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Here’s what Bill Morneau’s pension bill could mean for your retirement

The pension changes at the heart of the conflict of interest allegations against Finance Minister Bill Morneau may just save the cash-for-life retirement pension from edging closer to extinction.

But it's going to be an ugly process because the target benefit pension plans covered by the proposed legislation are a tough sell. Private sector companies haven't shown much interest, and some unions don't like them a bit. A target benefit pension was implemented for New Brunswick public sector workers in 2012, and there are legal challenges still.

Mr. Morneau owned shares of his family firm, Morneau Shepell, when the legislation was introduced (he has since sold them). Morneau Shepell provides administrative services to pensions, so Mr. Morneau theoretically could have benefited from the new rules. Not addressing that potential conflict ahead of time has diverted attention away from the big impact target benefit plans could have in the pension world.

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Target pensions are a halfway point between the guaranteed payments for life of the defined benefit (DB) plan and the uncertainty of the defined contribution (DC) plan, where you save with your company's help and then have to make your money last in retirement. Target plans offer payments as long as you live, but the amount you receive can be reduced if the pension's investments underperform.

In the private sector, the trend is for companies with DB plans to close them to new employees and instead enroll them in DC plans. DB plans are much more expensive to run and some companies offering them want out.

Keith Ambachtsheer, director emeritus of the International Centre for Pension Management at the University of Toronto's Rotman School of Management, is an advocate of target benefit plans and sees a role for them in the corporate world as an alternative to the DC pension. "It's kind of a disappointing thing," he said of the lack of interest he's seen in target benefit plans. "For [private sector companies], the simplest thing is close the DB, start up the DC. That's the no-brainer and that's what's been happening."

The proposed federal legislation would allow Crown corporations and federally regulated sectors such as banking to introduce target benefit plans. These pensions could replace DB plans, but this would have to be negotiated with unions. It's also conceivable that target benefit pensions could replace DC plans, which would be a win for employees.

Jana Steele, a pensions lawyer with Osler Hoskin & Harcourt LLP, sees potential for this in federally regulated companies with some employees in a DB plan and others in a DC. "There may be a willingness to look at the DC component and say, you know what, now that we have this option, let's talk about bringing them closer to the DB world."

There have long been "multi-employer" target benefit plans in sectors such as construction, where people frequently change employers but remain in the same field. But the most notable – some might say infamous – use of the target benefit plan has to be New Brunswick, where some public sector pension plans had become severely underfunded. Target benefit plans were adopted as a way to make the plan affordable while keeping some aspects of the previous DB plan.

Mr. Ambachtsheer said Canada Post is interested in making a similar move to a target benefit pension. A target benefit plan would ease the strain on the Crown corporation, but there's opposition. It was a group representing retired Canada Post workers that notified the federal ethics commission about the Finance Minister's shares in Morneau Shepell and his involvement in the target pension benefit law.

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Target benefit pensions assume a rate of return on their investments in calculating how much they will be able to pay members when they retire. If actual returns disappoint in a target plan, available options include:

  • Delaying cost-of-living increases for retirees until the plan is healthy again;
  • Increasing contributions, possibly with the employer and plan members sharing the extra cost;
  • Cutting benefits – a worst-case situation.

Certainly, a DB plan and its guaranteed benefits would be better for workers. But pension experts generally agree that a target benefit plan beats a DC pension.

Alexandre Laurin, director of research at the C.D. Howe Institute, said target benefit plans offer low-cost, professional money management and provide payments for as long as the plan member lives. With DC plans, people have to make their own financial decisions, sometimes with less than optimum investing choices. Worse, they have to manage their own money in retirement to make sure it lasts. "The better outcome is the target benefit plan," Mr. Laurin said.

Personal finance columnist Rob Carrick talks about the information you need to know to evaluate your company pension.
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