Defined benefit plans are famously expensive, costing private industry employers approximately 61 cents per employee hour worked, according to a recent U.S. Department of Labor statistic. This has sparked the proliferation of defined contribution plans — a much cheaper alternative where employees are responsible for their own savings, and in some cases costs, rather than receiving a guaranteed pension paid for mostly by the employer. Thanks to collective bargaining and legacy issues, many public employees have retained their DB plans. Some critics say that’s unsustainable — and at least one government is taking matters into its own hands.
In an effort to help curb costs at the public sector level, the government of Canadian Prime Minister Justin Trudeau, under Finance minister Bill Morneau’s direction, has introduced legislation, called Bill C-27, that would allow Crown corporations and federally regulated private sector employers to back out of DB plans and create so-called target benefit plans. Like their defined benefit counterparts, target benefit plans are professionally managed as centralized pools of capital, but TBP payouts vary based on the fund returns, as with defined contribution plans.
One of the most vocal critics of the proposed legislation has been the Canadian Labour Congress, a labor union representing 3.3 million workers. Hassan Yussuff, president of the CLC, contends that the bill was announced without consultation or advance notice to affected public sector employees and that it directly contradicts election promises made by Trudeau to stabilize and improve retirement security.
“Bill C-27 invites employers and other plan sponsors to abandon their pension promises to employees and retirees, downloading virtually all plan risks brought on by market volatility from employers to workers and retirees,” Yussuff argues. “This is very dangerous legislation that was even rejected by [former prime minister Stephen] Harper’s Conservatives, and I’m urging the current government to abandon it now.”
For its part, the government says it has provided some assurances to unions and other employees that pension benefits will remain intact. A special consent provision was incorporated into the bill to ensure that individuals who do not agree with a replacement of their old plan with a TBP could maintain their existing DB plan. Annie Donolo, press secretary for Canada’s department of finance, says the legislation calls for employers to provide all disclosure documents and information about risks and rewards of a new TBP so that employees can make an informed decision. Unions, when given a mandate to do so, could provide consent — or not — on behalf of members.
But even with the consent provision, the CLC has cried foul. Yussuff thinks that employers, which have an upper hand in negotiations, could threaten employees with the complete removal of a pension benefit if they don’t comply with a new TBP option. This, he adds, can happen when companies are experiencing financial difficulty.
Some experts think the government has not properly addressed the issue of pension cost — and that Bill C-27 is a step in the right direction. “We have to move to a workplace plan design that is 21st century,” says Keith Ambachtsheer, president of KPA Advisory Services in Toronto. “This legislation facilitates designs that are neither traditional old DB nor DC, and so in that sense it’s a good thing. We need that new middle ground.”
With a Liberal majority controlling Parliament, and the ability to pass legislation uncontested by the opposition parties, the passing of Bill C-27 is a forgone conclusion. The debate about pension reform, however, has only just begun. •