This past week marks the 50th anniversary of the Apollo 11 mission, the spaceflight that first landed humans on the Moon, and fulfilled the goal laid out by President John F. Kennedy on May 25, 1961 to land a man on the Moon, returning him safely to the Earth, and to do so before the decade is out.
Like many others, I marvel at this accomplishment, and I have been binging on the various commemorations of this momentous event (for those of you who are interested, I would recommend the 13 Minutes to the Moon podcast by the BBC). One of the things I find astonishing about this mission was the ability to have reached this goal in such a short period of time – especially considering that successive governments needed to commit themselves to fulfilling a goal laid out by a previous government.
Shortly following the Apollo 11 mission, the phrase ‘If they can send a man to the moon, why can’t they…’ entered our lexicon. It is with this phrase in mind that I ask: ‘If they can send a man to the moon, why can’t we build a better pension system?’
This Shouldn’t Be Rocket Science
Understandably, the pension system we have today is a byproduct of our history and has been developed slowly over time following an emergent-order process. As a result, and with but a few notable exceptions, the regulatory framework for employer-provided pension benefits that exists today is primarily focused on the duopoly of defined benefit and defined contribution plans.
The concerns with defined benefit and defined contribution plans have been well documented. Over the past 20+ years, private sector employers who sponsor defined benefit pension plans have been closing their plans due to the increased cost of the benefits (brought on by a lower interest rate environment and increased longevity) and the volatility in the contributions rates and financial reporting results. In contrast, members in defined contribution plans are challenged with managing investment and longevity risk.
The potential solution to this dual pension model – the Target Benefit Plan model – has also been well documented and discussed over the past 10+ years. A recent paper from the C.D. Howe Institute authored by Robert L. Brown and Stephen Eadie is the latest to summarize the potential benefits of the Target Benefit Plan model, and outlines some of the reforms to the regulatory framework that would be needed to allow these plans to flourish.
To date, we have seen a version of a Target Benefit Plan (i.e. the Shared Risk Plan) be adopted in New Brunswick, and other provinces have adopted (or started the process to adopt) rules to allow Target Benefit Plans. However, as is typical fashion in the Canadian pension environment, these rules vary by jurisdiction. Furthermore, a key impediment is that the Income Tax Act must be updated to better allow the flexibility of a Target Benefit Plan model. As such, a challenge in getting the widespread adoption of Target Benefit Plans is also getting the federal government and provinces to harmonize their initiatives on employer sponsored pensions.
Achieving the Goal
To me, the best way to get the legislation that we want is to build support at the grass roots level. The pension industry, which includes recordkeepers, investment managers, consultants, and regulators need to get on the same page on how Target Benefit Plans should be managed. Management rules for Target Benefit Plans need to not only address the desired governance model, but also the mechanism for increasing OR decreasing the pension benefits and funding requirements. Furthermore, for Target Benefit Plans to be successful they will need to be well communicated so that both plan members and plan sponsors understand clearly how risks and rewards are shared.
To be successful in this initiative, we will need leadership from policy makers and legislatures – preferably at the federal level so that the Income Tax Act can be amended to provide greater flexibility. Also, and as the experience in New Brunswick shows, allowing existing plans to convert their existing pension programs into Target Benefit Plans enables such plans to reach the critical mass that is needed for better risk pooling and to achieve lower costs for investment management and plan administration.
While time is running out to achieve this desired outcome by the end of this decade, this is not an insurmountable challenge, and we shouldn’t expect it to take the 8 years that it took the United States to succeed in its mission to the moon.