the watch of time

Now that the electorate has seen fit to return the Liberals to governance, a review of concerns about proposed centre piece legislation is in order: namely, the Ontario pension plan.

As a recently retired financial consultant for a large Canadian investment firm, I certainly share the concern, and frankly find disappointing the readiness of some to rush into it.

The premise is laudable.  Citizens should have sufficient monetary resources to fund at least a decent retirement.

What is currently in place via government pensions is a reasonable foundation. We have two retirement plans from the federal government, plus a low-income supplement program.  In addition, the Canada Pension Plan recently introduced provisions so that those who’ve started to receive benefits under age 65 but still work will increase the benefit payments.

It has been understood generally in our country that an individual should expect these programs to represent no more than 25 – 50% of an individual’s retirement income source, depending on lifestyle.  Is it reasonable to expect our overall tax dollars to provide more than a foundation?  Therefore, the individual over a working lifetime should expect to build up funds for the majority of that income, or be prepared to combine what is saved with what can be additionally earned by longer employment or personal enterprise.

The idea that young people are not aware or do not care doesn’t jibe with the facts.  Survey results earlier this year showed that about 50% of 18 to 34 year olds have started an RSP.  As from my own experience, I would like to think that the ripple effect of financial consultants working with families and their children over recent decades has contributed to their understanding about investing in compounding growth and in flexible dollar cost averaging.

This is indicative of consumers overall becoming wiser increasingly over the years. They realize personal or family financial security is a bull which one must take by its own horns, not by waiting for the government to do the corralling.  We have a societal obligation to make an effort to save.

When I was meeting with clients and doing financial reviews, two of most prevalent revelations were: insofar as goals, saving for retirement was almost always near the top of the list; insofar as cash flow, there was almost always room (perhaps with rejigging) for committing additional monies.  Sometimes short-term issues would be the priority. If so, the planner and clients could address this, while keeping the longer term picture in mind.

This is why we call the process a financial and goals review, and why it is subject to periodic reassessment. The government is not (thankfully) in the personal financial planning business.

It’s true that statistics this year continue to indicate more self-discipline is needed: just under 70% of those eligible have RSPs, and only 25% maximize annual contribution.  However, it’s never too late to build a nest egg: starting at nil, $500/month contributed at 6% average return over just 20 years creates a tax-sheltered market value of almost $300K.

Given the track record of government program cost efficiencies, how can we count on another pension plan to benefit much more than the costs of set-up and maintenance, especially given all the affected participants?

Let’s also consider that, if implemented, likely we would see bare bones benefits. Anyone with sugar plum ideas of a program akin to the bells and whistles governments give themselves or public servants should have a reality check.

Here are some potential concerns for the individual ready to hand over more income and control to a provincial pension plan:

–        How well can the company, which may well be small and with a tight budget, afford the additional, continuing corporate expense?  What happens if something happens to the company?  The experience of ex-Nortel workers and managers has left many of them financially penalized.

–        Given the virtual inevitability of moving to a variety employers over working years, how portable will the plan be?  Can it easily be transferred to a locked-in RSP (presumably a LIRA) if no new pension plan is in place? What commuted value assumptions would be viable if comparative calculations need to be made?

–        If pension benefits need to be transferred at some point to a LIRA, would the monies then be stuck as the less flexible version of an RSP? Although there are currently ‘unlocking’ provisions for up to 50% of a pension transfer, the locked-in balance would still not permit the payouts flexibility of a regular RSP.

–        Perhaps most significant is the loss of investment control of the additional monies being extracted from the taxpayer; what if the increasingly educated saver wants to keep exercising control of the rate of savings as well as the investment mix based on personal risk profiles which can and do change?

–        What input, if any, would one have in investment philosophy of the plan?

–        What if, for example, one prefers the equivalent dollars to be directed to Tax-Free Savings Accounts (TFSAs – which really should be Tax-Free Investment Accounts), for not only the much greater flexibility but also the tax savings if used in retirement.

While some issues would be worked out at least in terms of procedure, how solidly benefits outweigh questions remains to be seen.