Expert and academic makes key suggestion...
Canada’s pension fund model is lauded but one expert believes its status can – and should – be elevated further.
Keith Ambachtsheer, Executive-in-Residence at the Rotman School of Management at the University of Toronto, Director Emeritus of the International Centre for Pension Management, Senior Fellow at the National Institute on Ageing, and Co-founder of KPA Advisory Services and CEM Benchmarking, believes making the model available to employees and retirees in the private sector would make Canada one of the top pension nations in the world.
The Canadian Pension Fund Model effectively transforms contributions into retirement income streams for members in the public sector. Investment firms, which hold publicly listed securities and actively participate in the real estate, infrastructure, and private equity sectors, are leading the charge in transforming retirement funds into long-term, wealth-producing capital.
To create a yearly pension of $46,000, a private sector employee needs $1.15 million in retirement savings.
Ambachtsheer asks what it would take to make Canada one of the top pension-paying nations in the world. His answer is to make the Canadian Pension Fund Model available to Canadian retirees and workers in the private sector.
According to Statistics Canada, the median registered savings amount in individual accounts of Canadian households nearing retirement was $100,000. Based on this comparison, most of Canada's pensioners in the private sector would currently receive considerably greater pensions if the Canadian pension fund model had been expanded to the private sector 30 years ago, providing compelling evidence in favor of this expansion.
The Colleges of Applied Arts and Technology (CAAT) Pension is currently utilizing this option, but other institutions that follow the concept of a Canadian pension fund might provide their infrastructure for managing pensions to employers in the private sector.
One option for employees and retirees in the private sector is to establish an organization modeled after the Canadian pension fund. Ontario abandoned plans to establish an Ontario Supplementary Pension Plan when the Canada Pension Plan (CPP) benefits increased in 2016. Alberta is considering establishing an Alberta pension plan (APP) in place of the CPP.
Private sector financial service providers could develop products modeled after Canadian pension funds. Common Wealth and Purpose Investments organizations have both introduced services and investment choices in line with the tenets of the Canadian pension fund concept.
There has been a considerable 2.5% per year differential in investment performance between retirement savings pools using the Canadian Pension Fund Model and those in the private sector. This difference between "legitimacy" and "effectiveness," made famous by Drucker, is to blame for this.
Consider this straightforward math to see the impact of generating an additional 2.5% long-term return on retirement savings: $1 compounded at 1% annual return for 20 years becomes $1.22, with $0.22 coming from investment returns. With an investment return of $1.00, it compounds to a significantly greater $2.00 at a 3.5% return.
The private sector should be included in the Canadian Pension Fund Model because if it had been implemented 30 years ago, most pensioners in Canada's private sector would now be receiving significantly larger pensions. Moving their accumulated retirement funds now to the Canadian Pension Fund Model structure would still ensure that they are managed efficiently and affordably and continue to provide retirement income for as long as the retiree is alive.
For Canadians now employed in the private sector, they may fairly anticipate that their pension payments would be significantly larger than they are now, and their retirement income would continue as long as they are alive.
Finally, how will the Canadian Pension Fund Model be implemented in the private sector? To speed up the changeover, Ambachtsheer suggests any one of the following three routes could be used:
Path #1: Existing Canadian Pension Fund Model Organizations give their infrastructure for managing pensions to employers in the private sector.
Path #2: A government organization chooses to establish a Canadian Pension Fund Model Organization for employees and retirees in the private sector.
Path#3: Private sector financial service providers develop one or more fresh Canadian pension fund model products.
