High noon for pension reform

Originally published in The Financial Post April 17th, 2010. To go to the Financial Post website, please click here

It’s “high noon for pension reform” and time to move from debates to decisions, pension consultant Keith Ambachtsheer says in a widely circulated new report. The president of KPA Advisory Services Ltd. is pushing for a supplement to the Canada Pension Plan that would benefit the 75% of Canadians who don’t have employer pensions. His focus on improving prospects for middle-income Canadians earning $30,000 to $100,000 makes it one of the leading contenders for reform.

“One of these ideas will gain currency in the next six weeks,” Ambachtsheer said in an interview, “because the next [finance] ministers meeting is at the end of May.”

While Canada’s retirement income system is among the top three or four in the world, he’d like to vault the country to the “top of the pension podium.”

Even so, the ongoing pension debate was still very much in the talking stages at hearings in Ottawa this week.

“I don’t think we have a crisis,” says Mercer senior partner Malcolm Hamilton, who provided input to a Standing Committee on Banking, Trade and Commerce examining savings patterns in RRSPs and TFSAs.

Current retirees are “pretty satisfied,” Hamilton says, and “it doesn’t look like there will be a problem for Baby Boomers” approaching retirement.

Bill Kyle, group retirement vice-president for Great-West Life Assurance Co., also argues the Canadian pension system is “not broken.” Half of us have retirement plans at work, if you count Capital Accumulation Plans (CAPs). Those include group RRSPs, defined-contribution plans, deferred profit-sharing plans and group TFSAs.

But such plans are not pensions in the classic sense, says finance professor Moshe Milevsky. A true pension involves a binding contract and a guarantee or pledge that retirees will receive a predictable, reliable income stream for life.

Defined that way, two-thirds of workers lack true employer pensions. The lucky third are government workers and the few in the private sector who enjoy old-fashioned, guaranteed income defined-benefit pension plans.

That said, almost all Canadians will enjoy at least a partial “true” pension in the form of the three government programs: CPP, Old Age Security (OAS) and the Guaranteed Income Supplement (GIS).

Workers accustomed to living on meagre incomes may find that triad enough. Tina Di Vito, BMO’s director of retirement strategies, says an unmarried 65-year-old gets a maximum of $17,413 a year from the three plans and couples get $34,800 — inflation-indexed and tax-free on the GIS portion.

Not bad for those who never saved a dime.

But few get the maximum. Ambachtsheer says the average is $16,760 for a single senior or $28,202 for couples. Only 38% of Canada’s 4.2 million seniors receive the GIS — it’s not available to those with significant other sources of retirement income.

Few worry about people earning more than $125,000 a year, so it’s middle-income workers without defined-benefit pensions that Ambachtsheer and other reformers are targeting.

In Canada’s workforce of 17.8 million, 7.8 million make between $30,000 and $125,000, but about half of those have employer pensions. The 3.5 million who don’t are mainly the self-employed and those working in small- or medium-sized businesses. Few of those firms are likely to sponsor classic pensions and many large companies would rather not offer them either, Hamilton says.