April has been a busy month for the world of defined benefit pension plans. In recent weeks, both the OPSEU Pension Trust and the Colleges of Applied Arts and Technology pension plan have announced plans to offer new defined benefit options to other employers.
OPTrust is further along in its journey, since its new offering, called OPTrust Select, is now open for business. In the case of CAAT, its DBplus plan is still pending board approval, with a working launch date of June 1, 2018. Both plans, however, are hoping to open the doors to potential plan sponsors that may be averse to the liability of a traditional defined benefit plan but still want to provide their employees with a stable retirement income. In the case of OPTrust, it’s targeting employers in the broader public, charitable and not-for-profit sectors. As for CAAT, the new plan will be available to workplaces in the broader public, private and not-for-profit sectors across Canada.
Read: CAAT to introduce new DB plan
But will the new plans be enough to sway employers wavering on the question of whether they can sustain a defined benefit arrangement? “Canada’s employed workforce is 18 million people. Out of those 18 million, 11 million are not members of a defined benefit fund,” says Keith Ambachtsheer, director emeritus of the International Centre for Pension Management. While many Canadians are in defined contribution plans, the downside comes when they reach the decumulation phase, he adds, suggesting the new offerings could help address some of the gaps.
If the costs aren’t out of line with what an employer is willing to spend on compensation, beyond the hassle of making the transition itself, there’s no reason why an employer might balk at joining such a plan, says Ambachtsheer. “It’s more a question of doing due diligence on whether the organizations that they’re basically transferring this obligation to have good governance and whether they’re long-term and sustainable pension delivery organizations.”
Ambachtsheer stresses that as multi-employer plans seek to grow, there are certain factors to bear in mind. “The providers have to take care of the fact that assumptions are never going to work out perfectly,” he says.
“Ideally, you’d want to see something like, maybe inflation protection is conditional, as one possibility. The other is that they target to actually have a going-concern surplus on their balance sheet so they’ve got some wiggle room that if things go below expectations for some time period, they’ve got enough of a cushion on the balance sheet that they can carry that through without having to cut benefits.”
Read: 2017 Top 100 Pension Funds Report: The evolution of DB
In the case of the existing CAAT plan, it does have a series of funding conditions that dictate how it should act in a volatile period, including potential scenarios for raising contributions, reducing future benefits accrued by members and temporarily abandoning inflation protection. “So these are all elements of the plan that third-party employers should have a look at, in terms of what are they putting their employees into?” says Ambachtsheer.
According the website CAAT has set up to introduce DBplus, the plan aims to combine the cost certainty of a defined contribution arrangement with the advantages of a lifetime pension and survivor benefits that a traditional defined benefit arrangement provides. The contribution rates are lower than the regular CAAT plan, with organizations joining DBplus able to chose to contribute between six and nine per cent from both employers and employees. For CAAT’s existing plan, contribution rates are 11.2 per cent up to year’s maximum pensionable earnings and 14.8 per cent thereafter.
For employers that don’t have the resources to be very active in the administration of their plans, DBplus makes much of the ease of the scheme, noting both employers and members simply “make contributions. That’s it.”
Read: OPTrust launching new defined benefit pension plan
The decline of defined benefit plans is, of course, a well-documented trend. Given that, will the new plans offer enough to employers to reverse that trend? Have your say in Benefits Canada‘s weekly online poll.
Last week’s poll asked readers about their thoughts on the report from the House of Commons’ health committee that recommended universal pharmacare last month. The results show a fairly even split on the proposal, with 48 per cent agreeing a universal, single-payer program is the best way of harnessing efficiencies and negotiating the lowest prices for drugs. The remaining 52 per cent of respondents disagreed, suggesting any solution to drug access should focus on filing the gaps in the current system of private insurance, rather than replacing it.