Converting large public sector DB plans to DC arrangements is not a financial panacea; instead, it would create higher costs, inefficiencies and increased risks for employers, taxpayers and members, according a study.
The study, Shifting Public Sector DB Plans to DC – The Experience so far and Implications for Canada, examines the claim that converting public sector DB plans to DC is in the best interests of taxpayers and other stakeholders by studying the experience of other jurisdictions, including Australia, Michigan, Nebraska, New York City, Saskatchewan and Texas.
After examining the literature on the experience in other jurisdictions and modelling what the ramifications would be in converting a large Canadian DB plan to DC, the study concludes that none of the stakeholders, including taxpayers, would ultimately be better off.
“Our modelling has shown us that for an efficient $10-billion DB plan, converting to individual-account DC arrangements to provide the same value of pension benefit would increase the ongoing cost of the plan by about 77% and increase the required contribution rates accordingly,” say the authors, Robert L. Brown, retired professor from the University of Waterloo and president of the International Actuarial Association, and Craig McInnes, a journalist and writer.
They add that even with the use of pooled DC pension arrangements, ongoing costs would still increase by 26%.
“The perceived advantages to closing DB pension plans in the private sector do not translate directly into the public sector,” say Brown and McInnes.
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