Pensions are an important part of Canada's income retirement system. They are either a type of contract made in the employment relationship or a trust created by an employer for the benefit of its employees. Pensions typically provide an amount to be paid to a person on a regular basis following their retirement for the purpose of income replacement1.
Canada's retirement income system is often described as having three tiers:
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Public Pensions: these include universal Old Age Security (OAS) benefit and the Canada/Quebec Pension Plan, payable at age 65, plus an income-tested Guaranteed Income Supplement (GIS), payable to OAS recipients with net incomes below $39,6602. All of these benefits are adjusted automatically based on increases in the Consumer Price Index (C.P.I.);
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Employment or Workplace Pensions: many of these provide an early retirement or bridge benefit payable prior to age 65; Employee and employer contributions to a registered pension plan (RPP) are tax-deductible3. Benefits from an RPP may be shared with a spouse4.
- Other Savings Plans: Registered Retirement Savings Plans (RRSPs), Tax Free Savings Accounts (TFSAs) and other individual savings/investments. Personal contributions to an RRSP are tax deductible up to proscribed limits, and investment earnings within an RRSP accrue tax-free. Contributions to TFSAs are not tax-deductible; however withdrawals from TFSAs are not considered income.
This article is about workplace pension plans. The coverage of these plans has been steadily declining in Canada since its peak in 1997, when it reached 50% of the workforce. In 2010, only 38.8% of the work force was covered by a pension plan. In the public sector however, pension plan coverage is still nearly universal with 84% of the work force covered by a pension plan, compared to only 25% in the private sector5.
Pension plans in Canada are generally subject to provincial pension benefits legislation. The major exceptions are pension plans that fall under federal jurisdiction; such as those in the banking and inter-provincial transportation industries. These only represent about 7 % of all pension plans. (typically, these are plans covering larger employers like Air Canada, CNR, etc.)
There are many different kinds of pensions, but what they all have in common is that they are payable for life. The vast majority of pension plans are either defined benefit (DB) or defined contribution (DC) plans. According to Statistics Canada, in 2011 these types of plans represented 74% and 16% of all plans, respectively6. DC plans have grown over the past decade, mostly in the private sector, as have hybrid plans7. The types of plans are discussed below.
Types of Plans
Defined Benefit (DB)
DB plans are the most common type of pension plan, covering three out of every four plan members. With a DB plan, the benefit is known in advance. Typically, a DB plan is designed to replace a given percentage of pre-retirement earnings. For example, a benefit rate of 2% is designed to replace 70% of earnings after 35 years of service.
Defined Contribution (DC)
A DC plan, by contrast, specifies the contribution rates by the employer and the employee. Each employee has an individual account, and the accumulated funds are invested. The amount of pension "benefit" available to a plan member for this type of plan is based on the lump sum of contributions paid into the plan, plus interest.
Multi-Employer Pension Plans (MEPPs)
Looking beyond DB & DC plans, MEPPs are a subset of plans that combine the features of each, and typically cover more than one employer. Some of the largest pension plans in Canada are MEPPs, including plans like the Ontario Municipal Employees Retirement System (OMERS), the Ontario Teachers' Pension Plan (OTPP) and the Health Care of Ontario Pension Plan (HOOPP).
Employer and employee contributions to a MEPP typically form part of a collective agreement. The principal distinguishing feature of a MEPP is that the plan sponsors share the responsibility to make up any funding shortfall. In addition, any accrued surplus remains part of the plan, and cannot be used to reduce future contributions unless mutually agreed to by the sponsors.
In Ontario, the Report of the Expert Commission on Pensions in 2008 provided a major impetus for employers to switch to MEPPs8. The funding requirements for these types of plans are now based solely on "going concern" actuarial valuations, meaning that MEPPs are exempt from solvency funding rules.
In 2012, the Institute for Research on Public Policy (IRPP) issued a major report on "target benefit plans" which are a type of MEPP9. The IRPP study noted that target plans are part of a continuum of plan types which range from pure DB to pure DC. The study also noted the growth in hybrid-type plans and advocated this approach as a way to address public policy concerns over declining coverage.
The Toronto Transit Commission (TTC) Pension Fund Conversion
Take for example, the conversion of the Toronto Transit Commission (TTC) Pension Fund to a Jointly Sponsored Pension Plan (JSPP), pursuant to Ontario's Pension Benefits Act in 2011. The TTC Pension Fund is a large plan, ranked 6th in the Benefits Canada list of the top 100 pension plans in Canada10. It has approximately 12,690 active members and 6,500 retired members.
The plan covers all employees of the TTC, up to and including the rank of CEO. It began as a multi-employer pension plan, covering employees of the TTC, Greyhound Canada and Amalgamated Transit Union (ATU) Local 113 in the early 1940's. The plan evolved however, over the years, to essentially become a single employer DB plan, and a MEPP in name only.
The plan experienced chronic solvency issues. Under the Pension Benefits Act (PBA), plan sponsors are required to amortize solvency deficits over a period not to exceed five years, and are required to make annual payments to eliminate the deficiency. This would have put severe financial strains on the TTC. The plan's Board of Directors began to examine options for addressing the plan's growing deficiencies, and solvency funding relief was identified as the preferred option. The rationale was clear; a public entity like the TTC was not likely to wind up its pension plan. So, beginning in 2004-2005, the TTC began lobbying the Government of Ontario for solvency relief.
2008 was a pivotal year for the TTC Pension Fund Society. The global financial collapse led to a -15.5% return on pension assets, or a decline of $539.3 million in the value of the fund. A series of meetings were held with senior officials in the Ontario Ministry of Finance. It became clear that the issue would not be addressed until the plan converted to a JSPP. With a JSPP, the funding parties are jointly responsible to make up any shortfall through increases in contributions, reductions in future benefits, or a combination of the two.
In 2011, in the face of a growing solvency deficiency of over $700 million, the plan sponsors reached an agreement which provided for11:
- An increase in both employee and employer contributions of 0.5 % of salary; and
- A conversion of the plan to a JSPP.
The JSPP conversion was a milestone in the history of the TTC Pension Fund Society. The TTC plan was the first JSPP to receive solvency funding exemption from Financial Services Commission of Ontario (FSCO), effective on July 21, 201112. The conversion did not change the plan's governance structure. Prior to the conversion however, the TTC was responsible for any liabilities in the event of plan wind-up. After the conversion, the plan sponsors shared both the decision making and the risk13.
The takeaway for members covered by traditional DB plans? Members may want to consider converting the plan to a MEPP or a JSPP, particularly if the plan is experiencing chronic solvency issues or pressure to convert to a DC plan.
1http://www.merriam-webster.com/dictionary/pension
2http://www.servicecanada.gc.ca/eng/isp/oas/oasrates.shtml
3http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/207-eng.html
4http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/pnsn-splt/qlfy-eng.html
5http://www.statcan.gc.ca/daily-quotidien/120525/dq120525a-eng.htm
6http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/famil120a-eng.htm
7http://www.statcan.gc.ca/daily-quotidien/120525/dq120525a-eng.htm
8http://www.fin.gov.on.ca/en/consultations/pension/report/summary.html#funding
9http://www.irpp.org/pubs/IRPPstudy/IRPP_Study_no27.pdf
10Benefits Canada, 2012
11http://ttc.ca/PDF/About_the_TTC/TTC_Annual_Report_2011.pdf
12http://www.kmlaw.ca/About-Us/News/News-Item/?list=News&rid=83;
13Additional sources include TTC Annual Reports, 2008-2011 and Interviews with John Cannell, former Chief Operating Officer, and Mary Darakjian, Head of Pensions, TTC Pension Fund Society
