cost option to support their retirement savings priorities.