Improving Occupational Pension Plan Coverage: Why And How

Some 20 years ago, the World Bank suggested we think of a country’s retirement income system as potentially having three pillars:

PILLAR 1: a compulsory pension scheme funded by the state. It aims to provide a foundational pension benefit to all workers.

PILLAR 2: privately funded occupational pension plans, often sponsored by individual employers or by industry associations, designed to provide sufficient additional lifetime income for workers to maintain their living standards after they retire.

PILLAR 3: individual retirement savings through voluntary savings accounts and investment products, facilitating individual retirement planning and preparation.

Pillar 2 occupational pension plans play a critical role in this structure for two reasons:

1. Pillar 1 pension benefits are typically too small to support a comfortable post-work lifestyle.
2. Behavioral factors make the generation of Pillar 3 retirement income an uncertain proposition. Many people do not have discipline to save adequately and consistently over a 40 year working life, and then to turn the accumulated retirement savings pool into a sufficiently large lifetime retirement income stream.

These two reasons lead to a logical focus on well-designed and managed Pillar 2 occupational pension plans. Ideally, all workers are members of such a plan, as they are structured, together with the Pillar 1 pension, to generate an adequate lifetime income stream.        

Significant efforts have gone into ensuring that all workers in a country are indeed members of a well=designed and managed Pillar 2 pension plan. For example, employers in Australia, the UK, Netherlands, and the Scandinavian countries are required to offer such a plan. Even in the USA, required pension plan autoenrollment is on the move.

Somewhat surprisingly, this is not yet the case in Canada. However, the C.D. Howe Institute has just released a paper titled “Spreading the Benefits: A Targeted Tax Credit Is Needed to Expand Retirement Plan Coverage in Canada’s Private Sector”.  I am the paper’s co-author, along with Alex Mazer. 

Keith Ambachtsheer

Click HERE to download a PDF of the C.D. Howe paper  

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The information herein has been obtained from sources which we believe to be reliable, but do not guarantee its accuracy or completeness.