© Copyright 2006 Rogers Publishing Ltd. The following article first appeared in the September 2005 edition of BENEFITS CANADA magazine.
Editorial: DB on DB
Put on the overalls and bring out the tools. Canada’s defined benefit pension system needs a reno.
By Don Bisch

When it comes to fixing things around the house, you might say I take the Red Green approach—a bit of duct tape will fix just about anything. The most ambitious project I’ve got under my tool belt is assembling a shelving unit from IKEA. And even that was an ordeal. But after some cursing, an exhaustive search to find a missing Allen wrench that had slipped under the couch, and a bit more cursing, the unit was built. A little crooked, but finished.

Home repair is one thing. Repairing Canada’s broken-down defined benefit(DB)pension plan system is quite another. In this case, the problems are too plentiful, too complex and too long-standing for a patch-up job.

First, there’s the funding problem— soft equity markets and low-interest rates have ravaged pension fund returns, leaving many plans in a deficit position.

Then there’s the issue of accounting rules, which allow for smoothing of pension asset and liability values over time while sacrificing transparency.

And, of course, there are surplus issues. Under the current regime, plan sponsors are required to share any surplus with plan members if the plan winds up, but are fully responsible for any deficit in the plan. Not only does this asymmetry mean that sponsors bear all the risk and reap none of the reward, it leaves no incentive to cushion against volatile markets.

No, duct tape won’t do the trick this time. What’s needed is something more akin to the overhaul you’d see on one of those popular home renovation shows. Move over Red Green and make room for Holmes on Homes.

What shape will those repairs take? There are plenty of suggestions. No fewer than four consultation papers have been released in recent months— by Canada’s Department of Finance, Quebec’s Régie des rentes, the Canadian Association of Pension Supervisory Authorities and, most recently, the Association of Canadian Pension Management— on how to remedy DB’s many problems.

The proposed solutions range from extending the amortization period for solvency deficits, to establishing a pension guarantee fund to protect plan members on wind-up.

To put those recommendations in context, we’ve brought together some of the leading minds in Canada’s pension industry for a special report on how to fix the DB system.

But before any progress can be made, what’s needed is some political will—decision-makers in Ottawa and in the provinces who are prepared to get their hands dirty and make some tough choices.

One positive sign is that Canada’s Minister of Finance, Ralph Goodale, seems committed to doing something about the problem. He already demonstrated his ability to make things happen earlier this year with the removal of the Foreign Property Rule. Let’s hope he’s up to this challenge as well. After all, Ralph, if Canadian plan sponsors don’t find you handsome, they should at least find you handy.

Don Bisch