When the pension reform process started about seven years ago, the focus was on pillar three, meaning employer-sponsored pension plans. It was hoped that a little tinkering would suffice to make pension plans more sustainable and, hence, encourage more employers to adopt them. It’s fair to say that this aspiration did not pan out given that pension coverage in Canada’s private sector is at the lowest point in half a century. My estimate is 21% of the paid private sector workforce, and that includes coverage in both DB and DC plans.

About four years ago, pension experts finally conceded that a strictly voluntary pension system couldn’t solve the coverage problem. It could be remedied only if employers were required to offer a plan in the workplace and if enrollment of employees was automatic. To this end, the federal government created pooled registered pension plans (PRPPs) and strongly encouraged the provinces to adopt them. Initial enthusiasm, however, gradually gave way to skepticism and then outright apathy.

There were two reasons for this. First, the Ontario government preferred an expanded Canada Pension Plan (CPP) and was in no mood to promote PRPPs instead. This set the tone for the other provinces to drag their feet on PRPPs (though Quebec is about to launch its own version of PRPPs this year). Second, no one except Quebec could see their way clear to making PRPPs mandatory, which means they may eventually find themselves on the dust heap along with voluntary pension programs.

PRPPs may yet succeed if the concept is tweaked, but this is not the most likely outcome of pension reform. More likely, PRPPs will remain irrelevant and the gap in coverage among middle-income workers will eventually be filled by an expanded CPP or perhaps an assortment of provincial supplementary plans; both of these are pillar two solutions. It’s highly probable that one of these solutions will eventually be adopted. Otherwise, our leaders will have to concede that a pension reform process that has dragged on for nearly a decade has utterly failed.

Assuming failure is not an option, one has to wonder as to the eventual fate of employer-sponsored pension plans. My prediction is that they will continue to exist in the public sector, but in the private sector, only a select group—possibly as low as 10%—will have access to a pension plan in the mid-term future. At 21%, the current coverage level in the private sector is not stable since an estimated 40% to 50% of existing DB pension plans are closed to new members. These figures include both DB and DC. Coverage in DB plans alone may fall to just 5% of workers in the private sector, and, if this happens, one has to wonder whether the percentage will fall to 0% because of peer pressure alone.

As a result, employers will need to rethink why they sponsor a pension plan. The traditional reason, to help ease employers out of the workforce, becomes much less compelling if the gap for middle-income workers is filled in by other means (and note that lower-income workers do not need private pension coverage at all to maintain their standard of living going into retirement). As for employers that still want a means to induce early retirement in selective situations, a one-time severance payment is not only cheaper than offering early retirement incentives in a DB plan, it’s also a more effective way of targeting the non-performers.

In the case of collectively bargained plans, it may seem that employers have no choice but to continue providing coverage, but that may not be true if the pension promise fully priced in the risk the sponsor takes on. (See Malcolm Hamilton’s paper Evaluating Public Sector Pension Plans: How Much Do They Really Cost?) On a risk-adjusted basis, DB pensions are much more expensive than employers are given credit for. If the true cost were to be reflected in employees’ compensation, some unions might opt for a slimmer DC or target benefit pension and more cash instead.

Still assuming pension coverage is improved within pillar two, the better reason for employers to keep on offering a pension plan will be to become an employer of choice. Pensions may become more of a differentiator when competing for the best talent in the job market than is the case now. Be careful what you wish for, though. The job seeker who is attracted by a risk-free retirement that includes generous early retirement benefits may not be a bold, entrepreneurial risk-taker you might be looking for. If you are one of the 10% that still offers a pension plan and you want to use it as a differentiator, make sure the design features are aligned with the company’s values and philosophy.

Fred Vettese is chief actuary of Morneau Shepell. These are the views of the author and not necessarily those of Morneau Shepell or Benefits Canada.
Copyright © 2017 Transcontinental Media G.P. Originally published on benefitscanada.com

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Jim Cochrane:

Its amazing to me that we personalize motives of private sponsors of plans years after the courts In Canada have emphatically ruled that pensions are deferred wages. It is also amazing that this debate has been conducted without hearing from the Profession that has had the greatest influence on Pensions and Private organizations. CA , CMA and CGA professionals who have far more influence on decisions than any one else in the last 40 years. , Was that when ERISA removed them from those elegible to sign a cost certificate?Pity? IMO Fred your suggestion in the last paragraph, to parallel corporate goals, would have been instinctive by now if we had creatively involved the accounting.

Wednesday, March 26 at 2:33 pm | Reply

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