Saturday, September 12, 2009

Dutch pension plan for western Canada?

If the federal government does not move quickly to create a national pension program, the premiers of Canada's three westernmost provinces have pledged to push ahead to develop a regional pension plan in 2010.

The premiers of British Columbia, Alberta and Saskatchewan expressed concern that too few people have adequate retirement savings, noting that only two in 10 employees in the private sector have a company pension plan. They also noted that the number of retirees will increase rapidly as baby boomers stop working.

Many suggestions have been pressed on the federal government as to how to improve the national programs. These include:

  • doubling the CPP pension benefits
  • increase the OAS from about 15% of the average industrial wage to 75%
  • allow non-working spouses to gain entitlement to CPP benefits, either on a purchased or government sponsored basis
  • introduce a Dutch styled supplemental plan to top up the existing CPP and OAS

Of these a Dutch styled plan may be the most amenable to regional adoption. The Dutch styled plan is a collective DC plan that would suit as a company pension plan. Under these plans, the sponsor’s contribution rate is fixed for at least five years but, the pension benefits are denominated as a career average DB plan. Benefits earned each year are expected to be indexed, as are retiree benefits, based on a combination of targeted contributions and fund performance. While the basic benefits are very likely to be paid, they along with the indexing are not fully guaranteed.

Basic plan benefits are funded on a solvency basis. The plan must be more than 105% solvent before partial indexation can be provided, and more than 130% solvent before full indexation can be provided. The sponsor may not recover surplus. Contribution rates may be reset every five years, but current contributions cannot be used to cover past shortfalls. The plan structure means that the sponsor avoids having to realize liabilities on its financial statement. Individual account DC plans are rare in the Netherlands, due to their high administrative costs and bad publicity about their risk.

It will be interesting to see whether the premiers adopt a similar pension plan.

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