There is growing consensus that pension reform is urgently needed in Canada. And unless changes are made, a large number of Canadians will face a significant drop in their standard of living when they retire and some may feel they can’t even afford to retire, experts suggest. Proposals are now being generated to improve pension coverage, protect the pensions of those who have them and to encourage people to save more.

The overall objective of these proposals is to ensure the adequacy and security of future retirement incomes, but choosing among the options will not be easy. From expanding the Canada Pension Plan or adding another centrally administered supplementary plan to simply easing pension regulations and encouraging small employers to band together to provide pensions, each of these proposals has advocates and critics.

At issue is the fact that membership in workplace pension plans has been steadily declining, to the point that only 38% of Canadian workers now have coverage. As well, the economic meltdown has left many plans underfunded — and workers’ pensions threatened if the employer goes under. Add to that the fact that people saving for retirement through RRSPs have seen the value of their savings drop precipitously. And so many people are not taking full advantage of the RRSP system that there is now almost $500 billion of unused contribution room being carried forward.

Provincial premiers, through their Council of the Federation, have called on Ottawa to host a national summit on retirement income by 2010. According to the premiers, the summit “should bring together provinces and territories, Ottawa and interested stakeholders and experts to discuss possible options to improve saving options for Canadians and to encourage greater savings.”

So far, there’s been no response from the federal government. Meanwhile, federal and provincial finance ministers have established a research working group on pension coverage and retirement income, based at the University of Calgary.

Although the working group only started work this past July, federal Finance Minister Jim Flaherty is scheduled to meet with his provincial and territorial counterparts in Whitehorse in mid-December to receive the group’s report — unless an election intervenes, of course.

An official in the federal Department of Finance says the working group’s mandate is “to expand our understanding of retirement income adequacy rather than to consider options. We expect the research working group to table a research paper, not a policy paper. It is beyond the scope of the research working group to consider policy options.”

Only finance ministers from British Columbia, Alberta, Manitoba, Ontario and Nova Scotia are taking part. But some version of the supplemental pension plan proposed in the June 2009 report from the Alberta/B.C. joint expert panel on pension standards is likely to be under consideration once the finance ministers get together.

The “ABC Plan” was intended as a multi-employer, defined-contribution pension plan available to all workers in Alberta and B.C. There would be no guarantees on benefits to be provided from the plan, but contribution levels would be flexible, with employee contribution levels set at 3%, 6% and 9% of earnings. Employers would make matching contributions and could select what level of contributions they wished to make. All employers and employees would be automatically enrolled in the plan, but employers would be allowed to opt out — in which case employees could also opt out or could continue contributing without the matching employer contribution.

The ABC Plan would be administered by an institution — perhaps a pension society — operating at arm’s length from governments; a board of governors would direct the investment of the assets. In other words, the set-up would be similar to that of the CPP Investment Board, with the major difference being that — unlike the CPP, in which retirement benefits are based on earnings and years of contributions — the ABC pension at retirement would depend on investment returns and the state of markets when the employee retires.

Tony Williams, president of Vancouver-based PBI Actuarial Consultants Ltd., which reviewed the plan for the Alberta Federation of Labour, says: “We couldn’t understand why an employer who doesn’t make any pension contributions on behalf of their employees, which is 80% of the marketplace, would all of a sudden start to make large contributions voluntarily, just because there’s a vehicle there.” He notes that options such as group RRSPs are already available to employers.

@page_break@Susan Chortyk, vice president of PBI, adds: “Unless you use exceedingly optimistic — and, in our view, unrealistic — assumptions, the benefits payable from the proposed ABC Plan will be unlikely to provide the income individuals need in retirement.”

Like all DC plans, the risk of providing retirement income in the ABC Plan is shifted to the employee, which has drawn strong criticism from the AFL, among others.

The insurance industry doesn’t like the plan either. Dean Connor, president of Toronto-based Sun Life Financial Inc. , says his firm “believes that a private-sector solution is the best approach for Canada.” Connor argued in a recent presentation to the Vancouver Board of Trade that pension coverage could be expanded by amending legislation so non-affiliated employers and the self-employed could band together in a single multi-employer pension plan “so they can benefit from economies of scale that a large pension provider can deliver.”

Connor adds: “We should require pension plans and group RRSPs to auto-enroll employees earning above the CPP earnings ceiling, with the ability of those members to opt out if they so choose.” He also objects to the idea of the government “entering the DC business.”

But Robert Brown, a professor in the department of statistics and actuarial science at the University of Waterloo, who was research director for Ontario’s expert commission on pensions, believes small employers would sign on to something such as the ABC Plan “to attract and retain workers and to manage the exit of the workers from their particular place of employment.

“Employers — in particular, small employers,” he adds, “can’t handle the volatility of today’s defined-benefit plans, where they carry all the risk. And [as a result,] they’re getting out of them. If we could provide them with these commingled plans with very, very low expense ratios but very high expertise, both in investing and administration, I think there would be employers who would come back in.”

Essentially, the Alberta/B.C. report, as well as those of Ontario and Nova Scotia, are all talking about target benefit pension plans, Brown says. These plans combine features of both DB and DC plans.

“The plan sponsor makes a contribution, the funds are commingled and the worker is told what benefit to expect and [that] it’s a target and not a guarantee,” Brown explains. Establishing such a plan would have to happen through government action, he adds, “But the agency administering the plan should be an independent agency.”

As well, implementing such a plan doesn’t necessarily have to be done at the national level, Brown suggests. Like medicare, it could start with individual provinces implementing their own plans, which might eventually become a national plan covering all provinces, he says, adding that this concept would not necessarily preclude an expansion of the CPP: “Going to an ABC-type plan after a few years, a lot of people may just sit down, scratch their heads and ask, ‘Why aren’t we just doing this within the Canada Pension Plan?’ It’s a very small step from one to the other.”

Advocis says there must be more opportunities for Canadians to participate in pension plans. Greg Pollock, president and CEO of Advocis, says, “There are many immediate steps governments can take to make employer-sponsored defined-contribution plans more attractive to small and medium-sized businesses and ultimately more accessible to their employees.”

Advocis’ position is that policy-makers could eliminate barriers and create incentives for more employers to sponsor DC plans.

Pension guru Keith Ambachtsheer, director of the Rotman International Centre for Pension Management at the University of Toronto’s Rotman School of Management, says the proportion of seniors in the low-income category is not likely to fall in the future. He also concludes that about four million middle-income workers in the private sector are also at risk. Additionally, he told attendees at a recent seminar that RRSPs are not likely to produce adequate income replacement for most of those workers.

Ambachtsheer argues that pension coverage could be improved through a new pension vehicle that he calls the Canada Supplementary Pension Plan. An arm’s-length pension delivery agency “with scale, expertise and good governance” would administer the plan. He believes his proposed plan would address two major shortcomings in workplace pension plans and individual retirement savings.

First, the majority of Canadian workers are not members of workplace pension plans and “are not accumulating sufficient retirement savings to maintain a decent post-work standard of living”; second, 5.5 million Canadians “have their retirement assets invested in retail products with high sales and management costs, which make it difficult for many of these 5.5 million households to generate adequate pension income at affordable retirement savings rates.”

All workers without a workplace pension plan would automatically be enrolled in the CSPP, but opting out by employers and/or employees would be permitted. Ambachtsheer believes more participants would be in the plan if it were based on automatic enrolment with permitted opting out than if it were set up as a voluntary plan requiring people to opt in.

Contributions would be made by payroll deduction in the same way as contributions to the CPP. Contribution rates would be calculated to produce a pension replacing 60% of pre-retirement earnings, and contributions would be directed into personal retirement savings accounts. The CSPP would operate at arm’s length from the government as an expert entity similar to the CPPIB. The CSPP would offer a risk-optimizing portfolio in which each personal retirement savings account could participate and would have sufficient scale to operate at low unit costs.

Meanwhile, the Canadian Labour Congress is launching a pension campaign, advocating doubling of the CPP replacement rate from 25% to 50% of covered earnings to be phased in over a period of several years, as well as an increase in old-age security and the guaranteed income supplement. According to Bernard Dussault, chief actuary of the CPP from 1992 to 1997, the CLC says that a doubling of CPP retirement benefits would require contribution rates to be increased by roughly 50%.

The proposed increases would see contributions rise from 4.95% of covered earnings in 2009 (with a matching employer contribution) to 7.70% in 2016. The maximum CPP retirement pension then would be $1,635 a month, compared with $908 a month in 2009. IE