Ottawa to propose new reform on pension plans
The Canadian PressWednesday, April 23, 2014
OTTAWA - Ottawa is preparing to announce a proposal to create yet another new pension scheme designed to occupy a middle ground between defined-benefit plans, generally favoured by workers, and defined-contribution plans favoured by employers.
The announcement for a so-called target benefit plan, or shared-risk plan, would apply to Crown corporations and federally regulated workers is being sold as a proposal for "affordable and sustainable" lifetime pensions.
Government sources say Kevin Sorenson, minister of state for finance, will call for public consultations on the scheme in a speech at the Economic Club of Canada in Toronto on Thursday.
Details are scare, but target-benefit plans are generally advertised as capable of adjusting the funding-benefits formula to account for bad times, such as the recent economic crisis that put many defined-benefit plans in jeopardy.
C.D. Howe Institute president Bill Robson says there are a wide number of permutations that can be written into the plans, including limiting indexing as has occurred under the Ontario teacher's plan, all the way to lowering actual benefits once a plan's funding level falls below a pre-proscribed threshold. As well, the plans could allow for a portion of benefits to be guaranteed and a portion based on investment returns.
"I think the problem with classic defined benefit plans is that they are a little brittle and can't adjust for changing circumstances," he said.
Ottawa has announced several recent reforms to its public-service pension plan, including hiking contributions, but has kept benefits, which are fully indexed for inflation, largely untouched.
Dan Kelly of the Canadian Federation of Independent Business, which has been influential on Ottawa's thinking on the pension issue, said New Brunswick is leading the way in the area and has put legislation in place to negotiate with their public service unions.
"We're very supportive of this because the target benefit might be a nice compromise between a defined-contribution and a defined-benefit plan," he said.
"That model may be a way out of jail for many government entities that are trapped under the weight of an expensive and largely unfunded public-sector defined-benefit pension plan."
The announcement Thursday likely won't set out details, and won't affect the core public service. At present, it is intended to be introduced at Crown corporations and on a voluntary basis in federally regulated transportation, banking and telecommunications sectors.
Sorenson is also unlikely to relax his opposition to expanding the Canada Pension Plan, an initiative favoured by Ontario and Prince Edward Island but one that Ottawa believes will cost jobs because it would entail raising premiums on workers and firms.
Ontario Finance Minister Charles Sousa said in a speech Wednesday that his province is still planning to go it alone with a CPP top-off if necessary, accusing Sorenson of misrepresenting the issue with statements that it could cost up to 70,000 jobs.
He notes that a federal report, obtained by The Canadian Press, calculated the job losses on premium increases being introduced all at once, while all provincial proposals call for long phase-in periods.
The province also released a research paper co-authored by former Bank of Canada governor David Dodge that backed its call for enhancing CPP.
Dodge, who co-wrote the report with Richard Dion, a senior business adviser with Bennett Jones, concluded the damage to the economy from higher premiums would be minimal and more than made up for in future benefits.
"An increase in household saving would exert a relatively small and short-lived drag on the economy while its positive structural impact on growth would be long-lived and could be relatively quite significant, but only manifest after a period of time," the report concludes.
In December, then finance minister Jim Flaherty and Sorenson rejected a joint Ontario-Prince Edward Island proposal for CPP expansion, maintaining that the economy was too fragile.
Ironically, Dodge and Dion calculate that recent government cost-cutting has done exactly what Flaherty and Sorensen claim to have feared from CPP expansion.
"Efforts by the federal government in recent years to eliminate its budget deficit have reduced aggregate demand at a time when the economy has been operating below potential," they note.
"This reduction was likely greater than the modest negative impact than an increase in household saving due to CPP enhancement, if implemented, would have."
Kelly said his organization would vehemently oppose any measure to increase premiums on firms. He said there is no study that shows there would be no effect on the economy.