UPDATE 1-Canadian government proposes new risk-sharing pension plan

Thu Apr 24, 2014 4:48pm EDT

(Adds details of the plan, quotes, background)

By Leah Schnurr and Andrea Hopkins

TORONTO, April 24 (Reuters) - Canada's Conservative government proposed a new voluntary pension plan on Thursday that would shift investment risks to employees in a bid to make pensions more sustainable, touting it as a third option to the two main types of plans now in place.

The proposal heats up the debate over the best way to ensure a financially secure retirement for an aging population as pensions struggle with poor returns after the financial crisis and employers try to rid themselves of the burden of pension liabilities.

The government also reiterated its position that this is not the time to increase contributions to the well-regarded Canada Pension Plan (CPP), an arm's length government program that provides pensions to all employees in Canada. Several of the country's provinces, notably Ontario, see increased funding for the public CPP, and the QPP Quebec variant, as the best way to secure financial safety in retirement.

The federal government's proposed pension plan option is a targeted benefit plan that would provide a hybrid alternative to the defined benefit and defined contribution plans most commonly used in Canadian workplaces.

The option would be available to employees of government-owned corporations and private sector companies that are federally regulated, including those in the banking, telecommunication and transportation sectors. There are currently more than 1,200 federally regulated pension plans.

"Private pension plans across Canada are facing increasing challenges in providing a secure and predictable stream of income to Canadians in their retirement," said Secretary of State for Finance Kevin Sorenson, who announced the proposal during a speech in Toronto on Thursday.

"This framework will help address the long-term sustainability of pension plans by offering predictable benefits in both favorable and adverse market conditions."

The announcement drew immediate criticism from the opposition New Democratic Party, which called it "another Conservative step in the wrong direction".

"Pension experts, labor unions, provincial governments, and seniors organizations all agree that the best way to tackle the looming crisis is to boost benefits through CPP/QPP," NDP pensions critic Murray Rankin said in a statement. "Unfortunately, Conservatives have blocked any action to boost retirement savings."

Under the government's plan, pension benefits would be targeted, rather than guaranteed and would be based on a predetermined formula. Contributions would be fixed or set within a range.

Typically, when pension plans become underfunded, contributions from employers or employees must increase to make up the shortfall. With a targeted plan, benefits could be cut instead, and would depend on investment success.

Most workplace pensions in Canada now are either defined benefit plans, which provide a guaranteed pension backed by the financial health of the employer, or defined contribution plans, which provide a benefit based on investment returns.

Canadian pension consultant Malcolm Hamilton, a senior fellow at the C.D. Howe Institute, said the move to targeted plans by shifting the risk from employers to beneficiaries, is the right one. He said that promising benefits with no relation to investment performance has put many pensions into deficit, and in some cases, into bankruptcy.

"The concept is to move the risk to the benefits side. When there is a poor performance, members bear the investment risk rather than employers."

Hamilton said the move does nothing to shift the federal government's risk in its own massive public sector pension plans. Government plans are among the last survivors of the generous defined benefit pension plans that once dominated Canada's public and private workplaces.

SHARING THE RISK

Some big Canadian pension plans have already made some moves towards sharing investment risk between both the plan sponsor, or employer, and the beneficiaries.

The Ontario Teachers' Pension Plan has conditional indexing to inflation, a mechanism that takes investment risk and shifts it to beneficiaries, so that benefits may not be completely protected from inflation when the plan is not fully funded.

When markets are down and investment returns are low, the plan may become underfunded, and members lose a bit of their payout because their benefit is not worth as much relative to rising prices.

Ottawa and the governments of Canada's 10 provinces failed last December to agree on a deal to enhance the public CPP. The idea of enhancing CPP, has been on the provinces' agenda for several years.

Ontario Finance Minister Charles Sousa said Ottawa's new pension proposal falls "far short" and that the province will continue to move forward unilaterally with its plan to beef up the CPP.

"We know that CPP enhancement is the right choice, and is critical to ensuring that Ontarians and Canadians, particularly today's middle-income earners, have greater financial security in their retirement," Sousa said in a statement.

Sorenson said Ontario, the country's most populous province, should focus on balancing its books instead. (Editing by Peter Galloway)

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

Find your dream retirement town

Florida? Hawaii? Reuters has teamed up with Zillow to give you the power to customize a list of your best places to retire.  Video | Full Article