Could a recovery be on the horizon for DB plans?

In 1897, after a reporter was sent to investigate rumours that Mark Twain had died, the renowned writer was famously quoted as saying, “The report of my death is an exaggeration.”

This quote came to mind recently during a conversation with Normand Gendron, past president of the Canadian Institute of Actuaries (CIA). I sat down with Gendron to discuss the state of Canada’s pension system at the Montreal office of Buck Consultants, where he is chief actuary. I was expecting to hear the usual refrain about the decline of defined benefit (DB) plans and the shift toward defined contribution (DC) plans.

Instead, Gendron began by outlining DC plans’ flaws: that average contributions to DC plans are 1% lower than those to DB plans, that management fees are significantly higher for DC plans, and that DC plan members are often ill-equipped to make sound investment decisions. He said it’s just a matter of time before plan members catch on.

“As people retire, they’ll be able to compare what they get with DC versus DB. People will realize they’re getting the short end of the stick,” he said. He predicts that consumer and retiree groups will lead the charge to demand DB plans. The added catalyst will be worker shortages and the increased competition for talent, he said. “[Having a DB plan] could be a differentiator for employers.”

He acknowledged that DB plans have many flaws of their own and that those flaws have caused the swing toward DC plans in recent years. He thinks that shift will continue for a few years yet. But he believes the pendulum will begin to swing the other way over the next five to 10 years.

In the meantime, he noted, legislative and regulatory changes are needed to make DB plans more attractive to employers. To start, plan sponsors need to have clear rules surrounding the ownership of surplus. As well, the limit on the surplus that pensions are allowed to carry needs to be increased (the CIA has recommended 25% as the threshold), and a workable model for a pension benefits guarantee fund needs to be found. “We’ve really got to balance benefits security and having a fair deal for employers,” he said. “If you don’t have a sponsor, you don’t have a plan.”

For DB doubters, he points to the 1970s, when employers were starting up plans despite “skyrocketing” liabilities and big deficits.

While we’re not likely to witness the demise of DC plans any time soon, perhaps reports of the death of DB are premature. Or maybe something different will emerge. Either way, it may be up to the regulators and legislators to decide its fate.

Don Bisch is the editor of BENEFITS CANADA.

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© Copyright 2008 Rogers Publishing Ltd. This article first appeared in the March 2008 edition of BENEFITS CANADA magazine.