DB plans endangered

Number of workers covered by DB plans plunges 30 per cent in five years as costs soar
By Angela Scappatura
|Canadian HR Reporter|Last Updated: 06/15/2009

Defined benefit (DB) pension plans are fast becoming an endangered species, according to a report from Statistics Canada.

The number of Canadian employees who are DB plan members dropped 30 per cent between 1991 and 2006, according to Shifting Pensions, released late last month. While DB plans have seen a consistent yearly decrease, the membership in defined contribution (DC) plans has risen, said the report. And that data reflects what happened before the market and economy tanked.

In the past year, DB plans in Canada have faced unprecedented financial pressures thanks to tumbling stock markets and a battered economy. In the auto sector, workers and retirees from Oshawa, Ont.-based General Motors Canada have clamoured for government support, anxious their pensions will disappear. The failing company is struggling with an estimated $7-billion pension plan deficit.

In May, insolvent newsprint giant AbitibiBowater, based in Montreal, sought permission from a Quebec court to suspend some pension payments to cope with unmanageable costs.

These two examples aren’t anomalies — they’re just part of a stack of evidence indicating traditional DB plans aren’t sustainable, said William Robson, CEO of the C.D. Howe Institute, a Toronto-based think-tank.

“We’ve now seen a string of what, individually, look like accidents but when enough motor vehicle accidents occur on the same stretch of road, you have to say there is something wrong with the road,” he said.

The DB pension plan in its traditional form is disappearing, said Robson. And, while it may linger in some industries — namely the public sector — its presence isn’t due to the plan’s effectiveness, he said.

“The fact that it’s going to survive longest in the public sector is not because of anything that is good in these plans, it’s because its flaws will be most difficult to correct,” he said.

“The flaw with the DB plan is there is a fiction the employer can take on this risk and handle it well. There is nothing in the structure of the classic single-employer DB plan to justify that assumption.”

While it has become clear traditional DB plans are no longer working, there are also problems with current alternatives, said Robson.

DC plans and registered retirement savings plans place more responsibility, and more risk, on the shoulders of employees. If DC plans become the only option for workers, middle-income earners will struggle the most, said Martine Sohier, Toronto-based senior consulting actuary at Watson Wyatt.

People in lower-income brackets have social security and social plans to rely on while high-income earners probably have their own savings, she said. But the middle class tends to have less support.

“People tend to consume and not save enough,” she said. “If you don’t force them to save, I’m afraid they will not have enough to retire.”

Employee fears of responsibility and losing their investments may lead to a resurgence of demand for DB plans in the future, said Brian Hocking, Toronto-based CEO of the Association of Canadian Pension Management.

“The DC plan requires plan members to make investment choices and decisions on their own and when things like the past few months have happened, people get afraid about making those decisions on their own,” he said.

“So DB plans could come back to interest simply because people will say, ‘In DB plans, the company made decisions for us and gave us a guarantee we would come out on the other end.’”

While the future of DB plans is unclear, both Robson and Hocking acknowledged there is a need for reform. If anything positive can emerge from the economic downturn, it is the realization on the part of legislators they cannot ignore the problem any longer, said Hocking.

“It was considered one of those things that ‘Yes, we’ll have to do something one of these days’ and years pass before anything happens,” he said.

Because there is little to fill the space between DB and DC plans, reform should be directed at providing more pension options for workers, said Robson. A large-scale hybrid plan may be one desirable alternative, he added. New legislation in British Columbia that makes room for a private sector pension plan run by multiple employers is an example of a viable alternative, he said.

Ultimately, politicians need to recognize DB plans are no longer viable for employers, said Robson.

“I would hope policy-makers get over this preoccupation with bolstering a type of plan we know has terminal flaws and instead start to do things that would make it easier for people to offer or to join,” he said. “(We need) plans that are different from what we have today.”

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