One of the enduring myths in the Canadian pension scene is that we have held onto our DB plans more tenaciously than the rest of the world. While many Canadian companies have indeed switched to DC, the impression remains that the trend is not as pronounced as it is in the U.S. or the U.K.
Even the statistics seem to bear this out as a still respectable 35% of the total workforce participates in a workplace pension plan, the vast majority in DB. The coverage statistics look even better when you exclude the self-employed. The truth, however, is not nearly so rosy, at least not in the private sector.
Data derived from Statistics Canada shows that pension plan coverage, whether DB or DC, is down to 20.9% within the private sector. Even this figure masks the full extent of the decline.
Statistics Canada relies on the provinces for its data, a source that has long been suspect. I decided to look directly at the pension plan database maintained by the Financial Services Commission of Ontario to see if it would reveal anything new. This is a database—publically available online—of all the pension plans registered in Ontario.
It shows the number of active members, the type of plan and whether the plan is active, frozen or winding up. Teasing out some useful information turned out to be a little tricky, however, because the data proved not to be totally accurate. Upon spot checking some of the entries, I found one plan for instance that is reported as a DB plan with over 20,000 active members whereas it actually has fewer than 3,000 DB members left, with the rest earning a DC benefit. This was not the only anomaly.
To make a long story short, I made some adjustments to the Ontario database based on my knowledge of various plans with which I am already familiar. This was not a totally scientific exercise and, while it is prudent to take my adjusted figures with a grain of salt, what I found is shocking.
My best estimate is that the percentage of Ontario private sector workers with ongoing DB coverage has dwindled to 8.9%, fewer than 1 in 11! To be clear, I excluded participants of multi-employer pension plans (MEPPs) since these arrangements are strictly DC plans that only look like DB plans. If there is any doubt they are really DC, one MEPPs practitioner estimates that 25% of MEPPs have had to reduce benefits in recent years.
When to take action
At what point does the coverage rate go so low that it begins to affect public policy? I think the time for that is long past due.
In Ontario, for instance it was one thing to impose provisions like grow-in and the pension benefits guarantee fund in the 1980s when DB coverage was broad and expected to grow. Today, it is no longer clear that even unionized employees, if they were better informed, would embrace these types of provisions. A growing number of union pension plans are going DC and many hourly employees even in larger companies have never known anything but DC coverage.
How would they feel about paying a portion of their tax dollar to protect their DB brethren against downside risk when they themselves are not extended the same protection?
The future for DB plans does not look any better. I have mapped out four distinct scenarios for the economy and pension coverage over the next 10 years and based upon a realistic rate of conversions to DC and plan wind-ups. I estimate there is at least a one -in-three chance that the number of DB plans remaining in Ontario in 10 years will drop by 65% versus what we have today. There is only a one-in-six chance that the number of plans will rise and even then only if strong legislation is passed soon.
There is no reason to think that Ontario is unusual amongst the provinces in terms of its grim DB future. All of the provinces would do well to consider how their pension legislation would change if they recognized the need to provide support to the majority of their workforce, not just the increasingly tiny minority with DB coverage.
As long as we cling to the myth that DB coverage is the norm, not the exception, we are less likely to take decisive action that will improve the retirement situation for the population at large.