The new Liberal federal government has already met with the provinces to initiate discussions of enhancing the Canada Pension Plan (CPP). This was one of their campaign promises.  The former Harper government had refused to contemplate serious discussions over the past 5 or more years.  Ontario has developed plans for its own standalone plan (ORPP) to become effective January 1, 2017 (now delayed until 2018). (Quebec operates the Quebec Pension Plan (QPP) which is almost the same as CPP.)

I am optimistic that the new discussions under the leadership of Bill Morneau, the federal Minister of Finance, will result in sufficient support for a substantial expansion of the CPP. I hope that Morneau will provide the leadership required, relying on his previous business background as CEO of a national pension and benefits consulting firm.  The recent federal budget confirmed the intention to continue these discussions.  I hope that the discussions will progress soon enough that Ontario will continue to postpone (and eventually cancel) the ORPP.

Present Position

Canada’s present pension systems contain several parts:

  • OAS – a basic pension paid to all permanent residents
  • GIS – an income tested supplement to those whose other sources of income falls below a certain level
  • C/QPP – an earnings-related pension providing a benefit up to 25% of the average wage (YMPE = $54,900 in 2016)
  • Private employment-related pension plans for employees in both the public and private sectors
  • Individual RRSPs

OAS and GIS are undoubtedly important to many Canadians. Their appropriate levels are largely a matter of social policy. They are provided out of general revenues

The three other parts, C/QPP, private employment-related pension plans and RRSPs have been in place, with only minor changes, for more than 50 years.

The C/QPP is well respected and financed. A contribution rate of almost 10% of earnings up to the YMPE provides a pension of 25% of the YMPE (assuming a long working career with earnings equal to the YMPE or greater), with full indexing to CPI.  The main questions on C/QPP are whether 25% of the YMPE is sufficient, given the current challenges in private employment-related pension plans and RRSPs, and whether age 65 should remain as the normal retirement age, given improving life expectancy.

Private employment-related plans may be divided into Defined Benefit (DB) plans and Defined Contribution (DC) plans and those for employees in the public and private sectors.

In the public sector, DB plans are the norm. Current concerns are the increasing contribution rates required to maintain the existing benefit levels and whether taxpayers will continue to support these generous plans for public servants when the taxpayers themselves have limited or no access to similar plans for their own retirement.

In the private sector, particularly in the non-unionized environment, DB plans were common among medium and large employers but are currently being (or have been) phased out in favour of DC plans or no plan at all. DB plans have been burdened by excessive regulation fostered by politicians, accountants, actuaries, communication consultants, lawyers and investment managers.  These stakeholders have all been trying to create unique designs tailored to their assumptions about their clients’ specific needs but still:

  • Many of these plans currently have unfunded liabilities.
  • Employer sponsors of these plans have been disappointed when their funding costs have risen.
  • Costs of regulatory and accounting compliance have risen.
  • Plan members have been disappointed when pension promises have been cut back, or in some cases, lost entirely when their employer failed.

That said, DC plans are a poor substitute for DB plans. They provide the employer with certainty of cost but fail to provide the plan member with any certainty of pension income.  Very few plan members are interested in investment options or the accumulation of a large lump sum.  What most plan members want is a secure and predictable retirement income.

RRSPs suffer from the same difficulties as DC plans. In addition, they have high investment management fees that contribute materially to inadequate accumulations.  The army of investment advisors and investment managers has to be paid before any returns are left for the contributor.  A typical 1.5% to 2% investment management fee reduces the return by 50% when long bond yields are at only 3% to 4%.

We have an almost classic example of market failure in private pension provision in Canada. No amount of tinkering with new rules here and fancier risk management techniques there will solve the challenges.  We need a radical change so that the next generation of Canadians can look forward to a secure and adequate retirement income.

Proposed Changes

My proposal is to expand the existing C/QPP to provide 25% to 50% of covered earnings up to 2 or 3 times the YMPE

That could be accomplished, with a transition period of 10 to 20 years, by contributions of about 10% to 20% of the new level of covered earnings. This would be a relatively small price to pay for the more secure and adequate future benefits. These contributions would provide full financing of the increased benefits in the same way as the present C/QPP benefits are financed.

That proposed level of pension would provide a much more adequate pension for most Canadians. Those who have earnings above 2 or 3 times the YMPE could make their own private arrangements.

I also propose a gradual increase in the normal retirement age from age 65 to an age linked to mortality improvements. For example, normal retirement age could be expressed as 15 or 20 years below the average life expectancy at birth.  Once made, this change would avoid the political difficulties of a periodic government decision to increase the normal retirement age from time to time as life expectancies improve. (For example, the recent phased increase in the OAS retirement age and its subsequent cancellation by the current government).

Advantages for Canadians

This proposal would provide all Canadian employees with a more secure and adequate pension income. Coverage would be universal. The amount of regular pension income would be predictable.  The amount would be guaranteed in the same way as existing C/QPP payments.  The cost would be fixed with only gradual changes over time.  The plan would be fully portable as employees change employers over the course of their careers.

Employees would no longer have to worry as much about differences between different plans sponsored by different employers. They would not have to worry about the security of the pension promises.  They would not have to try and educate themselves on different investment choices and risks in a DC plan.  They would not have to worry about fluctuations in investment markets and interest rates as they approach retirement.

Advantages for employers

This proposal would allow all Canadian employers to provide a more secure and adequate pension income to their employees. The cost would be fixed with only gradual changes over time.  Retirement income would become more consistent between the public and private sectors.

Employers would no longer have to concern themselves with pension plans for their own employees and the accounting, financing and regulatory issues. They would no longer have to spend time trying to educate their employees on pension matters.  They could return to concentrating on running their own business operations in the most efficient way possible.

Advantages for public policy

This proposal would gradually increase the savings rate over the transition period of 10 to 20 years. It would make available a much larger pool of capital for investment.  It would control the long term costs of improving mortality by the gradual change in normal retirement age.

It would substantially eliminate the present pension dichotomy between public sector employees with generous DB plans and private sector employees with a DC or no pension plan.


This proposal would centralize the accumulation of savings much more than the present system. It could result in undue accumulation of economic power in a single central investment body.  However, that could be lessened by establishing several large competing investment organizations.  Each would be sufficiently large to take advantage of the economies of scale in investment organizations.

This proposal would involve the phasing out of many existing DB and DC pension plans in both the public and private sectors over the transition period. Most plan sponsors would welcome the removal of the present burden.  The transition period would be sufficiently long to enable this to be conducted in an orderly manner.

This proposal would not require the large number of regulators, accountants, actuaries, communication consultants, lawyers, investment managers and investment advisors that are supported by the present system and add to its costs. These bright people could turn their minds to other more productive activities.  These parties would be likely to oppose this proposal because it would threaten their livelihoods.  However, the advantages of this proposal for the country as a whole outweigh the disadvantages for this group’s self interest.  The transition period would be sufficiently long to enable these people to learn new skills for the new environment.


Most observers of the present system agree that it should be improved:

  • to increase pension coverage
  • to provide more secure and adequate pensions for all Canadians
  • to create more economies of scale in administration and investment management
  • to eliminate the complexities of regulations

This proposal would achieve all of these desirable goals.

Can the politicians get there?