With a Good Pension Plan Everybody Wins!

Communications, Energy and Paperworkers Union of Canada

A good pension plan for CEP members
CEP Research and Communications Departments
January 2006

Television commercials by insurance companies tantalize us with every worker’s dream: retirement at 55, complete with travel to distant lands, a cottage in some idyllic spot, hunting and fishing trips and joyous family get-togethers. After long years of working, many people dream of being able to take advantage of their new life in this way. But can this dream come true or is it merely an illusion?

For CEP members, the choice is clear: they want a decent and well-deserved retirement. This is their priority at the bargaining table.

In fact, income security in retirement has become an important social issue. A recent Canadian Labour Congress survey shows that a growing number of Canadians are worried about not having enough money for their retirement.

Savings for retirement

If we look at the situation across the country we see that according to Statistics Canada, 71% of Canadian families have private retirement savings of about $50,000. This means they invest their savings either in Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs) or in workplace retirement plans.

But are we saving enough for retirement? The experts estimate that to be adequate retirement income should be 70% of the salary a person earned when they were working. This would allow a person to maintain their standard of living in retirement. One third of Canadian families with at least one member nearing retirement do not have enough money set aside for retirement. This means that they will not be able to maintain the same standard of living as before and may even be forced to live below the poverty line.

A survey by RBC Financial Group confirmed that saving for retirement is not a financial priority for many Canadians. 33% say they already have a hard time making ends meet. For people aged 18 to 29, purchasing a home is a priority, while older people tend to save for the education of their children and grandchildren. Only 13% of respondents say that saving for retirement is a financial priority for them.

Trouble ahead without private retirement savings

Many families are dependent upon public pension plans as their primary source of income in retirement. This is particularly true for 29% of Canadian families, some 3.5 million people, who have no private savings for retirement.

They will be entirely dependent upon Old Age Security, the Guaranteed Income Supplement, the Quebec Pension Plan or the Canada Pension Plan. Some provinces also provide a modest income supplement to the elderly.

These public programs are extremely important; they have reduced the level of poverty for elderly people over the years. But one cannot rely entirely upon income from these programs for a decent retirement.

In 2004, for example, a single retiree living in Quebec, who retired at 65 and depends entirely upon public pension plans, would receive between $14,130 and $17,140, depending upon annual income earned during his or her career.

This person runs the risk of living below the poverty line set by Statistics Canada. The poverty line varies depending on whether a person lives in a rural or urban setting.

For the majority of people, a decent retirement will be an illusion. Many of our members are at risk of finding themselves in this situation because they are not saving for their retirement or, if they are, they are saving too little.

Group and individual RRSPs

Many workers invest in RRSPs, either individually or through their employer. This is a good way to save if one does not have a good workplace pension plan. It is important to know that, as collective and individual RRSPs are not covered by legislation on workplace pension plans, they do not have specific clauses protecting workers’ retirement funds. RRSPs, which are governed by the federal Income Tax Act, are one way to save for retirement. RRSP payments are tax deductible and the RRSP account grows with no taxation until money is withdrawn.

A group RRSP is a collection of individual RRSPs taken on behalf of workers and sponsored by the employer. A main disadvantage of RRSPs is that the money may be taken out at any time. Many people do so, thereby reducing their savings necessary for retirement.

The best pension plan: defined benefit plan

To provide an adequate income for retirement, a good workplace pension plan is a must.

That is why it has long been a bargaining priority for the labour movement, and this effort has borne fruit.

The vast majority of unionized workers now have a workplace pension plan, whereas most non-unionized workers do not. This holds true even in workplaces with less than 20 employees.

Small Workplaces

There are two types of workplace pension plans: the defined benefit plan and the defined contribution plan.

The defined benefit plan is the best workplace retirement plan. It provides members with retirement benefits that are directly tied to wages and years of service. Benefit amounts are known and they are set based on a formula that is laid out within the text of the plan.

This is also the only retirement plan offering advantages such as automatic indexing of benefits based on the cost of living, protection in the event of disability and better death benefits, termination benefits and transfer of benefits from one employer to another.

CEP demands at the bargaining table

The Eastern Canada pulp and paper sector’s model retirement plan is a good example of what we want to be able to provide in terms of a defined benefit plan. It provides good retirement income as well as other important benefits. This is what workers from the pulp and paper sector are demanding as their model pension plan.

  • A plan entirely financed by the employer.
  • A lifetime benefit of 2% of the worker’s final average earnings multiplied by his or her years of pensionable service. Final average earnings calculated on the worker’s three best years of service. Bridging until age 65, which is an additional allowance received until public pension plan benefits begin.
  • Retirement without actuarial reduction if he or she fulfils one of the following criteria : is 58 years of age, or has completed 30 years of pensionable service, or when the sum of age and years of pensionable service equals 80.
  • The option to take early retirement, with actuarial reduction, before his or her normal date of retirement.
  • Retirement income protected against inflation with benefits automatically indexed the 1st of January every year.
  • A plan that complements public pension plans.
  • Mandatory participation for all workers in the workplace.
  • Inclusion of the pension plan in the collective agreement so that all clauses of the plan are negotiated between the union and the employer.
  • Joint administration with the union, with at least equal representation between the union and the employer on the pension committee. This committee would also supervise the handling of funds.

Problems with defined contribution plans

Some employers are moving away from defined benefit plans, preferring defined contribution plans instead. These plans have set contributions by employers and employees.

Employers find these plans attractive because they can accurately predict how much they will be required to invest in the plan. But defined contribution plans are far from ideal for members, as they do not know what their benefits will be once they are retired.

For example, the benefits received by a worker who has accumulated $50,000 in a defined contribution plan and who purchases a lifetime annuity from an insurance company will vary, depending upon the year in which he or she retires.

An identical contribution can produce benefits that vary considerably depending upon whether interest rates were high or low when the individual retired. The lower the interest rate, the less the monthly benefits the individual will receive.

Many of our members have this type of pension plan. Money is saved for retirement but nobody knows if it will be enough. It is like playing the lottery. With luck, the member’s retirement date will coincide with a good year for the stock market and high interest rates. Otherwise it’s time to tighten your belt in retirement.

Employers prefer defined contribution plans because they say they can no longer afford defined benefit plans. It is true that many of these plans are now in deficit due to lower interest rates and the drop in the stock market several years ago.

But we need to remember that financial markets were flourishing in the 80s and 90s. This generated surpluses in defined benefit pension plan funds which many employers used to give themselves contribution holidays. In fact, a recent study from the Shareholder Association for Research and Education (SHARE) shows that employer contribution holidays are an important factor that led to the underfunding of pension plans in Canada.

Such deficits can be avoided in the future through improved legislation in the area of workplace pension plans. Employers, for example, should be forbidden to take contribution holidays, and limits on pension fund surpluses should be increased to compensate for shortfall years.

Employers’ preference for defined contribution plans also rests on the wrong assumption that they are alone in assuming the financial risks of defined benefit plans. In reality, the risks are shared with workers. At the bargaining table, many employers demand additional contributions from workers to make up pension fund deficits.

A good pension plan: everybody wins!

A good workplace pension plan is important for our members. That is why it is our priority at the bargaining table. It is also attractive to the employer.

Some employers provide a good pension plan because it enables them to recruit better workers. It becomes part of a competitive advantage for attracting and retaining them.

It is also one way to ensure their loyalty over the years, because workers can only receive a full pension if they remain employed by the company for a considerable number of years. The employer thus benefits from a stable workforce.

Good pension plans have specific clauses allowing older workers to retire earlier. They provide retirement benefits with no actuarial reduction before the age of 65 as well as a bridging benefit while waiting to receive full amounts from public pension plans. Employers can thus reduce their workforce without layoffs and older workers can leave jobs that are physically demanding.
With a good pension plan, everybody wins!

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