Unprecedented challenges threatening the security of pensions, causing membership numbers to decline
Defined benefit (DB) pension plans are fast becoming an endangered species according to a new report from Statistics Canada.
The number of Canadian employees who are DB plan members dropped by 30 per cent between 1991 and 2006, according to the report Shifting Pensions. While DB plans have seen a consistent yearly decrease, the membership in defined contribution (DC) plans has risen, the report said.
Through the past year, DB plans in Canada have faced unprecedented financial challenges threatening the security of workers’ pensions.
In the auto sector, workers and retirees from General Motors Canada have rallied 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 sought permission from a Quebec superior court to suspend some pension payments to cope with unmanageable costs.
What may seem like anomalies have been added to the stack of evidence indicating traditional DB plans aren’t sustainable, said William Robson, CEO of Toronto-based think-tank, the C.D. Howe Institute.
“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, Robson admits there are also problems with current alternatives.
DC plans and RRSPs place more responsibility, and thus 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, she added.
“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 in the demand for DB plans in the future said Brian Hocking, Toronto-based CEO of the Association of 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 the need for reform. If anything positive can emerge from the economic downturn, it is the realization on the part of legislators that 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, Robson said reform should be directed at providing more pension options for workers. A large-scale hybrid plan may be one desirable alternative, he added.
He cited new legislation in British Columbia that makes room for a private-sector pension plan run by multiple employers as an example of a viable alternative.
Ultimately, politicians need to recognize DB plans are no longer viable for employers, he said.
“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.”
