Expanding CPP is best way to protect pensions

Sears Canada's bankruptcy has refocused attention on the vulnerability of company pension plans.

Depending on how the affairs of the oncemighty retail chain are wound up, somewhere between 16,000 and 18,000 former and long-term employees risk losing a good chunk of the pensions they paid for over the years.

The sheer injustice of this has resulted in the usual calls to change bankruptcy laws so as to give pensioners and workers priority when an insolvent company’s assets are being sold off.

These have been met with the usual government unwillingness to do anything that might make it harder for banks and other so-called secured creditors to get first crack at the proceeds of a bankruptcy sale.

It’s an old story. I wish the Sears pensioners and employees luck.

But, in the long term, the answer to the pension crisis is to forget about company schemes. Instead, governments should dramatically expand the public and highly regarded Canada Pension Plan.

Pensions are, in effect, the fruit of forced savings. Workers forego wages now for the promise of income after retirement.

The actual payments are usually split between employer and employee. But conceptually, both represent the same thing — deferred wages.

In North America, company pension plans took off during the Second World War as a way to get around wage controls. It might be illegal to offer scarce workers higher wages. But it was all right to offer non-wage benefits like pensions.

After the war, the growth of unions encouraged the expansion of company pension plans. But it was always a minority of workers who benefitted from them.

Complicated solvency rules were developed to make sure companies could meet their pension obligations. For those entering the work force in the 1970s and ’80s, having a company pension seemed like money in the bank.

All of this was fine as long as unions were strong and corporations willing. But when that changed, so did company pension plans.

First, companies replaced so-called defined benefit plans, which guaranteed a certain payout, with defined contribution plans that did not. Some, like Sears, allowed existing employees to stay with the defined benefit plan but offered new hires the inferior defined contribution version.

Second, cash-strapped employers lobbied government to relax pension laws. Ontario, for instance, has promised rule changes that would let employers keep their defined benefit plans only 85 per cent solvent rather than the existing 100 per cent.

In Ottawa, federal Finance Minister Bill Morneau has introduced a bill that would let federally regulated firms replace their defined benefit plans with targeted schemes.

In a targeted benefit plan, the employer agrees only to try to provide predictable pensions. If it can’t, pensioners will get less than they were promised.

In short, outside of the public sector, there is little hope for real company pension plans. Their time has come and gone.

That leaves public defined benefit plans, most notably the CPP. Last year, Morneau scored a coup when he won agreement from the provinces to expand the CPP.

The expansion is significant. By 2065, the maximum payout will have increased by 50 per cent. But at $19,927 a year, it will still be too low.

The CPP is well-run and financially self-sustaining. As the Sears saga demonstrates, even the biggest private enterprises can go out of business. The government of Canada, which ultimately backs the CPP, cannot easily do the same.

If there is a future in pension reform, it is with the CPP. Changing the bankruptcy laws to put pensioners at the front of the queue, as both the New Democrats and Bloc Québécois suggest, is a fine idea. But it doesn’t deal with the fact that the company pension plan such a move would protect is a thing of the past.

Thomas Walkom writes on national affairs for Torstar Syndication Services.