The Conservative government is throwing a new idea into the heated debate over pensions, launching a national discussion of proposed new plans that share the investment risk between employers and employees.
Minister of State for Finance Kevin Sorenson will announce on Thursday in Toronto during an address to the Economic Club of Canada that the government will hold consultations on the plan.
The voluntary option, known as a target benefit plan, would be available to Crown corporations and to all federally regulated private sector companies, which include those in Canada’s transportation, banking and telecommunications sectors.
The target benefit plan could have the effect of watering down the existing defined-benefit plans that many employees of such companies currently have. It could encourage employers with defined-benefit plans to adopt something that costs employees more and offers them less while taking more risk.
The new plan, however, could also improve benefits for employees who don’t have a defined-benefit plan.
The new option would strike a balance between the guaranteed payments in retirement that come from a traditional defined-benefit pension and the increasingly common defined-contribution plans, in which the payout in retirement is entirely dependent on the success of an individual’s investments.
Many private sector companies are moving away from defined-benefit plans because they require them to cover shortfalls if investment returns fail to meet expectations.
In the case of Crown corporations such as Canada Post, taxpayers would be responsible for underfunded pension plans.
Under target benefit pensions, employers and employees jointly manage a plan aimed at collecting defined contributions to achieve a specific benefit in retirement.
However, if returns are lower than expected, employers are not obligated to top up the fund. Instead, the employer-employee fund managing group could reduce benefits, increase contributions or both.
Similarly, if investments overperform, benefits could be increased or contributions reduced.
The goal is to encourage more employers to offer pensions and to entice those with defined-contribution plans to offer something better. Ottawa’s proposal would not affect the core federal public service.
The Conservative government’s move comes amid an ongoing battle with some provinces – particularly Ontario – over whether governments should approve more mandatory saving for retirement through the Canada Pension Plan. After several years of talks, Ottawa has rejected the idea. Ontario’s Liberal Premier, Kathleen Wynne, is preparing to fight a possible spring election in part by campaigning for a new, mandatory CPP-style plan led by participating provinces. Mr. Sorenson called that a “reckless scheme” in a statement on Wednesday.
Ontario Finance Minister Charles Sousa, who will introduce his budget on May 1, spoke to the Economic Club of Canada in Ottawa on Wednesday, arguing that the approach, which he referred to as a “made-in-Ontario” solution, is needed because the average CPP payout of $6,400 a year is not enough.
As for target benefit plans, other provinces, including Ontario, have already passed legislation to allow such plans in companies they regulate. New Brunswick is the most advanced, and is already applying the model to the provincial public service. It is facing strong resistance from some provincial public servants over concerns that the change would lead to higher contributions and lower benefits.
Former Bank of Canada governor David Dodge weighed in on Wednesday with a report advocating both an enhanced CPP and a “shared-risk” voluntary option like target benefit plans.
The report, which Mr. Dodge co-authored with Richard Dion for the law firm Bennett Jones, rejects Ottawa’s claims that an expanded CPP would lead to immediate, economic damage. Both Mr. Dodge and Mr. Dion are senior advisers at Bennett Jones.
“An increase in future CPP pensions financed by an increase in actuarially appropriate CPP premiums starting in the near future would be an efficient measure to increase household saving and to provide for higher retirement incomes,” the report concludes. “At the same time, regulatory and legislative measures to facilitate the creation/expansion of shared-risk (hybrid) employer or group pension plans needs to be considered.”
THE THREE OPTIONS
Defined-benefit (DB) pension plan:
A traditional style of plan, it provides a guaranteed level of income in retirement, typically based on employees’ pre-retirement incomes and their length of service. Employers must ensure the plan has adequate funding to cover promised pensions, and are required by law to make extra contributions if the plan has a shortfall.
Defined-contribution (DC) pension plan:
A DC plan invests contributions from workers and employers and pays a pension in retirement based on the returns earned by the funds, which can vary depending on investment performance. DC plans do not promise a guaranteed level of income in retirement, so do not have shortfalls that must be funded by employers.
Target benefit plans:
Often described as hybrids between DB and DC plan models, target benefit plans typically have fixed levels of contributions that are expected to be adequate to provide a targeted level of income when a worker reaches retirement. If investment returns are inadequate to reach the target payout level, however, the plans allow benefits to be reduced rather than requiring employers to fund the shortfalls.