The time is right for Canada to adopt a pension model that serves the workforce more appropriately, according to a report by the C.D. Howe Institute in Toronto.
“The Canadian pension system is failing,” said Stephen Eadie, report co-author and partner at Robertson, Eadie and Associates in Oakville, Ont. “It’s been dying for a while and we’re having the funeral soon.”
With traditional pension models largely falling short of their goals, the industry must focus intently on the framework of the future, according to The Great Pension Debate: Finding Common Ground. At present, pension discussions continue to be divided into two camps — defined benefit (DB) and defined contribution (DC), said Eadie.
Employers hold the lion’s share of risk in the fully guaranteed DB plan, while employees take on most risk in the DC framework, he said.
It’s time to drop the traditional debate of DB or DC and move towards more realistic solutions, said Eadie. The pension model of the future ultimately lies somewhere in between, in a pooled target DB plan or a collective or comingled DC plan — actuarially equivalent frameworks.
“Policies encouraging larger, collective pooled pension plans governed by independent management boards are the way forward,” he said. “We need to do something about the failing Canadian pension industry.”
This type of pension model would be open to a diverse group of members, and design would ensure fairness for participants making different choices or changing careers, said Eadie.
The current single-employer pension plan is failing because it’s sponsored by people who don’t want to be in the business of providing pensions in the first place, he said.
“We want to provide pension plans to private sector employers so that they can treat the pension plan much like the Canada Pension Plan (CPP),” said Eadie.
“Their responsibility is to select that pension plan and to make the contributions on behalf of their employees, and then they’re done. It is the management board, the board of trustees of the pension plan, who will worry about managing that pension fund well.”
The optimum asset size would be $1 billion and up, with pooling across multiple employers to reduce the risk for plan sponsors and lower contributions from members, he said.
The pension would also remain in place for workers who change jobs often throughout their career, said Eadie.
“In Canada, such solutions are becoming common in the public sector, but need to be encouraged in the private sector,” he said. “Having a dynamic, well-funded pension system for the public sector and not for the private sector is just not something that we think is sustainable.”
And while target benefit plans or jointly sponsored frameworks have been available in the public sector and larger private sector unions for some time, the same isn’t true for small employers, said Eadie.
“You can’t retire and maintain your lifestyle if you’re making anything close to an average wage through the Canada Pension Plan and OAS (Old Age Security) alone,” he said. “That’s not enough. Private sector Canadians need to have access to real pensions.”
Implications of move to DC plans still unknown
When it comes to pensions, today’s employers are moving away from liabilities associated with DB plans, according to Janice Holman, principal of Eckler, an actuary consultancy in Toronto.
“They are happy to offer their employees a retirement savings plan,” she said. “They use it for attraction, retention of employees, but they also don’t want it to become a second job, just managing these plans.”
Alongside market volatility, a continued decrease in interest rates is driving up pension plan costs, said Holman.
Employers have been trending away from DB towards DC, and are now moving towards group registered retirement savings plans (RRSPs) or tax-free savings accounts to get out from under onerous pension plan reporting and to give employees maximum flexibility on retirement, she said.
The transition has been happening over the past two decades, said Andrew Hamilton, partner in retirement and investment at AON, a professional services firm in Toronto.
“If you look historically at when (DB) plans were put in place, or certainly when they were thriving, it was in a very different economic environment where interest rates were much higher and the expected cost of those programs was commensurately lower,” he said.
“Now that rates have been historically low for an awful long time, the ongoing costs of those plans — because expected returns are lower — is quite high, and maybe more than sponsors had envisioned when the plans were put in place.”
That migration from DB to DC hasn’t really slowed down, said Hamilton.
“One challenge will be now that we’ve seen a big move from defined benefit to defined contribution, we’re probably going to see… fewer larger, well-run defined benefit plans that share risk a little differently between the sponsor organizations and members,” he said.
The fallout of the large changeover to DC plans has yet to be experienced, said Hamilton.
“That’s something that, as a society, we haven’t really had to deal with yet — significant numbers or certainly a majority of Canadians retiring with those programs,” he said.
“But when we do find ourselves in that situation, I think we’re going to have to come up with innovative ways to help members generate lifetime incomes from those account-based groups.”
Workers continue to find it difficult to save for retirement and worry about post-retirement savings, according to an AON survey of 1,003 Canadians.
Of those expecting to fully retire, two-thirds expect to do so by age 66, but 30 per cent believe they will continue working forever.
Less than one-quarter of Canadian private sector employees have workplace pensions, while one in 10 have access to a pension plan that provides adequate retirement income, said Eadie.
“There’s a number of retirement savings arrangements, but not pension plans,” he said.
“And many of these defined benefit plans are being terminated. They’re really becoming quite rare.”
Retirement savings remain popular perk
Employers have much to gain by offering retirement savings plans, said Holman.
“If you survey across the generations, it’s actually one of the most valued benefits that an employer offers,” she said. “It is an attraction and retention tool.”
Some organizations and industry sectors are moving away from pensions in favour of group RRSPs, in an effort to have workers take on more financial and management responsibility, said Holman.
And converting retirement options from a pension to RRSP is possible for employers, if contribution amounts remain unchanged, she said.
“It’s not that difficult to go from DC to RSP, as long as you maintain the same financial commitment to it.”
Millennials continue to see value in employer-offered pensions. And DB plans can be a great lever to attract talent into an organization, especially as fewer employers offer them, said Holman.
“Pensions are still important,” she said. “(They’re) still going to be front and centre for a long time.”
Response from regulators has been to protect pensions by making them as safe and secure as possible, said Holman.
“It’s a delicate balance between creating the regulation that’s flexible enough that employers will continue to offer the plans, but also ensuring that it’s stringent enough that the security is there for the plan members,” she said. “It’s a fine balance.”
Removing the burden of pension plan management from small employers is a major driver towards finding a middle ground on pensions, said Eadie.
“If you’re an HR professional, now I can get my head around what I’m buying and recommending for our company, but I don’t have to run the day-to-day aspect of this; I just need to treat it much like I do the Canada Pension Plan,” he said. “That’s really what this is all about.”
“We are promoting this because we think that this not only is a viable solution, but it is a necessary solution. We cannot have a society that does not provide for responsible retirement income to our elderly,” said Eadie.
“A pension plan, managed well, is the best way to provide this kind of income… Society fails without responsible pensions.”
And pensions can still be a solid option for employers looking to provide retirement savings options to staff, according to Hamilton.
“I think we have a viable model; I think we have a healthy system here,” he said.
“You can still, today, design a perfectly adequate sustainable defined benefit plan. I think if you were starting with a clean sheet of paper, you could do that quite effectively, and manage the risk of those programs so that the cost and variability — the risk in those programs — was palatable to an organization.”
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