DB Comeback – Part ll

It always feels a little self-serving to say anything positive about the future of DB plans.  With that said, I have spent most of the past 20 years acknowledging why most private sector employers prefer DC plans and most of our clients have, to one extent or another, frozen their DB plans unless they have a union opposing such change.

At the same time, I have spent the last decade complaining about the failures of many of the DC plans that are offered in the private sector.  Poor rates of contribution, poor investment options, and poor education for plan members have been key drivers in the disappointing results that we are seeing for workers that are now retiring having spent the larger part of their career in a DC plan.  One of the things I like the least about the DC problem is the ignorance with which workers are marching towards Freedom 75.  Employers can blame employees for not paying attention, but why would they want to lead their lambs to slaughter.

Canadians want the benefits and features DB plans offer. In 2016, the Canadian Public Pension Leadership Council commissioned Ipsos Reid to survey 1,000 Canadians from across the country on their thoughts and attitudes toward retirement.  Industry legend Bob Baldwin reported in detail on the survey results in his 2017 report The Pensions Canadians Want.

The survey results demonstrate that workers want predictable income in retirement and Baldwin finds that members of DB plans are more confident, knowledgeable, and experience less stress than their colleagues in other savings arrangements. Most importantly for employers, DB plan members also express less concern than group RRSP members about the impact of retirement planning on their health and work lives.

But before we get excited about what workers want, lets remember that employers that don’t have unlimited funding from taxpayers don’t like DB for many reasons including overwhelming regulations, punitive accounting rules, and volatile costs that are not tied to business performance.

So, what must happen for the tide to turn back towards DB?  First, I am not sure we are going to get all the way back to single-employer DB plans for small and mid-size private sector employers.  I think the best bet is the target benefit plan smartly designed and funded as I discussed in my last commentary.  Second, employees are going to have to start to push back and to do that they are going to need knowledge as ammunition.  If employees don’t realize they are selling out their future for today’s wages, then they won’t demand a better arrangement from employers.  Finally, employers are going to have to want to do better whether it is because they are paternalistic or whether the combined forces of losing good employees to employers with DB plans or keeping weak employees because they can’t afford to retire.

In the last few years we have worked with several employers that have transitioned from single-employer DB to one of Ontario’s large target benefit plans.  We have also had one employer consider winding up their DB plan but decide to keep the plan open once they had a balanced presentation on the advantages and disadvantages of moving to the DC world.  Ontario’s new funding rules that reduce the volatility of contributions was a key element of this decision.  If we had these rules 20 years ago, we would likely have a much greater number of open DB plans today.

Maybe I am dreaming to think DB plans have a future.  I will be retired before this all comes out one way or another – so at least I can rest easy that my view in this case isn’t self-serving and is really borne of the mounting evidence that as much as DB doesn’t work for employers, DC isn’t working for employees, and the middle ground of the target benefit DB plan might be the compromise everyone can embrace.

Joe Nunes
Joe Nunes
Joseph Nunes, Co-founder and Executive Chairman of Actuarial Solutions Inc., has practiced in the area of pensions and retiree health plans for over 30 years. He has experience with many types of plans including single-employer, multi-employer, private sector, government, unionized, non-unionized, as well as registered and non-registered executive plans.

1 Comment

  1. Avatar Bob T says:

    DB plans died for a couple of reasons the main one being lack of looking at the long term nature of pension obligations. In the early days, plans were funded at a rate lower than annuity rates, a problem when recessions hit but great when the markets did well

    In the 80’s, all were happy as surpluses evolved, benefits were improved, costs were reduced as assumptions increased. As the 90’s hit, assumptions became market based and as annuity rates dropped, assumptions remained higher and sponsors continued to pay a small amount and in many cases take contribution holidays. As interest rates dropped and as plans matured, the result was that sponsors again had to pay and the number increased and thus the demand to end the plans as they were too risky.

    One plan, a quasi public sector plan started a plan, employees contributed roughly 4% of pay and the sponsor contributed about 8%. When others started to put in improvements such as special early retirement provisions, they reviewed and determined to continue with no change, despite the growing surplus in the plan and the assumptions remained somewhat conservative. Despite issues with surplus and challenges from members and regulators, they continued as they had since the 60’s.

    The plan is an integrated final five 1.3/2% benefit and as of the last valuation report I saw the plan still has a slight surplus

    While this was a pure DB plan, it operated much like a target benefit plan would with a fixed employer cost and a DB formula. Of course there was a risk the annual cost would increase but it did not. So while this worked well, the rest of our pure DB world took on a great risk and when losses mounted, blamed the design and ran to DC plans with a fixed cost and the regulators and others are turning to Target benefit plans so the sponsor could have a fixed cost and could reduce the DB benefit is things go poorly.

    The question becomes have we learned anything about the long term nature of the plans.

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