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My parents came from a small town in Italy near Monte Cassino. Apart from a famous battle there in World War II, the town is known for its monastery, which was established by St. Benedict in 529 AD, shortly after the continent had descended into the Dark Ages. For the better part of the next millennium when the “light of learning” was all but extinguished in Europe, there were only a few universities and monasteries—such as the one at Monte Cassino—where it continued to flicker.

Employer-sponsored pension plans in Canada are undergoing their own dark age. The percentage of private sector employees covered by an occupational pension plan down is now down to 22%. By and large, governments across the country have dragged their heels on various initiatives that could improve the situation: pooled registered pension plans, target benefit plans and/or an expanded Canada/Quebec Pension Plan. One might speculate that if only 22% of the country’s lawmakers had pension coverage, the quest to produce a viable solution would have taken on a greater sense of urgency.

This pension dark age is characterized not only by low pension coverage but also by suboptimal pension plan design. If current trends persist, it is only a matter of time before the remaining DB plans in the private sector all convert to DC plans. At that point, politicians might decide to convert the public sector pension plans into DC plans as well, since doing so would eventually become the path of least resistance. Defending public sector DB plans once the private sector is all DC would probably entail too great a political cost. If this is the future, it would be a shame since we can do better than DC in both the public and the private sectors.

I suggest that we look at the large public sector pension plans in a new light: they are effectively the monasteries of the new pension dark ages. Amidst the gloom, they offer hope of something better for everyone, in spite of their perceived excesses. Sure, public sector employees would still fare reasonably well with 30-plus years of hefty contributions under a DC plan, but going this route would be missing an opportunity to turn the plans into something better.

What public sector pension plans represent is the best hope for private sector pension plans to evolve into new hybrid vehicles that are more sustainable than traditional DB plans while still meeting the needs of workers.

Traditional final pay DB plans have been on their way out for some time, not only in the private sector but even in the public sector where we are witnessing tangible signs of evolution in plan design. Conditional indexing, reduced subsidies for early retirement (or at least higher employee contributions to preserve earlier retirement) and full 50% sharing of all pension costs are all becoming increasingly common. Effectively, public sector plans are edging toward becoming target benefit plans—meaning no more blank cheques but still preserving most of the positive aspects of DB plans. This is a good thing since such a platform works equally well in the private sector, too.

The best example of evolution in plan design thus far has come from the New Brunswick government with the shared-risk plan (SRP) it recently implemented.

Read: New Brunswick’s innovative answer to pension reform

The plan has gone further than any other plan to date in terms of redefining the benefit promise and specifying the conditions under which benefits can be improved or reduced. Employees in the SRP will be much better off than under a DC arrangement while the government and taxpayers at large will benefit from a more fiscally responsible plan.

The SRP can be held up as an example for private sector employers to follow. One can argue that the SRP design could only have come from the public sector since a private sector plan sponsor would not have the political clout to effect the changes in pension laws needed to bring it to life. Time will tell if other plans follow New Brunswick’s lead or if the SRP gives rise to even more innovative plans.

Public sector pension plans will continue to incite the envy of private sector employees and the hostility of taxpayer coalitions if they merely fight a rearguard action to preserve the status quo. Alternatively, should they choose to continue to evolve, and the signs are there, they can play the role of guiding private sector occupational plans into a new Renaissance. Ultimately, it would be to everyone’s benefit.

Fred Vettese is chief actuary of Morneau Shepell. These are the views of the author and not necessarily that of Benefits Canada.
© Copyright 2014 Rogers Publishing Ltd. Originally published on benefitscanada.com

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