When Stephen Harper’s minority government took over in Ottawa early last year, 72% of federally regulated defined benefit(DB)plans had a solvency deficit as of June 2005, according to the Office of the Superintendent of Financial Institutions. Private-sector plans faced large shortfalls of their own. On the first anniversary of the Conservative government, it’s clear there has been more activity around pension issues, says Steve Bonnar, principal at Towers Perrin in Toronto, “but it’s a first step only.”

One of the major changes came late last year when the government passed temporary measures to help federally regulated DB plans re-establish full funding. These included permitting plan sponsors to consolidate solvency payment schedules and amortize the entire existing deficit over a single, new, five-year period. The rules also allow payment schedules to be increased to 10 years if there is a buy-in from plan members and retirees, and if payments are secured by a letter of credit.

“They clearly acted on solvency schedules,” says Jerry Loterman of Hewitt’s retirement practice in Toronto. “The only problem is because they have very limited jurisdiction on the plans they regulate, it had limited scope.” If provinces had followed the government’s example, the industry would have felt more relief.

Bonnar believes the proposed funding changes addressed the deficit situation, but not for the long term. He wants a more permanent solution such as the government legislating minimum levels of contribution based on the investment risk of a plan to create safety margins. Since the way a pension plan is invested affects the financial risk, the contribution requirements for employers should reflect that risk. “If plan assets are invested in a typical 60% equity and 40% fixed income allocation, perhaps a safety margin of 10% would be needed.” That way, plans can mitigate the risk of assets moving down when liabilities move up. But this, Bonnar acknowledges, is not possible until there are resolutions around the ownership of surpluses. Scott Perkin, president of the Association of Canadian Pension Management in Toronto, believes this issue should be addressed next by the government.

The second major move by the Conservatives was breaking their income trust promise by introducing tax changes to prevent further loss of revenue. The move upset many but is generally viewed as having been necessary. “It was pretty clear the government had to take action to avoid significant tax drain,” says Bonnar.

Liberal finance critic John McCallum is quick to criticize the Conservatives for breaking their promise on income trusts, but he has no proposals for what the Liberals would do instead. The party’s new leader, Stephane Dion, is calling for a new retirement savings vehicle to supplement CPP/QPP that would be open to stay-at-home parents, those who are selfemployed or those working but not offered a pension.

Not surprisingly, NDP leader, Jack Layton, wants to see more protection for workers’ pensions in case of bankruptcy, specifically in the form of a wage protection fund. However, he isn’t in support of the new funding relief rules. “We’re a little concerned about it because it allows the companies to put off longer on an obligation. We’re watching it very closely to make sure this isn’t going to hurt the pensioners.”

The Conservatives made changes to pension rules affecting individual Canadians this year. They increased the pension income tax deduction from $1,000 to $2,000 and have allowed income splitting for couples and partners, both of which will benefit pensioners. Perkin would like to see the government continue to help working Canadians by increasing the registered pension plan and registered retirement savings plan limits.

What the Conservatives have yet to deliver on is the national securities regulator. “I don’t think the political will is there because the provinces would have to give up jurisdiction and then [it’s a] constitutional fight that no one really wants to get into,” says Loterman.

Harper talked a lot about pension issues and made some changes in 2006. What is critical for this year, says Bonnar, is to carry last year’s momentum around discussion and change into 2007. “There needs to be continuing and ongoing action to preserve and encourage employment pension arrangements and to provide employers with both DB and DC as being viable options.”

 

Report Card

Term: First Year
Name: Stephen Harper
Institution: Government of Canada
Grade: Pass

Subject: Solvency relief
Comments: Took active role in developing productive measures to address issues. However, industry insiders feel more is needed.
Grade: B-

Subject: Healthcare
Comments: Opportunity for improvement in this area. Has limited enthusiasm for and participation in solving problems. Relies too much on provinces to create solutions..
Grade: D

Subject: Income trusts
Comments: Failure to keep promise in this area. However, took action to prevent future tax leaks and has accepted responsibility for behaviour. Should make an effort in future to avoid such situations by keeping promises..
Grade: C

Subject: Income splitting
Comments: Has shown a good attitude toward improving this area. Has been helpful for some Canadians but next time should try to develop more inclusive strategies..
Grade: B-

Subject: National regulator
Comments: Enjoys participation in conversation on topic. Shows an encouraging desire to develop such a system, but has not show a full commitment on producing quality results.
Grade: C+

 

Hurry up and wait

In January, the Conservative government announced a 15-month pilot project aimed at establishing a wait-times database for children’s surgeries. This comes after the deadline Stephen Harper laid out in his election campaign when he promised to meet wait-time benchmarks.

Last year, Federal Health Minister Tony Clement met periodically with Canada’s health ministers in the hope of encouraging provinces to launch pilot projects of their own, but no agreements have been made. The attempts at reaching benchmarks have not been as productive as Canadians have wanted.

Late last year, The Fraser Institute released its 16th annual waiting-list survey and found that Canada-wide waiting increased in 2006. “Compared to 1993, waiting time in 2006 is 91% longer,” wrote the authors of Waiting Your Turn: Hospital Waiting Lists in Canada. “Moreover, academic studies of waiting times have found that Canadians wait longer than Americans, Germans, and Swedes for cardiac care.”

“Wait times hasn’t been honoured,” says Jack Layton, leader of the NDP, adding that Harper’s government has not addressed the issue in a substantial way or provided practical solutions for reducing wait times. This includes the new pilot program, which has been criticized for not involving the provinces that have responsibility for healthcare.

“The Conservatives seem to think they can get the provinces to spend a lot of money to do a wait-time guarantee without giving any money to the provinces,” says Liberal finance critic John McCallum. “The federal government has to put up some money.”

According to Waiting Your Turn, waiting time between a referral from a general practitioner and the treatment increased from 17.7 weeks in 2005 to 17.8 weeks in 2006. Among the provinces, New Brunswick recorded the longest total wait at 31.9 weeks, and the next longest waits were found in Saskatchewan(28.5 weeks)and Prince Edward Island (25.8 weeks). Ontario had the shortest total wait at 14.9 weeks, with Alberta(16.3 weeks)and Manitoba (18 weeks)the next shortest.

“We need much more systematic reforms to fix the issues so those wait times can be reduced,” says Layton. He suggests the government should first focus on ensuring every Canadian has access to a family physician to ensure early intervention and treatment.

Clement will resume meeting with health ministers later this month to continue discussions on wait times.—Leigh Doyle

 

Oh behave

Participant-directed defined contribution(DC) plans have offered behavioural economists a near-perfect laboratory to uncover new findings on how people actually make decisions as opposed to how they should make decisions about retirement planning, according to a report by the Washington, D.C.-based Employee Benefit Research Institute.

Contemporary behaviourists have repeatedly demonstrated workers’ tendency to follow whatever retirement planning path provides the least resistance. While an automatic enrollment plan increases plan participation, enrollees exhibit what is called default behaviour, which is the tendency to retain the plan’s default contribution rate and investment(a money market fund).

More choice isn’t always better as researchers have shown that more choice can have a negative effect on retirement saving outcomes. The individual probability of participation drops by about 2% for every 10 investment options added to a plan. A greater number of investment options can also increase allocations to more conservative options. For every additional 10 funds, researchers estimate that bond and money market fund allocations rise by 3.28 percentage points, and the probability that a participant puts all his money in money market and bond funds increases by 2.87 percentage points even though there are more equity funds than conservative funds to choose from.

To prevent participants from making bad choices, behaviourists say workers benefit from a simplified enrollment process, required active decisions could increase participation and deferral rates, and other plan features such as automatic-deferral escalation are effective in increasing participant savings rates. —Craig Sebastiano

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