This Is How Your Pension Will Probably Change

Kevin Press, BrighterLife.ca

The debate about Canada’s pension system comes down to four key ideas. Here’s what you need to know about each of them.

A report on the National Summit on Pension Reform landed Friday. Organized by Canada’s Public Policy Forum, the event provided an opportunity for industry leaders to assemble and talk about what comes next for Canada’s pension system. (The Province of New Brunswick, Sun Life Financial and Morneau Shepell contributed to the event as Summit Partners.)

Two things stand out from the report:

First, despite what you may have read, our national pension system is not in crisis. It could be better, certainly. But Canadians can rest easy knowing that a basic level of retirement income is provided for by the very well-managed Canada Pension Plan (CPP) and Old Age Security (OAS) program. Our system is admired around the world.

Second, there is political momentum behind efforts to improve the pension system. This is driven largely by recognition that Canada’s baby boom generation, as it enters retirement, will place a heavy burden on the system. This (along with volatile capital markets and low interest rates) has contributed to fears of a looming disaster.

Leaders at the summit discussed four big ideas. The event’s report provides a useful summary of how pensions across Canada — those provided by government, employers and via personal savings — are likely to change.

1. Risk is going to be shared differently

The goal is sustainability of the system, according to the report. That means you and I are going to be required to take on greater risk (we will have to save and invest more), and our employers and governments will lessen their exposure. This probably doesn’t mean lower CPP and OAS payments. But it will mean that both private and public sector employees will get less from their workplace plans than previous generations have. Many of us will retire later.

2. Pension plan design changes will grow more common

Pensions have not been known for flexibility in the past. Expect plan design changes on a more frequent basis as boomers move through the retirement income system. And watch for greater transparency in that process. For this to be successful there will have to be real balance between the interests of management and labour. Brush up on your financial literacy skills so that you understand what these changes mean to you and your family.

3. There will be more ways to save at work

This aspect of Canada’s system was headed in the wrong direction. According to the report, about 39% of the country’s paid workforce has an employer-sponsored pension plan. And that national average overstates the reality among private sector workers by a wide margin. “Overall saving rates in Canada are low, and there is a definite need to facilitate growth in Canadians’ workplace savings if we are to sustain an acceptable standard of living for the growing ranks of retirees,” reads the report. The recently introduced Pooled Registered Pension Plan is designed to address this. Ottawa created a regulatory framework for the new plans, and has left it to the provinces to decide how (and if) they want to implement. Quebec was the first to step forward with what that province calls the Voluntary Retirement Savings Plan.

4. CPP coverage could expand

We could see higher CPP payments and/or a new way for Canadians to top up their payout with individual contributions. There’s considerable debate on expanding CPP. Those for it point to the strength of CPP and ask why we wouldn’t want to rely on it more heavily. Those against it say it’ll increase taxes for consumers and businesses (because the money has to come from somewhere). Could go either way.

I would call it a safe bet that Canadians will have to save more personally if they hope to see the kind of retirement income previous generations have earned thanks to government- and employer-sponsored plans. The question for policy makers will be how to cushion that blow in the form of creative plan design and saver-friendly tax incentives.

I’m optimistic.