In search of Canada’s perfect pension plan

Finance ministers will have a lot of good proposals to consider when they meet next week in Whitehorse

This article was originally published in the Vancouver Sun, to visit their website, please click here

Canada’s investment industry may have shot itself in the foot recently in its fight against the Harmonized Sales Tax.

By pointing out how much the new tax would burn off the lifetime savings of Canadian retirees — an estimated $42,000 for someone who invested $5,000 a year for 35 years — they also spotlighted the much greater caustic effect of the management fees charged on mutual funds.

Those fees are just one of the many issues that should come to play next week as finance ministers meet in Whitehorse to discuss retirement and pension issues.

The central concern is that too many Canadians are ill-prepared financially for their retirement. Only about one in four employees in the private sector has a work-based pension plan.

Some of those private sector plans are in trouble. Even before the stock market collapsed, many were underfunded, creating a financial liability for companies still in operation and grief for employees if the companies they work for goes under.

The government-subsidized plans set up to encourage individuals to save for their own retirement have been underutilized.

Only a small portion of Canadians maximize their RRSPs. Those who do have to take their chances in choosing from a dizzying array of investment options offered by the financial services industry.

A number of proposals have been floated recently to give Canadians access to pension plans with a more secure return and lower management fees. B.C. and Alberta have proposed a publicly run plan that would be available for small firms, individual employees or people who are self-employed.

CARP, the Canadian Association of Retired People, has a similar proposal, although it wants a defined benefit plan, which most public sector employees enjoy, rather than the more easily managed defined contribution plan that B.C. and Alberta are considering.

The Canadian Labour Congress is pushing for beefing up the Canada Pension Plan, with a mandatory increase in contributions by employees and employers aimed at increasing the maximum pension to 50 per cent of earnings from 25 per cent.

The NDP and the Liberals both have come out with plans that would allow for Canadians to increase their contributions to the CPP.

The Liberals also have made a worthwhile suggestion of using the Canada Pension Plan to backstop pensions for companies that go broke.

Currently, employees of under-funded plans get handed back whatever is left of the money they were counting on for a comfortable retirement and are left essentially to fend for themselves in the private investment market.

The Liberal plan would allow them to take advantage of the economies of scale that are now available only to the very wealthy and pension funds.

All of these ideas have some merit. The challenge for our finance ministers is to come to an agreement that includes all provinces and the federal government, allows Canadians access to secure plans that are portable from province to province, and allows Canadians of all income levels to benefit from low fees and top-drawer management.