Little nests, birds and all that stuff
Keith Ambachtsheer’s ideal pension plan would not concern itself with labels such as defined benefit (DB) or defined contribution (DC) – rather, it would look at outcome and work its way back to a solution enabling such an outcome.
The director of the Rotman International Centre for Pension Management says removing the DB and DC labels would allow participants in a debate on pension plan design to have a better discussion, focusing on the three phases of life – pre-work, work and post-work – and the importance of maintaining living standard in retirement.
He is about to put his theory to the test. Earlier this year, the Toronto-based academic was asked by Ontario’s premier Kathleen Wynne to join an advisory group on how to improve retirement income security in Canada’s most populous province. The six-strong group was convened after the Liberal Party leader failed to win support for increased benefit payments from the Canada Pension Plan – currently worth around CAD12,000 (€8,000) per annum – instead opting to go it alone.
Ambachtsheer is likely to dust off and modify his 2008 proposal for a Canada Supplementary Pension Plan (CSPP) as the group gathers to work out its recommendations, due to be handed to the government in time for a spring budget.
He is hopeful he can win support for the principles of his CSPP proposal – universal access, auto-enrolment with opt-out, a default contribution rate and an investment option overseen by an arms-length government-backed body targeting a replacement rate of 60% – noting the successful application of his ideas in the UK’s National Employment Savings Trust (NEST).
However, he is wary of pointing towards any one approach adopted by other countries, and avoids naming a pension market that is worth emulating. “What you want to do is not just a willy-nilly [selection of good pension models] and say ‘we’ll pick that one, and that one’. You want a deductive approach and say ‘if this is the challenge you are addressing, what’s the best way to go about it?’.”
Nevertheless, Ambachtsheer praises the UK’s launch of the Personal Accounts Delivery Authority (PADA) to develop the approach that would underpin NEST on the launch of auto-enrolment. In particular, he notes that the management staff at PADA were retained when it transformed into NEST.
“This is a critical element of its success – to actually have the people you are going to rely on to implement it to do the detailed sketch of what it should look like, so that, when you create a mandate at a government level, it should be fairly general, not too specific.”
Ambachtsheer says that one of the “interesting design questions” is whether the proposed Ontario savings plan should offer an annuitisation option, potentially by default. “If you don’t do anything, you start buying deferred annuities at age 50 for a 15 or 20-year period. Those are all design questions that don’t have anything to do with DB or DC – they just have to do with common sense.”
The default annuitisation is an approach employed by Denmark’s ATP, and highlighted by the UK government as an avenue worth exploring in implementing its risk-sharing defined ambition proposals.
However, Ambachtsheer once again returns to the idea that the debate should not focus on jargon or scheme types, but rather on the member. He notes the importance of NEST chief executive Tim Jones’s previous life as a retail banker to the fund, saying the plan’s approach must focus on individual communication efforts. “So, you have little nests, birds and all that good stuff.”