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Tony Keller: why the obvious fix for the country’s collective pension problem is being ignored

Work Till You DieLast fall, the Royal Bank of Canada—with $27 billion in annual revenue, $752 billion in assets and 74,000 employees, the biggest and most prudent bank in the world’s safest banking system—announced that new employees would no longer be eligible to receive what is probably the company’s most important workplace benefit: the comprehensive retirement insurance plan. It insures the Royal’s Canadian employees, or at least those hired before January 1, 2012, against all sorts of risks. The risk of reaching retirement age at a time when stock markets are down, or interest rates are low. The risk of outliving one’s retirement savings. Inflation risk. Risks you’ve probably never even heard of, like reinvestment risk and liquidity risk. Even the risk of earning below market returns.

This generous program wasn’t unique to the Royal. Many employers, particularly big companies, once offered similar plans. Some still do, though their numbers are dwindling. You may be wondering, “Why have I never heard of retirement insurance?” You have. It’s called a pension.

We’re heading for a pension crisis. The federal government says so. The opposition says so. Most provinces say so. The library shelves of the land groan beneath the weight of studies. The first class of baby boomers hit 65 this year, and we’re still not ready. The economist Michael Wolfson, formerly the assistant chief statistician of Canada and now at the University of Ottawa, estimates that half of all Canadians born between 1945 and 1970 who have average career earnings between $35,000 and $80,000 are facing a drop of at least 25 per cent in their post-retirement standard of living. Which is perhaps not surprising given that most of us don’t have a pension plan.

The logical fix would be to expand our modest national pension plan: CPP. The Ontario finance minister, Dwight Duncan, spent several years pushing the idea. Workers and employers would contribute more so that, come retirement, they’d receive more. Pension crisis solved. For a while it looked like Duncan’s federal counterpart, Jim Flaherty, was onside—and then ideology got in the way. (It can’t have helped that the NDP and the union movement both favour an expanded CPP.)

Flaherty opted instead for a private-sector solution. Don’t expect results. The Tory government’s big fix is the Pooled Registered Pension Plan (PRPP), expected to come into effect sometime next year. It has major defects—including the fact that neither employers nor employees are under any obligation to join. Canadians are already sitting on more than $600 billion in unused RRSP room, and in 2009, only 31 per cent of those eligible to contribute to an RRSP did so. Nevertheless, a country that isn’t saving enough for retirement through voluntary savings programs is going to try to fix the problem with yet another voluntary savings program. But the biggest problem with the PRPP is its dishonesty. It’s not a
pension plan.

There are two major types of pension plans. The first—the kind that RBC offered its employees until this year—is called a defined benefit pension, or DB plan. Thanks to the pooling of funds among contributors and beneficiaries of different ages and retirement dates, members are insured against retirement savings risks, and then some. Long before they retire, members know what kind of monthly payments they’re going to receive. The employer guarantees it.

Someone enrolled in a typical DB plan and earning $100,000 a year knows that he will be owed an annual pension of two per cent of his salary, or $2,000, for each year of employment. A 30-year employee at that salary would be eligible for roughly $60,000 a year until death. That pension is made possible by a forced savings plan, with the employer required to regularly set aside and invest some combination of employer and employee contributions. The math is complicated, but the pension and RRSP systems are based on the assumption that, if you were that $100,000 earner saving by yourself, you’d have to put aside $18,000, year after year after year, to achieve the same result.

New hires at RBC, along with increasing numbers of private sector employees, receive a different type of pension plan. It’s called a defined contribution pension, or DC plan. The employer may put money in, sometimes quite a lot of money, but as for what comes out at the other end, that’s unknown, and unknowable. The health of the plan is not the employer’s responsibility. Which is why, according to Moshe Milevsky, a finance professor at the Schulich School of Business, DC plans are not pensions. In a recent paper, he describes them as nothing more than “tax-sheltered investment plans with zero guarantees.” A DC plan is really just another RRSP. The individual bears all the risks. And returns, instead of being guaranteed, are guaranteed to fluctuate—wildly.

The shift from pensions to not-quite pensions—or no pensions at all—is happening all across corporate Canada. Only 39 per cent of employees have a workplace pension plan, according to Statistics Canada. And that figure, dismal as it is, paints too rosy a picture. It includes DC pensions. It includes government workers, most of whom have a pension, and a DB one at that. In the private sector, only one in seven workers has a DB pension plan. One worker in nine is in a DC or other plan. The remaining 75 per cent of us? No pension coverage at all.