Ottawa proposes new target-benefit pension scheme

The best way to secure retirement for more Canadians is with a third option for pension plans, and not the way Ontario is approaching the problem by expanding the Canada Pension Plan, says Kevin Sorenson, minister of state for finance, on Thursday.

TORONTO — The best way to secure retirement for more Canadians is with a third option for pension plans, and not the way Ontario is approaching the problem by expanding the Canada Pension Plan, says Kevin Sorenson, minister of state for finance, on Thursday.

The federal government wants to create a target-benefit plan, or shared-risk plan, as an alternative to defined-benefit plans, generally favoured by workers, and defined-contribution plans, which are favoured by employers. It’s billing the new framework as a “sustainable and flexible” option, which will only be available for Crown corporations and federally-regulated workers in the transportation, banking and telecommunications sectors.

“We need to have a third option,” said Sorenson following the announcement during a speech at the Economic Club of Canada in Toronto.

“We are not picking and choosing for Canadians. We want the defined-benefit plan there as a choice, we want the defined-contribution plan to be an option and we want the target-benefit plan to be an option.”

Ottawa calls the voluntary plan as an “innovative approach” that will allow employers and employees to create targets, and adjust benefits and contributions to their needs in times of surplus or deficit, like the recent financial crisis that put many defined-benefit plans in jeopardy due to investment shortfalls.

The proposed framework would allow companies with defined-benefit and defined-contribution plans to convert to target-benefit plans, if all parties agree. The flexibility of the third option may prove attractive to employers who are moving away from the risk of defined-benefit plans.

With more workers retiring in the next few years, and living longer, the drain on pension plans has led to concerns that Canadians may be not be adequately prepared, financially, for retirement.

Sorenson said a shared-risk plan will allow flexible target benefits to be set, based on a pre-determined formula. Retirees would benefit from the “pooling of longevity risk” between employers and employees, something not offered by the current plans.

Public consultations regarding the proposal will be held during the next 60 days.

Sorenson said Ottawa continues to oppose expanding the Canada Pension Plan by boosting premiums and benefits, an initiative favoured by Ontario, Prince Edward Island, and Manitoba, but one the federal government called “risky” and said would cost jobs and stunt business development by raising premiums for workers and firms.

“We are not looking at the present time enhancing CPP. We have said that now is not the time to talk about extra payroll taxes,” he said

“We would encourage Ontario to look at balancing their budgets, and move away from higher payroll taxes for people of Ontario. We believe it would put businesses here in Ontario at a disadvantage to other businesses across the country.”

Ontario Finance Minister Charles Sousa said his province plans on moving ahead with its own provincial pension plan, even without the support of the federal government. In the past, Sousa has accused Sorenson of misrepresenting the issue with statements that enhancements to CPP could cost up to 70,000 jobs.

“Talk of a modest enhancement was, however, dismissed by the federal government in December, and today’s announcement gives no sign of a change in direction,” he said in a statement.

“It is as a result of this continued inaction that has forced Ontario to act now, so that today’s workers have a more secure retirement tomorrow. We will continue to move forward to implement a made-in-Ontario alternative to protect Ontario workers in their retirement. Doing nothing is not a solution to this problem.”

Meanwhile, the Canadian Federation of Independent Business said it supported Ottawa’s move but was disappointed that the target-benefit plan would not be available to the public service.

“With the private sector moving quickly away from traditional defined benefit pension plans, a shared risk model will be a terrific addition to Canada’s pension landscape,” said CFIB president Dan Kelly.

“A shared risk plan could also help taxpayers get out from under massive unfunded pension liabilities, such as the $6.5 billion liability at Canada Post alone. We hope the federal government doesn’t stop with Crown Corporations and considers moving the core civil service to a less costly shared risk pension plan.”

Sorenson would not commit to whether these new plans would be extended to the public service, only stating that it will continue to take it under consideration following the consultation period.

The Harper government has long preferred tax-free savings accounts and pooled registered pension plans, both voluntary savings vehicles created by the Conservatives, rather than mandated CPP improvements.

The CPP, established in 1965, currently provides retirement benefits to contributing workers up to a maximum of about $12,500 annually.

Maximum yearly premiums of about $4,700 are split half-and-half with employers; the self-employed pay the full amount.

There are currently more than 1,200 federally-regulated pension plans in Canada.

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