The Third Rail: Confronting Our Pension Failures – Jim Leech & Jacquie McNishThe book was published by McClelland and Stewart in 2013 and retails for $29.95

The book addresses what is currently dubbed as the “pension crises” in Canada and provides some examples of where this issue has been addressed in Canada and internationally. This is a simple exposition of the notion of a “target benefit approach” by Jim Leech, the CEO of the Ontario Teachers’ Pension Plan and Jacquie McNish, a Globe business columnist.

The first chapter sets out some of the fundamental issues facing the current three-tiered retirement landscape in Canada. The reference to the history of pensions in Canada has the merit of raising design issues that address the premises upon which pension evolution has taken place. Conclusion: design features should not be immutable.

One issue is that people are living longer in retirement sometimes exceeding the length of theirworking career. In the private sector in particular but even in the public sector, the proportion of active workers to retired has reversed significantly and the exodus of the baby boomers will only exacerbate this trend. Low interest rates have diminished returns on plan investments and the market reversal in 2008 wiped out 20% of plan assets.  Conclusion: plans can’t pay for promised retirements.

Among the social issues addressed is that although current retirees are protected from poverty by the three pillars of retirement income; one of the pillars, personal savings is disastrously inadequate on a go forward basis. The other two pillars are also in trouble;workplace pensions are addressed above but the third pillar the Canada Pension Plan/Quebec Pension Plan (CPP/QPP) and the Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) are inadequate. The CPP/QPP only provides a maximum of $12,000 a year based on a maximum of 25% of the average wage which for 2014 is $52500. If private savings fail and workplace pensions disappear or benefits are scaled back then hundreds of thousands of Canadians will fall below poverty guidelines and the shortfall will come from tax-payer dollars through increased payouts from the GIS.

The next three chapters are presented as case studies on how to address these issues. Chapter Two looks at the “shared risk” model of New Brunswick (NB). Demography in NB is the forward fringe of boomer exodus as out-migration from the provinces’ flagging economy places it on the cusp of retirees outnumbering active workers. Forestry bankruptcies imperilled existing retirees and divested unretired employees of their pension savings. In many cases contribution holidays in periods of surplus and early retirements funded by pension plans in situations of layoffs decimated assets. Similar situations emerged in the health care sector where low rates of contribution and a pattern of enhancing benefits coupled with the 2008 market crash lead to a $340 million shortfall in the plan. Forty per cent of nurses for example are over fifty-five, so impending retirements precluded enough time for assets to recover.

Bankruptcies in private and public plans would lead to the province assuming shortfalls in one way or another so the Premier took the advice of a pension commission and moved on both fronts. Health Care unions and the provincial government agreed to reduce benefits for future and current retirees and increased contributions for working members. A court ruling allowed the trustees to change the terms of an existing plan without member vote or negotiations between the parties. Provincial politicians rolled back their pension entitlements and pension legislation was changed in the province and the government agreed to shoulder some of the costs associated with these changes.

The model was that rather than employers topping up plans in deficit, the savings would come from reduced entitlements or increased contributions from a mix of retirees and working plan members. Independent administers would review plan assumptions on investment returns and mortality rates. Retirement age would be increased to further cut costs and other technical refinements were introduced. The chapter makes much of the community coming together to insure the long term viability of the pension plans.These reforms mark the first widespread introduction of “target benefits” in Canada. Conclusion: if workers are willing to pay more and accept less and the taxpayer kicks in some money there may be pension plans with variable outcomes.

Chapter Three sets up the Rhode Island example: close ties between unions and democratic politicians lead to supposedly rich pensions supported by the historical legacy of a plethora of small municipalities in a declining industrial economy. With the eventual outcome that by 2011 the Providence public plan was only funded at 34 per cent. A common practice of suspending employer contributions sent deficits through the roof on a number of large public plans. The State plan allowed members to retire after 28 years of service regardless of age. Declining real estate values limited increases in municipal taxes and the state cut transfer payment to municipalities worsening the situations of many plans. The same features appear here as in New Brunswick: retirees outnumbering active workers and years of pension mismanagement based on faulty assumptions.

This chapter cogently advises that one need think long term on these issues and not from a short term budgetary perspective. As it was based on the Netherlands model, retirees were told that their cost of living adjustments would be suspended until the plan was out of deficit.

Retirement which in some cases included people in their forties was moved to sixty-seven and entitlement would be based on career average and not final years. Defined contribution plans were introduced for future employment so that existing employees would have two sources of pension income: one fixed and one variable. Conclusion: employees take reduced benefits.

 Chapter Four reviews the pension experience in Holland starting with the postwar National Old Age Pension Act which obliged employees to pay premiums from 15 to 65 years of age unless they were unemployed or low income in which case the government assumed the premiums.The pension payout was set by to the net minimum wage. In the private sector, employers were obliged to pool their pensions by industry as were public sector employers. The government strictly regulated funding through the use of independent boards jointly made up of employers and employee representatives. This joint control aspect was initiated in the 50’s and persists today.

Holland endured the dot com crash like others and reacted by imposing minimum funding levels of 105% and made the central bank the regulator. Early retirement benefits were eliminated and the retirement age was moved to 67. This process was instituted by a long union/employer/government consultation which also set discount rates[1] at the interest rate benchmark. These restrictions were too onerous as pension contributions moved to 15 to 20% of salary. The 2008 crash leads to a debate around “defined ambition” or target benefits models. Surplus requirements were eliminated and funding shortfalls were dealt with by phased in benefit reductions and each plan was to set its discount rates based on demographics and investment returns. In some cases, minimum benefits were guaranteed by the purchase of annuities. Conclusion: Once again employees are faced with reduced benefits but the system is simpler as there is one benefit without means tested vehicles like the OAS and GIS.

Chapter Five deals with proposed solutions to the current Canadian situation were the CPP/QPP is set at 25% of the average wage. OAS and GIS are subject to claw backs and private sector plans, have shrunk by approximately 2/3rds. The move to greater investment in equities rather than increasing returns has led to asset losses due to the two market crashes in a decade. The move to defined contribution plans has increased risk to employees who are often asked to choose investment vehicles without any investment expertise. Management fees in Canada for these plans and RRSP’s are amongst the highest in the world. Income shortfalls overtime will lead to an increased reliance on tax based OAS and GIS payments.

What is paradoxical in all this is that income earners without workplace pensions who earn $30,000 to $50,000 will see the biggest percentage income drop. The authors see the proposal  to double CPP/QPP payouts is the most cost effective as the administration is already in place and the deduction process is set up with employers. Voluntary schemes are deemed to be inadequate as people need to save from 10 to 21 per cent for thirty years and the current savings rate in Canada is 5.5%.

This section raises a number of technical issues for specialists but the only important political one is the timeline for implementation as most proposals suggest phasing this in is 2050; long after the problem will have passed. The government could pay for the transition as it did in the 60’s with the CPP as the alternative is to pay later with increased OAS and GIS payments derived from the tax base. The section also embarks on a defense of defined benefit plans versus defined contribution plans and adds one further observation that of suspending indexing as BC did as early as 1982 in face of shortfalls. This introduces some fairness as retirees and current employees are both affected.

Some useful further observations are the promotion of joint trusteeship citing the Ontarioexamples as mirroring the Dutch models and a proposal that public sectorplans be pooled like Holland. There are some Canadian examples of this approach althoughthey don’t suggest a similar approach in the private sector as in the Dutch model.

Overall the book is readable, no doubt thanks to McNish, but the folksy addition of ‘pension heroes in chapters two, three and four may irritate serious readers. A worthwhile contribution to the debate and one that is available as an eBook as well.

Reviewed by Walter Belyea. Walter is a member of our interim project development committee and is a labour relations officer for CAPE, a federal civil servants union.