Pension reform defining issue of next decade: CEO

TORONTO - Pension reform will be the defining issue of the next federal election and the next decade as Canadians demand changes to rules that hinder rather than help saving for retirement, says the CEO of one of Canada's largest pension fund managers.

Jim Leech, chief executive of the Ontario Teachers' Pension Plan, said Thursday the confluence of an aging population and the financial crisis have turned the fate of pension plans and the retirees who depend on them into front-page news.

"As Tommy Douglas and national medicare defined public debate in the '60s and the natural gas pipeline and C.D. Howe in the '50s and Brian Mulroney and free trade in the '80s, pension reform could be the defining issue of the first decade of this century," Leech said in a speech to the Empire Club of Canada.

"And based on discussions I've had with officials in Ottawa, there's little disagreement about the election debate potential of this issue."

Leech said he is troubled by the private sector's move from defined-benefit plans, which guarantee employees a reliable and steady income after retirement, to defined-contribution plans, which base retirement benefits on investment returns.

Under current federal pension rules, defined-benefit plans must have enough money to pay retirement benefits to all members of the plan into the future. Many companies that offer these plans are under pressure to make up overwhelming shortfalls through higher contributions after the financial crisis caused plans' assets to plunge.

According to RBC Dexia Investor Services, Canada's pension plans suffered their worst year on record in 2008 as their assets dropped 15.9 per cent to $310 billion, and seven per cent in the fourth quarter alone.

Leech said "arcane" rules, such as one that prevents defined-benefit plans from having a surplus higher than 10 per cent, hurt pension sponsors' ability to protect themselves.

"The DB model has been made unaffordable for sponsors by short-sighted tax rules and court decisions that effectively prevent sponsors from saving enough in good times to offset losses in bad times, and weak-kneed management who, out of expediency, promised unrealistic levels of future benefits in order to dampen salary demands," Leech said.

He said defined-benefit plans actually cost far less to manage than defined-contribution schemes, because they can pool risk and savings.

Canada needs a pension champion who will undertake "visionary pension reform," Leech said. He pointed to reforms in the Netherlands that allow smaller pension funds to amalgamate with larger ones and give employees the option of buying credits in a defined-contribution overlay fund in addition to their defined-benefit plans.

In an interview after his speech, Leech called for "a mandatory plan that would help people save for their retirement over and above the Canada Pension Plan" like the Netherlands' overlay fund.

Many Canadians without defined-benefit plans have been forced to postpone retirement due to the financial crisis and its impact on their defined-contribution plans or their personal savings.

Ontario Premier Dalton McGuinty has called for a federal-provincial summit to talk about ways of guaranteeing an adequate retirement income for people who don't have pension plans.

And many major employers, including General Motors Canada and Air Canada (TSX:AC.B), have found themselves under tremendous pressure to top up their defined-benefit pension plans after the value of their assets were driven down by low stock prices and bond interest rates.

Air Canada has asked its unions to approve a 21-month moratorium on pension payments as the cash-strapped airline works to avoid seeking court protection from creditors. The airline has $2.9 billion in unfunded pension liabilities.

And GM Canada agreed in recent labour negotiations to give up its special status that has allowed it to underfund its pension plan since the 1990s and begin topping it up immediately. Ontario taxpayers will likely be on the hook for at least part of the plan's $7-billion shortfall.

Teachers', which administers the pensions of 284,000 active and retired teachers in Ontario, has a $2.5-billion shortfall. Another $19.5 billion in losses has been held back through what is known as a "smoothing adjustment" and will be recognized over the next four years.

Meanwhile, the Canada Pension Plan lost more than $19 billion off the value of its assets in the last six months of 2008, and Canada's largest pension fund, the Caisse de depot et placement du Quebec, saw the value of its assets plummet 25 per cent to about $120 billion from $155 billion last year.

The federal government has said it would consider extending the repayment period for pension shortfalls to 10 years from the current five and several provinces have approved or are considering similar changes, but many in the industry say that's not enough.

In 2008, there were 1,350 registered pension plans in Canada, of which 351 were defined benefit plans with 391,000 members and $109 billion in assets.