In all provinces, the painful dichotomy continues of having certain plans legislatively exempt from solvency funding rules, while other organizations see their business operations crippled by pension plan solvency funding requirements.
Uncertainty in the pension industry
For many years before the pension reform reviews, there was uncertainty in the pension industry stemming from complex rules and the absence of legislative uniformity between jurisdictions. This uncertainty was compounded by the absence of clear direction or leadership that would have elevated pension issues to the national stage to gain the focus they needed—all of the recent legislative review processes identified lack of pension coverage in Canada as a significant concern.
Various provisions, conditions and restrictions embedded in the legislation served to inhibit the creation of new plans and encourage a move away from registered plans, as plan sponsors retreated from the fiduciary and legal risks within the current system. Despite the considerable attention on the reform reviews from the industry, the media and the public, it was the market upheaval of 2008 that provided the critical catalyst for putting pensions on the national agenda.
We now see regulators and politicians jockeying for position to lead the pension reform wave—an irritating distraction from the necessary focus on the fundamental issue of coverage. Therefore, while the reviews have facilitated much broader debate on this topic, we are now faced with the considerable challenge of analyzing and digesting a massive amount of information, opinions, ideas and proposals—a process that requires co-operation, leadership and clear direction.
In addressing the issue of declining pension coverage, significant media attention focused on the JEPPS proposal to introduce a new product: the ABC Plan, in which employers and employees would be required to participate or would be enrolled automatically with the ability to opt out. Some experts feel this would add confusion as governments deal with the inevitable hurdles of sponsoring a new plan. Recent national meetings have debated expanding existing programs, most notably the Canada Pension Plan. Insurance companies have proposed alternative solutions. The noticeable lack of consensus seems to have forced the provinces back into their own corners where separate regional solutions are once again being considered.
There is also some confusion on where the regulators are going with some of the recent changes. Unlocking provisions have become more common, shrugging off a long-entrenched concern to protect members from themselves, while changes such as restrictions on solvency funding relief speak to a harder-to-understand focus on protecting the member from the plan sponsor. None of the recommendations make introducing new plans more palatable, effectively roadblocking intentions to increase pension coverage.
Consumerism, fiscal prudence and financial literacy
Despite a political and regulatory will that is seemingly engaged, policy-makers face a powerful force that has seen a general movement away from fiscal prudence on the part of Canadians. Low interest rate environments, in which savings see minimal growth while short-term borrowing is reasonably painless, have increased consumerist behaviour and shifted the population’s focus away from long-term savings. Despite the financial crisis, spending continued (albeit at a slower pace), leaving little ability for saving.
This behaviour, combined with the concerns of corporate leaders about fiduciary liability and fear-mongering related to the regulatory overburden of DB plans, does not lend itself to the expansion of pension coverage. The hot economies in western Canada over the past decade have exacerbated this issue with a focus on short-term rewards.
Therefore, this is not just a pension regulatory issue but a citizenship matter as well. The bottom line is highlighted in several of the pension reform reports: we need to increase the overall financial literacy of our population starting at a young age or the impetus of the pension reform wave won’t be powerful enough to change the big picture.
The pension reform reviews uncovered an abundance of good information and a great deal of innovative thinking, and the ensuing debate helped to raise the issue of pensions to the national stage. However, the behaviour of the major actors in the pension drama is still not aligned.
Citizens’ free spending habits continue unchecked. Employers are reluctant to disturb the status quo until they see what will come out of the reform initiatives, both locally and nationally. Plan sponsors continue to wrestle with the challenge of protecting themselves and their businesses from the liabilities and risks associated with their retirement plans.
We applaud and welcome this long overdue focus on pension reform as an issue of critical importance. There will indeed be interesting times to come.
Rosalind Gilbert is a vice-president in Aon Consulting’s retirement strategies practice in Vancouver. rosalind.gilbert@aon.ca
With contributions from Don Ireland and Murray Ferguson (Calgary), Tim McGorman (Winnipeg) and Paul Hebert (Saskatoon).
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© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the October 2009 edition of BENEFITS CANADA magazine.