Evan Bray always wanted to be a cop, though his reasons have varied over the years. When he was a teenager, it was the prospect of driving fast cars with sirens. Later, it was a desire to make a difference in his Regina community.

“Never once did I want to be a police officer to switch our DB plan to a target benefit plan,” says Bray. A target benefit plan has both DB and DC characteristics, with fixed contributions and a targeted — but not guaranteed — benefit.

But that’s what Bray ended up doing in his role as president of the Regina Police Association. Regina’s police department folded its DB plan after the 2008 meltdown. At that time, the plan looked like a black hole that would suck ever-larger amounts of money. Tweaking it wasn’t going to work.

“We just said, ‘It’s time to stop the bleeding — we’re continually throwing good money after bad,’ ” Bray recalls. “Anybody who follows the markets knows you need to basically double the returns to make up for any losses you have. We just didn’t see any way out of this hole.”

Read: Are target benefit plans secure?

Did you know?

More Canadian women than men have DB plans. One-third of female employees ages 25 to 54 — versus one-quarter of male employees in the same age bracket — have a DB pension plan. That’s mainly because women are more likely to work in sectors with higher rates of pension coverage, such as educational services, public administration, and healthcare and social assistance.

Source: 2012 statistics Canada figures

An increasing number of Canadian public sector employers have been closing their DB plans. This trend is hardly a surprise for DB critics, who say DB’s days are numbered because these plans are too expensive to offer. But DB supporters counter DB plans can be efficient and positively affect the economy.

What spurred the closing of the Regina Police’s $300-million DB plan was a 2009 valuation showing employees and the employer would each have to increase contributions from 12% to 18%. But, since the plan was underfunded, plan members would receive benefits worth only half of what was being paid in.

DB remains the predominant model for Canada’s police departments, says Bray, adding only one — Moose Jaw Police Service in Saskatchewan — offers a DC plan. Since Regina Police members rejected the DC route, together with the employer, they decided on a TBP instead.

How TBPs work

A TBP involves fixed contributions from members and employers with the goal of securing a target benefit in retirement. Benefits and contribution levels can be adjusted over time, depending on how the plan’s investments perform. If returns don’t meet expectations, a plan sponsor can increase contributions or reduce benefits, including benefits for past service. If returns exceed expectations, the sponsor can do the opposite.

And the design can be customized. “It can look a thousand different ways and still be a TBP,” says Bray.

For example, the Regina Police plan limits early retirement with unreduced pensions — officers have to meet certain conditions. Under the old DB plan, this wasn’t the case, and that exerted a lot of financial stress on the plan, he notes.

Read: Do target benefit plans reduce costs and risk?

The TBP model is piquing interest among more public sector DB plan sponsors, says Bray. “When we did our final presentation [on the new TBP] to our members in Regina, we had members from Alberta, Manitoba and B.C. sit in because they’re going through similar challenges,” he adds.

This shift is happening as more public DB plans close. Aon Hewitt’s latest Global Pension Risk Survey shows 23% of public sector DB plans in Canada closed for existing employees this year, and 37% closed to new entrants.

In Aon Hewitt’s 2013 survey, 12% of Canadian public sector DB plans closed for existing members, and 38% closed to new entrants.

C.D. Howe Institute president William Robson says DB plans are rightfully under pressure. “It’s very easy to imagine circumstances where it’s not going to be possible to deliver on [the plan’s] commitment,” he explains. “And there’s no provision [on] what you do if that turns out to be the case.”

The numbers

  • At the end of 2014, assets for the Top 100 Pension Funds totalled $1.1 trillion, compared with $979.5 billion in 2013. That’s an increase of 12.2%.
  • Not one pension fund in the Top 100 had a decline in assets.
  • Sixty-six plans recorded a double-digit increase. The Royal Canadian Mounted Police Pension Plan (No. 32) had the largest organic growth, at 25.0%.
  • Great-West Life Assurance Co. (No. 51) entered the Top 100.

Note: Data for the Top 100 Pension Funds was collected through the Canadian Institutional Investment Network, which surveyed plan sponsors between March and May 2015, with an accounting year-end date of Dec. 31, 2014.

Knowing their numbers

DB critics say these plans have been using high discount rates on future liabilities to downplay realities about their funded status, allowing them to promise a rich future benefit without making all the necessary payments in the present, Robson explains.

“Better performance over the past couple of years has given people a bit more fuel for that argument,” he says. “But most DB plans are badly underfunded, and that’s one of the main reasons why they’ve been winding up.”

Derek Dobson, CEO of the Colleges of Applied Arts and Technology Pension Plan, admits some plan sponsors have “a more optimistic view of what the future will hold.” But, he says, discount rates don’t influence benefits costs because the numbers balance over the long term. The use of discount rates is just a timing mechanism allowing plan sponsors to pay less today and make up for it by paying more in the future.

Read: Top 100 Pension Funds Report 2014: Celebrate good times

The only real risk with discount rates is if the employer goes bankrupt, he says, which is why he believes more industries should adopt multi-employer DB plans that can outlive single companies.

Did you know?

About 75 cents of every DB pension dollar in Canada comes from investment returns, versus 25 cents from contributions.

Source: 2014 Shifting public sector DB plans to DC study

DB critics also charge most plans have ignored demographics, operating on the assumption their members will die sooner than they likely will.

“There’s no actuary who correctly anticipated the nature of the changing demographics,” says Mark Yamada, CEO of PUR investing, a firm specializing in DC plan investments. “I’ve not seen a single actuary take responsibility for this problem. As the car is careening down the highway, the actuary is yelling directions to the driver while staring out the back window.”

These issues have caused DB plans to largely disappear from the private sector. “And I think they ought not to exist in the public sector either,” says Robson. “The only reason they still exist in the public sector is because it’s possible to push a ton of risk onto the taxpayers without them realizing that it’s happened.” Yamada concurs, saying it’s only a matter of time before all DB plans become TBPs.

“It may well be the way we’re headed, but it’s not a way I can applaud,” says Robert Drummond, professor emeritus at York University.

Read: Top 100 Pension Funds Report 2013: Bouncing back

Drummond, co-author of Pension Confidential, sees TBPs as DC plans in disguise. “To say, ‘This is the target benefit, but if we don’t reach it, well, too bad’ — then, in effect, you’re saying it’s a DC plan,” he explains. While the targeting may give employees a sense they’ll achieve the income they’re aiming for, there’s no guarantee. “And without the guarantee, you still put the risk on the shoulders of the employee,” Drummond adds.

And while some advocate for converting public DB plans to TBPs, others support more drastic solutions. For example, Ontario’s Progressive Conservatives have been calling for the conversion of all public sector DB plans in the province to DC arrangements.

77% cheaper

But what if well-managed DB plans were cheaper to run than DC plans?

In fact, they are, says a 2014 study by Robert Brown, president of the International Actuarial Association.

The study — funded by the Canadian Public Pension Leadership Council — asserts converting major Canadian public pension plans to DC arrangements would actually make it more expensive to produce a comparable pension benefit.

“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,” the paper concludes.

Switching to a DC arrangement can make it harder to manage the old DB plan’s unfunded liability, it adds. In fact, the study points out, the unfunded liability will likely keep growing for decades after the DC conversion.

DB critics tend to dismiss these calculations, says Dobson. They also tend to describe all DB plans as arrangements where employers alone are responsible for plugging funding holes.

Read: Top 100 Pension Funds Report 2012: Health watch

But not all DB plans work that way. Many — including giants such as the Ontario Teachers’ Pension Plan, the Healthcare of Ontario Pension Plan and the CAAT Pension Plan — ask employees to assume an equal amount of risk.

These DB plans, known as jointly sponsored pension plans, resemble TBPs. The main difference is that under a JSPP, accrued benefits can be reduced only if the plan winds up.

So why aren’t JSPPs part of the ongoing pension debate? Lack of awareness, says Dobson.

“[Even] in the broader industry itself, when you look at advisors, actuaries, lawyers and custodians, there are very few JSPP practitioners … the bulk of the industry [is] focused on DC issues and private sector employers,” he explains. “That’s where they get most of their business, so that’s what they’re most familiar with.”

Good for the economy

There’s also evidence DB pensions are good for the government and the Canadian economy. A 2013 study by Boston Consulting Group shows only 10% to 15% of DB retirees in Canada receive the guaranteed income supplement, a benefit provided to low-income seniors. Among other Canadian retirees, this number jumps to more than 45%. DB pensions reduce annual GIS payouts by between $2 billion and $3 billion, the report reveals.

The report also says DB pensioners contribute $14 billion to $16 billion annually to Canadian government coffers through income, sales and property taxes. These retirees spend $56 billion to $63 billion annually on various goods.

Read: Top 100 Pension Funds Report 2011: Risking it all

And DB plans have lots of capital. Per the 2014 Shifting Public Sector DB plans to DC study, total Canadian pension assets amounted to $1.34 trillion at the end of 2013, with more than $900 billion in public schemes. This lets DB plans finance big projects, such as real estate and infrastructure, over the long run. “Many federal and provincial finance ministers have called for more investments in our infrastructure. Pension plans have stepped up,” Dobson says, explaining infrastructure, with its steady cash flows, fits DB plans well.

Bray agrees DB plans are valuable and some are sustainable. But he’s happy to have settled on what he sees as the second best option for his own Regina police department. It’s an option that will also be available to future generations of police officers — including his son, who’s just completed his training to be a cop.

The DC route isn’t easier either

Closing an underfunded DB pension plan and switching to a DC arrangement is often portrayed as the solution to a company’s pension troubles. But the unfunded liabilities from the old plan remain after the conversion — and, in some instances, DC schemes can still be expensive for employers.

This is exactly what happened to a North American company that closed its mandatory DB pension plan to new entrants at the end of 2009.

“I can tell you one thing for sure: we will not be going back to DB plans,” says a senior executive at that company. “I just can’t see us going back to that risk of not knowing where it will go and what those liabilities could be.”

But the organization isn’t out of the DB business yet. It’s currently pouring “millions of dollars” into its old DB plan, which is about 75% funded. Despite good investment returns, liabilities remain high because interest rates are low, the company executive explains.

Once the plan becomes fully funded in a year or two, the organization will either annuitize it or transfer the money to employees’ DC accounts so they can invest it themselves, the source says.

But it’s not all rosy on the DC front either. The company had to pare back the DC plan it introduced after closing its DB scheme. Under the original DC arrangement, the employer offered a 2% basic contribution, and employees had the option to contribute an additional 1% to 7%. The company would match employees’ contributions at 75 cents on the dollar.

“Our business just couldn’t support that DC plan,” the executive says. So the company now provides a basic 1% employer contribution with a 50-cent match on each dollar an employee contributes

Yaldaz Sadakova is associate editor of Benefits Canada.

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Copyright © 2020 Transcontinental Media G.P. This article first appeared in Benefits Canada.

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DC plans are also good for the economy or at least the other two legs of the Pension Stool. Participants have a shorter life span after retirement. This will reduce the cost of OAS, CPP and GIS. Hopefully allowing for an increase in these Benefits( or a reduction in the Normal retirement Age)

Wednesday, June 17 at 5:45 pm | Reply


Shorter than Police, I don’t think so. The point is that we will need the ORPP or something akin to it if large employers can only afford a 1 % contribution.

Friday, August 07 at 1:26 pm | Reply

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