Pension plans are in dire straits in Canada. The number of workers covered by defined benefit pension plans has fallen by over 30 per cent in just the last decade. This trend doesn’t look to change anytime soon.
What’s behind this steep decline? Low interest rates combined with volatile investment returns are partially to blame and have led to employers rethinking their pension plans. Employers like Air Canada that face multi-billion dollar pension deficits must take drastic measures to reach fully-funded status. The golden age of pensions may be long gone, but there was a time when generous pension plans were the norm and used as a tool to attract the best talent.
Pension Plans Over the Years
Pension plans have been around since the dawn of the 19th century in Canada. In a time before government benefits like Canada Pension Plan and Old Age Security, employers started offering pension plans as a way to help fund workers’ retirements. Today pension plans are highly regulated, but back then there was no guarantee the employer would still be in business when it came time to collection your pension.
The Second World War is when pension plans really took off in Canada. To help attract the best workers, employers started to offer defined benefit pension plans. The plans guaranteed workers a monthly pension upon retirement based their earnings and years of service. Pensions didn’t evolve much until the 1970’s, when the baby boomers started to enter the workforce. Faced with a labour surplus, employers offered early retirement incentives to free up positions.
The 1980’s saw a new challenge in the form of rising inflation. Today retirees are struggling to make ends meet with low interest rates, but back in the 1980’s retirees on fixed income saw their purchasing power vanish as interest rates reached shot above 20 per cent. To help protect pension plans, employers introduced inflation protection. These inflation increases were often ad-hoc, solely at the employer’s discretion. Once inflation was under control, the 1990’s saw the return of strong investment returns, as pension plans reached fully-funded status. Some even paid out surpluses to pension members.
Pension Plans Struggle to Adapt
The problems faced by pension plans today are serious. The financial crash of 2008 exacerbated the situation and pushed pension plans into multi-billion dollar deficits. Over the last several years investment returns have been anything but predictable. With each passing years employers have fewer active employees to fund retirees. As baby boomers retire en masse, the problem will only get worse. Pension plans are a lot more expensive than they were 50 years ago – in the 1960’s the average worker who retired at 65 and expected to live 15 years in retirement, while today the average worker retires at 62 and expects to live 23 years in retirement.
Although employers can apply for solvency relief to amortize the deficit over a longer number of years, the shortfall will have to be made up eventually. The public sector has faced resistance from unions, although civil servants must now share pension contributions equally 50 per cent with employers. The federal government has touted Pooled Registered Pension Plans (RPPPs) as the solution of the pension crisis, but that remains to be scene. The fact remains that if pension plans don’t evolve with the times they might be as good as history in a couple decades.
Readers, is your pension in deficit? How confident are you that your pension will help provide a decent retirement?
About the Author: Sean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University. You can read some of his other articles here.