The Conservative government's proposed new hybrid pension plan is winning praise from some pension experts, but many critics warn that it fails to address Canada's savings problem and could leave many worse off.
Extensive details on a proposed target benefit plan were released Thursday that would see federal legislation lay out rules as to what these funds would look like and how they should be managed.
Many pension experts have favoured target benefit plans, and have long urged both federal and provincial governments to introduce legislation allowing them in the private sector. They argue that target benefit plans would help slow the trend of shutting down traditional defined benefit plans and converting workers into savings plans known as defined contribution plans, which do not pay a guaranteed level of income in retirement.
The new proposal would see employees and employers work together to govern a plan in which contributions are managed in order to provide a targeted payout for life in retirement. If the fund underperforms expectations, joint decisions would be made about reducing benefits, raising contributions, or both. The federal proposal also outlines how pension surpluses could be managed.
However, Ottawa's latest proposal would only affect people working at federal Crown corporations or federally regulated companies such as banks or transportation companies, of which about one million currently have some form of workplace pension.
That means the move will not affect most Canadians and could see some companies water down their traditional pensions to the new target benefit approach.
Many independent reports have concluded that middle-income Canadians are not saving enough to maintain their current lifestyles in retirement. That has prompted many experts – including former Bank of Canada governor David Dodge – to call for an expanded Canada Pension Plan that would force Canadians to save more.
Federal Conservatives debated that option for several years, but now strongly reject the idea over concern that higher payroll premiums will hurt the economy.
Advocates for an expanded CPP – including the government of Ontario, the seniors advocacy group CARP, the Canadian Labour Congress, federal public service unions and the opposition NDP and Liberals – all dismissed Thursday's announcement as an effort to distract attention from Ottawa's decision not to move on CPP.
"It's astonishing to us when the solution is right in front of them," said Ken Georgetti, the president of the Canadian Labour Congress. "People need certainty in retirement, not risk. It's encouraging the move away from [defined benefit] plans and that's just not good leadership."
Meanwhile Denis Lemelin, president of the Canadian Union of Postal Workers, said he fears the government will eliminate defined benefit plans for employees at Canada Post and other Crown corporations. "We're really worried about this announcement," he said.
Setting aside the debate over CPP, numerous pension experts said Ottawa's approach is a positive responseto the fact that many companies are moving away from defined benefit plans.
Claude Lamoureux, former chief executive officer of the Ontario Teachers' Pension Plan, said Thursday that he supports the federal government's move as a way of making traditional pension plans more sustainable. Mr. Lamoureux said experience has shown that workers in defined contribution plans end up with a pension that is one-third to one-half of the level of people in an ordinary private sector defined benefit pension plan, so more needs to be done to save a more traditional pension model.
"Retirees have to participate in the risk. The risk is not just decreasing the benefit – a lot of times if you have really good years, you're going to have more money than you know what to do with. So it's symmetrical – you could increase the benefit, too," he said.
Minister of State for Finance Kevin Sorenson unveiled the proposal Thursday in a speech to the Economic Club of Canada, while Finance Canada released a 37-page consultation paper outlining how the plan would work.
Mr. Sorenson did not say whether the Conservative government will use the legislation to convert pensions into target benefit plans at Crown corporations.
Asked about the government's intentions, he told reporters he is waiting to see what emerges during a 60-day comment period.
While target benefit plans can offer a less secure benefit for workers, Mr. Sorenson said they will instead protect workers by offering a better alternative than converting into defined contribution plans.
"We believe target benefit plans can meet a lot of the concerns that employers and employees have," he said.
He said the government sees many pension plans with funding difficulties and wants to help "make sure their solvency is there and they are able to meet their requirements."