Not everyone needs the Canada Pension Plan upgrades

Not everyone needs the CPP upgrades

By Special to MoneySense on June 28, 2016
Estimated reading time: 3 minutes

Employees in some sectors already set for a secure retirement

OTTAWA – The tentative deal for an improved Canadian Pension Plan will help thousands of young Canadians better prepare for retirement, but not everyone needed the help. Ian Lee, a professor at Carleton University’s Sprott School of Business, says workers with generous defined benefit pension plans, including many government and public sector employees, were already on course for a secure retirement. “The large corporate sector, they also have very good pension plans, by and large,” he added. Lee called the enhancement of the CPP an “squandering of resources” because reports suggest only around 15 to 20 per cent of Canadians are ill-prepared for retirement. This is how much you’ll get from CPP changes » “It’s not that the resources are going to disappear into nothingness, it is just that we’re using resources that are scarce on a problem that doesn’t exist for 80 per cent of the population,” he said. Instead, Lee added, a more targeted solution was required. While the private sector has moved to shift the risk of pension plans to employees with a move to defined contribution plans, many in the public sector have managed to hold on to those plans. Under defined benefit plans, the employer guarantees an employee will get a set, pre-defined level of benefits. If the pension fund’s investments don’t do well, the employer has to make up the shortfall. To avoid that risk, many employers switched to defined contribution plans, where they provide a certain amount towards an employee’s savings, but it’s up to the employee to manage the money — and they carry the risk if the stock market tanks. The size of pension the money can buy at retirement isn’t guaranteed. Nonetheless, those in public sector defined benefit plans haven’t entirely escaped unscathed. The Ontario Teachers’ Pension Plan has made changes in recent years that will result in teachers sharing some of the risk, and the benefit, if the plan has a deficit or a surplus, while the OMERS plan has also made adjustments. Under the former Conservative government, Ottawa made revisions that will see federal civil servants pay more for their pensions and work until they are older before they qualify for a full pension. The average age of someone in the Public Service Pension Plan retiring with a full pension in the last fiscal year was 60, while the average unreduced pension they started to collect was $40,633 a year. Making sense of the CPP expansion » Defined contribution pension plans have been growing in popularity while enrolment in defined benefit plans has declined. According to Statistics Canada, defined benefit plans in 2014 accounted for 71.2 per cent of employees with a pension plan, down from more than 84 per cent a decade earlier. Meanwhile, enrolment in defined contribution pension in 2014 was up about 18 per cent from where it was in 2004. The changes come as the C.D. Howe Institute raises questions about the burden of the federal government’s employee pension plans. In a report earlier this year, the think tank estimated the cost of federal employee pension plans is more than $100 billion higher than the government says it is because Ottawa is underestimating the future costs. Colin Busby, associate director of research at the think-tank, says the interest rates Ottawa uses to value its pension obligations are too high and understate their future costs. Enhancing the CPP won’t benefit some seniors: Study » “You don’t really want future increases in taxes to have to pay for these things if there are shortfalls,” Busby said. “You don’t want to be distributing the burden on to future taxpayers to pay for past benefits.” The Treasury Board, however, said it uses the accounting standards set out by the Public Sector Accounting Board and adds that the Public Sector Pension Plan annual report is audited every year by the Office of the Auditor General.