PETER DOLEZAL: Pondering pension plans

Governments would be wise to expend greater effort toward improving the financial literacy of Canadians

By Peter Dolezal

Columnist – Peninsula News Review

 

For many decades, Canada’s public service employees have been the beneficiaries of superb retirement plans which few private sector employees could hope to secure.

In the private sector, roughly 2.8 million employees also enjoy the benefits of a pension plan. However, of these, only 1.6 million have a “defined benefit” contribution plan. The remaining 43 per cent have much less beneficial defined-contribution plans.

Over the past 20 years, the private sector has seen a dramatic shift away from the defined-benefit plans – with some 40 per cent changing to defined-contribution plans. This trend is accelerating. Within 10 years it is highly likely very few private-sector employees will have access to lucrative defined-benefit plans.

Despite these mutating plans, a pension plan in any form remains the envy of the 62 per cent of Canadian employees who have no workplace pension plan to supplement their CPP and OAS benefits once they retire.

Despite some 20 years of continuing moderation of private-sector plans, the availability and nature of public-sector pension plans has remained virtually unchanged. Undoubtedly this is because public-sector employers’ contributions are funded by the taxpayer. Now however, even these previously-stable plans are no longer sacred.

The federal government recently introduced major changes. Commencing in 2013, new employees must work until age 65 to receive an unreduced pension. This is an increase of five years over that of existing employees. Contribution rates are gradually increasing toward a 50/50 cost sharing between employer and employee. The massive Ontario Teachers’ Pension Plan also announced major changes recently. Teachers will not only contribute almost 13 per cent of their income to the Plan, but inflation calculations will also be moderated.

Decades ago, largely because the population was much younger, governments could afford their golden defined-benefit plans. Not only were fewer employees retiring than today, but also pensions were usually collected for only 10 to 15 years. Today, with an aging workforce and increased life-spans, the large numbers of retiring employees can expect to draw their pensions for almost as long as they were employed. This reality, combined with the inclusion of inflation protection in many plans, makes the financial structure of traditional defined-benefit plans unsustainable.  As a result, public-sector plans will inevitably gravitate toward the much less expensive plans found in a segment of private-sector organizations.

As federal, provincial and municipal governments continue to experience fiscal pressures and as pension funding shortfalls continue to exist, major changes to public- sector plans will become the norm. Current employees may be minimally affected, with their entitlements grandfathered. The next generation of government employees will need, however, to seek solutions beyond their employers’ pension to supplement their retirement income.

With these emerging trends in employer-sponsored pension plans, employees in every sector will need to become more knowledgeable, and disciplined, in taking advantage of personal retirement saving vehicles. For many of us, these plans continue to be highly underutilized. Failure to take greater advantage of these savings vehicles — whether or not we enjoy a workplace pension will adversely affect the quality of our eventual retirement.

Governments would be wise to expend greater effort toward improving the financial literacy of Canadians, to ensure these retirement issues and opportunities are much better understood.

A retired corporate executive, enjoying post-retirement as a financial consultant, Peter Dolezal is the author of three books. His most recent, The SMART CANADIAN WEALTH-BUILDER, is available at Tanner’s Books and in other bookstores.