One of the more interesting parts of the federal budget put out by Finance Minister Jim Flaherty in May was the proposal that budget surpluses should be used to help top-off the coffers of the Canada Pension Plan(CPP). But with any proposal out of Ottawa, there are differing opinions on what it could mean for plan sponsors and plan members.
The C.D. Howe Institute in Toronto recently released a report on the proposal stating that opening the door to government intervention in the CPP can “leave pensioners at the bottom and out of pocket.”
Speaking to BENEFITS CANADA, the report’s author and president of the Institute, William Robson, says there are three main reasons why he doesn’t like the proposal to move federal budget money into the CPP.
First, “the amounts of money we are talking about are not all that big, when you look at the scale of the Canada Pension Plan.” He adds the benefit from “buying down” the contribution rate by using surplus money is not that big. Second, “once you’ve put money into the Canada Pension Plan that did not come from the contributions of participants, it creates a real uncertainty in people’s minds about what the source and purpose of the money is.” Furthermore, that co-mingling of funds that are not necessarily all from CPP participants, would direct people to use that money for more than one purpose. Finally, Robson argues that once you’ve got money in the CPP from taxpayers the case against drawing the money out, other than for CPP purposes, becomes more difficult to fight against.
Robson admits this could take some time and might not happen until very far down the road, however, he still says the notion of adding federal money and then only drawing it out for one purpose becomes unrealistic. Says Robson, “It’s possible to imagine circumstances where the federal government says, ‘look we’ve put money into this and therefore now we are entitled to take it out.'”
But not everyone feels the same way about it. Some, like Morneau Sobeco’s manager, pensions, Greg Hurst believes the proposal is a step in the right direction and can not only reduce contributions for the public CPP but can also help plan sponsors and members with their private pension plans. “All other things being equal, it sounds like a positive proposition for both employers and employees who pay those contributions,” says Hurst.
He adds that plan sponsors could take any savings realized from CPP contributions and use it to fund underfunded defined benefit pension plans. “Underfunded pension plans aren’t going to go away, except by allocating dollars to it, so it makes dollars available for that purpose which would be a good thing.”
Hurst goes on to say the potential cost savings could help plan sponsors with defined contribution(DC)plans as well. It would allow the sponsors and employees to put further money into or help start a DC plan.
As far as the C.D. Howe Institute’s worry of having the government eyeing the CPP for other purposes, Hurst says that worry has been and is always present. “If the government puts surplus funds in [the CPP] I don’t see it necessarily as being requisite of having the possibility of a two way flow of the money.” He says that just because the government might put money into the CPP, it doesn’t mean they have control over governance or how the money flows out of the plan. He maintains that the arms-length nature of the Canada Pension Plan Investment Board need not necessarily be compromised.
Despite the various takes on the debate, there is one thing, however, on which the two camps agree: the model of the CPPIB and its arms length nature from government. Both Hurst and Robson maintain the model of the Board should remain independent and if money were to come in from federal surpluses it should be earmarked for pension only.
Leading by example
With endless worry about insufficient pensions it’s hard to imagine anyone would volunteer for a 29% cut in their pension.
Nortel Networks Corp’s chief executive officer Mike Zafirovski did just that last month. Instead of receiving a $500,000 a year pension he will now receive $355,000 a year. All other terms and conditions of the special lifetime annual pension benefit are unchanged.
Zafirovski’s announcement was made just eight days after the telecommunications equipment manufacturer unveiled plans to reduce its pension and retiree health benefits and cut 1,100 jobs. On July 1, post-retirement healthcare benefits were eliminated for employees under 50 with less than five years of service. As of Jan. 1, 2008 all North American employees in defined benefit (DB)plans will be moved to defined contribution(DC)plans. Under the DC plan, employees will automatically contribute 2% of their eligible earnings and Nortel will match 50% of employee contributions up to 6%.
“With these changes, we are redesigning our pension plans to reduce the overall cost of the program while still ensuring we offer a competitive pension plan and overall benefits program in alignment with industry-benchmarked companies,” Dennis Carey, Nortel executive vice president, corporate operations said in a statement.
The changes are expected to save Nortel US$100 million in annual pension costs by 2008 and reduce its unfunded pension liability by approximately US$400 million by 2012.
WorldviewIRISH PENSION GAP
REFORMS IN SPAIN
EAST MEETS WEST