Head to head: Is Canada’s pension future DB or DC?

Let’s cut to the chase. Absent a voice for workers through a union and collective bargaining, there really wouldn’t be much debate around defined benefit pension plans, as employers would simply impose their will and preferences on employees.

These preferences have shifted decisively in recent decades, pushing risk and obligation to employees. I remember, once upon a time, when DB plans were aligned with employer interests — be it recruitment, retention, reward or just taking credit when investment returns largely carried the freight.

Read: VIA Rail, Unifor collective bargaining includes strengthening pension plan

There wouldn’t be much debate around the superiority of DB pension plans if we had resolved that the Canada Pension Plan and Quebec Pension Plan would be re-designed to provide more than the modest 33 per cent in retirement income for working Canadians.

Whether it’s a collective public or workplace plan, a DB approach has always been vastly superior from the perspective of value and efficiency in converting savings into an adequate and secure retirement income, by pooling longevity risk and eliminating the possibility of outliving one’s savings.

More critically, DB plans are much better aligned with the interests of plan members, and their fiduciary approach limits the fees and costs around investment and administration.

For example, consider 2018 research by the Healthcare of Ontario Pension Plan that pegs the value, from a dollar of contribution to benefits in retirement, at $5.32 for a DB plan and only $1.70 for an average registered retirement savings plan.

Read: 80% of Canadians would prefer pension improvements over salary increase: HOOPP

The decline in DB plans will lead to growing inequality and insecurity among seniors that can’t be ignored by employers. Senior poverty rates will continue to rise. In 2016, the median amount of retirement assets for Canadian families with working members aged 55 to 64 without an employer-provided pension was only $3,000, according to 2016 research by the Broadbent Institute.

Quite simply, that’s a looming poverty crisis that must be addressed.

It’s time for others to take up the DB pension challenge, from which employers in the private sector have walked away, to ensure a secure and adequate retirement for working Canadians.

Orla Cousineau, executive director for pensions at the University of British Columbia:

It’s clear, in the private sector, the future is defined contribution pension plans.

Many private sector employers have already backed away from sponsoring traditional defined benefit plans. A DC plan with high contribution rates and flexible decumulation options could be the pension model of the future.

Read: UBC outlines its strategy for decumulation

The University of British Columbia’s faculty pension plan is a well-designed DC plan that delivers good retirement benefits and a lot of flexibility to plan members. Established in 1967, it has more than $2.4 billion in assets today.

With compulsory membership and significant contribution rates of about five per cent from members and 10 per cent from the university, the plan allows our faculty to accumulate significant assets over the course of their careers.

The plan also offers a well-diversified custom balanced fund that contains exposure to a number of investment managers and strategies, including real estate, at a very low fee. Alternatively, plan members can design their own asset mix using the other five investment options available.

What sets the UBC faculty plan apart is that we allow members to leave their funds in the plan when they retire and receive a pension or retirement income from the plan. Members can choose a variable payment life annuity, or a registered retirement income fund or life income fund type payments from the plan. Most members choose a combination of these options. They value and trust how the plan is managed and invested, and choose to stay in the plan for their retirement.

Read: A look at the legislative landscape for decumulation options in DC plans

We even allow members to transfer other registered monies into the plan. And, if they transfer out and then change their minds, they can transfer the funds back in. Investing their savings through the plan means lower fees, which ultimately boosts their income in retirement.

I urge employers to follow UBC’s example and focus on optimizing their DC plan design to provide employees with a more secure retirement. Allowing retiring members to pool and share risk, and to use all or some of their DC savings to buy an annuity from the plan, should be the future of Canada’s retirement landscape.