Defined benefit pension plans aren’t just better for Canadian workers, but for the country’s economy in general, according to a new study by the Canadian Public Pension Leadership Council.
Statistics Canada data from 2018 showed 37.5 per cent of Canadian workers have some type of pension or retirement savings plan through their workplace, and 25.2 per cent have a DB plan. Far more (88 per cent) employees in the public sector participate in some form of retirement savings plan compared to the private sector (23 per cent). Also, 80 per cent of Canadian public sector workers are still in DB plans, compared to 9.5 per cent of private sector workers in a DB plan.
While the report asserted DB plans offer multiple advantages over other options, it also noted longevity risk is a systemic problem affecting the entire population and DB plans go a long way to mitigating this risk.
The report referenced a 2018 survey by the Royal Bank of Canada, which found 62 per cent of Canadians are worried they’ll outlive their retirement provisions. While annuities are another option to handle this risk, only 10 per cent of the survey respondents said they’re using or planning to use an annuity, prompting questions of whether they actually understand or are aware of longevity risks. The report also suggested administrative fees or alternative low-risk investment strategies could be steering people away from annuities.
“People argue against DB plans because of their cost when, in fact, they’re the most affective and efficient form of retirement income planning,” says Robert Brown, professor emeritus of actuarial sciences at the University of Waterloo and co-author of the report. “If you look at the cost net-net, investment income from these asset pools pays for 75 to 80 per cent of plan benefits, so the cost is only 12 to 12.5 per cent for contributions from workers and the taxpayer.
“Then, these people, because they’ve this nice stream of income post-retirement, and they can’t finagle it, they don’t use [old-age security] and [guaranteed income supplement] nearly as much,” says Brown. “They don’t use GIS at all, so that’s saving billions of dollars for Canadian taxpayers.”
Referring to a 2016 survey by the CPPLC, the report noted only 10 per cent of those in DB plans said they expect to need GIS. Further, the Ontario Municipal Employees Retirement System estimated in 2013 that 10 to 15 per cent of DB beneficiaries collect GIS compared to 45 to 50 per cent of other Canadian retirees.
DB plans also allow for a less stressful retirement, because members don’t have to worry about outliving their savings, according to the report. This alleviation of stress doesn’t only affect retired members but those who remain in the workplace. Research from the National Institute on Retirement Security showed organizations reported noticeable productivity drops when they moved from DB to DC plans compared to employers that stuck with a DB plan.
The CPPLC report suggested these productivity issues could be directly improved with a DB pension plan and noted employers shouldn’t be too quick to dismiss them based on excessive cost.
“This is the tone of the dialogue in Canada right now — ‘I can’t have a good pension plan, so you shouldn’t have one either,'” says Brown. “What I’d say to policy-makers is everybody can have a pretty good pension plan, so why are we creating a system that leads to nothing or something as inefficient and ineffective as [registered retirement savings plans] and [tax-free savings accounts]?”