Federally-regulated pension plans
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Canada’s Pension Predicament
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May 22nd, 2009
To the members of the Federal Pension Review Panel,
On behalf of the 105,000 small- and medium-sized business owners that the Canadian Federation of Independent Business (CFIB) represents in every province of Canada, I wish to provide input into your consultation panel on federally-regulated pension plans. We are happy to see that the government is taking this issue seriously, as we have advocated for comprehensive reform to the current pension system. While the mandate of your review is directed at investigating federally-regulated pensions, our members have grave concerns regarding the looming pension crisis and its implications on Canadian taxpayers as a whole.
Our members overwhelmingly reject the notion that the government should backstop private sector plans that run into financial trouble. Guaranteeing pension plans exposes them to future financial risks and creates a disincentive for the plans to be cost-effectively managed. CFIB strongly opposes government using taxpayers as the default go-to mechanism for covering pension shortfalls. Independent business owners are already saddled with the funding of lavish defined-benefit public sector pension plans at a time when they cannot afford anything remotely comparable for their own retirement.
The most recent illustration of the growing pension unfairness is the Canadian Auto Workers (CAW) demands to have the Federal government bail out Air Canada, and to backstop their pension plan. According to Air Canada’s CAW Local 2002, the union is afraid that the planned restructuring of Air Canada could result in a defined-contribution plan rather than the current costly defined-benefit model.
It is indeed unfortunate that retired Air Canada workers would suffer from the airline’s potential bankruptcy. It must be noted, however, that management and the union should bear responsibility for the predicament they placed their employees/members in. Over the years, collective bargaining has put more pressure on employers to provide for more generous pension benefits. In this case, CAW has heightened expectations among their members for having generous and protected pensions, which become unrealistic during hard economic times.
We believe that it is short-sighted of some to assume that Air Canada’s pension ailments will be cured by pouring taxpayers’ money into a severely underfunded pension plan. It is also exceedingly unfair to force taxpayers, who largely do not have pensions of their own, to pick up the tab on pension bailouts. Think about the seniors who never had the luxury of having a company pension, or the employees, whose RRSPs lost considerable value after years of diligent contributing. Will they be bailed out? Bailing out pension plans such as Air Canada’s, or any other federally-regulated pension, will also set a dangerous precedent by giving other troubled pension plans reason to ask for a similar lifeline. Such an approach will certainly have a long term detrimental effect on public finances, as the list of beleaguered companies is growing.
Any pension restructuring, whether or not there be any kind of government oversight due to bankruptcy, should involve two principles. The first and most important principle is fairness. CFIB has been and will continue to be a strong advocate for improvements to pension savings, but only on the basis that all Canadians have access to the same quality of pension, which requires them to be reasonable in scope and cost. The regulatory framework for defined-benefit pension plans is certainly due for review and improvement. However, instead of bailing out certain pension plans “on the fly”, the government should adopt an overarching principle of fairness for all Canadians to be able to afford a decent retirement. According to CFIB’s recent Wage Watch report, which compared the salaries and benefits of public-sector employees to those of private-sector employees in identical jobs, there is a large and growing disparity between the pension benefits of public and private employees. While we do not advocate taking away these pensions from civil servants, the fact that the costs associated with these plans continue to grow unchecked, while most Canadians face an increasingly uncertain retirement, needs to be addressed if we are to ever find a holistic solution to this problem.
The second principle is that pension funds that fall into deficit due to bankruptcy or mismanagement need to be switched to a defined-contribution model, like the vast majority of pensions Canadians today have access to. Defined-benefit pensions are constantly running into problems with shortfalls, which are usually caused by temporary downturns in the financial system that play havoc with mark-to-market accounting rules. While these funds use windfalls during times of growth to expand benefits and offer early retirement benefits, they are constantly running to government for a bailout during periods of economic difficulty. Defined-contribution plans have no such problems, as any windfall profits made during times of economic growth are used to balance out losses during recessions, which give them the necessary long-term growth to provide retirement benefits in the future. Unlike defined-benefit plans, they have no need to guarantee a certain level of benefits and therefore can weather tough times without going to the government for a bailout.
This growing problem was also explained in more detail in our comprehensive 2007 report on the growing pension gap, Canada’s Pension Predicament, which tracks the growing disparity between public sector, private sector, and self-employed retirement benefits. Both Wage Watch and Canada’s Pension Predicament have been included with this submission. CFIB wants to see a fair, workable system of pensions and retirement benefits that is accessible to all Canadians regardless of whether or not they work in the public or private sector, or for a small or large business. We believe that these principles of fairness and access are key to a successful reform of the pension system, and hope to see them at the core of any report generated by this review.
We look forward to reading the forthcoming report, and would be happy to answer any further questions in regards to this submission.
Sincerely, Catherine Swift
President, Canadian Federation of Independent Business
