Pension Plans For The Masses: Canada's Ontario Province Answers The Call

“To help Ontarians, especially those in the middle class, be more secure in their retirement, our government is introducing the first-of-its-kind provincial pension plan as an enhancement to the Canada Pension Plan (CPP)....”.

ONTARIO BUDGETMAY 1 2014

Pension Plans for the Masses

Our February Letter (“Pension Plans for the Masses: Good Idea or Pipedream?”) noted that the majority of private sector workers in the USA, the UK, and Canada no longer participate in an employment-based pension plan. This effectively leaves these people to their own devices to figure out how much they should save for retirement, and how to invest the money they do save. Behavioral economics suggests that a likely result is that many people will not save enough to maintain their standard of living when they would like to stop working. At the same time, due to the asymmetric distribution of information, many people who do save, will pay too-high investment management fees relative to the value of the services provided. On top of that, life expectancy has been rising, and is expected to continue rising, requiring ever larger retirement nest eggs and/or longer working lives.

There has been a growing recognition over the course of the last decade that this under-saving by some, paying too much for too little by others, together with rising longevity, constitutes a public policy issue.

Simply put, if a cost-effective mechanism could be designed to help workers without pension plans save and invest for retirement, public policy should cause it to be created. The UK was the first to accept this logic and act on it. The National Employment Savings Trust (NEST) was designed in the 2007-2010 period. Legislation requiring employers not offering their own pension plan to enroll their employees into NEST (or a commercially-provided qualifying alternative) was passed in 2011. Since then, millions of UK workers have been, or are being enrolled in NEST (or a qualifying alternative).