What is starting to emerge, in the Netherlands for example, is better risk sharing between employers and employees. They ended up with a DB/DC hybrid where benefits are tailored to available assets, as you have in a DC plan, but at a collective level. If the funding ratio is more than 125%, benefits are indexed. If it drops below 100%, the pension deal could be modified to reflect lower assets. You still get the benefits of longevity insurance. I was involved in getting to a similar point when I was in Australia, and I am trying again here, but it’s much tougher in a classic DC context than in the Dutch hybrid I just described.
Will the downturn change people’s attitude toward retirement?
I’ve been of the view for some time that people grossly underestimate the cost of retirement, and at the same time with longevity kicking in, which is one of the reasons the cost of retirement is so high, you probably will find people working longer but do it under flexible arrangements—partially working, partially accumulating pension credits, partially drawing down pension credits. You’ll see all sorts of things you wouldn’t have contemplated 10 years ago when you were either working or retired.
Would you say that the pension coverage problem is the biggest challenge in the industry right now?
There is the coverage problem but also, I’m not sure the notion that actuaries have in Canada that managing to 100% funding ratio is the right way to go. In comparison to the insurance industry, where if you finance a secure promise to a policy holder with risky assets the regulator insists of a buffer that will protect you from adverse conditions like we saw in 2008. That is how the Dutch central bank regulates both insurance companies and pension plans in the Netherlands.
We’ve taken this notion that if at any given point there is as many assets as there is liabilities in a plan, you’re covered. We have a systematic bias in Canada to underfunded pension plans and that’s because…we have two rules, there’s the 110% rule that says you can’t be over funded and that is a really silly rule that was only put in place because the government though that companies were hiding assets in their pension plan. What they forgot in the process, if individuals and corporations do not provide for the pensions of their employees, than they eventually the state is going to have to layout more tax dollars to do the job for them. I think it was very short sighted and would very much encourage for that rule to be removed. IT has been removed for public sector pension plans but not for private sector plans.
Do you think a supplemental plan is the way to go?
I think so. Keith Ambachtsheer has tried to get a national plan going, but given the way Canada is put together that is probably a long shot. I’m not sure, but if the management of supplemental plans was graphed to that of organizations that already have good economies of scale, you could probably do something that is very efficient without incurring a lot of overhead costs.
Is there anything you would like to add?
If there was one message I’d like to emphasis, a lot of people are shocked by 2008 and second guessing themselves about whether their strategies of having equities in those plans makes sense, and they are probably going to be wrong. Because, the reason you have equities in a plan is because, on average, it is a very successful strategy. You have to be careful to not pull the money out when you are at the bottom of a market. You have to ease out of equities as times goes on, but at the beginning or even at the mid-point of your career, excess return on equity is really attractive. You have to be able to say, I signed up for this and yes I knew something like this could happen, it’s not unprecedented and I should not modify my long-term strategy because something I should know, could happen, did happen. But that is hard for us to do. We are often so emotionally tied up in how we think about our investment decision. It’s hard to maintain a clear head.
Alyssa Hodder is editor and April Scott-Clarke is assistant editor of Benefits Canada.
alyssa.hodder@rci.rogers.com
april.scottclarke@rci.rogers.com
> click here for a PDF version of this article
© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the November 2009 edition of BENEFITS CANADA magazine.