Predictions of the demise of defined benefit pension plans are premature.
The reality is DB is still alive and well in the public sector, with a growing number of multi-employer plans making the promise of financial certainty in retirement provided by DB pensions available to private sector employers of all sizes.
What’s under threat is the single-employer DB pension plan, says Mark Newton, the founder of Newton HR Law, who has practised pension law since 1987.
The decline of single-employer DB plans can be traced back to the 1990s. In 1991, registered retirement savings plan and defined contribution plan contribution limits were increased substantially, levelling the playing field for tax-assisted retirement savings. The limits continued to increase in the following years while DB limits stayed the same. As a result, the incentive for private sector employers to establish single-employer DB plans vanished.
This is illustrated by Statistics Canada data. In 1990, around 90 per cent of pension plan members in the private sector were in DB plans. By 2009, this had dropped to 56 per cent. Meanwhile, things looked different in the public sector. The same year, 94 per cent of public sector employees were members of a DB plan.
Other factors contributing to the slow demise of single-employer DB plans include: an increasingly complex legislative environment for administering the plans; more complex tax and accounting rules; an increasingly mobile workforce; volatile rates of return and low interest rates, which significantly raise the risk and cost assumed by DB plan sponsors; and Bill 228, which provides super-priority to plan members when an employer goes bankrupt and is expected to worsen financial risks associated with operating DB plans.
The reality is there are a number of more attractive options employers can offer, says Newton. A strong believer in DB plans, his first thought for a unionized group is to look around for an existing MEPP to join. “If that’s not around, a target-benefit or flat dollar plan would be appropriate.”
For a non-unionized workforce, he suggests there’s more appeal in joining a plan like the Colleges of Applied Arts and Technology pension plan’s DBplus offering or the OPSEU Pension Trust’s OPTrust Select.
One of Newton’s pension plan sponsor clients in the health-care sector had its own DB plan but was facing attraction and retention issues, so it moved to the Healthcare of Ontario Pension Plan. “In the health-care sector, if you’re not in HOOPP, that’s a major negative to attract people.”
And while more Canadian jurisdictions are looking into making target-benefit plans available to single employers, he doesn’t believe there will be great uptake. “They’re too complicated and difficult to communicate.”
In addition, smaller employers don’t have the size to benefit from target-benefit plans, says Newton, noting that, with smaller plans, the target can go “all over the place and if some employees retire in a down market, you have a bunch of disappointed retirees. A good, solid DC plan will get you much further than a difficult-to-communicate target-benefit plan.”