Is now really such a good time for a new Ontario pension plan?

News report: Ontario weighs launch of own pension plan

Apparently, most of us aren’t socking enough away for our retirement. Despite the litany of government-encouraged savings strategies, such as RRSPs, TFSAs, RESPs, the Province of Ontario is concerned that take-up of these existing programs isn’t broad enough to suit its liking. And that the time is right to launch a provincially-driven retirement fund if the rest of Canada doesn’t agree to some form of enhanced Canada Pension Plan.

The scheme, as the British would call it, would see workers double the ceiling on their current $2,356.20 annual CPP contribution to $4,681.20 (50/50 being given to Ottawa and Ontario) with the hope of future payouts growing from $12,150 to $23,400 upon retirement. (source: Globe)

For the majority of Ontarians who don’t currently have a second pension plan (such as one from their company or government employer), this apparently is the solution to the belief that you all have a pending retirement problem. Despite the remarkable increase in the value of single-family homes over the past 20 years, which form the core of any middle-class asset-building strategy.

To me, it seems nothing more than a tax increase on workers and their employers at a time when encouraging entrepreneurs to add staff should be the primary concern of governments everywhere. If I have 15 staff, and need to boost employer contributions to an Ontario Pension Plan by 100% on top of the current CPP payroll tax, that sum represents the lion’s share of one $50,000 salary that can’t now be added to my team. That’s one fewer entry-level white collar job being created.

Think about how this would impact an Ottawa-based, VC-backed start-up company with plans to hire 75 employees. Where are you going to locate it? Quebec already provides special tax incentives for hiring engineers and Phds. Tack on another $180,000 in Ontario payroll tax, and the notional Kanata headquarters may well find its way to Gatineau. (This is why Ontario would prefer that Finance Minister Jim Flaherty would implement a new national program.)

For others, this is just another tax increase since many retirees have their entire CPP cheque taxed-back in any event.

But that’s not my central concern.

Toronto is the financial capital of Canada when it comes to retirement planning and money management. Firms such as Sun Life, AGF, Mackenzie, RBC, BMO, TD, Manulife, BNS and CIBC have thousands of staff who are trained to manage everyone’s retirement savings. If 7.48 million Ontario workers have to contribute even $1,000 extra per year, which is doubled by their employer via a new payroll tax, we are talking about $15 billion of funds that won’t be flowing to the local investment management industry.

Moreover, given the crappy 4.2% 5 year gross return of CPP Investment Board, there’s no evidence that a new multilateral pension plan will actually do better than AGF, Mackenzie, BMO or Sunlife, for example, when it comes to earning we investors an appropriate risk-adjusted return on these additional retirement savings. And from a cost standpoint, if I can pay 15 basis points per year in fees for an S&P500 ETF, and earn a 96% gross return over the past five years on that investment, why should we all be paying, say, 55 basis points in annual MER to a CPPIB lookalike (see prior post “Why is CPPIB’s MER higher than its peers?” Jan. 9-13), only to earn a gross return of 4.2% per annum over that same five year period?

I’m all for employer-sponsored pension plans, particularly in workplaces where the pension is a key element of the entire benefit program. But for many employees and their firms, the Ontario proposal is just another way for the government to put its hand into our pockets, when there’s already a world-class industry just down the street that’s ready and willing to help us all reach our retirement goals.

MRM