The History of Pension Plans in Canada

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 AuthorSean 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.

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Sean Cooper

Sean Cooper

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.
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7 years ago

I work for a provincial gov’t and have a pension plan.
If it all works out perfectly, I’ll be getting far more in payments than contributions.

As an individual, I would need to make 25% annual returns on my contributions for 20 pre-retirement years, or 15% for 55-60 years all-inclusive, to reap the same monies.

(That’s the great thing about Ponzi sche….I mean pension plans, someone else is always paying for your retirement!)

Having said that, I have no faith in government to deliver:
*They are a perpetually bankrupt entity with ever growing debt (only
$14 billion more in the next three years) and heinous “leadership”.
Where will the money come from to keep up the 50% fund contributions?

*Continual cuts to gov’t mean fewer contributors to fuel pension funds.

*A high reliance on stock market (and RE) returns is imprudent: the PP equity return for 2011/12 was -1.4% (yes, that is a negative), but in 2010/11 the return was +12.6% — enjoy the stock market whipsaw.

(yet another reason why I only have 20% of net worth in paper equities; and why would I buy more AAPL, GOOG, RY, and TD when my PP already does so much of it with my money?).

[note: the PP has a 10% allocation in private equity which delivered a 10% return 2011/12.]

Basically, the gov’t can do whatever they want with pensions plans (eg. OAS/GIS to 68), including shutting the entire thing down.

Eg. When I first started contributing to the PP I was given a letter stating contributions were not based on PP performance. Less than one year later I received another letter stating contributions levels were increasing because of poor returns. (Isn’t that throwing good money after bad?).

In the end, it’s fun to fantasize about all that tax-payer funded free money, but until I see the cold hard cash in my hand….

Happy Canada Day!

7 years ago

I work in government, and I have been lucky enough to have a DBPP. But I think it is important that I don’t count on it or CPP when I retire in about 30 years. Instead, I choose to look at pension plans as a bonus. I save well, try to make wise investment choices with the money I save, and I have a very long time horizon before I plan to liquidate any of my investments. This will hopefully allow me to retire comfortably.

With that said, I think pension reform is important in the public sector and I think what most parties who defend or try to change DBPPs understand that the plan is invested with an unlimited time horizon, but are trying to get the most short-term benefit out of it. At the very least the formula for determining payouts could change to average all years worked instead of the final 5 or best 5.

Jason K
7 years ago

All I can say is i’m glad i have no intention of living off whatever pension amount i have upon retirement. I really hope people in general don’t plan on using a pension plan as their bread and butter in retirement.

7 years ago

The government should take the lead here. Don’t screw the people out of what they’ve already earned, but transition starting now to a defined contribution plan, and let industry follow suit. Governments can make up shortfalls in funding by increasing our taxes, but companies don’t have this luxury. Lead by example.

Oliver D
7 years ago

Defined benefit pensions plans, at least in their current state, have a lot of problems. As an employee in the private sector I’m happy I don’t have one. I’d much rather administer my own “pension plan” and my employer facilitates this via a very nice RRSP matching plan.

We’ve seen too many examples of companies going under and people losing their pensions. These problems aren’t limited to private companies either; plenty of municipalities and other public sector entities have had to make changes to their pension plans, and their employees are thus not receiving the benefits they were told they would.