Fix 'ailing' pension system, Lamoureux urges

The federal government needs to fix Canada's "ailing" retirement savings system, a prominent former pension plan executive said Tuesday.

"Despite their many advantages as a retirement savings vehicle for Canadians, defined benefit plans continue to decline while governments stand by watching them disappear," said Claude Lamoureux, the recently retired CEO of the Ontario Teachers' Pension Plan.

Lamoureux noted that a third of Canadians have no pension at all while many of the rest aren't saving enough for retirement.

"I am deeply concerned that eventually Canadians will no longer have access to defined benefit pension plans," he told the Economic Club of Toronto on Tuesday. "This would be a terrible loss of an attractive, efficient and reliable retirement savings vehicle and an important pillar of Canada's pension system."

Defined benefit plans typically guarantee members a retirement income based on a pre-set formula and a member's years of service with a company. For example, an employee who had 35 years of pensionable service, might get 70 per cent of the average of his/her best five years' salary upon retirement.

The percentage of Canadian workers covered by such plans dropped to 34 per cent from 44 per cent from 1992 to 2003, with the decline most significant in the private sector.

Employers are increasingly offering their workers defined contribution plans, which pass on all investment risk to the employee. A fixed pension is not guaranteed because the retirement payouts depend entirely on the employee's ability to invest the contributions.

Companies prefer defined contribution plans because they'll never have to fund any deficit in the plan. That often happens with defined benefit plans when low interest rates and poor market returns leave a plan underfunded. At the same time, employers do not have any automatic right to any pension plan surpluses, which leaves them even less incentive to opt for defined benefit plans.

Lamoureux said the system needs to be changed to encourage employers to keep defined benefit pension plans. He urged the federal government to convene a national summit on pension reform.

Lamoureux's call for change follows similar sentiments from former Bank of Canada governor David Dodge and the Association of Canadian Pension Management.

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