Ontario pension reform: What really needs to be done!

Reform proposals?

On August 24, 2010 Ontario Minister of Finance Duncan tabled proposed reforms. These ‘reforms’ can be best described as tinkering, rather than grabbing the bull by the horn in an effort to tackle the fundamental changes that Canadian pensions, now in systemic failure, really need.

Most commentaries, about the proposed pension plan reform, discussed minutia of the list associated with an announcement. I would like to talk about what was missing from the announcement.

The reality

These proposals will do little if anything to improve security for current or future retirees, or to encourage companies to establish new pension plans. What should have been addressed, and was not, is (1) how to improve private sector protection of pensioners’ deferred wages in case of sponsor bankruptcy, and a new pension system architecture which (2) encourages increased savings consistent with desired retirement income levels, (3) provides low cost investment vehicles for accumulation and growth of savings and (4) provides low cost decumulation and longevity insurance strategies in retirement. And all of these changes could be implemented with the market risk and (cohort) longevity risk being borne by the participating Canadians.

What was missing from the proposals?

Specifically, what should have been in the proposed reform, and was not is:

-No bankruptcy protection via higher priority for the underfunding of pension plan trust funds (the deferred wages of private sector Canadians),

-No PBGF increase in protection from $1,000 to $2,500 (as recommended by the Arthurs commission),

-No suspension of the policy of forced and paternalistic annuitization in case of bankruptcy driven pension plan wind up (The philosophy that government knows what’s best for the people after providing failed regulatory process/oversight which resulted in underfunding of the plan is truly strange),

-No option to receive actuarial fair commuted value for pensioners,

-No substantive change in frequency of regulatory oversight of pension plans, with required valuations remaining at three year intervals (what’s required is annual valuation),

-No requirement for fiduciary responsibility for anyone providing financial advice (whether they are planners, brokers, insurance salesmen, etc),

-No behaviourally driven mechanisms for enrolment (‘auto-enrolment’), increased contribution levels (‘save more tomorrow’ commitment) to encourage saving for retirement and ‘auto-investment’ (default asset allocation),

-No government sponsored low cost (<0.5%) pooled investment management vehicles for individual DC accounts (with feedback mechanisms on required savings rate to achieve target retirement income),

-No low cost (default) decumulation strategies in retirement

– No low cost annuitization

-No access to (low cost) pure (without investment component) longevity insurance

So what in fact was in this package?

How does it constitute pension reform and how will current pensioners and the wave of boomers approaching retirement age in the next ten years benefit from this laundry list of ‘reforms’?

What we heard is that there will be a modest and gradual improvements in CPP (good but not enough), Ontario will charge a higher premium to provide PBGF (probably still below market rates), and we’ll find new mechanisms to push Canadians retirement savings into the waiting arms of Canada’s uncompetitive financial industry (not something that any Canadian should aspire to). And, of course funding relief is provided for some public sector (e.g. university) pension plans (which otherwise would have to be covered by increased government funding, now, to the institution). All in all, this sounds like shuffling the deckchairs on the Titanic (i.e. the systemic failure of Canadians’ pensions in particular and retirement income system more broadly).

Bottom line

So on one hand, it feels like a missed opportunity. On the other hand, perhaps I misunderstood some of the directional statements in the announcement, and in fact the intention of the Minister was to address these fundamental structural pension issues.

Private sector DB plans are essentially dead, with no new ones being established and existing ones increasingly being terminated or capped (new employees ineligible and current employees increasingly unable to continue accruing benefits). But this should not come as surprise, as the concept of single company DB plans is fundamentally flawed: employers refuse to deal with market and longevity risk, whereas lifetime attachment to a single employer in the hope of getting a DB pension must only occur in the dreams of most Canadians working in the private sector, and is now a nightmare for many whose lifetime employer has gone into bankruptcy protection with an underfunded pension plan. The existing commitments must be met by legislating higher priority to the underfunding of pension trust funds. The going forward changes mentioned above which were not included in the recent Ontario reform proposals are the ones required, and they can be implemented in a manner whereby the market risk (consistent with each individual’s tolerance) and (cohort) longevity risk is born by the participating working and retired Canadians. It’s time to get going. We are losing valuable time which boomers don’t have.