At the Association of Canadian Pension Management(ACPM)Conference, held earlier this fall in LaMalbaie, Que., the asymmetry debate was at the forefront. And it wasn’t pretty.
Described in detail in the recent ACPM report, Back from the Brink: Securing the Future of Defined Benefit Pension Plans, the asymmetry argument goes something like this:
The plan sponsor is responsible for funding pension benefits, is usually wholly responsible for funding shortfalls, but is prevented from using any plan surplus, other than for benefit improvements. Not only does this asymmetry act as a barrier to establishing and maintaining DB plans, it also leads to conservative, minimal funding strategies.
The frustration surrounding the asymmetry conundrum was expressed by David Burke, national retirement practice director at Watson Wyatt Worldwide in Montreal, when he described the “golden rule” of DB plan members.
“I would say that 90% of DB plan members honestly and truly believe that if the plan has a deficit, they own the accrued pension. And if the plan has a surplus, they own the plan assets. Kind of, heads: plan members win, tails: plan sponsors lose.”
But the discussion about asymmetry was far from symmetrical. That became clear when ACPM president Scott Perkin read aloud comments prepared by Ken Georgetti, president of the Canadian Labour Congress in Toronto. Georgetti argued that using asymmetric risk to explain the lack of incentives for employers to establish and fully fund DB plans is “greatly exaggerated.”
“According to the theory, employers who sponsor DB pension plans get none of the upside risk and all of the downside risk,” Georgetti wrote. “To be candid, the idea that employers just swallow the painful financial pill without flinching strikes me as the world of make-believe.”
Georgetti also took exception to the ACPM’s proposed solution to the asymmetry problem—that governments should pass legislation overriding common law trust precedents and establish the paramountcy of contract law for pension plans.
“It is virtually impossible for contracting parties and government regulators to anticipate all of the circumstances of a pension plan through time,” he said.
Regardless of which side of the asymmetry debate you’re on, the stakes are high. As Burke put it, the very future of DB plans lies with resolving the “Aword.” But, if the dialogue at the ACPM conference is any indication, settling the asymmetry issue isn’t going to be easy.
In fact, it could get ugly.