The OECP Report: Prof. Harry Arthurs Responds

Prof. Harry Arthurs: No. If anything, the current financial crisis has pointed to the need to change the architecture of the system to deal with both normal times and crises. Terrible disasters show the need for changes to the design of the system, but crises happen. We need to ensure that the system has the ability to deal with them when they arise.

What do you think of the criticism that your report did not address the concerns of sponsors of Single Employer Pension Plans (SEPPs)?

It would be fair to say that the concerns of SEPP sponsors were addressed, although perhaps not in the way that they would have liked. Admittedly, SEPP sponsors were not granted relief from solvency funding, nor were they granted relief from contributing to the Pension Benefits Guarantee Fund. However, the report did grant relief to sponsors of SEPPs in the area of plan mergers, plan-to-plan transfers and other matters.

More importantly, though, it is important to note that SEPP sponsors are in an inherently awkward situation. As a general rule, SEPPs are not big enough to spread risk, distribute cost or gain leverage due to their size. SEPPs also pay too much for the financial and other services that they require. The report addresses this problem by proposing forward-looking reforms that would allow SEPPs to buy modules of service from larger plans or other private providers.

The structure of a SEPP is also inherently awkward in at least two senses. First, there is an intrinsic ambiguity in a SEPP. Sponsors are sometimes put in the difficult position of choosing between their own interests and the interests of the pension plan. A second concern is entirely practical. Staff members who are assigned responsibility for the pension plan are often preoccupied with their day jobs. They are usually not pension experts and may not be comfortable or able to discharge the pension plan responsibilities that they have been assigned.

Consequently, the report proposes an alternative solution for SEPPs. If the SEPP is reinvented as a Jointly Governed Target Benefit Plan, then the SEPP sponsor will see a lot of its concerns resolved. In exchange for granting members a voice in the governance of the plan and adopting greater transparency, their funding and regulatory concerns can be resolved. This change in the architecture of the system will also position plans to better face both the normal problems that occur as well as periodic crises. When viewed from this perspective, sponsors of SEPPs that are willing to move to a different configuration of governance, funding and benefits have gained a great deal in my recommendations.

A final point that I would like to make is that I listened when representatives of small business came forward with the notion of creating a voluntary layer to the Canada Pension Plan, which would allow for greater pension coverage of employees of small enterprises. I drew this low-cost strategy to the attention of the government in my report, even though it lay outside of my mandate.

Do you think the pension community is ready for reform?

Yes. I have observed the reaction to the report. There is awareness on all sides that things have to change. Based on what I have observed and read, I believe that there is an understanding that the report can be worked with and that it is a good starting point for the process of change.

What do you see as potential obstacles?

The current crisis being faced by pension plans is preoccupying people. There is no doubt that it must be addressed, but there is a risk that the manner in which it is addressed will be seen as a permanent solution. But this is not so. The underlying issues with the design of the system must be addressed.

Another potential obstacle to reform is that there is a lack of coherence on both the sponsor side and on the union/member/retiree side. There are a variety of different views related to the type of plan and the area of the economy in which it operates. The current situation has also led to the articulation of some proposals that, if adopted, would shape the system to deal with the issues of only one sector. However, there is no fix that works for everyone—there is a profound need to move away from a one-size-fits-all approach to pension issues.

Long-term planning and strategic thinking are required. Both the government and the pension community are reluctant to embrace this type of thinking. For reform to succeed, long-term planning is essential. Based on my experiences over the last two years, I believe that reform will succeed and that the pension community and the government will support it.

Hugh O’Reilly: On a personal note, I enjoyed the opportunity to present to Professor Arthurs and to participate in the consultation process. His ability to bring people together is remarkable, given the fractured nature of the pension community. If this spirit animates the reform process that I hope that the government will undertake, then I am confident that meaningful pension reform is at hand.

Hugh O’Reilly heads the pension and benefits practice group at Cavalluzzo Hayes Shilton McIntyre & Cornish in Toronto. horeilly@cavalluzzo.com.