Despite the widespread acceptance that major fixes are needed if pension funds are to meet their obligations to retiring baby boomers, governments have not done enough to ensure the funds’ viability.
Pension reform is an enterprise for those with patience. Major change typically happens only once every few decades. That’s why the period since the financial crisis of 2008 has been so remarkable: it offered a perfect storm of economic, political and psychological conditions for the possibility of real reform.
The 2008 market crash fuelled a feeling of retirement insecurity among younger and older generations. Concern about whether there would be enough — or any — pension funds to live on brought at least talk of reform from a technical, back-burner issue to a politically charged priority, with governments across the country attempting some version of pension overhaul.
It’s been four years since Lehman Brothers failed. So how successful have we been at achieving pension reform?
Let’s start with the positive. Several governments, including the federal government, Ontario, British Columbia, and Nova Scotia, have passed meaningful legislation to update the rules governing defined-benefit plans. Many of those laws had not been updated in decades. These reforms provide much-needed clarity, flexibility, and prudence in the regulation of pension plans.
As well, governments appropriately mitigated the worst of the recession’s impact on pension plan members and the companies that sponsor them. Companies were offered more time to make pension payments, freeing up cash to be redirected to hiring and capital investments. And government intervention helped avoid a catastrophic reduction in retirement security for pensioners at GM, Chrysler and Nortel.
We can also claim progress simply by having raised the debate about pensions to a higher level of awareness. Citizens, policy-makers and stakeholders now have a better understanding of our retirement income system and the options for improving it. More and better-informed media coverage has helped: in the first six months of 2012, over 12,000 news articles mentioned the word “pension” — three times the number of similar articles from the first six months of 2002. A flurry of research by expert panels, academics and practitioners has broadened the evidence base about the health of our system, and about the nature of the very real problem we will face in the future, given weaker market returns and the rapidly flagging willingness (and ability) of employers to bear the risk of their workers’ longevity.
Finally, no major harm has been done to our pension system, a system that ought to be — perhaps even more than our banking system — a source of pride for Canadians. The fundamentals of that system, which has allowed us to dramatically decrease seniors’ poverty without it being a fiscal drag on governments, remain in place. This is more than can be said for the retirement regimes in many other rich countries.
Despite these positive elements, it’s hard not to come away with a sense of missed opportunity. The flip side of the fact that we have done the system no major harm is the fact that it looks much the same today as it did before the crisis. The reforms up until now have not made the system significantly more secure, more sustainable or more adequate. Reform of the Canada Pension Plan (CPP) has lost steam. Reform of private pensions has been slower and less bold than many hoped. And the primary measure to boost the retirement security of pension “have-nots” — the federal Pooled Registered Pension Plan (PRPP) — is regarded by many experts as not enough to move the needle.
Another disappointment is that much of the debate has occurred in silos. Private pension reform has been largely left to the provinces. Changes to Old Age Security (OAS) were made within the cone of silence of the federal budget. Pensions for public-sector workers have been reformed on a jurisdiction-by-jurisdiction basis. Collaboration has occurred only where the law requires it: reform of the CPP, and the relatively brief effort to develop more innovative savings schemes that ended with the federal PRPP and its provincial variations.
The pension question has not been framed broadly enough. The problem is one of ensuring adequate retirement income for the retirees of the future, who face a lower likelihood of having a secure pension through their work than their parents did. This applies to private- and public-sector pensions, the CPP, the OAS, the Guaranteed Income Supplement (GIS) and the personal income tax policies such as Tax Free Savings Accounts and RRSPs, which aim to encourage saving. Yet it took governments some time to conclude that we face a challenge to the broader retirement income system, rather than to one or two of its constituent parts. Even then there was a tendency to deal with the various components of the system on a piecemeal basis, an approach that can slow down reform, hinder coordination and make it easy for leaders to overlook key parts of the problem.
Overall, then, despite some successes, the promise of this round of pension reform remains unfulfilled. And there is some evidence that appetite for reform is flagging.
Giving up on this round of reform would be a serious mistake. The economic and fiscal troubles that created a window for reform several years ago continue to confront us today. And a public that has been demanding pension reform for the past several years does not appear ready to congratulate governments for a job well done.
Here are three initiatives that governments could seize to get reform back on track.
First, there should be a concerted effort to reach agreement on reforming the CPP. The review that began over two years ago should be completed, with the federal government playing a more active role in promoting reform and leading the way toward a compromise among provinces and other interests (including labour and the business community).
A modest increase to the CPP would still be the most effective response to pension adequacy issue, and if other elements of a bargain are required to secure the agreement of right-leaning governments (such as changes to the retirement age, or making contributions to an additional tier of the CPP voluntary or not fully matched by the employer), those should be on the table too.
Second, reforming the CPP should be supplemented by new voluntary schemes. Building on the lead taken by the previous Quebec government, with its Voluntary Retirement Savings Plan (VRSP) (although the Marois government appears unwilling to implement the VRSP), provinces should act within their jurisdiction to beef up the federal government’s proposed PRPP for those with no pension coverage.
Provinces could offer automatic enrolment for employees, could mandate employers above a certain size to offer a plan and could regulate investment fees more strictly than the federal proposal does. Governments could collaborate and offer a common plan designed to apply across provinces, making it more likely that private providers will offer the product, and also making it easier for citizens to move their plan from one province to another.
Finally, governments could adopt a more collaborative approach to a challenge they all face: public-sector pensions. Fiscal constraint makes reform inevitable, but it need not and should not mean abandoning the defined-benefit model, which has served Canada very well. The question is whether decision-makers can muster the creativity and diplomacy needed to sustain the strengths of our internationally recognized public pension plans while addressing this fiscal imperative.
Reform of the pension system has lost steam.
Sustaining our public pension plans in today’s difficult investment climate will require an even greater focus on generating the greatest value for every dollar of pension investment. In some cases this will mean larger plans. It will also require lower levels of benefits and new benefit structures, with shared-risk and conditionally indexed plans becoming more common. All of this is highly complex and contentious, and it would be a shame if provincial silos prevented the kind of shared learning and problem solving that, with the provinces working together with plans and their sponsors, could lead us to better solutions for the pension sustainability challenge.
Given the strengths of our system, and the world-leading talent that exists in the Canadian pension community, there is no reason why we should not strive to have the best pension system in the world. Unlike many policy goals aimed at making Canada a world leader, this one is actually realistic. But to make our retirement system an even greater source of pride for Canadians, we must salvage what remains in this round of reform, and commit to tackling the next round with even greater ambition, urgency and cooperation.