The Globe and Mail
22 Oct 2013
Bill Hatanaka, Jim Keohane, Jim Leech and Michael Nobrega
We find ourselves in the midst of a timely pension reform debate: Some advocate for Canada Pension Plan enhancements; federal and provincial governments are moving toward enabling Pooled Registered Pension Plans (PRPPs) for employees who are not members of RPPs; and a number of provinces are introducing significant reforms to their public-sector plans. Missing from this debate is a full understanding of the Canadian pension system and, in particular, the value and importance of the defined benefit model within that system.
Canada's three-pillar retirement income system is largely responsible for the significant drop over the past three decades in the number of Canadian seniors living below the poverty line. Ranked sixth-best in the world in the Melbourne Mercer Global Pension Index, it is anchored by robust government-funded and administered schemes (Old Age Security and the Guaranteed Income Supplement), supplemented by government-sponsored workplace pensions (CPP/QPP) and workplace and tax-deductible personal savings plans. What is sometimes overlooked is that the pension income paid to retirees has had a strongly positive impact on the Canadian economy overall.
It would be tragic to see the past 30 years of progress jeopardized by the unintended consequences of ill-conceived pension system changes – especially calls for the wholesale shift from defined benefit to defined contribution plans.
Canadian public defined benefit (DB) pension plans paid out between $68-billion and $72-billion to their members in each of 2011 and 2012. The vast majority (up to 80 cents) of each pension dollar paid out by our four major Ontario pension plans comes through investment returns, which in turn come from sound funding policies and “best in class” investment results at home and abroad.
The benefits paid to retired DB plan members boost national and local economies. DB pensioners spend an estimated $56-billion to $63-billion annually on consumable and durable goods, shelter, recreation and services while saving only $2-billion to $3-billion, according to a recent study by Boston Consulting Group. They have the opportunity to spend at a higher rate because they can rely on a steady and stable income through their defined benefit plan. They pay $14-billion to $16-billion in taxes annually – money sorely needed to deliver health care, connect our communities and educate our children. As well, it is estimated that only 10 to 15 per cent of DB beneficiaries collect the Guaranteed Income Supplement (GIS) versus 45 to 50 per cent of other retirees. This saves the federal government between $2-billion and $3-billion annually in GIS payouts, freeing up funds for other social spending priorities.
By almost any measure, our defined-benefit pensions, which guarantee a continuing benefit on retirement that is based on a percentage of employee earnings for each year of service, are the most effective retirement savings system in the country. As an expert committee on the future of the Quebec retirement system said this year: "Defined benefit plans provide the type of financial security that should be emphasized … No other supplemental pension plans or personal savings vehicles can provide members with the same level of financial security."
This is not a zero sum game where one group benefits at the expense of the other. Most pension plan members in fact make mandatory contributions of 10 to 14 per cent of their total income throughout their working years. Canada's public pension funds offer financial security to millions of Canadian retirees while providing a major source of patient, long-term capital that funds vital infrastructure projects – roads, bridges, hydro dams, airports and hospitals – in Canada and around the world. They are famous for their independent governance structure that allows them to invest solely in the best interest of their members, for their highly professional management and investing expertise, and for their strength and stability through good times and bad.
Canada's defined-benefit pension funds do more than contribute to a retirement income system that is the envy of the world and offers us a competitive advantage; they are also a key driver of prosperity in Canadian communities large and small, and a cornerstone of our national economy. As we continue to explore options in the face of growing challenges, let us not turn our backs on a true Canadian success story.