Canada’s actuaries want to salvage DB plans

The Canadian Institute of Actuaries (CIA) says the decline of defined benefit pension plans in Canada is unacceptable, so it is proposing a 10-point plan that it says will ensure defined benefit plans play a major role in Canada’s retirement landscape.

Speaking to the Economic Club of Toronto, CIA president Normand Gendron referred to a previous study his organization conducted that found that retirement expectations of many Canadians are out of whack with the reality of their savings.

Gendron says this problem is only going to be exacerbated by the decline of defined benefit pension plans, which traditionally provided a virtually guaranteed retirement income for plan members.

“Defined benefit plans are in crisis. There is a steady decline in private-sector defined benefit pension plans,” he says. “In a few years the only working Canadians with a defined benefit pension plan will be in the public sector or in large unionized environments.”

Viewing DB plans as too great a financial liability because, many corporations have opted to offer defined contribution plans instead.

“The employers with a DB plan will experience ups and downs and there will be deficits at times,” Gendron says. “Employers do not like that there is that fluctuation in the plans results, which starting next year, will affect their bottom line in a given year. It’s that variability of results that is really of a major concern to them.”

For employees, Gendron the DB plans are inferior because they require a slightly higher contribution from the employee, are slightly more vulnerable to market volatility and have inferior investment returns because of higher management fees and a smaller pool of capital.

“By having larger pools of money to invest and longer investment time horizons, employers can choose a more aggressive, diverse and informed investment strategy with lower management fees,” he says. Gendron adds that even if a DC plan charges a 1% management fee, studies show that over the long term that could result in a 20% difference in retirement income.

Gendron says the government must act now to draft legislation that protects DB plans and makes them more attractive for employers to sponsor.

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The CIA recommends that employers be allowed to set up security trusts where they could deposit money to be used to cover funding deficiencies. Gendron says the money in the trust could be released back to the employer if a subsequent valuation showed that it was not needed in the plan.

The CIA would also like to improve employer incentives by allowing them to tap into a portion of fund surpluses. In the past, Gendron says they have lost out on battles with employees over who’s entitled to the surpluses in pension funds and do not want to bear 100% of a DB plan’s risk without getting some return.

“We need to make it more a certainty to the employer that if they have contributed too much, then they will be able to use that money to reduce contributions or find some other use for it. This imbalance is the key element as to why these plans are shutting down,” he says. “Plan sponsors told us they would be more willing to fund their plans more conservatively if the could access surpluses that might arise from wise investment of their contributions.”

The DB model does not need to be relegated to employer/employee relationships either, he says, but instead could be expanded throughout industries so that employees who transfer to other employers within an industry don’t lose their benefits. This would also allow small business owners and entrepreneurs the chance to participate in pension plans.

It should be noted though that the CIA’s affinity for DB plans is not without bias — the organization says that almost half of all actuaries in Canada are involved in pension plan work. The scale-back in DB plans also means a potential scale-back in actuarial jobs.

A list of all Canadian Institute of Actuaries proposals can be found here.

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(06/27/07)

Mark Noble