This page has been archived and commenting is disabled.
Demise of Defined Benefit Pensions?
Ray Turchanshy of Postmedia news reports, Too early to declare demise of defined benefit pensions:
Economist
Jack Mintz from the University of Calgary got crowds buzzing at the
western regional conference of the Canadian Pension and Benefits
Institute, when he predicted that the defined benefit pension plan
could make a comeback.
Defined benefit plans have been knocking on
death's door, due to the huge cost and risk of investment loss to
employers, compared with defined contribution plans in which the
employee takes on the investment risk.
Mintz started his conference presentation by saying, "Freedom 55 is really when your kids turn 55."
He
noted that the percentage of pre-retirement income that people need to
live on during retirement, usually cited as 70 per cent, is often
over- exaggerated, usually by financial industry people with
investments to offer.
"If you have relatively low working income, just to survive you might need 100 per cent.
"On
the other hand, when people do retire there are a lot of savings, like
automobiles and furniture that you don't have to keep buying, and you
don't have transportation expenditures to go to work, and can probably
wear jeans instead of suits."
The median annual employment income
of Canadians is $50,000 to $55,000, and the Organization for Economic
Co-operation and Development says people making $27,500 require 70 per
cent in retirement, workers making $52,500 need 60 per cent, and people
making $105,000 require 50 per cent.
When it comes to saving for
retirement, Mintz said Canadians hold $1.9 trillion in Canada Pension
Plan, corporate pension and Registered Retirement Savings Plan assets.
But they also have $1.9 trillion in home equity (which isn't taxed when
you downsize); and $2.2 trillion in nonfinancial assets.
"So
when people suggest we're under-saving, it's way over-exaggerated
because they ignore these other assets. And we can be very proud in
Canada that we have the lowest poverty rate of seniors in the world."
According
to the OECD, the percentage of people age 65 and older living on half
the average income ranges from 4.4 per cent in Canada to 30.6 per cent
in Ireland, with a world average of 13.3.
"The big difference
between the United States and Canada is that the U.S. economy has not
only seen a massive erosion in terms of financial wealth, but also in
housing wealth, which has not happened here in Canada."Mintz noted a number of interesting trends:
*
People without company pensions tend to work longer and therefore have
more retirement income than those with company pensions, although
retirement income of people without company pensions is much more
variable.
* Women retire earlier than men and live longer, so they
need to save more for retirement, especially if they're single or on
their own. And we have more lone parents with children, another group in
peril of having insufficient retirement income.
* People are working for the same company longer than they used to, from an average of 85 months in 1987 to 100 months in 2009.
But
Mintz theorizes that an aging workforce will cause companies to lure
and retain employees by dangling carrots like a defined benefit pension.
"Governments
may correct some regulations. Perhaps defined benefit plans won't
disappear, and in fact there may be a desire by many employers and
employees to see some return of those defined benefit plans."
However,
most people feel the cost and investment risk to employers will kill
defined benefit plans in the private sector, and put pressure on
government worker or public sector plans.
"When it comes to risk
involving defined benefit plans in the public sector, that falls onto
the taxpayers. And if these pension plan costs are high, what it means
in the future is pressure on salaries in the public service, and some
pressure to reduce services in the public sector.
"There will be a
desire to outsource more work outside the public sector. And we'll see
young people not willing to pay the costs of pensions to older
workers."
Concern that Canadians
retiring early and living longer are not saving enough for their
extended retirements has produced various theories to revamp the
system.
One is to create a government-sponsored defined
contribution plan, such as a personal pension account like a group RRSP
as a supplement to the Canada Pension Plan, suggested by Keith
Ambachtsheer of KPA Advisory Services, or a series of provincial plans
such as the proposed Alberta-British Columbia pension.
A second
idea is to expand CPP, with increased contributions and investment
growth covering liabilities, and with benefit increases phased in over
time.A third concept is a national privately delivered defined contribution plan.
And
the C.D. Howe Institute proposes raising annual RRSP contribution
limits from 18 to 34 per cent of income, to a maximum of $34,000 instead
of the current $22,000.
Mintz said
the federal government is looking at a very modest revamp of the CPP,
like increasing the 9.9 per cent of pensionable earnings that employers
and employees combine to contribute, or increasing the current
pensionable earnings maximum of $47,200. The effect would be to
increase the CPP's current aim of replacing 25 per cent of average
working income in retirement.
Other suggestions coming out of the
conference were to allow people to retain RRSP contribution room after
taking money out, as is allowed with a Tax- Free Savings Account; to
increase the age when people can take unreduced CPP benefits above 65;
to reduce indexing of public and private pension plan benefits when the
economy falters; and to make pension plans hold reserves for
guaranteed defined benefits.
I agree with Jack
Mintz that the percentage of pre-retirement income that the financial
industry often cites as "necessary" to retire comfortably on is greatly
exaggerated. I also think reports on the "death" of defined-benefit (DB)
plans are also greatly exaggerated.
And I even agree that
companies will use DB plans to lure employees. However, if you think
about it logically, we shouldn't even have private DB plans. There
should only be public DB plans which covers all Canadians. But there is a
lot of money involved, and everyone wants a piece of the pension pie,
so this will never happen (consultants, actuaries, financial services firms like banks, insurance
and mutual fund companies all have a stake in the pension pie).
The ultimate solution is having everyone's pension managed by
professionals working at large public DB plans. You need to get the
governance right, and more importantly, you need to have realistic
investment assumptions to make sure these plans are properly funded.
This solution has the added benefit of pension portability, meaning that
no matter where you work, your pension will follow you effortlessly. Of
course, what's logical to me seems like a monumental undertaking. It's
too bad because Canadians deserve better.
»
- advertisements -
***Feedback***
Jonathan Jacob of Forethought Risk shared these points with me:
In your recent column you discuss the “ultimate solution is having everyone's pension managed by professionals working at large public DB plans”
While I may agree to a certain extent in theory, the practicality is frightening:
ALL AMERICANS SHOULD SHORT BAC. IT IS YOUR PATRIOTIC DUTY. A JOURNEY OF ONE THOUSAND MILES STARTS WITH THE FIRST STEP.
Living in a Box bitchez
Question of the day-
who, what, why- x deserves a premium?
omg...Leo...did you drink some purple koolaid this afternoon?
Pension plans and defined pension plans are dead; they exist only as projections, and can only deliver if the infinite expansion of the markets continues infinitely. Do you really see continued 8% growth in pensions when considering worldwide debt and impending inflation/stagflation/hyperinflation?
You said: "The ultimate solution is having everyone's pension managed by professionals working at large public DB plans."
Holy hell that must have been one huge bong hit.
It is precisely those "professionals" mananging pensions and individual's retirements that got suckered in (or joined the ponzi) to buy, buy, buy equities in diversified, diversified, diversified portfolios over the long, long, long term.
Guess what the bankers and politicians did with those giant pools of responsible money? THEY DRAINED THEM.
What do you think the crash was all about? What do you think the reflation using taxpayer dollars and the devaluation of the currency is all about? Why...REFLATING THE MARKETS TO DO IT ALL OVER AGAIN OF COURSE!!!
My God it's a good thing you Canadians and Elites can keep pretending; enjoy it while it lasts.
Saying DB is dead because 8% is unrealistic is stupid. Make it 3%. Now your problem is fixed.
The rest of your rant suggests bad returns whether one is invested in a DB plan or a DC plan so not sure how you can say DB is any worse.
A realist.
I was beginning to think that they were all extinct.
hey Leo - any ink about how pension managers getting 'swayed' to 'invest' into absolute junk ?? like Enron stock?? MBS?? and then the pension funds take a massive hit and then all that dirty press comes out on how the pensioners are sucking the fund dry??
the main problem with pensions is that any huge pile of money will always be attacked
Thank god you're not in charge of policy making.
Amen! A few months ago, when Leo started, all he could go on about what the idiocy, mendacity, and overall mediocrity of the individuals running Canadian public pensions. Now he wants those same people running all the pensions...
Leo's thoughts are profoundly disordered.
And Jack Mintz is a putz...
Leo, thanks as always for the pension updates. It affects all of us in lots more ways than many of us see. I agree with Mintz that there will be pressure to increase DB plans. I also expect that there is going to be pressure to increase the ability of self-employed savers to increase max contributions, and be able to drawdown balances as taxable income up to a certain point (perhaps the excess that they put in vs the normal cap) so as to cushion income shortfall when economic malaise occurs.
I think, however, that your idea of having DB plans covering all Canadians is problematic. The only reason why one would choose everybody having a DB plan vs everyone having a DC plan is because one cannot trust people to choose appropriate investment vehicles. A universal DC program could be completely portable as well. The main reason for NOT having a universal DB plan to replace a universal DC plan is that taxpayers put themselves on the hook for not making babies. Unfortunately societies undergo change s in population distribution, without thinking about future generations ability to pay for the prior generation's DB plan.
DB Plans are fraught with political risk and moral hazard. Universal DC plans are much less problematic from that standpoint.
More Socialist drivel...
"if you think about it logically, we shouldn't even have private DB plans."
If you think about it "logically" it is not your money neither state money.
"The ultimate solution is having everyone's pension managed by professionals working at large public DB plans."
hahaha.
I don't know about the Defined Benefit plans, but I did see a news article the other day which claimed that Employers were cutting out Dental plans.
What a society we're moving towards. Bit by bit, the Empire crumbles.
Or maybe dentists will charge less. I know what the markup is from the dental lab to the dentist's chair.
Perhaps if they had less overhead vis a vis fewer costs to combat potential litigation and less generous salary the number of people receiving quality dental care would go up.
Ergo. The only crumbling would come from the blood suckers in the middle. Stop blaming prudent economics and start blaming the parasites. The same parasites that sold y'all down the river with PV.
Nope, what's going to happen in Canada is they are going to raise your taxes more and cut some of defined pension money out of circulation via less on your checks. And they won't try to entice older workers, they will allow more foreign nationals (who the majority will be younger) to come work in Canada. I truly believe that Canada has been cooking it's books in regard to it's economy. They are having troubles also, but it's being hidden.
The Canadian government learned well from the past efforts of the Mulroney years and our previous bank collapse in the 90's on how to make accounting cobblers and casseroles. From the same government that tends to lose a billion and a piece on a gun registry, to ad scam, to subs with screen doors, helicopters that still don't work on delivery for the navy or a fellow scamming his way to 110 million richer by inventing imaginary people in contract roles across the fed.
What gets me is the unidentified horde of Canadian youth sitting in mom and dad's basement in their early 20's that still haven't recieved a SINGLE paycheck, ever in their lives. It's a demographic called the snowflake set. The so smart for school, to stupid for life as it were.
How do those guys make out...wait...it doesn't matter, it should be completely broke by then.
I would love to see a company offering a DP nowadays though, haven't seen one of those in the private sector in 20 years.