The pension crisis

We have a pension crisis in Canada but because it is unfolding in slow motion few people seem to notice. Crises created by natural disasters — earthquakes, hurricanes, wildfires — and sudden and immediate. Attention is riveted on the victims and the frantic relief efforts to help them.

By contrast, the pension crisis is taking years to unfold. But it is gradually eating away at our social fabric and threatens to place immense financial strains on an aging population in the years ahead.

This crisis does not make headlines but if you read the newspapers carefully you will find new evidence of it almost every day. Last week, for example, a small item in The Globe and Mail Report on Business revealed that Canadian Pacific is targeting its burgeoning pension plan deficit in current negotiations with the Teamsters union. CP says it has had to borrow $1.3 billion in the past two years to fund the plan, an expense that is “not sustainable or desirable”.

The company wants to move to a less costly defined contribution (DC) plan for new unionized hires. Unlike defined benefit (DB) plans, a defined contribution plan does not guarantee any specific pension income at retirement. The payments are based on a combination of the amount contributed and the performance of the invested assets.

As in most of these cases, CP says it is willing to protect the pensions of current workers. It’s the new people who will be affected.

This is one of the reasons why this trend is taking so long to hit a critical stage. It will be several decades before all the current employees with DB plans reach the end of their working lives. So it won’t be until sometime after 2035 that we start to feel the real effects of this cosmic shift in the pension world.

But make no mistake about it — it’s coming. It may be hard to believe but only 38 per cent of Canadians have any kind of pension plan at all. Moreover, most of those people are in the public sector. Pension coverage among private employers is only 25 per cent. In the public sector, 84 per cent of workers have a pension plan, most of which are funded in part by taxpayer dollars.

There has already been criticism of the gap between private sector plans and what are perceived as “rich” public service plans. In a 2010 report, the Certified General Accountants Association of Canada (CGA-Canada) said: “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 2011 Pension Risk Survey published by human resources consulting firm Towers Watson reported that 51 per cent of private sector defined benefit plan respondents have now converted their plans to defined contribution for current or future employees. That was up from 42 per cent in 2008 and a press release issued by the company said there is no indication the trend is relenting.

Towers Watson described the future of defined benefit plans as being at “a tipping point”, saying that private sector employers have “crossed a pension Rubicon”. Ian Markham, Canadian Retirement Innovation Leader at Towers Watson, added: “This year’s survey results show that employers planning a conversion to DC are intent on doing so regardless of whether economic conditions improve, or a more sponsor-friendly legislative environment appears, or even in lieu of less dramatic changes to plan design or investment strategy.”

The federal government’s proposed Pooled Retirement Pension Plan (PRPP) system is intended to expand pension coverage in the private sector by introducing a low-cost, low-maintenance program for small businesses and the self-employed. But even if it finds wide acceptance — which is questionable at best — these will be DC plans with no guarantees at the end of the day. If the savings are badly managed, many people are going to be disappointed, disillusioned, and financially strapped when they retire.

There are no easy solutions to this crisis. But recognition that it exists is an essential first step. The federal and provincial governments should be given credit for at least addressing the issue, even if the initial “solution” — PRPPs — is imperfect. But a lot more work is needed.

As far as individuals are concerned, the only logical course for non-pension plan members is to increase their focus on retirement savings. In 1997, 45 per cent of employed Canadians contributed to RRSPs. By 2008, that number had dropped to 39 per cent. If that pattern continues, the crunch may come even sooner than expected.

Gordon Pape’s new book Retirement’s Harsh New Realities: Protecting Your Money in a Changing World is available for pre-publication order here.