Defined Benefit and Defined Contribution: More Voices
By Jim Stanford
Progressive Economics Forum
June 14th, 2011
Headlining the CIR number is an interesting article titled “DC Model a Short-Term Fix.” The article reported the views of several experts who spoke recently at the annual Canada Cup of Investment Management (a financial conference). Their views on the value of DB plans made for an interesting — and timely — read. The speakers included Jim Keohane, senior vice-president of investment management at HOOPP (the multi-employer Ontario health care DB plan). DC plans are “a short-term fix to the underfunding issue,” he said. “I think it makes it worse because it just masks the problem.”
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.
“The issue with DC plans is that you’ve moved away from this benchmarked environment into a non-benchmarked environment. Nobody’s saying whether it’s underfunded or fully funded.” That’s a polite way of saying that virtually no workers have any idea of whether their DC will provide them with adequate pension coverage or not. (In most cases, of course, they will not.)
Swartz concluded, “I believe that for most people, a DB plan, particularly for a long-term employee, will provide a better result.”
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. 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. “Defined-contribution plans can mitigate a number of risks to individuals, businesses, and society as a whole,” he told the Conference Board of Canada in 2007. “However, appropriately structured defined-benefit plans can do better.” 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. He proposed regulatory changes to make it easier for companies to fund DB plans.
Even Jack Mintz has provided backhand compliments to the DB system, as in this National Post commentary: “Fully funded defined-benefit pensions paid to employees generally do not depend on the investment experience of the fund. Instead, employers, who are in a better position, absorb investment risks inherent with pension funding.”
Mintz continued: “In the past decade or so, businesses have shifted from providing defined benefit pensions to other forms of retirement savings such as defined contribution pension plans and RRSPs held by workers. In both cases, the pension received by workers is based on the risky investment performance of the plan. Unless the assets are held in relatively safe bonds — thereby making them more expensive to fund retirement income — employees face significant risk depending on investment performance. Unfortunately, new retirees are discovering how important risk is with current market conditions. It is not fun to find accumulated wealth being hammered by today’s stock and bond markets.”
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-effective vehicle of retirement planning. 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 for PRPPs). 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 promise to their workers.