Getting Clarity on Canadian Retirement Challenges

The image below is an ancient impact crater as seen from the Earth’s orbit on a clear day. The circular crater was filled with water after a hydro dam was built in Quebec in the 1960s. It is visible from space with the naked eye. It is a beautiful, iconic image of human ingenuity. It seems fitting for the topic of gaining clarity on a complex subject, such as the challenge of making Canadian defined contribution plans fulfil their promise of retirement income.

If one gains some elevation, on a clear day free from distraction, one can see the problem for what it is. Canadians with defined contribution assets don’t have good options for converting accumulated balances into retirement income. This is getting more acute with every passing year because more and more Canadians only know DC retirement savings. Defined benefit plans are going extinct in the private sector, and the public sector remains the last stronghold for DB plans, sometimes raising the feelings of us-vs-them, haves-vs-havenots. As a side note, most of the pension envy is related to the level of benefit, not the type of benefit, although the two are related to some degree.

What do I mean by a “good option”? It is simply the option that does not run out of money before death and generates a reasonable level of retirement income. Reasonable here is in relation to the person’s lifetime sacrifices of retirement savings.

If I put an investment hat on, that mysterious good option becomes good if it is provided by an entity that is an efficient investment structure that is able to pool longevity risk.

Achieving an efficient investment structure can be distilled to a few essential components. It should be large enough for economies of scale, it should have access to a wide range of investment instruments, and it should be professionally governed. Good governance is often associated with a fiduciary duty, but I would argue that a combination of scale, professionalism and good regulation can achieve just as good results when it comes to investment efficiency.

There are of course good examples of efficient investment structures in Canadian retirement industry. That part is fairly well understood both in Canada and abroad. What we refer to as the “Canadian pension model” is largely that.

Now, let’s turn to the other essential component, the ability to pool longevity risk. In Canada, there are three types of providers who could foot the bill:

• Life insurance companies (both stock and mutual) and fraternal benefit societies. They are generally not very efficient, i.e. not providing a sufficiently high income in retirement, due to structural factors, such as capital requirements effectively prohibiting any equity exposure in the liability hedging portfolios, profit margins and an outdated distribution system for annuities.
• Pension plans pool longevity as well – defined benefit, target benefit, or else defined contribution plans with a variable life benefit (VPLA) component. Pension plans are limited in their ability to accept registered money from prior employment via the service buy-back process. Furthermore, registered pension plan in the private sector are being displaced with DC-like arrangements with more flexible withdrawal provision and less onerous regulation, such as Group RRSPs.
• PRPP or VRSP provider with a built-in variable life income components (VPLA) is also able to pool longevity risk. Those structures don’t exist yet, even though tax regulations permitted them since 2017. Quebec is the first Canadian jurisdiction to permit VPLA within VRSP as of January 1, 2026.

I have argued for a long time, and I will repeat it again here: a VPLA (also known as a dynamic pension pool) inside a PRPP or VRSP shell is the best route for providing reasonably high retirement income that does not run out of money before death. This is because PRPP or VRSP is already permitted to accept all tax-deferred registered money – from registered pension plans, from DPSPs, from RRSPs – and it has no regulatory restrictions related to past service. In effect, any Canadian with a tax-deferred retirement savings balance should be able to transfer it to such a plan.

What is more encouraging is that the Quebec version (VRSP) permits individual membership. There is no need for a pre-existing employment link between you and your employer who is a participating employer of the VRSP. You can individually apply for VRSP membership and then transfer the balance. This is similar to how the Saskatchewan Pension Plan operates, and Canadian policymakers should take heed and replicate this approach as much as possible.

Why is individual membership important? This is because achieving investment efficiency requires a sufficient scale. There is currently over $1 trillion of RRSP balances in Canada [1]. Without individual membership, that huge pile of money will continue to sit there and bleed assets through high fees and being unable to pool longevity risk to provide lifetime retirement income.

PRPPs and VRSPs were originally designed to be cost-efficient accumulation vehicles. That was a Faustian bargain, where the providers agreed to price caps in exchange for a limited safe harbour protection with respect to potential claims of breaches of fiduciary duty. Unfortunately, the policymakers naively assumed that they can put price caps before the scale is achieved. In economic reality, scale is a cause of low fees, not a result of it. Scale can be achieved by mandatory participation, like was done in the Australian superannuation system. And over there, both for-profit and non-profit super trusts achieved low cost over time due to scale, not the other way around.

Why is Quebec getting ahead in this process? This is because the pension business lies at the intersection of finance and employment, and both need to pull in the same direction. In Quebec, both employment law and securities law are governed by the same government. If that government decides that something needs to be done, it can be implemented without the responsible parties washing their hands or pointing fingers at each other.

The PRPP suffers from an EU-like problem of decision-making. PRPP is administered by a federal regulator (OSFI), but the provinces participating in the PRPP regime have effective veto power on any important changes. Every province has its own employment law, and every province has its own securities law. Harmonization of securities laws achieved some success, but policy objectives still differ from place to place.

The painfully slow adoption of the PRPP framework across the country is a symptom of this issue. Back in 2014-2015, many provinces were concerned about the economic impact of creating a “new tax” if the PRPP were to have a minimum contribution standard. In Alberta, the Act was introduced in 2013, adopted in 2017, but never proclaimed into force.

So what can be done about all this? The pension policymakers across Canada should look at what Quebec is doing about VRSPs and try replicating it. It may be difficult to get everyone agree to anything, but there are things that would be very helpful.

It would be very helpful if decumulation-only PRPPs were permitted. Such a PRPP would only deal with balances already accumulated, and it would not stand in the way of any province’s employment or economic agenda. A decumulation-only PRPP may gain scale much quicker than an accumulation PRPP. This amendment can be done at a federal level and would not be subject to provincial veto.

It would also be helpful if policymakers realize that scale comes before low fees. As such, they need to focus on facilitating asset consolidation in the DC space. I would recommend not repeating the mistakes of the Ontario’s Wynne government and their approach to pension consolidation. This is a business problem, and it can’t be solved by forcing existing large plans to load on outside pension assets.

Asset consolidation in the DC space is different. DC can be and should be efficient on its own, not by forcing a round peg into a square hole (DC into DB).

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[1] There are no published stats about the total size of RRSP system. It was reported that the number of contributors to RRSP accounts (who claimed tax deduction) was 6.2 million in 2022, and that the average account balance was $144,000 (although self-directed accounts may have been excluded).