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Pension plans: what to know

Historic low interest rates these past few years have been great for people buying a house or a car, but they haven’t been good for private pension plans. Even as interest rates are creeping up, many of the plans we get at work are underfunded and the employer has to find a way to respond. And that means change.

People who have pension plans are seeing some of their retirement benefits cut or completely new plans that don’t guarantee a set amount upon retirement. At the same time, there’s a movement afoot to get more people and companies involved in affordable plans. Even though Canadians often rely on private pensions to sustain their retirement, many simply don’t have one. About 80 per cent of public-sector workers and close to 20 per cent of private-sector workers in Canada participate in some sort of pension scheme.

Mitch Frazer describes retirement as a three-legged stool consisting of personal savings, public pension plans (like the Canada Pension Plan), and private pension plans. “The issue of pensions has truly come to the forefront,” says Frazer, a pensions lawyer at Torys LLP and author of A Practical Guide to Private Pension Plans in Canada.

As companies struggle to meet their obligations with defined-benefit plans, which guarantee a pre-set monthly retirement income, they are looking at making plans more affordable. One option is for them to pump more money into the plans. Another is to cut some of the benefits they offer. Amendments can be made to defined-benefit plans to make them more affordable for employers, but they have to be part of collective bargaining.

Some companies have switched to the more predictable defined-contribution plans, which specify how much the employer contributes but doesn’t guarantee a set amount at the end of the day. Instead, monthly pension cheques are determined by the amount contributed and how the invested money performed over the years, putting more of the responsibility on the employee.

The trend that sees employers looking to de-risk volatile defined-benefit pension obligations is a global one, says Ian McSweeney, pensions and employee benefits lawyer with Osler Hoskin & Harcourt LLP. “There has been a real sea change” during the past five to 10 years “around the cost of defined-benefit plans, the sustainability and affordability of the plan,” he says.

The fact people are living longer and further drawing on pension plans is an additional challenge as are volatile markets in which pension plan money is invested. McSweeney says there has always been an ebb and flow, that’s the nature of pension plans, and that’s why we look at them from a long-term perspective. But there’s been a trough in that ebb and flow, particularly since the 2008 market meltdown, making it more difficult for employers to weather that storm. “Some employers have not been able to withstand it and have gone under,” he says. “In many cases the pension benefits became a huge part of the company’s budget cap. This volatility has really brought pension plans to the forefront.”

At the same time, there’s a desire to get that huge group of people working for private companies without a private pension plan involved in nest-egg building outside of RRSPs and what the government offers. Many smaller companies that have trouble retaining employees because they offer no plans are also keen to get involved in something they can afford.

That ball has already started rolling in Canada. A shared-risk model was instituted in Holland and adopted by New Brunswick in 2010. It involves a different governance structure with base-level benefits and some pre-determined steps established to follow if funding targets aren’t met. “The shared-risk plan is meant to try to accommodate the risk volatility of defined-benefit plans,” says McSweeney.

The Canadian Federation of Independent Business, which represents small- and medium-sized employers, is interested in the federal initiative in Pooled Registered Pension Plans, which requires the provinces to adopt their own legislation. In a 2011 survey, 78 per cent of federation members indicated they offered nothing to their employees. “We’re trying to encourage more coverage,” says Plamen Petkov, the federation’s vice president for Ontario. “Ideally you should have more participation.”

In Ontario, legislation has been introduced to try to fill that gap so the large group of people who have no private pension plan at all will at least have something when it comes time to retire. The Ontario Retirement Pension Plan (ORPP) would act as a top up to the CPP and is scheduled to launch in 2017 and be phased in over a two-year period. The plan, however, would not be available to all workers, as it would exclude people who are self-employed, workers whose companies have workplace pension plans, and those in federally-regulated sectors like banking, transportation and telecommunications.

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