Lessons for Canada
Unfortunately, none of these national test centres seems to have found the optimal solution to the global DB pension plan issue. The numerous provident funds in Asia and DC plans in Australia seem to be doing fairly well—they have not yet generated any horror stories such as cohorts of retirees unable to retire due to a sudden shift in investment results. The biggest controversy so far may be the level of plan expenses in many countries, since DC plans generate considerably less retirement income than DB plans for each dollar invested. One interesting initiative is the EU directive to encourage the creation of pan-European pension plans. This initiative allows an employer to create a plan in one location and cover all European employees under that single plan, thereby encouraging employee mobility and reducing administration costs. Such plans must comply with the rules from the funding authorities of the plan’s home country while still respecting some of the pension laws of other countries where employees reside or where plan beneficiaries have retired. Since the directive was implemented, countries such as Luxembourg, Ireland and Belgium have tried to create the best tax and legal environment to attract these plans. It is too early to tell which country, if any, will become the leader in this area.
The EU situation is very similar to our Canadian system, which has provincial minimums based on the members’ province of employment yet follows only one set of provincial funding rules (based on the province in which the majority of members are based). This patchwork of legislation and regulations makes the Canadian system and the pan-European pension plan directive complex. Indeed, Europe created its challenging but much-needed directive in order to deal effectively with the historical legislation and taxation of the various member countries. Canada is just one country with a single federal government, yet it has allowed each province to create its own legislation. Looking at the big picture—and given Canada’s population of 33 million versus 700 million in Europe—it’s clear that our pension landscape should have been more straightforward from the outset and desperately needs to be simplified.
But until we find better ways to enhance and preserve DB plans, employers will have to make some difficult decisions. Country by country, they must choose between assuming the risks and higher administrative costs of sponsoring DB plans, and moving to DC plans, which typically do not produce the same retirement value for each dollar spent and are less flexible as an HR tool.
It’s unlikely that pension regulators around the world will align to a common solution in the near future. They should, however, strive to make corrections to major systemic flaws. In Canada, one of the fundamental issues is the varied provincial legislation. Based on Canada’s small total population and the fact that the legislation is largely similar, there is no reason not to have pension legislation that applies across all provinces—particularly since the current system gives pension plans a bad reputation and becomes yet another argument against DB plans for Canadian employers.
However, there is some hope for the future. Three expert commissions in Ontario, Nova Scotia and, jointly, in Alberta and British Columbia, are undertaking reviews of the pension legislation in those provinces. Although it is not part of their official agenda, perhaps they will find the right balance between regulation and governance—and perhaps other provinces will also align to their findings. Introducing new legislation is yet another new government solution, but it would be a great step for DB plans in Canada. And who knows? Canada may lead the way and find the optimal solution for other countries as well.
Frédéric Létourneau is east division practice leader, international, with Watson Wyatt Worldwide. frederic.letourneau@watsonwyatt.com
