Pensions: A broken promise

Despite his relative youth, Bahler is already making big sacrifices to ensure he has enough money saved to cover his golden years. He and his wife scrimped and saved so they could pay off the mortgage on their first home in just six years. To save money, Bahler used to cut his neighbour’s grass in exchange for free haircuts, and his family doesn’t have cable TV. To make sure he’ll have enough to retire on, Bahler has tried to teach himself the ins and outs of investing. He’s partial to GICs because he likes the security, although he knows the return on investment is low.

Some might say he’s worrying too much, but Bahler would counter that people in prior generations didn’t have to worry about retirement the way he does. Things have changed a lot since the 1970s, when big companies such as Bell, General Motors and Stelco offered their workers the best gold-plated defined benefit pensions North America has ever seen. Today’s workers will live longer and thus have to fund longer retirements, but most of them don’t have a pension plan at all. If they do, it’s a defined contribution plan, which can be little more than a fancy group RRSP. If the markets do well, you’ll be okay, but if not, you’re out of luck.

The Cadillac of pension plans, the defined benefit plan, is fading fast. Thirty years ago, 31% of workers in the private sector were enrolled in defined benefit pension plans. Now, only 16% of workers in the private sector have them and that percentage is getting smaller every year. If you’re just starting out in the private sector today, you probably shouldn’t expect to ever get one. And the younger you are, the less chance you have of ever collecting a pension, says Harry Arthurs, the former dean of Osgoode Hall Law School and president of York University, who headed up an Ontario government commission on pensions last year. “If you’re 30 or 40 now, it’ll be pretty slim.”

Already, 74% of workers in the private sector are responsible for funding their retirement on their own. There hasn’t been a huge outcry about the loss of the pension plan, but that’s largely because younger Canadians have no idea what they’re losing. Surveys find that most believe they’ll be just fine in retirement without a pension. They seem to think that they can cobble together enough in their own RRSPs to live as well as their parents are now living in retirement. But many are being too optimistic. The defined pension plans their parents received are typically worth much more than most people realize — often between $500,000 and $1 million each. Most Canadians without a pension won’t be able to save up anywhere close to that much in their RRSPs. Unless there’s a drastic overhaul in the pension system, it means that younger Canadians will struggle harder and harder to save enough — and even then, many will fall short.

When the stock market collapsed in the fall of 2008, it didn’t just hurt individual investors. Pension plans were decimated too. Many plans were underfunded even in those heady days before the crash, and now they’re in serious danger. Even big, supposedly safe Canadian stalwarts now have defined benefit pension shortfalls not in the millions, but in the billions of dollars. Bombardier’s pension is now underfunded by $1.6 billion, or 30%. Manulife Financial’s pension is underfunded by $1 billion, or 28%. BCE’s pension is underfunded by $2.1 billion, Imperial Oil’s pension is underfunded by $824 million, and the Canadian Oil Sands Trust pension is underfunded by $215 million, or 43%. Watson Wyatt Worldwide, a pension consulting firm, estimates the average company pension plan in Canada is now 20% underfunded. In total, the solvency deficit is $50 billion.

This shortfall couldn’t come at a worse time. The first wave of the baby boom generation is hitting retirement age. Many companies are now trying to meet their growing pension obligations while struggling to remain profitable through the recession. In cases where companies have filed for protection from creditors, such as Nortel, employees and pensioners are lumped in with the other creditors to try to collect the money they were promised. Most will be lucky if they get 70% of what they’re owed.

Meanwhile, the changing demographics of the Canadian workforce are taking their toll. Big pensions are falling apart as workforces are slashed and the number of pensioners balloons. When General Motors first started offering pensions it had a workforce in the tens of thousands in Canada, and hardly a soul collecting benefits. Just before it went into bankruptcy protection in 2009, GM had only one active employee paying in to the plan for every three retirees collecting. When you factor in rapidly disappearing union jobs, an aging workforce and retirements that have stretched out from five or 10 years to 25 or 30 years, it’s not surprising that many large companies are thinking about getting out of the pension business altogether. “As the population ages and the number of retirees increases, the defined benefit plan is becoming the tail that wags the dog,” says James Pierlot, a lawyer and expert on pensions with Towers Perrin in Toronto. “Many employers are saying that in the current regulatory environment, they simply can’t afford to take on all the risk associated with funding these plans.”

If pension plans do disappear, theoretically there’s nothing to worry about, because back in late 1950s the federal government came up with a solution: the RRSP. Registered Retirement Savings Plans were supposed be the easy, tax-free way for Canadians to accumulate a tidy retirement nest egg over their working lives. All you had to do was take a bit of your paycheque and invest. By the time you reached 65, your investments would have grown enough to provide a comfortable retirement.

RRSPs proved to be very popular, but in a lot of ways they haven’t accomplished what they were supposed to. The problem is, without the forced saving required by a pension plan, a typical Canadian couple doesn’t save nearly enough. The median household with the main breadwinner between 55 and 64 has only $55,000 in RRSPs, according to Statistics Canada, but to enjoy an adequate retirement, most couples need 10 times that amount. According to Planning for Retirement: Are Canadians Saving Enough?, a study by the University of Waterloo for the Canadian Institute of Actuaries, most people would have to save between 14% and 20% of each paycheque to pay for a decent retirement lifestyle. The study found that a single person earning $40,000 who started saving for retirement at age 40 would need to put away between 14% and 20% of his or her income for the next 25 years. A couple earning $80,000 combined would need to save 18%.

You only have to look at growing gap between public sector workers, who still have defined benefit pensions, and private sector workers, to see what a poor job RRSPs are doing at filling the void. Recently, James Pierlot at Towers Perrin did just that by comparing two fictitious couples. The members of the first couple, Angie and Brad, are both civil servants. The members of the second couple, Courtney and David, work in the private sector. Throughout their working lives, both of the couples are relatively equal. Everyone starts working at age 28, and when they hit retirement, each person earns $50,000 a year. But while their pre-retirement lives are similar, in their post-retirement lives a shocking split emerges. The civil servants Angie and Brad will retire in luxury, with combined pensions worth $1.1 million. Courtney and Dave, meanwhile, will retire with savings worth just $244,800, the amount the average household in Canada has amassed in RRSPs and pensions. So while Angie and Brad will retire at age 58 and enjoy an annual pension income of more than $50,000, Courtney and David will have to work until both are 62. And even then they’ll only get an income of $11,000 a year. The example highlights a gross inequality, but Pierlot says he doesn’t have a problem with public sector workers getting a good pension. “It’s that the rest of the population deserves a better pensions than they’re now getting.”

Alisa Metcalfe-Haggert is a 43-year-old single mom who works out of her home in Toronto as a psychometrist. Like Calvin Bahler in Saskatchewan, she worries a lot about retirement, even though it’s still decades away. She’s well educated, with two degrees in clinical developmental psychology, and she does assessments on children who’ve had head injuries. At one time a hospital might have employed Metcalfe-Haggert full time for her services, but a lot of psychology support jobs have been phased out at medical institutions. Most psychometrists now work privately.

She enjoys her work, but since she’s self-employed it doesn’t come with many benefits. She often thinks about how things have changed since her father, a university professor, was in his peak earning years. Back then, if you worked in the medical field—or a university for that matter—you didn’t have to worry about the future. You just knew you’d be taken care of. But Metcalfe-Haggert is on her own. “Unless I win the lottery, I know I’m the only person who’s going to take care of my retirement.”

Metcalfe-Haggert is typical of the modern Canadian. She’s single, she works for herself, and she’s having trouble coping with the responsibility of saving up hundreds of thousands of dollars so she can retire with dignity. She has been extraordinarily disciplined, socking money away every month since she was 24. But she wishes there was an easier way. What would really help is an optional national pension plan that offers many of the benefits of the public sector pensions, but is open to self-employed Canadians and others who can’t get a pension through work.

In fact, that’s exactly what a growing chorus of pension experts and politicians in Ottawa are calling for right now. The pension commission headed up by Harry Arthurs in Ontario and the pension commission for Alberta and B.C. have both recommended setting up a government system that’s available to everyone, including the self-employed. In Alberta and B.C.’s case, the pension would operate as a defined contribution plan in which employers and employees both contribute. It would be overseen by a pension board and operated by the same kind of experienced pension managers who oversee large public plans now. That’s important, says Arthurs, because most people “don’t have the financial skills” to manage hundreds of thousands of dollars on their own.

Another option is to increase the amount Canadians receive through the Canada Pension Plan (CPP). Right now contributors receive about 25% of their average annual lifetime earnings, according to Monica Townson, a research associate for the Canadian Centre for Policy Alternatives in Toronto. She says it should be topped up to 50% of earnings. That would result in more money being taken from paycheques, but Townson says the increase could be phased in gradually, and most people wouldn’t mind since a larger CPP pension would be government-guaranteed.

Another plan floating around is from Keith Ambachtsheer, director of the Rotman International Centre for Pension Management at the University of Toronto. He is proposing a national supplementary pension to top up CPP and Old Age Security (OAS) payments with an income replacement target of 60% for middle-income workers. Ambachtsheer is largely aiming to help middle-class workers. He points out that government pension programs like OAS and the Guaranteed Income Supplement (GIS) do a good job taking care of the poor, while the rich thrive nicely in retirement without help. It’s the middle-class that has been left out.

So far there has been a lot more talk than action, but insiders involved in government discussions say that the chances of either a larger CPP payout or some form of supplementary pension are quite good. The finance ministers in both the federal and provincial governments are meeting in Whitehorse in December to come up with a beefed-up national pension system, and if they don’t, Alberta and B.C. have indicated that they’ll do it on their own.

The companies offering pensions, for their part, seem to agree that they need the help. A recent poll of 370 Canadian plan sponsors by RBC Dexia found that 89% are pessimistic about the pension system’s ability to deliver in the future. Among their biggest concerns is the ability of their own plans to generate the returns they need to meet their obligations to retirees.

If more companies drop their pensions or switch to the watered-down defined contribution variety, the push for a government-run program will only grow. And much like universal medicare in the 1960s, which was introduced by Saskatchewan before going national, if one province launches a pension system, it won’t be long before others fall into line, speculates Townson. If that happens, a good pension, just like decent health care, will become a right for everyone. Not just the lucky few.