Planning for retirement in Canada became more difficult

Retirement security and planning became more difficult for younger Boomers in Canada under new government rules passed in April and taking effect soon. The new rules allow companies to change the rules about Pensions not only for new employees but for existing workers. 

Those who have chosen to contribute to a company pension plan, may find that their contributions do not match what they need when they retire. By shifting the rules on pensions, Harper is taking away another cornerstone of security from Boomers.  The mainstream press in Canada has largely ignored this problem. Too busy feathering their own nests, I expect. 

Income security for retired workers was one of the key benefits won by unions in the postwar era, allowing ordinary Canadians to plan their lives to ensure they wouldn't end up homeless, or sharing what their pets eat.

Workplace pensions were always expected to be a key part of that retirement security. Unlike many European countries, where public pensions were generous enough to serve as the centerpiece of a retiree’s income, the Canadian government kept public pension benefits low and encouraged workers to rely on workplace pensions.

Employers now want to be able to fundamentally rewrite the terms of those workplace pension deals so that, if the market plunges and the pension fund declines, the pay-outs will be less — in effect, shifting the risk from the company to the retiree.

 Te legislation proposed by Harper would create a way for employers to open up existing pension deals — effectively changing the rules in mid-stream, after workers have spent years paying into their plans.

There’s no evidence that the change is necessary for economic reasons, or to ensure the viability of corporations.

While the ongoing recession has left the workforce shaken and insecure, corporate Canada has made a stunning recovery since 2008. Profits are up dramatically, and Canadian corporations are now sitting on a stunning $630 billion in cash holdings — which they are declining to invest.

None of this fabulous wealth is being shared with workers, who increasingly are expected to fend for themselves.

Perhaps this is simply part of a new mentality — of boldly embracing risk — that is integral to the global economy.

In April, the federal government unveiled its pitch for a new type of pension plan, what officials are calling a target benefit plan, with characteristics that put it somewhere between the two predominant types of plans currently in place.

This target benefit plan will only be available for Crown corporations and federally-regulated industries, such as transportation, banking and telecommunication, as long as all parties agree.

According to the most recent statistics, of the six million Canadians who have registered pension plans, 73.2 per cent are in a defined benefit plan, 16.4 per cent are in a defined contribution plan and 10.4 per cent are in other types of plans, many of them similar to the proposed target benefit plan.

So how do the three plan types compare?

How they work:

• Defined benefit (DB) pension plans pay a set benefit to members on retirement. The Canada Pension Plan is a DB plan. The monthly benefit is usually based on an employee's earning history, length of service and age. Both the employer and the employees contribute.

• Defined contribution (DC) pension plans set a fixed contribution amount for the employer and/or the employee. Benefits are determined by how well the plan's investments perform.

• Target benefit (TB) plan "benefits and contributions would adjust over time based on the financial performance of the plan," Minister of State for Finance Kevin Sorenson said in an April 24 speech in Toronto. The department of finance adds: "The proposed TBP framework would promote plan viability through its ability to adjust benefits and contributions to help ensure that the target benefit is met, and to deal with surplus or deficit situations."

Who has which plan:

• Almost 3,000,000 DB plan members work in the public sector, and about half that number work in the private sector.
• Over 850,000 private sector workers belong to defined contribution plans, as do just 150,000 in the public sector.
• Numbers for members in the new kid on the block, TB plans, are not available from Statistics Canada, which lumps all other plan types together. New Brunswick was the first jurisdiction in North America to adopt TBs, where they're known as shared risk pension plans. They started in the Netherlands and have become popular in Northern Europe.
• Membership numbers for DB plans have been falling for at least the last two years, while numbers for DC plans and other types have been on the rise.

In 2011, membership in both the DC and "other" categories increased by 3.5 per cent, according to Statistics Canada.

Who likes which plan:

DB plans have been called the gold standard for employees, especially if the benefits are indexed to inflation.

Private sector employers, on the other hand, increasingly prefer the relative certainty of the costs for defined contribution plans. Some employers, like Canada's Big Three automakers, have stopped adding members to their DB plan and now enrol their new hires in DC ones.

Who runs the risks and who stands to benefit from the plans:

In DB plans, the employer makes sure the plan is properly funded and therefore must cover any shortfalls. But employers sometimes cut their contributions when the plan is in surplus.

Management consultant company Aon Hewitt recently released the results of a survey of DB plans in Canada. Noting the "current strong financial health of DB plans," Aon estimates defined benefit plans have a median solvency ratio ("the market value to plan assets over plan liabilities") of 95.4 per cent, a 21-point increase in the past year.

About 36 per cent of the plans are fully funded, compared to just three per cent a year ago.

Strong performance by the financial markets is the key reason for these gains.

With defined contribution plans, it's the employees who take on the risk, and it's usually the employees who decide on how the pension funds are invested. Their pension income will depend on the performance of the plan.

With TB or shared risk plans, the risk is shared by the employer and the employees. Because the taxpayer is ultimately responsible if a shortfall develops in a public sector DB plan, the C. D. Howe Institute and others have been advocating for TBs.

Which plans might change under the government proposal:

Both defined benefit and defined contribution plans for workers in the federally regulated private sector and Crown corporations could be changed to TB plans. However, the vast majority of those are currently defined benefit plans, which are more highly valued.

According to the federal department of finance, there are 1,234 federally regulated pension plans in Canada, covering about one million workers.

My thanks to Linda McQuaig and Daniel Schwartz, for this information.