Too Late For DB?

Van Riesen said the time to act was during the “perfect storm” for DB plans in the first part of this decade when interest rates and investment income were low, causing pension deficits to spike. According to her, this period put pensions squarely on the map of most chief financial officers.

“After that, private sector organizations came to a clearer realization that we are not in the business of providing pension plans,” Van Riesen said. “And if doing so placed the organization, or more importantly, their compensation structure in some risk, then they want no part of it.”

She believes that while large plan sponsors may be willing to maintain their DB plans, small- and medium-sized plan sponsors may be unwilling to do so in the future. “My fear is that DB plans will become the design solely of the public sector and unionized plans,” she said. “I don’t believe this is in the best interest of Canadians.”

Not everyone on the panel shared her views though. Michel Lizeé, a pension trustee at the University of Quebec, outlined a new type of DB plan for Quebec which aims to address the challenges of coverage and contribution volatility for small- and medium-sized organizations. He described it as a member-funded DB plan pitched as a viable alternative to DC plans, with the aim of guaranteed benefits and stable contributions.

Provincial regulations have been enacted and two multi-employer plans have been launched in Quebec. One consists of affiliates of the Quebec Federation of Labour, and the other is a broad coalition of community groups, women’s groups and other not-for-profit organizations, with a potential membership in the tens of thousands. Both plans have similar designs, and should start operations in the second or third quarter of 2008.

“Both plans have a deliberate order of priorities,” said Lizeé. “To fund and pay guaranteed benefits, to keep employee contributions stable, and subject to priorities one and two, to provide indexing of pension credits and benefits.”

The key features of these plans involve negotiations between each union and the employer on the total contribution for current service, the employer’s share of that contribution, and the ability to revise both items periodically. There is some flexibility in eligibility rules, but after a certain length of employment membership is compulsory.

“Introducing conditional benefits such as indexing helps spread the risks among active, deferred and retired plan members and reduces the pressure on contributions, thus enhancing the long-term sustainability of a pension plan,” explained Lizeé. “Flexibility in benefits reduces, but does not eliminate, risk.”

Van Reisen said she is excited by ideas such as Lizeé’s, but doubts any of them will prove to be a magic bullet.

“The likely reality is that the larger public sector and unionized plans will stick with their defined benefit design and all of its flaws and manage through the myriad of challenging issues, but the smaller and mid size plans would flee to the easier, equitable, and predictable DC plans,” said Van Riesen. “I wish this was not true, but in my view…we seriously lack the will to change the things that need to change to sustain private sector DB plans as we know them today.” p>To comment on this story, email jody.white@rci.rogers.com.