The thinking for plan sponsors over the last decade has been to reduce risk, reduce liabilities, get out of DB and move to a DC pension model. But a pure DC plan isn’t the answer to the overarching pension problem—and neither is DB, argued Yvan Legris, global CEO, consulting, with Aon Hewitt, at a recent Toronto Board of Trade event.
He and his colleague Allan Shapira, a senior partner in the firm’s retirement practice, lectured the audience that more thought needs to be put into creating retirement plans that will be sustainable in the long term for both plan members and sponsors, and not just a quick fix to reduce risk.
“The same fundamental challenges that DB plans face are also there for the individual in these new [DC] arrangements,” Legris said. “There is no real risk reduction, just HR passing [on] some or most of those risks to the participant. [But] the ability of the individual to mitigate that risk is lower than that of the sponsor.
“There is a need for a concerted approach, bringing together an equitable share in risk between all the stakeholders—the participants, the sponsors, but also the government. Some risks are simply too great for just plan sponsors and members to bear, even if they are sharing it.”
Shapira concurred with Legris on the fact that a sustainable solution to the “pension conundrum,” as he called it, needs to be found.
Shapira defined a sustainable pension as one that can “consistently deliver in both favourable and adverse circumstances an appropriate range of benefits with an acceptable range of costs over the long term.”
“Neither of the traditional approaches at either end of the spectrum—with pure DB on one end and pure DC on the other—meets that definition of sustainability. That’s why new approaches are starting to evolve to provide retirement income in a sustainable way,” Shapira said, alluding to target benefit plans. Although he said he’s a fan of these types of plans, he emphasized that they, too, need some work.
Shapira propped up the much-criticized public sector and suggested that the private sector take notes when looking to implement sustainability elements into existing plans. “Many public sector plans have already adopted some of the [sustainable] characteristics with cost and risk sharing and self-adjusting mechanisms to put the plan on a better track if things get out of hand,” he said.
Mark Fuller, president and CEO of the Ontario Pension Board, was surely thrilled not to have negative light shone on the public sector for once and debated that systemic efficiency was a driving force behind the sustainable pension plans issue.
He explained that, up until now, the debate around which pension model will deliver a sound retirement system has really been about risk sharing. “This is an important part of the conversation, but, from my perspective, approaching the question of how to build a sustainable and sound retirement system through risk sharing is problematic. It’s a polarizing way to frame the discussion and wrongly sets up an either/or debate between DB and DC and ignites opposing world views,” he said, adding that the risk-sharing DB/DC debate has deflected thought being put into other vital considerations in designing a sound retirement system—like efficiency.
For Fuller, an efficient system is one that delivers adequate retirement income to the greatest number of people—which is what every contender in the pension circle wants, yet how to get there is where ideas diverge.
Such a system, he said, can been obtained only through low expense ratios, access to experts and the pooling of assets and risks. “Risk and asset pooling have significant enhancing elements that single account models don’t.” And, currently, the system isn’t set up like that. It’s those with the most wealth who have access to these efficiencies that Fuller names.
The structure of how Canadians financially fund their retirement years is unbalanced by the terms of these men. Plan sponsors, providers, government—and even members—need to derail the risk train of thought and jump track to a more sustainable way of thinking.
Legris pointed to examples in the U.K., where “adaptive systems in which longevity risk is shared in a more dynamic way,” and to the U.S. and the Netherlands for their plan sponsor-friendly legislation. But Legris and his panellist cohorts agreed that Canada can make strides toward sustainability, with a little effort.
“In Canada, you may have the right ingredients—historical and cultural values that emphasize collective responsibility,” Legris said. “You might achieve something spectacular and better than other countries. This could be your moment.”