Pension model of future must find common ground between DB, DC: report

The Canadian pension industry must go beyond the defined benefit versus defined contribution debate and focus on the model of the future, according to a new report by the C.D. Howe Institute.

The report, by actuaries and pension experts Robert Brown and Stephen A. Eadie, proposes a common ground as a starting point for all pension model discussions. For those of a pro-DB persuasion, the common ground model would be a pooled target-benefit DB plan, noted the report, while the starting point for those of a pro-DC persuasion would be a large, collective DC plan.

“These plans have a lot in common and, since they can provide equivalent benefits for the same contributions, they should be viewed as being actuarially equivalent,” stated the report. “Thus, by finding the common ground in the great pension debate, we have also identified models for pensions that can provide all Canadian workers with significant retirement income security.”

Read: Top 50 DC Plans Report: How plan sponsors can blend DB features into their DC pension plans 

The debate over the best pension model is divided into two camps: the DB plan and the DC plan. The report’s authors argue these models should give way to pension plans that facilitate sharing of risks among all stakeholders, whether the plan is characterized as DB or DC.

“It can be called a pooled target DB pension plan or it can be called a collective or commingled DC plan. That does not matter since these two plans are actuarially equivalent,“ said Eadie, in a press release.

According to the report, the common ground would include:

  • Pooling across multiple employers to reduce risk for plan sponsors and lower contributions from members;
  • Target benefits to share risks between plan sponsors and members;
  • Scale, with the optimum asset size $1 billion and up; and
  • Independent management boards to ensure good governance.

Read: A look at three trends in pension plan design

Going forward, pension debates should start at this common ground, suggested the report’s authors. From there, the discussion would focus on whether a plan sponsor wants a bit more of a DB flavour and why, or whether one wants a bit more of a DC flavour and why. “This should make arriving at an agreeable plan option much easier for all,” noted the report.

As well, it will be imperative that regulation and tax laws allow small and medium-sized employers to join in these collective schemes to extend their benefits to the majority of working Canadians.

“Policies encouraging larger collective, pooled pension plans governed by independent management boards are the way forward,” said the authors. “In Canada, such solutions are becoming common in the public sector but need to be encouraged in the private sector.”

Read: Federal target-benefit conversions face an uphill battle