The report and recommendations of the Ontario Expert Commission on Pensions were released November 20, 2008. The Commission’s mandate, while not explicitly stated as such, was to save defined benefit (DB) plans in Ontario. If we are honest with ourselves, that battle has already been lost for many corporate plans, or single employer pension plans (SEPPs) as Commissioner Arthurs terms them.
DB plans have long been a mainstay of the public service and of union organizations, and will likely remain so for many years to come. To declare my bias, I am a supporter of DB plans, believing they have a role to play in pension provision—and am happily a member of one myself—but I do not believe they are the only approach to providing pensions. Defined contribution (DC) plans have a role to play as well, though not in the way they are currently delivered.
This is where the British Columbia/Alberta Joint Expert Panel got it right. Part of its mandate from the outset was to consider all forms of pension as well as a means of providing pension coverage to those not currently participating in one, namely the self-employed, occasional workers, and workers whose employers do not offer one.
Specifically, the BC/Alberta Panel recommends the creation of a single fund whose investment strategy is developed and overseen by an expert, yet independent group. The total cost of providing a savings vehicle is to be limited to 0.50%, roughly the cost that the larger DB plans pay to administer their pension arrangements.
While the Arthurs’ report attempts to address the same lack of pension coverage, it really falls short. It simply argues for the ability to create jointly governed target benefit plans, or the ability for the uncovered to be able to tap into the CPP or a CPP-like benefit—albeit with very little detail—or to tap into large existing DB plans if they will accept non-affiliated members.
Rather than dealing with the lack of pension coverage for many in Ontario, Arthurs instead seems fixated on the concept of a more inclusive governance process, believing jointly sponsored or multi-employer pension (JSPP or MEPP) governance arrangements to be more transparent to members than those utilized by SEPPs, and therefore better able to be managed. His fundamental premise seems to be that the greater the stakeholder representation among plan fiduciary bodies, the greater the likelihood of better governance decisions, and hence, plan success.
There is little doubt that good governance can lead to better results and greater success in a plan achieving its goals. As a consultant who works with all of SEPPs, MEPPs, and JSPPs, as well as endowments and foundations, I would not agree that one form of governance is superior to another. Rather it is the skill and knowledge of the decision makers, the frequency of meetings, and the size of the decision making body or bodies that tend to be much greater predictors of success.
Both the BC/Alberta and Ontario reports address the need for increased knowledge and training of plan fiduciaries, which is a laudable goal. There seems to be continued support for lay decision makers with appropriate and available education, though the approaches taken by the commission and the panel vary.
The BC/Alberta Panel believes it is possible for those without the requisite knowledge to acquire it, setting a prudent expert test for investment decisions. It wants accredited courses run by post-secondary institutions with certification of plan fiduciaries in order to meet the higher prudent expert standard.
In other words, simply attending industry conferences, no matter how educational, will no longer be sufficient. Should plan fiduciaries not contain the resident expertise and if they do not acquire it through the certification process, then delegation to external experts will be required. Of course, plan fiduciaries can combine both approaches.
Ontario’s message is much more mixed, with much of the detail yet to be worked out. For example, what level of skill is required? Is proficiency mandatory? Is there a test? Is proficiency regulated? Ontario is supportive of an inclusive governance process that includes lay and professional decision makers, yet it is skeptical that the right level of skill can be achieved, and therefore wants a code of best practice and minimum standards.
Unlike BC/Alberta, the Ontario report only sets out a prudent expert test for more complex investment decision making, rather than all investment decisions. As well, the prudent expert test does not reside in knowledge and experience, but is linked to a joint governance structure consistent with Arthurs’ views on governance.
This critique is not meant to be exhaustive by any means. There are many such analyses of the two reports available to the reader should they so desire to read them (or the reports themselves). As an interested party in the improvement of the pension system in Ontario (and Canada for that matter), I simply note that there is scope for Ontario to broaden its review and the recommendations of the Arthurs report. As yet, they are simply recommendations, open to further comment—by February 27, 2009—and not yet adopted by the Province of Ontario. Let’s take this time and opportunity to do the right thing.