©  Copyright 2002 Rogers Media. The following article first appeared in the January 2002 edition of BENEFITS CANADA magazine.

PFA did work on developing a vision of what such schemes should look like. But our failure is that we never followed through to successfully sell our better mousetrap to the pension world.

What were the serious design flaws in DB and DC plans? PFA argued they have the same source: inefficient risk pooling.

In the DB arena, these inefficiencies revolve around unclear issues such as which stakeholders bear inflation risk, which stakeholders gain and lose from the extreme back-end loading of pension accruals, and which parties underwrite balance sheet deficits, in contrast with those that benefit from balance sheet surpluses.

Looking to DC plans, the inefficiencies are less fuzzy. In the capital accumulation phase, fluctuations in market returns and skill differences impose a lottery ticket effect on plan participants. Some will do well, while others will fare poorly.

During the capital decumulation phase, most participants also sign up for the mortality lottery. How long should the accumulated capital be made to last? Ten years? Twenty years? Or even longer? Die early and you win, live long and you lose. Go figure.

Now, 20 years later, the DB and DC chickens have come home to roost. The 1980s saw the predictable (and still unresolved) fight over mandated inflation protection in DB plans. The equity bull market of the 1990s saw the emergence of surpluses on DB plan balance sheets.

Predictably, with no clarity in the underlying pension deals, all stakeholder groups have been claiming these surpluses for their own benefit. Our legal and regulatory communities have been all too willing to join these often nasty frays.

The equity bull market of the 1990s had another effect on pension plans. Plan participants grew increasingly impatient with backend-loaded DB plans. They wanted a piece of the investment action, and they wanted it now. An increasing number of plan sponsors have been happy to accommodate these plan members by offering new DC plans. Offloading both balance sheet risk and plan expenses in one fell swoop onto a willing workforce has proved too tempting an opportunity to pass up.

In March 2000, stock prices began to fall rather than rise. Even now--almost two years later--it is not clear when prices will stop falling. Apparently, the risk side of the equity risk-reward equation has not been repealed after all. Both participants and sponsors of DC plans are beginning to wonder what they got themselves into.

So the question of how to build a better pension mousetrap remains. We must design arm's length, well-governed mechanisms that pool investment and mortality risks efficiently, and that operate at a large enough scale to be cost effective.

These mechanisms will be transparent and fair for both current and future generations of plan members and plan sponsors (ultimately taxpayers or business owners). Twenty-five years ago, author Peter Drucker used the word 'legitimacy' to classify such pension schemes. While we have since made some progress towards building pension schemes endowed with legitimacy, we still have a long way to go. BC

Keith Ambachtsheer is a strategic adviser to major pension schemes around the globe. He is also the current president of the Association of Canadian Pension Management. kpa@kpa-advisory.com.

The Romanow Commission has released its final report on the future of healthcare in Canada.

For Commissioner Romanow's recommendations, click here.

Click here for Senator Michael Kirby's report, "The Health of Canadians – The Federal Role: Recommendations for Reform."