The middle class is the most vulnerable

By Alain Thériault | February 26 2010 05:52PM

Meeting in Whitehorse on Dec. 17 and 18, the federal and provincial ministers of finance came to an unexpected conclusion: it's not the poorest who need a supplementary safety net at retirement, but the middle class.

The meeting in Whitehorse should set the tone for the next public consultation on pension plan reforms that the federal government is going to host. The question is how to give more Canadians access to an adequate pension at retirement and where that solution will come from: the government, the private sector, or both? Just before the event the private sector, with insurers figuring prominently, insisted on taking an active part in the reforms. They unanimously reject the idea of a state sponsored plan.

The private sector, however, was not invited to the Whitehorse conference. The occasion only brought together the ministers of finance from the provincial and federal governments. A conduit between the ministers and the public, Ted Menzies is the parliamentary secretary to the federal minister of finance Jim Flaherty. He also presides over the research working group established by the federal government to analyze possible solutions. Mr. Menzies also took part in the discussions in Whitehorse.

"A lot of Canadians would have assumed that low income households won't have enough money for their retirement," he explained to The Insurance and Investment Journal. "But it appears that it is the mid-income who will struggle to have enough money - let's say households in the range of $45,000 to $80,000 of annual income."

At press time, Mr. Menzies did not yet know when the public consultation would begin. The insurance industry is ready to contribute to the discussion. "Some of the research out there concluded that there's no pension crisis in Canada. We would say that's true on average, but there are very large pocket of people where that is not true," Kevin Dougherty, CEO of Sun Life Canada told The Insurance and Investment Journal. It would take only a few regulatory changes to quickly contain the problem, he said, for example, allowing employers to group themselves under one multi-employers defined contribution (DC) plan. Another change that would help would allow automatic enrolment of employees into a DC plan.

At the time of the interview, Sun Life had just launched a guaranteed minimum withdrawal benefits product for group plans. This is a good example of the industry to adapt to the needs of Canadians, says Mr. Dougherty. "The focus has been largely on the accumulation phase. Now, the front-end of baby-boomers are turning 63 and 64 this year. Hundred of thousands every month will face the situation of de-accumulation and they're looking for the best and safest de-accumulation strategy."

According to the most recent data collected by Statistics Canada, only 5.9 million Canadians were members of a pension plan at work in 2008. At the moment, that represents 38.3% of all paid workers. However, these figures do not take into account the fact that many Canadians contribute to group or individual RRSPs to fund their retirement. But how many?

At the Montreal stop of a roadshow discussing the challenges faced by Canadian pension plans, Mercer presented some worrying statistics. According to 2007 federal government statistics, 45% of workers do not have a pension plan or an RRSP. Collectively, Canadians have only used 6% of their accumulated RRSP contribution room.

A presenter at the conference and a principal consultant at Mercer, Michel St. Germain brought up the same issues as those raised in Whitehorse and he invited ministers to change regulations in order to make defined benefit plans (DB) more appealing. These plans rely on long-term interest rates and investment returns in order to provide a pension to future retires.

However, pension plan funding rates dropped dramatically after the beginning of the financial crisis in September 2008, and their situation only improved by 2% in 2009. According to Mercer's numbers, DB plans were only 70% funded as of January 2010.

Defined benefit plans represent bigger and bigger liabilities for employers, who recently obtained some regulatory breathing room from different levels of government in order to catch up.

Some employers have thrown in the towel, abandoning their DB plans in favour of defined contribution plans, where the worker's pension at retirement depends on the returns earned by his or her contributions.

Currently, only 16% of workers in the private sector are members of a defined benefit plan, while 78% of workers in the public sector are members of a DB pension plan, Mercer's statistics revealed.

Changing the law that governs how pension plan deficits are absorbed, sharing costs with employees, and putting the mandatory retirement age above 65, are some of the solutions that Mr. St. Germain recommends in order to keep DB plans attractive. Creating flexible and multi-employer defined benefit plans for small and medium sized businesses, with simple and uniform regulations, are also essential if DB plans are to remain competitive. "I doubt that all that will be achieved in 2010," comments Mr. St. Germain. "All change is gradual."