Pension Plan Overhaul Needed to Fix Problems, Consultants say

Canada's private pension plans need a thorough overhaul to fix problems that have been aggravated in recent years by patchwork measures, a major management consultancy says.

Principals with Towers Perrin Inc. are aware that overhauling such a complicated -- and often misunderstood -- system will take years of negotiations as well as legislative changes, but they said changes are necessary if retiring Canadians are to receive the pensions they expect after a lifetime in the work force.

"If nothing dramatic happens, we won't have any plans," said David Service, a principal with the Toronto office of Towers Perrin. "The system has to be fixed." 

Mr. Service, who wrote the report along with fellow principal Steve Bonnar, said the problems have become so acute that major changes will be needed within the next 10 years. "Nobody is really happy with the system" as it now exists, Mr. Bonnar said.

The root problem is a patchwork of band-aid solutions that have been introduced to meet the needs of a rapidly changing work force. Many company pension plans were designed in the 1950s and 1960s when it was usual to spend an entire career with one employer and then retire at 65. These plans discriminate against employees following more modern career paths, changing jobs more often or retiring early.

There have been many questions over surpluses and deficits in recent years, the authors said. In some cases, company owners have been seen as "raiding" surpluses. while several high-profile companies have recently filed for bankruptcy protection, leaving huge deficits in the pension plan.

"The question of who owns the excess or surplus assets and who pays the deficit is murky at best," they said.

The Towers Perrin authors are also concerned with the widespread confusion they see among companies and their employees. Because staff rarely understand their own plans, they take risks without realizing it and sometimes lose the benefits they would normally be entitled to. Companies are confused by the cost of funding the plans, a particular concern during the bear market of recent years.

The authors suggest a widespread revamping of the pension system, a 27-step overhaul that would require the approval of policy-makers, regulators, politicians, companies and their employees. And that is no simple task, they said.

They suggest a national regulator who would introduce a consistent set of rules across the country. But that would require the approval of 10 provinces and the federal government and that is "practically impossible," Mr. Service said. 
He recommends an in-depth review every five or 10 years to keep the pension system in sync with ever-changing social trends and economic developments that affect the financing of the plans.

The authors want to make the pension system age-neutral to minimize the penalties that now come with early retirement or job changes. And they want to clarify the pension system so employees understand the consequences of leaving early or staying beyond 65.

They suggest a variety of changes in the funding of pensions to make the system more flexible and more fair for the sponsor, and they want to set a minimum funding level so companies don't find themselves with an unexpected pension deficit.

They want to make pension plans more common in the workplace, and they want to remove the barriers that many companies face should they want to set up a new plan. "We're not in an environment where companies are encouraged to start plans," Mr. Bonnar said.