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Jun 15, 2010

What will it take to fix Canada’s pension system?

I don’t know about you, but any discussion about pensions – whether company-sponsored, individually purchased via RRSPs, or CPP/QPP – just boggle my mind. Yet, like many baby boomers approaching the years I might need to have a good pension portfolio to keep me in house and home, I can’t avoid the discussion. And, frankly, neither can employers and their benefit managers.

Federal finance minister and his provincial counterparts just wrapped up a series of meetings on the Canada Pension Plan by agreeing to enhance the defined benefits under the plan. While labour groups such as the CAW are lauding the decision, employer groups such as the CFIB are worried about increasing employer contributions.

On June 13th and 14th, the ministers met in P.E.I. to discuss nation-wide solutions to Canada’s pension and retirement concerns, including a possible plan to increase mandatory Canada Pension Plan (CPP) premiums. According to the CBC, Flaherty and his provincial counterparts have agreed to work toward increasing CPP payments and contributions.

"We agreed to consider a modest phased-in and fully funded enhancement to defined benefits under the Canada Pension Plan," the CBC says Flaherty told reporters at a news conference in P.E.I. Though still far from agreeing on implementation, the ministers reached "consensus," Flaherty said, that a modest increase in the plan would be the best course of action.

Flaherty also ruled out one option suggested for Canada's retirement income system - a government-sponsored, voluntary supplementary plan that would have functioned much like an RRSP.

CAW President Ken Lewenza called the news of possible improvements to the Canadian Pension Plan "encouraging and historic.” Lewenza said that the indication that the government is willing to increase CPP benefits is a clear sign that Canadians' concerns around retirement security have been heard by their elected officials.

For the last year, CAW members have lobbied their municipal, provincial and federal elected officials, urging changes to the CPP legislation, as part of the Canadian Labour Congress campaign to double the CPP.

Towers Watson: three-pillar approach solid, but changes needed
In an interview with Workplace, Ian Markham, a Canadian retirement innovation leader with Towers Watson (TW),  a leading global professional services company that helps organizations improve performance through effective people, risk and financial management, spent some time helping me try to understand what these discussions mean. On one hand, he notes that TW is comfortable with the three-pillar approach of the current system. He says the mix of risks and rewards for the various constituents is acceptably balance. That’s not to say that the consulting group doesn’t agree that changes are needed.

Through their work with clients and their research in connection to the ongoing government consultations, Towers Watson points to a number of issues they believe must form part of the discussion around the reform of Canada’s pension system. These issues were address in a May 2010 submission to the Federal-Provincial Relations and Social Policy Branch.

Among other things, the submission addressed:

1. The importance of maintaining Canada’s holistic three-pillar approach:
•     Old Age Security (OAS) and Guaranteed Income Supplement (GIS) systems
•     Canada Pension Plan (CPP)/Quebec Pension Plan (QPP)
•     Private savings arrangements, including Registered Pension Plans (RPP)

2. Taking steps to reinforce the weakest pillar – RPPs. In its submission, Towers Watson strongly encouraged the federal and provincial governments to work together to modernize the regulatory framework for RPPs. The submission noted: “Barriers that discourage employers from voluntarily sponsoring DB plans must be adequately addressed. Policy and legislation must be updated to facilitate the development of new plan designs that would potentially expand pension coverage for employed and self-employed workers.”

3.  The appropriate role of government-sponsored plans in retirement savings. In its submission, Towers Watson, “caution(ed) against adopting an approach that would essentially replace Pillar Three forms of retirement savings (i.e., RPPs) with a mandatory expansion of the Canada Pension Plan (CPP). Instead, we encourage the federal, territorial and provincial governments to undertake legislative and policy reforms that will encourage and strengthen registered retirement savings, especially occupational pension plans.

4.  The broader impact of possible changes to Canada’s system of bankruptcy priorities. The issue of retirement income has gained prominence this year, with numerous banks sounding the alarm that current trends in retirement savings will not sustain Canadians' expected lifestyles. The problem was exacerbated by the high-profile bankruptcies of several companies through 2009, all of which left pensioners in the lurch.

As Minister Flaherty noted, "There’s a lot of work to be done." And, he offered no timetable of action and, says the CBC, stopped well short of a guarantee that an increase in CPP payouts and contributions is a sure thing.

The ministers plan to reconvene sometime this fall to continue the work begun this month. By then, maybe Ian Markham’s explanations will sink into my pension-challenged brain.
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