The time is right for a new pension paradigm

With traditional pension models largely falling short of their goals, the time is right for a new pension paradigm that better serves the needs of all Canadian workers, says a new report from the C.D. Howe Institute.

In “The Great Pension Debate: Finding Common Ground,” actuaries and pension experts Robert Brown and Stephen A. Eadie argue the pension industry must go beyond the “tired” defined-benefit versus defined-contribution pension debate and focus on the model pension of the future.

“Many classic defined-benefit and classic defined-contribution pension plans have not achieved their goals. Policies encouraging larger collective, pooled pension plans governed by independent management boards are very much needed to better serve Canadians,” says Brown.

At present, the debate over the best pension model is divided into two camps. At one extreme is a traditional, fully guaranteed defined-benefit (DB) pension plan. In this plan, all of the risks are born by the plan sponsor given that plans are fully funded. That is the starting point for many in this debate.

At the other extreme is a traditional defined-contribution (DC) plan. In this plan, all of the risks are borne by the worker participant. This, again, is a starting point for many in the pension model debate.

The authors argue these models should give way to pension plans that facilitate sharing of risks among all willing stakeholders, whether the plan is characterized as DB or DC.

With that in mind, the authors explain a new pension paradigm that lies between these traditional models.

“It can be called a ‘pooled-Target DB pension plan’ or it can be called a ‘collective or commingled DC plan.’ That does not matter since these two plans are actuarially equivalent,” says Eadie.

The common ground would include:
• Pooling across multiple employers to reduce risk for plan sponsors and lower contributions from members;
• Target benefits to share risks between sponsors and members;
• The optimum asset size would be $1 billion and up;
• Independent management boards to ensure good governance.

The authors recommend that, going forward, pension debates start at this common ground. That is, the participants in the discussion will start with proposing either a pooled target benefit DB plan or a large collective DC plan. Then the discussion would focus on whether one wants a bit more of a DB flavour and why or whether one wants a bit more of a DC flavour and why.

This should make arriving at an agreeable plan option much easier for all, Eadie and Brown believe.

As well, it is vital that regulation and tax laws allow small and medium-sized employers to join in such collective schemes to extend their benefits to the majority of working Canadians.

“Policies encouraging larger collective, pooled pension plans governed by independent management boards are the way forward,” say the authors. “In Canada, such solutions are becoming common in the public sector but need to be encouraged in the private sector.”

 

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada’s most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.