Defined benefit pensions scarce

Almost everyone agrees old-fashioned defined benefit (DB) pensions were one of the best inventions ever for giving loyal employees a guaranteed workplace pension they could rely on in their old age.

Perhaps they were too good to be true, at least for those in the private sector. As Bill Tufts has written in his book, Pension Ponzi, the only Canadians who can count on inflation-indexed DB pensions are government workers and members of union-negotiated pensions, and the politicians who make the rules for the rest of us.

DB plans are becoming scarce in the private sector and corporations keep looking for reasons to replace them with defined contribution (DC) plans or group RRSPs that shift market risk from their shoulders to that of their workers. This shift is a "social tragedy," according to Charles Ellis, author of Winning the Loser's Game, a treatise on indexing.

The ongoing financial crisis that began in 2008 has furnished corporations with more excuses to abandon DB plans: notably low interest rates and volatile stock markets.

Even the country's largest bank, RBC, has frozen DB plans to new hires, who will have to join the DC plan.

But what of the federal government's new PRPPs or pooled registered pension plans? In a classic case of "do what we say, not we do", PRPPs will be like group RRSPs and DC pensions in that they too will expose workers to market risk. Legislation (Bill C-25) was introduced in November 2011 but pension experts don't expect the plans to surface until 2013, except maybe precursor plans in Quebec or Saskatchewan.

Late in December, finance ministers met in Victoria to put more flesh on the PRPP concept but the process of defining them and setting regulations to govern them will continue into 2012, says Keith Ambachtsheer, president of Toronto-based KPA Advisory Services. In a recent article he wrote with former regulator Edward Waitzer, the pair noted it's "up to the provinces" to "breathe life into the federal legislation."

PRPPs are bound to have at least some impact on improving pension "coverage," particularly for small- and medium-size corporations who would never have taken on the administration and fiduciary headaches of traditional RPPs.

The irony is there already exists an alternative that is defined benefit in nature and is already compulsory for workers and the infrastructure for putting it in place already exists. This is of course the Canada Pension Plan or CPP. As originally designed and established in 1966, CPP only covers 25 per cent of the average industrial wage. But the labour movement would like to see an expanded CPP or "Big CPP" that might bring the CPP's income replacement percentage up to perhaps 40 or 50 per cent over time.

Both the NDP and the Liberals want to go this route although in different ways: The NDP favours compulsory increases in CPP premiums (and so ultimately benefits) while the Liberals prefer a voluntary supplementary CPP option.

The Tories have not ruled out a "modest" enhancement of the CPP but clearly believe that in today's economically fragile global environment, it's no time to underwrite the costs of a super generous universal DB plan that a "Big CPP" might entail. The PRPP will also be a welcome business opportunity for Canada's banks and insurance companies, and perhaps to others like pension managers and makers of exchange-traded funds. Their collective challenge will be to charge fees considerably lower than retail mutual funds, something I believe they could easily do by choosing the passive index fund/ETF route recommended by Charles Ellis.

Focusing exclusively on the DB versus DC issue may not be overly productive. In a recent issue of The Ambachtsheer Letter, Keith Ambachtsheer waxed philosophical about pension design and capitalism. The $30-trillion pension industry is "the only investor class with a fiduciary duty to invest across generations," he notes. But there are problems with both DB and DC plans. Traditional DC plans (and hence the PRPP) force contribution rates and investment decisions on participants which they are ill-equipped to make. Also, there's little work on the decumulation side of DC plans.

-- Postmedia News

Republished from the Winnipeg Free Press print edition February 8, 2012 E3