Common Wealth's Alex Mazer makes the case for a tax credit that could cut plan costs by 40 per cent while expanding coverage to more workers
Pension Awareness Day may very well be in the rearview mirror but new reports are keeping pensions top of mind for plan sponsors, reminding them about the lack of retirement coverage that exists in the country.
One such report, conducted by Common Wealth and C.D. Howe Institute, found that retirement coverage gap in Canada falls hardest on small and mid-sized employers. Common Wealth's research estimates that about 19 per cent of employers with between four and 500 employees have no retirement plan in place.
The reasons are also familiar and intertwined, citing cost, complexity, and a lack of urgency that lets the issue slide in favour of more pressing day-to-day priorities.
“Inertia is also a reason too. It’s one of those things that maybe never seems urgent,” said Alex Mazer, CEO and co-founder of Common Wealth. “If you you're a busy small business, you might need someone to come in and nudge you to set up a plan. I also think, historically, there hasn't been a huge amount of competition in this space so that's meant that fees have been higher. For small businesses, advisors or consultants aren’t often interested in engaging their clients on a group retirement plan because they didn't feel there was a good offering in the market. Some of that's changing now, which is great, and we're trying to contribute to that as a business, but it still leaves a big coverage gap.”
To that end, the core of the report, which Mazer co-authored, suggests implementing an employer tax credit that could boost pension plan adoption. He believes a well-designed tax credit can materially shift the economics and behaviour around small-business retirement plans.
While he agrees that a compulsory requirement might be more effective in the long run, imposing new costs on businesses already under economic strain seemed like the wrong approach. So Common Wealth went with the carrot instead of the stick - a tax credit modelled on the US approach and adapted for the Canadian context.
The numbers, at least on paper, are compelling. Common Wealth's analysis estimates that a 30-person employer with an average salary of $75,000 a year would see the cost of a retirement plan fall by a little over 40 per cent in the first three years.
"It’s a significant discount, so there's a cost savings element," said Mazer.
He also stresses that the credit is meant to trigger conversations that are not happening today. Advisors remain the main distribution channel, and a new incentive gives them one more concrete reason to raise the issue with clients who rarely wake up thinking about group retirement. Meanwhile, employees are unlikely to push from their side either, because many feel behind on saving and do not want to admit that to their employer.
“Sometimes it's that conversation and that engagement that gets the employer thinking about it in the first place,” he noted.
Mazer frames the proposal as a direct response to what he calls the biggest problem in Canada's retirement system: the lack of private sector coverage. When asked about simply expanding government benefits, he acknowledged it wasn’t really considered because the public pillar has already seen significant investment over the past decade, noting CPP, GIS, and OAS have all been enhanced.
"Any retirement system has to have a healthy balance between privately provided and publicly provided," he says. "Because we've already enhanced the publicly provided part, it felt like time to enhance the privately provided part."
From a fiscal standpoint, Mazer contends the credit is far cheaper than enhancing the public benefits pillars and could reduce government spending over time if more Canadians save through workplace plans.
Mandatory coverage was also ruled out. For it to work, Mazer argues, it would need to include compulsory employer contributions, as the UK and Australia have done, and that amounts to a new cost that businesses cannot opt out of.
With the Canadian economy already under pressure, that felt like the wrong lever to pull. The tax credit, by contrast, helps small and mid-sized employers offset costs so they can compete for talent with larger firms that have no trouble running retirement plans.
"Right now, because a lot of them are struggling to set up retirement plans, they're at a competitive disadvantage compared to larger employers, which don't have a problem setting up and running these plans," he said.
CEO and founder of Bloom Finance Ben McCabe also sees the broader push to expand workplace pension access as a positive step. He welcomes "any type of innovation that will allow a broader cross-section of employees to benefit from a workplace pension," he said.
He acknowledged that for Canadians already at or approaching retirement with most of their career behind them, the options around pension coverage are limited, though other avenues exist, including the wealth many have built up in home equity. McCabe believes the real opportunity lies in reaching the next generation of workers employed by firms that fall outside the traditional pension mould.
According to Mazer, the proposed tax credit targets the two main costs that keep small and mid-sized employers from offering retirement plans: setup expenses and ongoing contributions.
One component offsets the cost of getting a plan off the ground, while the other subsidises employer contributions in the early years, cutting overall plan costs by a substantial margin. After that initial period, Mazer expects the expense becomes more manageable, and notes that employers who start offering a plan rarely discontinue it.
Common Wealth estimates the credit could expand coverage to up to roughly half a million additional Canadians, and potentially more with effective promotion. Additionally, workers saving through payroll with employer matching tend to save more and do so more efficiently than those navigating retail products on their own, noted Mazer, citing lower fees, stronger investment options, and better oversight that group arrangements provide.
Mazer also stressed that the biggest beneficiaries would be middle- and modest-income workers who currently lack a plan and often end up either not saving at all or relying on high-fee products at the branch level. Shifting them into workplace plans would improve both the volume and quality of their savings.
According to Mazer, Common Wealth drew heavily on the US tax credit for setting up workplace plans as the model for its proposal. Now, the firm is now working to rally support from across the industry – advisor groups, industry bodies, and even competitors – to present a united front to government.
"We would love to build a big tent of support for this so that the government can consider it and hopefully implement it," he said.
But getting the policy on the books is only half the battle. Mazer warned that poor awareness has undercut other tax credits in the past, and this one will fail to reach its potential if employers do not know it exists.
The report recommends a simplified claiming process built into the existing tax filing system, alongside a coordinated education campaign led by government and supported by advisors, accountants, and small-business groups. He argues advisors are ultimately the linchpin because they remain the primary channel through which group retirement plans reach employers.
If the tax credit doesn’t materialize, Mazer underscored the work won’t stop.
"There's certainly room for multiple innovators in the space, and we hope we'll see more of that. I also think there's a limit as to what innovation can do by itself if it's not paired with policy change to solve the problem,” he said. "If the Canadian market had the same market penetration as the US market, there would be hundreds of thousands more group retirement plans.”
