Tuesday, April 10, 2012

Re-Engineering the three pillars of Canadian retirement income system

The following is from Workplace Wire and written by the  Heenan Blaikie's Labour, Employment and Pension Practice Group published March 30, 2012 and it makes for interesting reading for those interested in pension issues

 You can read the entire post here: Re-Engineering the Three Pillars

The government has subtly re-engineered the Canadian retirement income system. For the past 45 years, the Canadian system has been described as having three pillars:
(i) Government-sponsored plans. The first pillar has been comprised of the broad-based government run, supposedly universal pension schemes, including Old Age Security, the Guaranteed Income Supplement (“GIS”) and other provincial supplements, and the Canada/Quebec Pension Plans (“Q/CPP”).
(ii) Employer-sponsored plans. The second pillar has been comprised of the employer-provided pension plans, whether defined benefit or defined contribution.
(iii) Individual savings. The third pillar has been comprised of individual tax-assisted retirement savings, primarily through registered retirement savings plans.
More recently, including in its budget papers yesterday, the federal government has conveniently shifted the pillars, because of a glaring weakness in the second pillar. I pointed this out in our March 25, 2010, edition of the Pension Pulse (“Three Pillars: Ten Questions”)
This is not insignificant and should not go unnoticed. Just like the Olympic stadium in Montreal, cracks have begun to appear in our retirement income system and pieces are crashing down. By changing the pillars, somehow our system is made to look stronger and more sustainable.
The three pillars, as described by our federal government, now are:
(i) the OAS, GIS and other provincial supplements;
(i) the Q/CPP; and
(i) all other forms of accumulating retirement savings, including employer pension plans, savings plans, RRSPs and tax-free savings accounts.

I believe part of the reason for the re-jigging is because the old pillar number two, traditionally employer sponsored defined benefit pension plans, are largely defunct, at least in the private sector. By lumping all employer-sponsored plans and private savings into the third pillar, this pillar does not look as weak, relative to the other two. Plus, the new first pillar, being comprised only of the OAS and other non-contributory programs funded exclusively from government revenues, can be treated separately

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