Chronicling the Canadian pension system’s constant state of crisis

It seems the current pension crisis — whether it be over reform of the Canada Pension Plan or high levels of underfunding among private plans — is always the most significant one yet.

But as past issues of Benefits Canada going all the way back to the first one in 1977 show, alarm about the future of the pension system has been a long-standing feature of the industry. When the magazine first launched in March 1977, the combined CPP contribution rate was just 3.6 per cent. And as actuary Geoffrey Calvert pointed out in that issue, trouble was on the horizon. Referring to figures from the federal government’s chief actuary, he noted that if the contribution rate were to remain at 3.6 per cent, the plan would have had an almost $13-billion shortfall by 2010 alone. Instead, a CPP actuarial valuation a few years ago showed the plan had net cash flow, not including investment income, of almost $3.9 billion in 2010. The decision to boost the contribution rate to 9.9 per cent, of course, was a big help in the turnaround.

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So reform of the CPP and the Quebec Pension Plan has been on the agenda for a long time. And while it’s common to lament the decline of defined benefit pension plans and romanticize their bigger presence among the private sector workforce in 1977, it’s worth pointing out that there was major concern about their inadequacy in those days.

Even in that first issue, articles touted group registered retirement savings plans as a good alternative for the pension system. Employees, a writer suggested, could potentially do better by investing their own money. And the worries over the pension system led to years of debate over how to reform the rules to improve benefit adequacy. Of particular concern were vesting rules that typically required members to be at least 45 years old and have 10 years of service in order to safeguard benefits should their employment terminate before retirement. Indexing benefits to inflation was another big issue. While low interest rates in the current environment have been a constant concern for pension plans for years, the worry then was that high inflation would consistently erode the value of retirees’ benefits.

Reports, reports, reports

The concerns led to a succession of reports about how to reform the pension system in Canada. From the federal task force on retirement income policy to the Royal Commission on the Status of Pensions in Ontario, the industry had plenty to debate in the early 1980s. Interestingly, the royal commission included a recommendation to set up the Provincial Universal Retirement System to provide for a mandatory retirement savings plan for all workers aged 18 to 64.

Similar to the Ontario Retirement Pension Plan that would spur major debate more recently, the earlier proposal suggested employer contributions in the area of two per cent (with employees putting in up to two per cent as well). While there were key differences with the ORPP, including the fact that employees would have their own account and be able to decide how to invest their money, the 1980 proposal aimed to address a similar concern about income replacement rates and mandatory coverage. Like the ORPP, however, it never became reality.

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As the debate raged on, Manitoba was the first province to move on some of the issues. In 1983, it moved to require five-year vesting by Jan. 1, 1985, with a plan to boost it once again to two years by 1990. The 1980s saw provinces improve pension vesting one after another, with Ontario moving to a two-year provision and, eventually, immediate vesting by 2012. In the meantime, yet another report, this one headed up by former MP Doug Frith, addressed long-abandoned ideas such as pensions for homemakers and mandatory inflation protection. Perhaps ironically, Frith also touted the inevitability of the move towards a more defined contribution approach through money purchase plans.

The surplus debate

In the meantime, governments moved on CPP reform in the mid-1980s with a plan that would see contribution rates rise to a combined 7.6 per cent by 2011. But as they finally got around to implementing reforms on issues like vesting periods and coverage for part-time workers, the 1980s gave way to years of debate over pension surpluses. It seems hard to imagine today at a time of worry over pension shortfalls, but by 1990, a number of plans were reporting significant surpluses. But who would get the benefit of those surpluses?

The issue played out in large part in the courts, with an Ontario judge ordering Dominion Stores Ltd. to repay $38 million in surpluses removed from a unionized employee pension plan. Litigation over surpluses would continue for years, with the Supreme Court of Canada issuing a landmark ruling on pension surpluses and contribution holidays in Schmidt v. Air Products Canada Ltd. in 1994 and the debate later heating up in Ontario once again around the distribution of pension surplus on a partial windup in a case involving Monsanto Canada Inc.

A maturing system

Besides the surplus issue, the 1980s and 1990s saw significant discussion over the creation of the pension adjustment to ensure RRSP limits reflected contributions from other retirement vehicles such as registered pension plans. The developments were all part of a maturing of the pension system that saw the rules become more complex over time, a trend sometimes blamed for pushing employers away from pension plans altogether or to simpler alternatives like group RRSPs. And while the industry would love to see at least some simplification of the pension system through the creation of national rules, it did see some progress with the 2004 release of the capital accumulation plan guidelines.

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Plan sponsors, however, have continued to grapple with their pension plans. The economic crisis of 2008/09 wreaked havoc on pension plans, helping to push companies like Air Canada into serious financial troubles. Governments, however, are once again taking steps to ease the burden, with Quebec leading the way by lifting solvency funding requirements in 2016 and Ontario now looking to follow suit.

The debate over the CPP, of course, continues as plan sponsors prepare for the implementation of last year’s deal to further boost the plan. But contrary to the dire scenario in 1977, the CPP is in good shape as contribution rates are well above the 3.6 per cent premium in place then. By 2025, the rate will hit a combined 11.9 per cent, with additional premiums payable on income above the year’s maximum pensionable earnings but below a projected $82,700.

So despite the bleak warnings along the way, Canada has tended to muddle through its many pension crises.

Glenn Kauth is the editor of Benefits Canada.

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