Pension adequacy issue has far-reaching implications

Ensuring sufficiency and certainty of retirement savings requires major changes in everything from harmonizing pension rules across the country to raising the country’s productivity rate, but the issue of adequate pensions has far-reaching implications that must be addressed, speakers told the Conference Board Pension Summit held in Toronto in late April.“Pensions is not a little issue in a small box,” said Murray Gold, partner at Koskie Minsky LLP.

Gold said pensions cut across different socio-economic lines and can have a cascading effect, not only for retirees, but for the communities they live in and the next generation.

However, despite protests of the lack of adequate retirement savings, Statistics Canada and studies by McKinsey show that about 80 per cent of Canadians have more than enough, said Jack Mintz, Palmer Chair at the School of Public Policy at the University of Calgary. In fact, said Mintz, these studies have indicated that there might even be over-saving by some cautious individuals.

Nevertheless, five million to six million Canadians without a workplace pension, mostly those in the middle class and earning between $50,000 and $100,000 a year, will be hit hard, said Tom Reid, senior vice president, Group Retirement Services at Sun Life Financial Canada, who was attending the conference.

Reid believes many provinces will be watching how Quebec’s new voluntary retirement savings plans (VRSPs) will fare. VRSPs are Quebec’s version of Ottawa’s pooled registered pension plans (PRPPs) and will require all companies in the province with five or more full-time employees to offer a workplace retirement plan. VRSPs are aimed at employees of small- and medium enterprises as well as the self-employed.

“There is no silver bullet,” Reid said of the pension problems. “Everyone will look at Quebec to see how they are doing. If automatic enrollment and universal access create a better outcome than some of the other provinces that aren’t creating universal access, then I think you may see some of the other provinces rethink their legislation.” (see page 38 for more on VRSPs)

Alberta and Saskatchewan have also passed PRPP legislation. Ottawa has recently proposed target benefit plans for certain government employees.

There is no doubt that the number of defined benefit (DB) plans in the private sector has dropped in favour of the less expensive and less financially onerous (for employers) defined contribution (DC) plans.

Part of the reason for that is because the rules pension plans must follow are all over the map, Ron Mock, president and CEO of the Ontario Teachers’ Pension Plan, told the conference.

“Private sector DB plans are becoming increasingly rare because employers have been so bogged down by arcane and complex regulatory frameworks, rules that are not harmonized from province to province – funding rules, solvency rules, windup rules, accounting and tax rules,” said Mock. “Simply put, the current framework is cumbersome and expensive and it is driving employers away from the [DB] model. We need to harmonize and simplify the rules in private and public sector plans across the country.”

Mock said driving people away from DB plans will be costly in the long run and threatens the retirement safety of generations of future seniors.

Reform of current workplace pension plans is also needed – but it’s important to note that not all plans are in trouble, nor do they all need to take drastic measures to stay in place, said Shelley Engman, partner, retirement practice, with Aon Hewitt.

But Engman said coverage of employees in workplace pensions is too low and needs to be improved.

“The call to action for all of us is to actively work together with our colleagues and other stakeholders to make sure this happens,” she said. “[We do this by] first, making the workplace pension environment more friendly and flexible; second, by ensuring that we preserve the workplace pension plans that we already have and third, by seeking to expand the scope of coverage to more workers.”

While people nowadays understand that their future retirement income may drop for any number of reasons, they do want some certainty as to what they will be able to get, said Susan Eng, vice president, advocacy of CARP.

“It’s the uncertainty that scares people,” said Eng. Not even DB plans are truly certain, pointing to the Nortel bankruptcy. Reports have stated that some of Nortel’s Canadian retirees have had their benefits cut to 55% of their former level outside Ontario.

“Know also that governments are using this period of time to actually erode the benefits of the civil service retirees who banked 18%-20% of their salary in order to have reliable, dependable pension at the other end. Things have to change in terms of the structure of our laws and how readily governments are prepared to erode them in order to destabilize the stability – such as it is now.”

Productivity lag

Another pension problem stems from Canada’s low productivity rate. The Conference Board of Canada recently reported that Canada is 13th among its 16 peer countries on the level of labour productivity. It now stands at 80% of the U.S. level from a high of 91% in the mid-1980s and the gap continues to widen.

“We have a horrible track record going back 25 years,” said Glen Hodgson, senior vice president and chief economist with the Conference Board. “We are on the bottom quarter of the richest countries when it comes to productivity growth.”

Hodgson said productivity growth is set to rise a bit in the next few years but not enough to counteract aging workers who are leaving the workplace.

Governments, he said, have been reluctant to take ownership of the problem and come up with a productivity strategy, although he also acknowledged that the onus should not be on one group alone.

But Hodgson said, someone has to tackle the issue, especially in light of an increasingly aging population.

“The challenge in funding those publicly funded pension plans becomes more obvious. If your economy is growing more slowly, you have an aging workforce, more pressure on health care, more pressure on the pension system – somehow we have to square this all up and make the equation work. That’s our challenge going forward.”