The contrast between the glacial pace at which pensions change and the rapid pace at which technology changes couldn’t be more striking. When I entered the workforce in 1974, there were no personal computers, no spreadsheets and no cellphones. There was no Microsoft, Apple or Google. Innovation and reinvention are the norm for technology companies—fall behind and you perish.

Pensions aren’t like that. The pillars of Canada’s retirement system—Old Age Security, GIS, the Canada Pension Plan (CPP) and Quebec Pension Plan (QPP), registered pension plans and RRSPs—predate the 1970s. Yes, there have been changes, but the changes have been at the periphery. At the core, it’s the same old retirement system.

Why do pensions change so slowly? Probably because people want it that way. They want something familiar and reliable that evolves slowly and predictably. Innovation is fine for phones and computers, but nobody wants pension plans reinvented twice a decade.

For pensions, the last half-century has been a continuing, but not entirely successful, experiment. The experiment moves slowly because serious problems—those that can threaten a pension plan’s viability—are seldom visible when plans are young or when stock markets are soaring.

Only when mature pension plans confront challenging economic environments can we distinguish the sustainable from the unsustainable. In this respect, the last decade has provided a useful, albeit painful, economic stress test. The next 20 years promise an equally challenging demographic stress test. Perhaps then we will understand what we are up against.

While the previous 10 years have been a struggle, we have learned a few important lessons along the way.

  • Retirement plans are hostage to the economic environment in which they operate. Everything works in good times; nothing works in bad times. And nothing can be done about this.
  • DB plans do not have stable contribution rates, and DC plans do not have stable benefits. Risks must be taken, and they must be borne by people—not by institutions.
  • There is no long term—no comfortable equilibrium toward which we are always headed and at which we will some day arrive. The world is an unending succession of short terms, each differing in unpredictable ways from its predecessors.
  • Financial illiteracy is a disease for which there is no known or probable cure. Retirement savings plans that rely on the astute decision-making of plan members are destined to disappoint.
  • Since future generations will ultimately decide if Canada’s retirement system is sustainable, the fair treatment of future generations is a priority.

Before solving a problem, mathematicians first ask whether or not that problem is solvable. No fraction when squared equals two. Likewise, I suspect that no pension plan can deliver safe, adequate, affordable pensions, just as no investment strategy can consistently deliver high real returns. Our first task, then, is to moderate the expectations of plan sponsors and members.

Fortunately, there are now several promising plan designs to evaluate.

  • The CPP and QPP, while far from perfect, have done a better job of addressing intergenerational equity and flexible retirement ages than most social security plans. They are an excellent platform on which to build.
  • Target benefit plans preserve much of what works well in traditional DB pension plans while abandoning guarantees that are unnecessary, intergenerationally inequitable and unaffordable. This is the most promising avenue to a collective approach to retirement saving.
  • Smart DC plans—which rely on auto-enrollment, sensible defaults and economies of scale to improve the prospects of those who do not wish to make retirement planning their hobby—should significantly improve the effectiveness of retirement savings plans.

It will take decades to fully explore the potential of these designs. Hopefully, they will take us where we want to go. If not, the experiments will continue.

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

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Stephen Cheng:

As a fellow actuary, I like to compliment Malcolm Hamilton on his collective pension wisdom and thoughts. Here are some of the observations I have made throughout my career:

1. Recent experience has much more influence over people’s behavior than the distant past – the high returns of the 80’s and 90’s lead to demand for defined contribution to replace defined benefit plans and thus resulted in a lot of plan conversions. I suspect the low returns in recent years would lead to higher demand for defined benefit plans by labour groups. Whether plan sponsors are in a position to offer DB plans is a separate issue.

2. A pension plan member as an individual is not able to undertake all the inherent risks in pension savings and funding. The pension plan sponsor or the employer has much greater financial resources and strengths to undertake such risks and share in the expected rewards. The future of our pension world should promote a healthy balance of risk and reward undertaking and sharing among employers and employees rather than sticking all the riskes to one group.

3. With many of the plan conversions that happened in the past, I don’t think we have seen the long-term effect of such shift of risk undertaking to the employees in an extended low return environment. We can expect a lot more workers postpone their retirement plans beacuse they can’t afford to retire. This may lead to lower productivity and efficiency in the future, particularly in industries that are very physically demanding.

Monday, July 23 at 3:22 pm | Reply

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