Using a Canada-model pension plan, employees would see $5.32 in retirement income for every dollar they contribute compared to the typical $1.70 resulting from an individual approach, according to a new report by the Healthcare of Ontario Pension Plan.
The report, The Value of a Good Pension, divides Canadian retirement options into five distinct types: an individual approach, a small employer capital accumulation plan, a large employer capital accumulation plan, a large-scale pooled plan and a Canada-model plan. The World Bank has defined Canada-model pension plans as a specific category of public plan or public asset manager that’s typically defined benefit. Generally, they feature independent governance; larger scale, in-house management; diversification; high-level talent; and a long time horizon. As well, these plans usually allocate more heavily to alternative assets, more often doing so directly.
In reviewing both academic and industry literature, the report found that good pensions create value for money for Canadians through five key drivers: savings, fees and costs, investment discipline, fiduciary governance and risk pooling. These value drivers are all in play to different degrees, depending on the type of plan. However, a scale of efficiency emerges, based on how much employers and employees contribute into a plan versus how much workers actually receive at retirement.
“The further you move up that scale, the more efficient pensions become so that in the end it works well for everybody because it costs less to produce that same outcome,” says Jim Keohane, president and chief executive officer of the HOOPP.
When individuals are left to their own devices to make investment choices, they’re at a disadvantage from the moment they begin to the moment they start tackling the decumulation phase, says Keohane. As well, they’re missing out on the mutualization of investment and longevity risk that a Canada-model plan can offer, which is why these models rest at the top of the efficiency scale relative to all other plan types, he adds. “That mutualization of that risk really allows us to charge people way less to get the same thing.”
While a single-employer defined benefit pension is still an efficient way to save, the corporate world is steadily trudging towards the conclusion that the model doesn’t work for them, says Keohane.
“From a public policy point of view, we should be thinking about how to create policies that move people up that scale,” he says. “Corporations are getting out of offering people defined benefit plans so people are moving down that scale. We need to think about how we can reverse that trend and start moving people back up that scale. If you create a more efficient pension system, you’re either going to end up with more money to pay pensions with or you can charge people much less throughout their working careers, so it’s a win-win.”
Keohane says it’s admirable that other large public sector plans, such as the Colleges of Applied Arts and Technology pension plan and the OPSEU Pension Trust, are making efforts to push Canadians up the scale with their new, modified DB systems. However, due to their inherent low-cost nature, both for the employer and the employees, these options are providing less, even though members do benefit from the peace of mind of a DB guarantee, he adds. “It’s certainly a step in the right direction.”
On the other hand, the debate around DB versus defined contribution plans hasn’t yielded much of any real use, says Keohane, noting Canada’s weakness is in breadth of coverage. A solution is creating policy that promotes the formation of more plans like HOOPP, either subdivided by industry or geography, and bringing multiple related entities together to pool their resources for retirement planning, he suggests.
“We’ve talked to both the provincial and federal government and all three parties about [the report], and there is a lot of interest in this. I think a lot of people recognize there is a bit of a gap in the retirement system right now.”
While politicians and stakeholders have latched onto the issues raised by Sears Canada Inc.’s bankruptcy, the suggestions that pensioners should be first in line to be reimbursed when a company gets into trouble could be a double-edged sword, says Keohane, noting companies could simply add such a policy to the list of reasons why offering a DB plan is untenable for them. Examples like this highlight the need for government policy to be holistic, ensuring that efficiency is at its heart, he adds.