Defined Benefit and Defined Contribution: More Voices
How coincidental that the current number of the Canadian Investment Review arrived in my in-box today, just hours after CAW members at Air Canada hit the bricks to reject the company’s demand to abolish the defined benefit pension plan for new hires (and impose major cuts in pensions for the existing workforce).Â The demand to eliminate DB plans is a common feature in almost all the major industrial conflicts currently taking place in Canada, including U.S. Steel in Hamilton, Canada Post, and the very long recent stoppages at Vale in both Ontario and Labrador.
Headlining the CIR number is an interesting article titled “DC Model a Short-Term Fix.”Â The article reported the views of several experts who spoke recently at the annual Canada Cup of Investment Management (a financial conference).Â Their views on the value of DB plans made for an interesting — and timely — read.Â The speakers included Jim Keohane, senior vice-president of investment management at HOOPP (the multi-employer Ontario health care DB plan).Â ï»¿DC plans are â€œa short-term fix to the underfunding issue,â€ he said. “I think it makes it worse because it just masks the problem.â€
High administrative costs, difficulty in measuring and meeting target replacement ratios, and lack of information on the part of plan members all reduce the probability that DC plans will provide an adequate retirement.
â€œThe issue with DC plans is that youâ€™ve moved away from this benchmarked environment into a non-benchmarked environment. Nobodyâ€™s saying whether itâ€™s underfunded or fully funded.â€Â That’s a polite way of saying that virtuallyÂ no workers have any idea of whether their DC will provide them with adequate pension coverage or not.Â (In most cases, of course, they will not.)
Lawrence Swartz, a principal at Morneco Shepell, chimed in: â€œWhen you have a long-term employee, DB works really well because the young employees end up putting in more in the early days and less in the late days and also benefit from professional management.”
Swartz concluded, â€œI believe that for most people, a DB plan, particularly for a long-term employee, will provide a better result.â€
These pension professionals echo the views of a roster of other experts, some of them not the usual suspects, who have also recently reemphasized the value of the DB model.Â The renewed lustre of the DB system comes in light of recent financial instability, and the glaring failure of Canada’s RRSP system to provide adequate income replacement, especially for retiring middle-class Canadians.
These DB advocates include famously David Doge, former Governor of the Bank of Canada. â€œDefined-contribution plans can mitigate a number of risks to individuals, businesses, and society as a whole,â€ he told the Conference Board of Canada in 2007. â€œHowever, appropriately structured defined-benefit plans can do better.â€Â He highlighted the effectiveness of the DB model in pooling risk across pension plan members, and as a tool for employers in recruiting and retaining talented workers.Â He proposed regulatory changes to make it easier for companies to fund DB plans.
Â Even Jack Mintz has provided backhand compliments to the DB system, as in this National Post commentary: â€œFully funded defined-benefit pensions paid to employees generally do not depend on the investment experience of the fund.Â Instead, employers, who are in a better position, absorb investment risks inherent with pension funding.â€
Mintz wants to make DB plans easier for companies to afford by reducing the level of benefits, which is where he and I would part ways.Â But at least he recognizes that making one’s pension contingent on the fleeting moods of the asset markets is an awfully risky venture for any individual retiree.Â In a recent speech to the Toronto Association of Business and Economics, he also spoke of his experience as a director with Imperial Oil, where the company made a deliberate decision to use its DB plan as a staff recruitment tool.
It seems to me that there has been a growing view — by no means unanimous, but striking nonetheless — among the pension industry that the DC/RRSP model has failed Canadians as a reliable, cost-effectiveÂ vehicle of retirement planning.Â Sadly, growing awareness of that failure has not changed the Harper government’s bull-headedness in charging ahead with still more RRSP-style pension solutions (like their new proposal forÂ PRPPs).Â And sadly it has not slowed down increasingly aggressive corporate executives, no matter how much profit their firm may be making (and regardless of how generous their own executive DB plans may be!), from trying to break the pension promiseÂ to their workers.