TARGET BENEFIT PENSION PLANS - WHAT ARE THE TRENDS THROUGHOUT CANADA

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1 SFL PENSION KNOWLEDGE CONFERENCE: TARGET BENEFIT PENSION PLANS - WHAT ARE THE TRENDS THROUGHOUT CANADA MAY 3-4, 2016 KEVIN SKERRETT CUPE RESEARCH

2 CANADA S PENSION PYRAMID Private Pensions & Savings Arrangements Workplace pensions can be part of employment agreements. Individuals can save through RRSPs and/or TFSAs. Public Pension for Workers Canada Pension Plan Mandatory participation for all workers (employed & selfemployed). Funded from contributions from employers & workers. Universal Public Programs Old Age Security & Guaranteed Income Supplement Available to workers & non-workers, based on residency requirement. Funded from general government revenue.

3 WORKPLACE PENSION PLANS Defined Benefit Plans (DB) Amount of lifetime pension is known in advance Usually calculated from a formula based on salary and years of service Employers and plan members make regular contributions, usually employer responsible for shortfalls Defined Contribution Plans (DC) Amount of pension not known in advance, depends on market returns, interest rates, lifespan Employers and plan members make regular contributions, no obligation for employer for any additional payments

4 WORKPLACE PENSION COVERAGE MILLION EMPLOYED WORKERS DC or HYBRID PLAN 1.5 million DEFINED BENEFIT PLAN 4.5 million NO PENSION 11 million

5 INDIVIDUAL SAVINGS PLANS Registered Retirement Savings Plan (RRSP) Contributions voluntary, maximum amount set by Income Tax Act Contributions tax deductible, growth within fund is tax free, income is taxed in retirement Funds can be withdrawn early different tax treatments for different purposes Vulnerable to market downturns, personal longevity no guarantees

6 WHY ARE THERE GROWING PROBLEMS IN THE SYSTEM? Public pension plans under attack (OAS-GIS) Canada Pension Plan still insufficient (25% replacement rate) Workplace pension plans under attack, increasingly in the public sector Austerity and Stagnant wages Private retirement savings hurt by stock market crises 2002, 2008

7 WORKPLACE PLANS UNDER ATTACK Private sector DB pension plans have been under serious attacks for years (Vale-Inco, St. Mary s Cement, Air Canada, RBC, Big 3 Auto) Conversion to DC or Hybrid for new hires (2-tier) Increasingly common in the public sector Fueled by cost cutting governments and the myth of the gold plated public sector pension (Average pension for CUPE members: $18,000 / year) Move to risk-transferring Target Benefit plans

8 MEDIA MESSAGES: SHIFT RISK 8

9 RECENT ADDITIONAL CONCEPT: TARGET BENEFIT PLAN In some ways, multi-employer plans with fixed costs are long established and may be viewed as TBPs Some unions introduced very strong TBP models in sectors where DB was difficult to win Since financial crisis, many employers and governments have re-configured the TBP as a lower cost/lower risk alternative to DB Trade unionists and pension advocates need to respond to this marketing of TBP models that are not in the interest of members

10 DEFINING TARGET BENEFIT PLANS: Two defining characteristics: 1. A limit or constraint on the availability of funding to secure the ongoing pension benefit promise (i.e. contribution caps, fixed contributions from employer) 2. Reduction of accrued (already earned) pension benefits is legal and a normal method of resolving funding deficits Test Question: Is Canada s public health system a DB, DC, or TB arrangement? What if delivery became contingent on public finance picture?

11 11 PENSION SPECTRUM AND RISK Defined Contribution Target Benefit Defined Benefit Plan members bear most/all of risk. Employers bear risk on paper. *Members indirectly exposed to risk through bargaining plan design

12 WHY DO EMPLOYERS LIKE TARGET BENEFIT PLANS? Employer funding risk is reduced and that risk is transferred to employees and retirees Many models look and operate as Defined Contribution type plans, and they can be treated as such from a budgetary liability perspective (eliminates certain liabilities) Facilitates privatization enhances budgetary balance

13 TARGET BENEFIT PLANS IN CANADA Shared Risk model in New Brunswick Now acknowledged as a form of TBP Recent actuarial analysis exposes far more risk than understood Being referenced as a model by governments & regulators Highly technical actuarial system (stochastic modelling) Both public and private sector employers can access Finance Canada introduced concept in 2014 paper Some employer strategies shifted from DC model to TBP (including City of Regina and the universities in SK) Pension consulting industry has embraced TBPs as the sustainable alternative to Defined Benefit plans

14 WORKPLACE PENSION PLANS Defined Benefit Plans (DB) Defined Contribution Plans (DC) Target Benefit plans (TB or TBP) Benefit promise becomes target depending on funding Members bear most or even all of the risks involved Can be better than DC

15 UNION STRATEGIES FOR RESISTING MOVE TO TBP 1. Provide basic member education on DB pensions and the entire retirement income system 2. Challenge employer and consultants claims about risks and costs force disclosure and transparency 3. Avoid allowing significant differences in benefits based on age or other category ( two tier systems) 4. Join the ongoing fight for a significantly expanded CPP and public pension system!

16 KEY TAKEAWAYS 1. We must defend the DB model! Employers and government agenda is to shift pension risk and cost to plan members 2. Many employers are now preparing to propose changes to remaining DB plans that would convert them to TB (though this is sometimes not clear) 3. An improved and generationally equitable retirement income system is possible if we make a political commitment to it 16