Targeting Canada's DB Pensions?

Grace Macaluso of the Windsor Star reports, Opposition MPs, labour groups decry federal 'anti-pension' bill:

A growing number of seniors could face poverty if the federal Liberals proceed with proposed legislation enabling Crown corporations and federally regulated private sector employers to back out of defined benefit pension plans, Essex MP Tracey Ramsey said Monday.

“With less and less retirement security, seniors in Windsor-Essex are living more precariously than they ever have because of the erosion of benefits,” said Ramsey.

In Windsor-Essex, one in 11 seniors was living in poverty, according to figures compiled by the Windsor-Essex County United Way. For a single family household, the low income cutoff totalled about $19,900 a year.

The NDP member and labour groups are sounding the alarm over Bill C-27, which would amend the Pension Benefits Standards Act, and allow federally regulated employers and Crown corporations to replace defined benefit plans with target benefit plans.

More than 820,000 people, or six per cent of all Canadian workers, are employed in such sectors as banking, rail, air and ferry transportation, radio and television broadcasting.

Introduced by Finance Minister Bill Morneau last month, the bill has yet to be debated in the House of Commons.

The legislation is “an attack on retirees and working people,” Ramsey said. “There couldn’t be a more wrong-headed approach. When we talk about defined benefits, that’s deferred wages. That’s something workers know they can count on. These new target plans are extremely unstable.”

Defined benefit pensions guarantee a specified payment upon an employee’s retirement. Any funding shortfall must be covered by the employer. Target pension plans borrow attributes from defined benefit plans and defined contribution pension plans, which absolve employers from covering any funding deficits. Target benefits plans can place limits on the volatility of employer contributions; in the event of a funding deficit, part or all of it can be compensated by reducing benefits. A traditional defined benefit plan would require the entire deficit to be made up by the employer.

The proposed federal legislation will broaden the scope of retirement savings opportunities, a Department of Finance spokesman said in an emailed statement.

Target benefit plans “represent a new, voluntary, sustainable and flexible pension option for employees in federally regulated private sector and Crown corporation pension plans,” the statement said. “For those who choose this option, (target benefit plans) will provide a lifetime pension that benefits from the pooling of market risk and protects against the risk of outliving one’s retirement savings. At the same time, transferring benefits from an existing plan to a (target benefit plan) is optional.”

Hussan Yussuff, president of the Canadian Labour Congress, viewed the move as yet another attempt by employers to shift workers out of defined benefit plans.

“Currently, defined benefit pensions provide stability and security to employees because employers are legally obliged to fund employees’ earned benefits,” said Yussuff. “Bill C-27 removes employers’ legal requirements to fund plan benefits, which means that benefits could be reduced going forward or even retroactively. Even people already retired could find their existing benefits affected.”

Yussuff said the former federal Conservative government attempted a similar move but, after holding public consultations, dropped the plan ahead of the October 2015 election.

The Liberals, on the other hand, introduced the proposed legislation, without consulting Canadians, unions or pensioners, he said. “This proposal directly contradicts Prime Minister Justin Trudeau’s campaign promise to help the middle class by improving retirement security.”

It also smacks of hypocrisy given the fact that MPs are enrolled in defined benefit pension plans, noted Yussuff. “They maintain a defined benefits plan for themselves, and I don’t have an issue with that. But why would they treat workers with such disregard?”

Pension numbers

4,402,000 Canadian employees were in defined benefit pension plans in 2013, down 0.5 per cent from 2012.

71.2 per cent of employees in a registered pension plan in 2013 had defined benefits, compared with more than 84 per cent a decade earlier.

1,037,000 employees were in defined contribution plans in 2013, up 0.6 per cent from 2012.

86 per cent of employees with defined contribution plans in 2013 worked in the private sector.

746,000 employees belonged to other pension plans, such as hybrid or composite, in 2013 — up two per cent from 2012.

Source: Statistics Canada

I asked Bernard Dussault, Canada's former Chief Actuary, to share his thoughts on Bill C-27 (added emphasis is mine):

For both concerned employers and employees, Bill C-27 is a poor, inappropriate and unduly complex solution to the possibly real, but generally highly overestimated debt of Defined Benefit (DB) plans sponsored by employers for their employees.

Such pension debt overestimates are caused by the DB plans-related legislation, i.e. the 1985 Pension Benefits Standards Act (PBSA), which compels these plans to be evaluated on a solvency as opposed to a realistic ongoing concern basis.

And as Bill C-27 allows any DB plan sponsor to shift to active and retired plan members the responsibility to assume any debt of the DB plan upon the effective date of its conversion into a Target Benefit (TB) plan, it plainly corresponds to an unfair and inappropriate legalized embezzlement of some pension benefits by the plan sponsor.

Actually, Bill C-27 is a replicate of the so-called Shared Risk Plan (actually and more precisely a TB plan that fully shifts the risks to, rather than shares risks with, plan members) introduced in New Brunswick on January 1, 2014, with the exception that DB plan members would have to consent to its conversion into a TB plan. It is to be reasonably feared that DB plan members would give such consent only pursuant to a misunderstanding of the complex TB plans provisions envisioned by Bill C-27.

By virtue of Bill C-27, a DB plan converted into a TB plan would no longer be subject to solvency valuations. Besides, the onus of any still emerging deficits would be assumed entirely by active and retired members.

Indeed, pension deficits would naturally continue to emerge from time to time as would surpluses. In this vein, Bill C-27 fails to address the existing unsuitable PBSA provision allowing plan sponsors to take possession of DB and TB pension plans surplus through contribution holidays (CH). These CHs are a sure recipe for financial disaster and are a very, if not the most important cause of financial difficulties encountered by DB plans.

In light of the above considerations, I have been steadily promoting since 2013 the following three amendments to the PBSA, which would be much more sensible, effective and appropriate than Bill C-27 and would also counteract its severe inadequacies:

1. Evaluation of DB plans on a realistic (i.e. margin-free best estimate assumptions erring on the safe side, no asset value averaging, etc.) going concern basis rather than a solvency basis.
2. Full prohibition of contribution holidays.
3. Amortization of emerging surplus over 15 years, just as already are emerging deficits, i.e. through a generally small decrease or increase, respectively, in the contribution rate. This would well address one of the DB pan sponsors’ main aversion for DB plans, i.e. their highly fluctuating and unpredictable costs. In case where a given DB plan sponsor would still envision the higher stability of contribution rates under a TB pension plan, then there would be a case to maintain the DB plan (as opposed to convert it into a TB plan) and negotiate with plan members the transfer to them of the very light contribution rates volatility of my proposed DB plan financing policy.

I thank Bernard for sharing his wise insights with my readers. I've openly questioned the merits and logic of Bill C-27 in a recent post covering the Liberals attack on public pensions.

There is a wide gap in the pension policy the Liberals are implementing. On the one hand, they are enhancing the CPP for all Canadians which is a very smart move, and courting large funds to help them with their infrastructure program (another very smart move), but on the other hand they are introducing a bill which will potentially kill defined-benefit plans in Canada (a very dumb move).

This is a sleazy and underhanded move from a party which was attacking the Conservatives when they tried doing the same thing (at least they were upfront about it).

The global pension storm is gathering steam and one thing that worries me is bonehead policies like this which attack defined-benefit plans, the very plans we need to bolster and expand in a world where pension poverty and anxiety are on the rise. And make no mistake, if Bill C-27 passes, it will exacerbate pension poverty and negatively impact economic activity for decades to come.

Unlike Bernard Dussault and public sector unions, however, I don't think DB plans can be bolstered just by prohibiting contribution holidays (something I agree with). I believe that some form of risk-sharing is essential if we are to safeguard DB plans and make sure they are sustainable over the long run. Target benefit plans are not the solution but neither is maintaining the farce that DB plans can exist with no shared-risk model.

[Note: To be fair, after reading my comment, Bernard sent me his proposed DB pension plan financing policy which "promotes true risk sharing at any level (ideally 50%/50%) between the plan sponsor and the plans members, in such a way that not only would both parties share the cost but also the 15-year amortization of surpluses and deficit."]

I take Denmark's dire pension warning very seriously and so should many policymakers and unions who think we can just continue with the status quo. We can't, we need to adapt and be realistic about what defined-benefit pensions can and cannot offer in a world of low or negative rates.

On that note, let me once more end by sharing this nice clip from Ontario Teachers' Pension Plan on how even minor adjustments to inflation protection can have a big impact on plan sustainability.

The future of pensions will require bolstering defined-benefit plans, better governance and a shared-risk model, which is why pensions like OTPP, HOOPP, OMERS, OPTrust, CAAT and other pensions will be able to deliver on their promise while others will struggle and will face hard choices.