By: Elaine Noel-Bentley
Fundamental questions about the future of the pension system in Canada are being raised with increasing frequency. Although generally still the domain of a smallish group of people fascinated by pensions (ʻpension weeniesʼ I call them), the broader public is now starting to enter the debate.
Some of the key elements of the issue are becoming better known:
- Regulatory structures, court decisions, and accounting requirements are not friendly to sustaining pension plans.
- Defined Benefit plan costs frequently are set too low for stable funding. The resulting volatility, among other reasons, has led to fewer DB plans continuing and essentially no new ones being created.
- The intergenerational transfer of some pension costs/risks is seen as potentially problematic and the longevity risk is attracting attention and concern.
- Individuals are recognized as needing support to manage effectively their own retirement savings, but such support is frequently lacking.
- Declining pension plan coverage in Canada has become a fact of life.
One of the challenging areas of this problem – which is sometimes mentioned, but not getting as much focus as I think it should – is the following: while private sector pension coverage is declining rapidly, especially for DB plans, public sector coverage is declining more modestly (See Chart 1).
So while the percentage of public sector employees participating in DB pension plans dropped by about 10 per cent in 13 years, over the same period the percentage of private sector DB employees dropped 30 per cent. DB private sector coverage, therefore, is now about one-quarter of the public sector coverage – it was about one-third in 1992 – with no end in sight to the growth in this profound difference. Itʼs hard to believe that this wonʼt become a flash point for pressure as it becomes more broadly known that most public sector workers are protected by relatively rich retirement arrangements partially funded by taxpayers who, themselves, have no such coverage.
In the U.S., this is starting to get more press. “Public employee pensions, one of the last bastions of guaranteed retirement plans in America, are under assault as cashstrapped state and local governments struggle to cover rising costs and as resentful taxpayers refuse to pay more to cover them,” was a quote cited in October in the L.A. Times. An Alaska state senator continued the theme: “When the private sector has to pay for the public sector packages they canʼt get themselves, youʼre going to have a lot of political and social unrest. The average homeowner, when he gets his property tax jacked up to pay his neighbourʼs benefit package, heʼs going to get upset about it.”
We are not hearing such stark messages in Canada as yet, but there are the beginnings of concern being expressed about the declining coverage issue in general and the chasm between public and private sector coverage in particular. Pension regulation across the country used to include a mandate to promote the creation, extension, and improvement of pension plans. In many jurisdictions the objective of the regulations is now simply to protect the benefits under existing plans with no increased coverage ambitions remaining. ACPM had asked politicians to amend pension statutes to include such a mandate and to actively fulfill and support it. Not much, however, has been done about these coverage questions by politicians or by anyone else.
As Canadians, and especially the pension weenies among us, we need to get this issue into open consideration before it gets the ugly spin we are starting to see in the U.S. The answers, however, are not that easy. With an aging and increasingly mobile population, a low interest rate environment, and recent periods of negative investment returns, workplace pensions in the private sector, especially single sponsor DB, seem more and more like dinosaurs. The concept of retirement in the 21st century is undergoing dramatic change and retirement systems have not been evolved to refl ect the new patterns that are starting to emerge.
There is no doubt that, whether public or private sector employees, people need adequate capital to support themselves in retirement and we need to find a practical approach to get these challenging topics considered by the right people. While there are an increasing number of Canadian conferences on the topic attended by those already in the know, this is preaching to the converted. So it behooves those of us at the front line to look for realistic ways of getting these important issues closer to solutions.
Elaine Noel-Bentley is senior director, total compensation, at Petro-Canada.
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