Over the past three years, workplace pensions and the security of defined benefit (DB) plans have been grabbing headlines. Air Canada has underfunded its plan, Canada Post has been trying to kill DB benefits for new employees, and Unifor recently accepted defined contribution (DC) plans for future hires at GM. More recently, employees and pensioners at Sears will likely lose out on the DB pension they had been promised for years of loyal employment. The problems facing these pension plans are not only cases of poor management. Rather, they point to the structural limitations of Canada’s voluntary private pension system.
Sears is not unique. In the media, the retailer’s plight has been compared to what happened at Nortel 10 years ago. If one digs deeper into history, companies reneging on pensions goes far back in time and has been the catalyst of pension policy stretching back to the 1960s, when Ontario implemented Canada’s first “minimum standards” pension legislation. Since then, all provinces (with the exception of Prince Edward Island) and the federal government have put in place pension legislation intended to protect worker’s retirement income.
Yet, given all the rounds of reform that have occurred since the 1960s, private sector workers who belong to a DB pension plan remain vulnerable. This is augmented by the reality that part-time workers, the self-employed and independent contractors usually have no pension coverage, in part because Canada’s workplace pension system was designed to protect only full-time workers. As 2016 census data indicates, full-time employment is decreasing (only 48.2% of adults aged 24-54 worked a full-time job for all of 2015), intensifying the challenges of providing retirement income security for Canada’s labour force.
To understand why Canada’s private sector workplace pension system is failing so many workers, one must interrogate history and the political and economic terms in which this system was negotiated. Knowing this history puts into focus the need to re-evaluate this system if we are to successfully expand pension coverage.
The birth of workplace pensions
The first employment-based retirement income scheme in Canada was introduced in 1821 by the Hudson’s Bay Company. In 1870, the federal government introduced a pension plan for civil servants, followed a few years later (1874) in the private sector by the Grand Trunk Rail (whose plan covered clerks). In general, workplace pensions developed alongside the growth of large employers, typically in government, railroads, utilities, hospitals, universities and private manufacturing sectors.
From the employers’ perspective, the scale of these industries and bureaucracies required a loyal and dedicated workforce. Pensions thus served as a mechanism to attract and retain quality workers, and as an instrument of personal management. The size and longevity of employment characterizing that time enabled employers to make a legitimate promise to workers. Labour movements across Canada and other industrializing countries took root and the demand for unionized work environments slowly evolved. Workplace pensions for “good service” came to represent an aspect of the social wage model as part of worker’s compensation.
Before the Second World War, the private pension system (then in its infancy) was not viewed as an enforceable legal right. Many workers left their employer before receiving a pension. Coverage rates were low, pension funds were often mismanaged, and the absence of government pension regulation meant employees and their dependents were vulnerable to the whims of paternalist employers. It was not unusual for employers to use the promise of a company pension as a leveraging tool to control their workers, threatening to withhold an employee’s pension if they became involved in labour organizing activities.
As corporate welfarism grew in Canada during the first half of the 20th century, favourable federal income tax legislation was introduced to make establishing pension funds more attractive (i.e., the Income War Tax Act of 1917, which was amended in 1928 and 1938). This legislation allowed employers to deduct pension plan contributions and exempt investment income from their taxes if the employer agreed to place the fund in a trust under separate management. But there still was no common law principle that prohibited an employer from withholding pension entitlements from a member.
The golden era of private pensions began after the Second World War and lasted until the 1970s. Full-time employment across industrial sectors, growing unionization and rapid industrial economic expansion characterized a new range of political co-operation as Canada’s welfare state expanded. To identify the structural problems facing Canada’s workplace pension system today, it is useful to describe the broad forces that have shaped different workplace pension systems across Western industrialized societies since then.
The destruction wrought by the Second World War was most damaging to the economies of continental Europe, where, along with the Great Depression, the net worth of many private employers and their pension schemes were destroyed. Consequently, there was little to be offered to the aged. Given the comparatively strong tradition of publicly provided welfare in continental Europe, national wage bargaining occurred after the war, institutionalizing labour-market relations that became the basis for organizing mandatory quasi-public social insurance covering all workers. Subsequently, workplace pension systems became administered through public-private systems.
In countries such as Canada, the United States and the United Kingdom, workplace plans became a separate private pillar in a broader public-private retirement income system. A strong corporate-financial culture dominated conservative business perspectives on the role of government. These countries also exited the Second World War in a stronger economic position where workplace pension plans could still be offered to workers. The result was that collective bargaining in countries such as Canada was conducted at the company or industry level.
The need for reliable sources of labour in war industries led governments in Canada and the United States to establish an institutional framework that would integrate unions into capitalist economic expansion through industrial relations legislation and arbitration.
For example, in 1935, the Wagner Act in the United States became a foundational statute guaranteeing the basic rights of private sector employees to organize into unions, to engage in collective bargaining and to strike. During the Second World War, the National War Labor Board legislated that employers must negotiate sick leave, and that disability wage plans and group insurance must be written into labour management contracts. In 1948, the board concluded that “employers were legally obligated to negotiate pension plans,” thus making pensions a formal bargainable issue.
In Canada, although workers had been granted the right to freely associate into trade unions in 1872, following the Trade Union Act, in 1944 the Privy Council Order 1003, adopted by Wartime Labour Relations Regulations under the Liberal government of Mackenzie King, forced employers to negotiate with organized workers, including on workplace pensions.
While collective bargaining rights were established, the desire of Canadian and American governments to use collective bargaining to mitigate labour disputes created an opening for employers to establish corporate welfare models of industrial relations. As a result, control over workers’ economic security became a key battleground for control of the economy and class power.
Initially, many unions had lobbied for universal security for the elderly in the shape of national or industry wide workplace pensions, but found themselves reluctantly negotiating private pension schemes with single employers through collective bargaining. Governments were unwilling to step in to labour disputes beyond setting out basic parameters of collective bargaining.
By offering new benefits and keeping unions out of the administration of employment benefits, along with demanding collective bargaining occur at the local or plant level, employers were able win advantage over many unions. Consequently, employers could now dictate the structure of Canada’s private pension system, in which the risk of providing retirement security was voluntarily assumed by the employer as long as favourable economic conditions prevailed.
In hindsight, while the power of labour did substantially grow, along with increasing wages and social benefits for workers, unions were not able to secure control over retirement income security. By the late 1950s, governments began to develop public policy that served to fill the holes left in private social policy, ultimately siding with the interests of employer-sponsored welfare capitalism. The design of the Canada/Quebec Pension Plans (C/QPP) and Ontario’s Pensions Benefit Act during the mid-1960s reflected the acceptance by government of the role employers would play in Canada’s retirement income system.
In the absence of a universal pension plan that offered full coverage, unions increasingly accepted and negotiated for beefed up workplace pension plans through the end of the 1950s and 1960s. This pivotal period reflected a victory for capital, in which the labour movement’s intent of pooling risk across a broader group of workers was terminated by the desire of large industrial employers to control the retirement savings of their workers and benefit from the tax exemptions.
Subsequently, private sector pension coverage rates shot up dramatically in Anglo-Saxon countries such as Canada, the United States and the United Kingdom, expanding coverage from around only 15% during the 1930s to over 40% by the 1960s. In Canada, the 1970s were the pinnacle of pension coverage in the private sector, reaching over 50% for male workers, many of whom worked for large industrial companies in manufacturing.
This cemented the key function of workplace pensions as a central pillar in retirement income systems, in contrast to the mandatory social insurance arrangements in continental Europe. It is here that one can locate how the risk of saving for retirement has been historically institutionalized between workers and employers.
The long decline and the future of pension coverage
The peak of pension coverage in the 1970s was short-lived and began to diminish into the 1980s as corporate restructuring integrated Canada’s economy into global markets, often by way of plant closures, unhinging the postwar industrial employment relationship.
Growing regulatory and accounting standards, unfavourable court rulings and deteriorating economic conditions compelled employers to believe they were taking on too much of the risk involved with plan administration (what actuaries and employers termed the “asymmetry of risk”). At the same time, unionization levels were decreasing and unemployment was growing for men in industrial jobs, allowing more employers to diminish pension benefits with less resistance from workers. These conditions led, in the 1990s, to a critical period in which employers exited en masse from the provision of retirement security in the form of the DB pension plan.
The trend continues today. Virtually no new private sector DB plans have been established since the 1990s, and existing plans continue to be underfunded and replaced by less secure pension schemes such as DC and target-benefit plans. Even public sector DB plans, which typically are viewed as more secure, have come under threat in recent years, as experienced at Canada Post and by public sector workers in New Brunswick.
The workplace pension system designed in the 1950s and 1960s was only feasible in the long term if economic conditions remained the same. But economic conditions have changed. Given that workplace pension policy was designed to fill the holes left in a system that was created by siding with employers in the early postwar years, it is not surprising that this system is now deteriorating. Secure DB pension plans are being left to sink, forcing workers to worry about the risk of losing their pension income.
So what is to be done? How can we protect current pensions from the fate faced by workers at Sears? And how can we expand workplace pensions to workers with low coverage, particularly the self-employed and part-time workers in low-paying jobs?
There are some new policy innovations and services that are worth highlighting. In Canada, Common Wealth, a Toronto-based firm that provides pension plan recordkeeping and administrator services, is assisting labour and professional associations establish quality multi-employer pension plans for part-time and low- to middle-income workers. For example, in 2017, Common Wealth launched a retirement plan for lower- and moderate-income Canadians in partnership with the Service Employees International Union (SEIU), targeting part-time frontline health care workers.
New policies are being legislated south of the border, too, with the intent of expanding pension coverage for employees of small businesses. The state governments of California, Oregon, Illinois and New Jersey are proceeding with “auto-IRAs” that automatically enrol employees in individual retirement accounts through paycheque deductions. These programs are administered through financial service companies and overseen the by the state government.
While these ideas have the potential to increase retirement income security for some, the fact remains that pension coverage continues to decrease. The majority of working Canadians today have no workplace pension coverage to speak of. To meaningfully expand coverage to more sectors in the labour force, Canada’s labour movement must play a leading role and collectively advocate for all workers, particularly the precariously employed. This will require new organizing strategies that cross jurisdictional and sectional boundaries in Canada’s economy.
One recent victory occurred when the federal Liberal government expanded the CPP in 2016 from covering 25% to 33% of preretirement earnings. While a significant change, it still fell short of the 50% coverage that the Canadian Labour Congress (CLC) has been fighting for since the 1970s. It means middle-income workers will still need other sources of retirement income besides CPP. Beyond this CLC-led campaign, there are no other significant organizing efforts across Canada’s labour movement with the goal of expanding pension coverage.
Instead, campaigns occur at the provincial or federal levels, typically targeting a specific piece of legislation. For example, at the federal level several unions and grassroots groups such as the Ottawa Committee for Pension Security are campaigning against Bill C-27, legislation that would establish a target-benefit plan in federally regulated workplaces. In New Brunswick, Pension Coalition NB, a lobby organization representing 13,000 public sector pensioners, is suing the provincial government over the introduction of legislation that retroactively changed DB pension entitlements into a target-benefit pension plan.
On the other side of the country, the Alberta Federation of Labour is leading a campaign to introduce a joint worker-employer trustee governance model for public sector workers to better protect existing DB plans. And in Manitoba the provincial government has recently launched a consultation process on a new funding regime to convert existing DB plans to target-benefit, generating a new showdown between public sector unions and the government.
These battles are notable and must be fought vigorously. However, they are geared to protect already existing benefits, and are fought separately in the absence of a cohesive national movement, reflecting the need for a new collective strategy. Presently, the labour movement is splintered when it comes to agitating for collective pension reform and campaigning for non-member workers with no benefits.
One hurdle that must be overcome is Canada’s collective bargaining system that atomizes unions into negotiating at the company or local level. Campaigning for pension expansion is often high up on the to-do list as individual unions face a multitude of pending issues on a regular basis. When time is given to the pension file, unions spend their resources protecting already existing benefits for their membership, either against aggressive employers at the bargaining table or against legislative threats that seek to dismantle the hard-fought-for pension benefits discussed above. This limits a union’s available resources for organizing new campaigns collectively across Canada’s labour market.
The time is right for a national discussion, like the ones that took place during the “Great Pension Debate” of the 1970s, to address the existing voluntary pension system that is simply not providing adequate retirement income security for Canadian workers. Employers are walking away from the pension system that they shaped in their own interests generations ago. Current labour campaigns and the pension innovations mentioned above offer band-aid solutions to a structural problem that is worsening. It is hard to imagine workplace pension coverage expanding within the current system.
While there may be some bright spots for pensions among public sector workers in places such British Columbia and Ontario, threats remain on the horizon, with legislative attacks such as Bill C-27 that aim to transform secure DB plans and shift the risk of saving for retirement onto employees. The power of traditional DB plans is that members are required to contribute earnings to the plan, and these earnings are pooled, generating more secure retirement income. To expand pensions coverage to all workers in the Canadian economy, the labour movement, retirees, concerned workers with a good pension plan and those without, must band together at a national level to demand a larger role for Canada’s public pension system as the best remedy to expand coverage for all workers.
Benjamin Christensen is a sociology lecturer at the University of British Columbia, Douglas College and Kwantlen Polytechnic. He completed his doctoral dissertation in 2016, examining pension policy reform in Canada over the past 50 years.