Pension Plan Reforms

With Budget talks swirling around this week there is a lot of focus on Retirement Pension Plans, and the fact that many Canadians are not saving enough for their retirement.  Many ideas are being tossed around; here are three of them;

Canada Pension Plan (CPP) Enhancement

The most obvious and one that has been talked about for years is a modest enhancement to the current CPP which would be phased-in over time.  Mandatory contribution rates would increase for both employers and employees in an effort to help ensure adequate and predictable income for future retirees.  The percentage increase mentioned was 3% each (employer and employee) for a total of 6%; which would increase the current contribution rate to almost 16%.

Pooled Registered Pension Plans (PRPPs)

Approximately 60% of employed Canadians do not have access to a company pension plan. A PRPP would give employers the ability to offer their employees a Pension Plan that is administered by a third party or financial institution.  By small employers pooling their pension assets together they will save administrative costs and be relieved of the fiduciary responsibility an employer sponsored plan entails.  The government has many concerns with PRPPs and in his speech Minister Duncan reiterated the government’s position that it favors an enhancement to CCP as the first course of action.

Target Benefit Pension Plans (TBPP)

Pension plans like OMERS are Defined Benefit Pension Plans (DB) where the future pension income paid to employees is based on a formula using their income and years of service.  It is the company’s responsibility to invest the pooled assets and pay the pension upon retirement.  If the pooled funds are not invested properly and there is not enough money to pay the pension, the company is responsible to make up the shortfall.  A TBPP is very similar yet if there is a shortfall at retirement, the company does not have to make up the difference.  The pension benefit or income to the employee would simply be reduced.  In comparison, the TBPP does not seem like a great option, although removing this liability may encourage more employers to offer pension plans. 

It is clear something has to be done to help solve the retirement income issue; it will be interesting to watch the debates and see what happens.

Have a great weekend,

Next week I will have a review of the Budget and what it means to you as an investor.

Tracey

Sources:  Fidelity Investments, Mackenzie Financial and BNN