Canada’s pension system is inequitable, treating public sector workers far better than those in the private realm, according to a new report by C.D. Howe.

The report, entitled A Pension in Every Pot: Better Pensions for More Canadians, finds that roughly 80% of public sector retirees participate in defined benefit pension plans, while just 30% of private sector workers have a pension plan, and the benefits are typically more generous in the public sector.

Furthermore, an increasing number of employers in the private realm are replacing defined benefit pension plans with defined contribution plans for greater predictability of compensation costs. Employers typically contribute to defined contribution plans at lower rates, and recipients of such plans are put at greater risk of outliving their savings.

The report, by Toronto-based pension lawyer James Pierlot, highlights several Canadian rules that give unfair advantages to public sector employees. For example, rules that limit annual contributions to retirement savings vehicles make it difficult for private sector workers to save enough for retirement, he says.

In addition, the report argues that rules should not tie pension saving to employment and employment income. Since workers cannot participate in pension plans that aren’t sponsored by employers, Canada’s 2.6 million self-employed workers cannot join plans. The rule also makes it much less likely that employees of small or medium-sized businesses are able to join plans.

Rules should also not inhibit the creation of the kind of large, pooled pension arrangements in the private sector that work well for public sector workers, according to Pierlot.

He says with large pools of invested capital, public sector plans have proven very good at leveraging economies of scale to deliver pensions with very low agency and unit administration costs. In addition, the benefits they provide are far more generous than most private plans.

“When it comes to pension plans, big is good and bigger is better,” Pierlot says.

He praises multi-sponsor pension plans as far superior to single-sponsor plans, since they can deliver good pensions with extremely low administration costs. He recommends the amendment of pension standards legislation to expand the classes of entities which can register and administer pension plans, to allow all Canadians to participate in multi-sponsor plans. Professional associations and financial institutions, for instance, should be allowed to administer plans, according to the report.

The report also criticizes rules that restrict the types of income that can be used for retirement saving. “Tax rules need to become less restrictive to allow more kinds of taxable income to be contributed to a pension plan,” Pierlot says.

The report recommends that Canada adopt uniform, target retirement savings limits so that all Canadians will have the same opportunity to save for retirement. In addition, current contribution limits should be replaced with a more equitable lump-sum accumulation target of $1 million, or more, as a preferred option, Pierlot says.

He notes that policymakers in the United Kingdom made such a change to their pension system in 2006, and replaced annual contribution limits with a lifetime deferral allowance of £1.5 million with annual increases approximating an inflationary measure.

“This provides equal access to income deferral to all taxpayers, and it allows for catch-up funding for individuals who delay retirement saving until later in their careers,” the report says.

“The goal of pension saving should be a target retirement income; the timing for funding to the target should be flexible.”

IE