LESSONS FOR LEO: THIS IS HOW CANADA IS TACKLING ITS PENSION CRISIS

Is Leo Varadkar our Justin Trudeau?  At least when if comes to sorting out the pensions mess

Trudeau is the 44 year old Canadian prime minister who after winning the Canadian election last October, appointed a former head of one of Canada’s largest private pensions and employment benefits companies to be his new Finance Minister.

The appointment of Bill Morneau to the FinMin job is regarded as one of the most radical – and progressive – appointments ever in a rapidly ageing and indebted western country.

Inadequate pension provision, as we know from our own experience is a deeply unpopular subject and something most politicians try to avoid tackling head on since just about every resolution to the problems besetting the three pension pillars – the state old age pension, private/occupational pensions and public sector workers’ pensions – involves some degree of financial pain.

Since government monetary policies (and too much regulation and red tape) are also part of the bigger problem of poor ‘safe’ investment returns, there just isn’t enough appetite for the kind of radical, structural reforms that are needed if today’s younger generation of workers will see any return from their compulsory social insurance contributions.

Trudeau, being one of the youngest PMs ever, knew that without further reform to the pension system generally, but to CPP in particular (which began in earnest in 1997) there wasn’t going to be sufficient retirement income for his generation to collect in 25 years time.  Minister Morneau opened talks in early Spring with the provincial premiers.

Next month, Leo Varadkar, our Social Protection and Pensions Minister is expected to announce that this government will introduced some kind of mandatory auto-enrolment pension scheme for workers who are not already in an occupational or self-employed pension scheme like a PRSA. (Personal Retirement Savings Account.) 

Company-based, such a scheme will result in every new worker being signed up with contributions made by the worker, unless they go to the effort of opting out, by the employer and the state. This money (and if the UK’s Nest auto-enrolment scheme is anything to go by) will probably be no more than a few percentage points worth of the workers’ annual salary at first, and increase gradually over a period of years. It will be actively invested in a tax-free fund of various assets and contributions will carry tax-relief for workers and employers.

Endless pension reports (including from the OECD) has been calling for such a scheme in Ireland for decades where private pension coverage has fallen below 47% of the working population. It needs to be done. But we also need to urgently reform the Irish state pension and the civil/public service schemes to also make them sustainable and fair.  Varadkar should be starting with the pension sectors that come under his and the government’s direct remit.

In Canada, just seven months into office, Morneau fashioned an agreement with the required majority of provincial premiers to start raising CPP monthly contributions. From 2019 for a rolling period of five years, contributions will rise by c$7 a month. By 2025 the annual benefit will rise by a third, from c$12,650 to c$17,478 and a typical worker earning $55,000 (the maximum income on which contributions are paid) will be paying an additional c$34 a month in contributions.

The Canadian Pension Plan is loosely modelled on the UK one and is two pronged to also include the Old Age Security pension. The latter’s benefits (about half the total maximum CPP payment of $12,650 are means-tested and anyone earning over $71,592 from private retirement income is subject to a clawback of OAS benefits.  Like here, many Canadians have private occupational pension membership or have an RRSPs, a personal pension plan.

Unlike here, however, Canadians can draw down their CPP from age 60, though at a lower rate of value than if they waited to age 65 (it will rise to 67 by 20123) or they can postpone drawing down their CPP until after age 65/67 and claim a higher benefit. 

These are the kinds of reforms we need for the Irish state pension, which isn’t adequately funded as it is, and will see a doubling of beneficiaries by 2050.  

But our system needs even more than just an increase in contributions, a clawback of benefits from retirees with substantial private income and a higher retirement payment incentive to encourage people to delay claiming their old age pension.

Faced with a bankrupt scheme by the mid-21st century, in 1997 the Canadians set up the CPP Investment Board to begin investing their workers’ state pension contributions to meet long term pension payments. Though still a hybrid part invested/part pay-as-you-go system, the CPP fund is worth $287 million and is projected to be worth $580 billion by 2030. It is the 10th largest sovereign wealth fund in the world.

We were there once too. It was called Pension Reserve Fund.