Canada is facing a crisis in the private pension sector – Opinion – Canada is facing a crisis in the private pension sector: Economic upheaval is putting pension payouts at risk, which will affect retirement incomes
December 11, 2008. Murray Gold

Pension plans are a pillar of our financial economy, and they are in trouble. That means our retirement incomes are in jeopardy.

The immediate problem is that plans have suffered losses this year of 10 to 25 per cent. But there are deeper challenges. Coverage levels are declining, especially in the private sector. And the quality of pension coverage is changing, as employers seek to buffer themselves from the risks of sponsoring a pension plan by shifting more of those risks onto employees and retirees.

In his Nov. 27 economic statement, the federal finance minister announced, for the second time this decade, emergency funding relief for defined benefit pension plans. He also launched a consultation process on other potential reforms. Significantly, two provincial reports were also released late last month, by the Ontario Expert Commission on Pensions and the Alberta-British Columbia Expert Panel on Pension Standards.

The challenges to the pension system are well recognized, but the responses to them are fraught with tough trade-offs. Because they are long-term arrangements, the pension choices we make now will bear directly on our retirement incomes in five, 10 and 20 years from now. And the options on offer today will affect different people in very different ways tomorrow.

Canada faces a crisis in the private pension sector. It is most severe for newer, so-called “defined contribution” pensions, in which employers commit only to fixed contributions, not the final payouts. The growth of defined contribution plans is destabilizing retirement income security. Pension plan members have no predictability as to their retirement incomes. If contributions are inadequate, or investment returns are poor, or market conditions are adverse at the time of retirement, retirement may be impossible or significantly poorer than expected. This weakness of the system is clear today as asset values plunge.

In the defined benefit sector – in which members are guaranteed a fixed monthly pension – the crisis is not one of retirement income security. Instead, it is a “funding” crisis. A promise of a fixed pension has been made, and money must be set aside to provide for those pensions. Investment losses must be made up through higher contributions. Unfortunately, today’s need for higher contributions coincides with a recession; hence, demands are afoot for pension funding relief.

Pension security, however, is the touchstone of the defined benefit system. Unless pension plans have the assets they require to pay the pensions they have promised, the defined benefit is illusory.

Our current rules require comparisons between a defined benefit plan’s assets and its liabilities every three years. Any deficits must be paid over five years. While it is tempting to think that pensions are very long-term arrangements, and that no harm is done through temporary relieving provisions, we have seen a number of cases in which companies become insolvent before their pension deficit is paid off.

In its report, A Fine Balance, released Nov. 20, the Ontario Expert Commission on Pensions recommends a new process to address underfunded pension plans in hard times. Employers in distress would approach the representatives of affected plan members (a union or employee group). Together, the employer and the members would reach an agreement about the measures best suited to deal with the problem. The pension regulator would have the authority, under the commission’s recommendations, to approve the deal and vary the funding rules as necessary.

The report also reviews the province’s Pension Benefits Guarantee Fund. It currently insures pensions where the sponsoring employer becomes bankrupt and the pension plan doesn’t have the money it needs to pay promised benefits.

The fund insures pensions up to $1,000 per month – a level that hasn’t changed in almost 30 years. The commission recommends increasing this to $2,500 per month. Even then, Ontario’s Pension Benefits Guarantee Fund would provide only about half the level of coverage provided by the Pension Benefits Guarantee Corp. in the U.S.

This may be controversial because it will entail additional cost. But the options available for secure retirement income don’t come cheap or easy. We can adopt more defined contribution plans – but they provide no retirement income security. Or we can maintain defined benefit plans, with an insurance backstop.

Unfortunately, the Canadian federal government has no pension insurance system for the defined benefit plans it regulates. Without one, federal reform of pension funding rules should proceed with caution.

If it cannot provide retirement income security, then the private pension system itself is at risk.

Perhaps today’s challenges are too great and the cost of security is too high. If so, we can look at enhancing the CPP, the largest and most efficient pension arrangement in the country.

Increasing CPP benefits may allow us to fix the private pension problem, not by paying more into those plans, but by shifting the pension obligations away from them and toward the national plan.

Ontario’s Expert Commission has endorsed the call for a national pension summit. The time to choose between these alternatives is now.

Murray Gold is a partner at Koskie Minsky LLP and a leading pension and benefits lawyer in Toronto. He was one of four expert advisers to the Ontario Expert Commission on Pensions.

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