Morneau Shepell maintains a database that covers literally all of the defined benefit (DB) pension plans for which the firm performs a funding valuation. The database contains detailed data on hundreds of DB pension plans covering more than a half million active and retired DB members. The 2015 edition of this database, which was recently completed, yields […]
The plunge in interest rates to new lows in recent years has made DB plan sponsors rethink whether their pension plans continue to be sustainable. Private sector employers for the most part didn’t really have to think about it as they have already abandoned their DB plans in droves. Recent statistics suggest that roughly 60% of DB pension plans in the private sector have closed their doors forever to new hires.
While attending last week’s Pension Policy Forum in Toronto, it became clear that the focus of pension reform in this country has gradually been shifting.
Target benefit plans have been making significant inroads in the public sector of late, more so than most of us realize.
After a number of false starts (and there may be more yet), the goal of pension reform in Canada seems to have zeroed in on helping middle-income Canadians maintain their standard of living into retirement.
A little over two years ago, Daniel Kahneman wrote a seminal book on human behaviour and perceptions, titled Thinking, Fast and Slow. In the book, Kahneman makes the following observation, “A reliable way to make people believe in falsehoods is frequent repetition because familiarity is not easily distinguished from truth.”I would submit that this phenomenon is the basis for the widespread belief that Canada is suffering a national retirement crisis. The frequent repetition in the media that Canadians are not preparing themselves adequately for retirement certainly has to colour our thinking on the matter.
When the pension reform process started about seven years ago, the focus was on pillar three, meaning employer-sponsored pension plans. It was hoped that a little tinkering would suffice to make pension plans more sustainable and hence encourage more employers to adopt them. It’s fair to say that this aspiration did not pan out given that pension coverage in Canada’s private sector is at the lowest point in a half a century. My estimate is 21% of the paid private sector workforce and that includes coverage in both DB and DC plans.
This past summer, the employer members of OMERS proposed cutting the basic pension formula from 2% of final average pay (on earnings over the year’s maximum pensionable earnings) down to 1.85%. This seems like a fairly modest reduction in percentage terms, but it would have been represented as one of the most significant events in many years within the pension industry. While OMERS ultimately dropped the idea, for now anyway, the idea may be far from dead.
Morneau Shepell maintains a proprietary database with detailed data on hundreds of DB plans. Every so often, it yields up some interesting tidbits of information. For example, consider the prevalence of active versus passive investment management. You might be surprised at the percentage of plans that are actively managed, but let’s set the stage before revealing the answer.
I recall co-authoring a report in 1982 in which we predicted that future inflation would 9% a year for the long term. That sounds crazy now, but it seemed reasonable at the time, especially considering that inflation averaged 9.7% a year over the previous 10 years, with no end in sight.