There’s a retirement crisis brewing in Canada. Canadians carry more debt than ever, as savings rates drop to all-time lows. A couple decades ago you’d have the safety net of a well-funded pension plan; how times have changed! Pension plans are facing a perfect storm; the retirement of the baby boomers, coupled with the prolonged low interest rate environment, is leading to massive pension plan challenges and deficits.
Pension Providers Facing Deficits
In the public sector, the Ontario Municipal Employees Retirement System (OMERS) is facing a $10-billion solvency deficit, while Canada Post is facing a $6-billion deficit. Things aren’t much better in the private sector: Via Rail is facing a $419-million deficit. Employers faced with massive pension deficits are pushing the risk to employees. They are switching from defined benefit plans where employers bear the risk by guaranteeing a set pension at retirement, to defined contribution plans where your pension is based on your investment returns. Pensions may be in tough times today, but it hasn’t always been that way.
Pension Plans By The Decade
The concept of pensions in Canada can be traced back over a century ago. When pension plans were first introduced they were fully funded by employers. Although employees weren’t required to make contributions, however, there was also no guarantee the employer would be around to pay the pension.
World War II is considered a boom period for pension plans. In order to hire and keep the best workers, employers began offering generous defined benefit pension plans. This was long before freedom 55 – to put it in perspective:
- In the 1960’s the average worker retired at 65 and lived another 15 years.
- In the 1970’s employers faced a surplus of workers as baby boomers flooded the job market. To make room for the new generation, employers offered early retirement packages to their eldest workers.
- The 1980’s saw inflation reach unprecedented levels. Prime rate went as high as 22.75 per cent in 1981, making it especially tough for retirees on fixed income. As a way to protect the purchase power of retirees, employers started offering inflation protection.
- The 1990’s saw strong investment returns, as pension plans regularly posted surpluses.
The Challenge Faced by Pensions Today
The market crash of 2008 has really changed the landscape for pension plans. Investment returns have been anything but stable over the past five years. Disappointing returns combined with chronically low interest rates has led to record pension deficits.
It gets worse: Canadians are also living longer than ever. The average worker expects to live 23 years in retirement – 50 per cent longer than back in the 1960’s. Although employers can apply for solvency relief, the fact remains that defined benefit pension plans need to change with the times or face extinction.
The public sector has already introduced 50-50 cost-sharing ratio, where employers and workers equally contribute to pension plans. The private sector needs to adapt with the times and develop a long-term pension plan strategy or there won’t be any pensions left when it comes time to retire. Unfortunately for the younger generation, it looks like we’re going to have to worker longer and receive a smaller pension. If there was ever a good reason to pay yourself first and save 10 per cent of your income, this is it.