While Ottawa’s five-pronged proposed reform of the pension system is welcome as far as it goes, the focus is mostly on enhancing benefit security for the fortunate few who are already in employer-sponsored Defined Benefit pension plans.
“Anything that can help the endangered species of DB pensions is to be welcome but I’m afraid these measures do little to assist the vast majority of Canadians without any pension whatsoever,” says Moshe Milevsky, finance professor at York University’s Schulich School of Business. Nor do the DB plan tweaks help those with Defined Contribution (DC) pensions and RRSPs, who have no guarantees or promises of lifetime income, Milevsky said.
Also, the changes aren’t immediately applicable in the current environment where most companies have funding deficits. Restricting contribution holidays and loosening tax restrictions are “bull market” measures that should have been imposed during the bubble years of surpluses, Milevsky added.
There’s no mention of new savings vehicles for the 75% of private-sector workers who don’t have employer-provided pensions, says CARP advocacy vice president Susan Eng.
Nor do the proposed measures directly address the problems of under-funded pensions from bankrupt employers. It was the plight of pensioners at troubled firms like Nortel Networks and Air Canada that moved CARP to push for a Universal Pension Plan that would piggyback off the Canada Pension Plan, to which most workers contribute.
Liberal leader Michael Ignatieff is floating a similar scheme of a supplementary savings plan tied to the CPP, although his party has yet to unveil a formal pension platform. An alternative supplementary plan which would be voluntary and Defined Contribution in nature has been proposed by Keith Ambachtsheer of KPA Advisory Services.
The Canadian Labor Congress has even proposed a doubling of CPP benefits phased over the next 17 years. The CPP currently pays a maximum of $908 a month or $11,000 a year. On top of that, whether you were in the workforce or not, most Canadians will also qualify for Old Age Security benefits when they turn 65, with the poorest seniors also getting the Guaranteed Income Supplement.
The new proposals say nothing about increasing tax-sheltered room for RRSPs or the new Tax Free Savings Accounts. As anyone will realize who waded through the somewhat abbreviated backgrounder in yesterday’s blog post, the focus was almost entirely on seemingly obscure changes to DB plans.
Still, esoteric as they may seem, it’s a step in the right direction to tweak existing corporate DB pensions and important to those who are affected.
Ian Markham, director of pension innovation at Watson Wyatt Canada says Finance Minister Jim Flaherty’s reforms are “clearly aimed at enhancing benefit security, which DB plan members do need.”
Loss of control could push more firms to DC plans
But Markham is worried the proposed changes will “be regarded as quite imbalanced by large and small private sector DB plan sponsors, who are increasingly worried that their pension plan finances in future years will swamp their company results.”
Such a loss of control hurts their ability to plan for future capital investment and could push them towards Defined Contribution plans, Markham says. While there were some mentions of DC plans, the government’s proposals are “not focused on the DC side.”