© Copyright 2006 Rogers Publishing Ltd. The following article first appeared in the September 2005 edition of BENEFITS CANADA magazine.
Discussing DB
Ralph Goodale gives his take on the DB dilemma.
By Joel Kranc

BC: How do you see the future of DB plans?
GOODALE: We are very interested to ensure the pension benefits that people are counting on are solid and secure and that people in the future have the appropriate means and opportunity to prepare for their retirement. There have been a number of studies and commentaries in the last couple of years that have raised questions about the viability or effectiveness of the present private pension system.

BC: What do you see as the Ministry of Finance’s role in the DB debate?
GOODALE: I think our initial role here is to focus attention and stimulate the discussion. And that really is the intention of a number of people, like the accountants, like the Bank of Canada and others [who] have been saying “there are potentially some problems here.” So we think it is part of our function and obligation to provide an opportunity for all interested people to focus their attention on this issue, to identify exactly what the issues are, and [to] come together, hopefully, in a good solid consensus to identify the solutions to those issues—recognizing, of course, that the vast majority of these plans fall into provincial jurisdiction. But we’ve published a paper and outlined a number of questions for the very purpose of seeking feedback from all the stakeholders on the challenges that are before us.

BC: What do you see as the problem with the DB pension issue?
GOODALE: It is interesting. When you look at the work that was done by the Certified General Accountants,(they said as of Dec. 31, 2003 [that] they would see a funding shortfall of about $160 billion if you added together all of Canada’s defined benefit pension plans), and according to existing legislation, plan sponsors have to make special payments to eliminate any shortfall within five years. But they also noted that if you make some reasonable assumptions about investment returns and long-term interest rates and so forth, that for basically healthy companies operating in healthy industries, the situation is not necessarily a cause for concern. But if you are looking at companies that are in some kind of a troubled situation…then the picture is not so sanguine. So I think it behooves us to take a look at all of these issues relating particularly to funding and the management of surpluses and deficits to make sure, to the extent that it is humanly possible to do so, that people can count on the pensions they think they’ve got.

BC: One of the suggestions in the government’s consultation paper is increasing the solvency time-span from five to 10 years. Do you see that as a potential fix to the defined benefit issue?
GOODALE: At this stage we’re not prescribing any outcome and we are certainly not committing to any specific course of action.

BC: That goes for the pension benefit guaranty suggestion, which has been a big problem for the U.S. system?
GOODALE: There’s enough commentary and there’s enough concern in the professional management community and in the corporate community and among labour organizations that it behooves all of us to examine this seriously and make sure that we’ve got the rules and regulations and the funding and the management principles in the very best possible configuration.

BC: Is there the political will to address pension related issues? It doesn’t really seem to be a mainstream topic for the media or politicians.
GOODALE: Yeah…and for most people unless they are receiving a pension. Or thought they should receive one and it turned out not to be there. A pension is something you worry about next year or next decade. I think there will be an increasing appetite to focus upon these questions and to try our very best to get them right. One recent lesson was, back in ‘97 or ‘98 when [then Finance Minister] Paul Martin and the provincial finance ministers tackled together the issues around the Canada Pension Plan(CPP).

BC: Do you think that looking at the CPP was a first step in “fixing” the DB question?
GOODALE: I think we have to be always prepared to keep examining programs of a long-term nature, like a pension system, because demographics, circumstances and lifestyles change. The biggest single demographic change in Canada’s history is the one that’s coming at us with the retirement of the baby-boomers. In order to deal with that, I think we have to be at work on a number of fronts. We have to keep bringing down the public debt so we will use fewer of our public resources just to pay debt-servicing charges and retain more flexibility to deal with future social challenges like pensions and healthcare. Things like enhancing our physical capital, our human capital, investing in education and innovation so that our next generation of wealth production will be able to keep up with the social and economic demands of the future. It means refinancing Medicare as we’re in the process of doing now with the $41 billion dollars. And it certainly means examining all of the pillars in our pension system to make sure that they are sound and secure.

BC: What is the status of income trust investment for pension plans as far as you’re concerned?
GOODALE: My concern certainly has not been diminished. And we are going to invite the business community and Canadians generally to enter into a discussion. The earlier discussion tended to focus on the degree of tax leakage and whether or not the government of Canada was or was not losing a significant amount of tax revenue.

BC: Is that still the concern you have?
GOODALE: It is a concern, but is certainly not the only concern. And I think the evidence is accumulating that the tax risk is not insignificant. We will be doing further calculations to try to be more precise as to what exactly is lost when trust revenue flows essentially into a non-taxable situation in a pension fund or some off-shore [position].

BC: Is it possible you will reinstitute some limit on pension funds’ investment in income trusts?
GOODALE: The problem remains a problem. And I’m hearing now increasingly from people on the other side of the equation saying that the present state of affairs in relation to income trusts is an unfair form of competition for those enterprises that are organized along the traditional corporate model. The question then becomes: what are the long-term implications of this form of corporate organization as compared to the traditional company model and is it a fair situation? Is it a healthy thing for the longterm [state] of the economy and so forth?

BC: As far as consultation on DB plans, is there a timeline ?
GOODALE: We’ve established a consultation period till the end of September—Sept. 15th. We will take then and digest everything that comes in the consultative process and later on in the fall indicate any conclusions that we will be able to draw from that.

BC: Do you see room for both DB and defined contribution plans or are we seeing the demise of the DB plan?
GOODALE: The issue clearly is that defined contribution plans essentially shift the risk from the plan sponsor to the plan member. And that is obviously a concern. Is it going to be successful in the long-term in terms of people’s retirement security for more and more Canadians to be relying on defined contributions as opposed to DB plans? Or is it the greater wisdom to make sure that DB plans are properly done and therefore people can have a better idea with a greater sense of security where they stand in retirement?

Joel Kranc is news editor of BENEFITS CANADA. Joel.kranc@bencan-cir.rogers.com.