In the winter of 2008, the Certified General Accountants Association of Canada (CGA-Canada) embarked on a third research study on the state of the Canadian pension system. CGA-Canada remains committed to making meaningful contributions to the ongoing debate on pension issues facing Canadians and as such, the content of this report effectively expands CGA-Canada’s earlier works while complementing the collective efforts of other professional organizations, regulators, plan sponsors, members and their representatives.
Reference to pension plans in this paper relate specifically to defined benefit (DB) and defined contribution (DC) pension plans registered with a provincial or federal pension authority unless otherwise expressed. This paper does not address or represent the state of supplementary employee retirement plans (SERP), defined benefit pension plans for Federal public employees (PSSA) or Québec public employees (RREGOP). Multi-employer pension plans which tend to attract different funding and accounting issues, have also been excluded.
We anticipate that this new report entitled Gauging the Path of Private Canadian Pensions: 2010 Update on the State of Defined Benefit and Defined Contribution Pension Plans, will be of significant value to the Canadian public and policy makers.
Key Report Highlights
Pension plan challenges deepening and funding deficits intensifying
- The ability of Canadians to maintain a financially comfortable and healthy lifestyle after retirement has become one of the nation’s most vexing challenges.
- Pension plan challenges have deepened and funding deficits have climbed from $160 billion in 2003 to an estimated $350 billion in 2008.
- The overall funding position of DB plans has significantly deteriorated since December 31, 2004 with the vast majority (92%) of private sector pension plans in a deficit position as at December 31, 2008.
- There are an estimated 7,000 private DB plans and an estimated 8,000 DC plans having an estimated 4.5 million and 0.8 million members respectively. DB assets exceed $550 billion while DC assets represent an estimated $50 billion.
- According to estimates performed by Mercer, 71% of Canadian defined benefit pension plans were in a solvency deficit position at the end of 2007. By the end of 2008, that statistic had risen to 92%. At the end of 2008, almost 40% of defined benefit plans had solvency ratios under 70%, and over 70% of defined benefit plans had solvency ratios under 80%.
- With escalating entitlements (pensioners), funding deficits can only be exacerbated by a declining contributor (worker) base.
Financial crisis highlights need for fundamental reform
- The recent financial crisis accompanied by a chain of high-profile bankruptcies highlighted the need for broader, more far-reaching and fundamental reforms to pension legislation and the other side of defined-benefit pension plans – the risk that an employer fails to fulfill its pension obligations i.e. Nortel.
- Typical pension plan lost 20% of its asset value, measured on a market value basis during the six months from September 2008 to February 2009.
- The crisis has raised awareness of, and interest in, pension issues among sponsors, members, and regulators. Most of these issues have existed for decades, but have not been fully appreciated by most stakeholders; or perhaps have been beyond immediate reach.
Boomers to place enormous demands on retirement system
- Post retirement expectations and needs of the “boomer” generations will place enormous demands on the country’s health and social support systems.
- Long term demographic trends challenge the Canadian retirement system – the working age population will conceivably shrink further in the years to come and baby-boomers will progressively leave the workplace.
- Decline in the numbers of the working-age population will inflict constriction of funding into the retirement system.
- Unless this dual pressure on the system is otherwise relieved and counterbalanced by prudent regulatory and pecuniary policies, steady disintegration will befall Canada’s retirement system(s).
Employers favour defined contribution pension plans over defined benefit pension plans
- There is a shift among employers towards DC plans and away from DB plans.
- The private sector stimulated the build of increased activity in defined contribution plan participation.
- By 2006, DB pension plans represented 81% of the workers participating in registered pension plans while DC plans represented a more conservative 16%.
- There was a noticeable rise in DC plans between 1991-2006 and this number continues to rise.
- DC plan membership in the private sector nearly doubled over the same period (1991-2006) increasing the coverage rate from 14% to 27%.
- Unlike a DB plan, DC plans afford certainty of expense and cash flow for the employer and hence assists in planning controlling and monitoring risk.
- DC plans allow the employee to exercise greater control over retirement planning and increased adaptation to their own individual circumstances and lifestyle.
- DC plans impose ownership responsibilities on the participants for shaping their working lives and retirement expectations.
Private savings cannot outperform defined benefit pension plans
- Private savings done outside of retirement savings vehicles would hardly reach half of the benefits level offered by the defined benefit plan, particularly in the public sector. For this reason, declining defined benefit pension plan coverage is received as bad news to many.
- It is simply not possible under the current tax rules to generate or to mimic the benefits bestowed by public-sector DB pension plans.
- Maximizing RRSP contributions does not lead to achieving a level of pension benefits similar to that of defined benefits pension plans.
- CGA-Canada contends that private savings would have to be undertaken outside of tax-preferred saving instruments to produce similar benefits.
Private sector carries the burden of public sector pension plans
- The present pension system in Canada has produced pension “haves” and “have-nots” – at one end of the spectrum are public sector employees who enjoy the security of government-guaranteed DB pension plans and on the other end of the spectrum are some private sector employees having no income or retirement security whatsoever.
- The asymmetrical coverage of working Canadians can be rectified by making enrolment in workplace pension plans mandatory for all employees while also re-pricing public sector pension plans.
Design new pension system that is fair to all Canadians both now and in the future
- Design a pension system that is sustainable in the long term, fair to present and future generations, simple to administer, and cost effective.
- Recognize pension benefits as deferred compensation.
- Consider adaptations of the “Hybrid Model” (Cash Balance Plans) that can, going forward, substitute for current DB and DC plan models.
- Establish a common pension regulator to monitor the retirement system and adherence to the principle of “one law, one regulator”.
- Examine the prospect of introducing universal and compulsory coverage of all working Canadians.
- Consider consolidation of the oversight of private sector registered pension plans under the authority of the proposed common pension regulator for achieving efficiency and economy of scale.
- Harmonizing more fully the tax treatment of all pension plan transactions, including funding and payout irrespective of their origin and structure.
- Codify a set of guiding principles aimed at guarding the system against human error and external shocks.
Incorporate guiding principles to ensure new pension system is robust and secures the futures of all Canadians
- No participant in the pension industry should be allowed to grow too big to fail. Hence a proposed common pension regulator for RPP should be independent of the CPP.
- When a participant in the pension industry grows too big to fail, it should be split into manageable entities.
- Whenever a pension industry participant needs to be bailed out, it should be nationalized and be subject to assumption by the government and not vice versa.
- Failed theories and enterprises should not be resurrected in new form or under alternate moniker.
- The compensation structure in the pension industry should not be asymmetrical. There should be no incentives without disincentives, no rewards without punishment and no nationalization of losses and privatization of gains.
- Pension plans should be self-sufficient and sustainable. They should not operate in a manner that unduly borrows from future generations to pay the present one.
- Pension plans should not be allowed to metamorphose into the empires of debt.
Allow Canadians to build retirement income outside of pre-existing pension plans
- CGA-Canada reiterates the importance of eliminating or relaxing the rules that limit an individual’s ability to marshal public-sector equivalent retirement resources.
- CGA-Canada believes citizens should be encouraged to take charge of their own financial destiny and support their retirement by way of private savings.
- Optimizing and investing tax refunds received due to pension contributions may prove a crucial element in improving financial security at retirement.
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CGA-Canada | Last Updated: April 30, 2013