More on Companies Fleeing DB Pensions

Leo Kolivakis's picture

Via Pension Pulse.

A follow-up to my previous comment on Canadian companies crossing the "pension Rubicon". Cynthia Vukets of the Toronto Star reports, Companies flee defined-benefit pensions:

Financial
officers are increasingly switching private sector pensions from
defined-benefit to defined-contribution plans, even with the economy on
the upswing, according to a study released Wednesday.

 

“The
2008 crisis may have been the final straw for senior finance officers”
said David Service, director of investment services at Towers Watson.

“While
plan sponsors may not be able to afford to make changes right now,
many are working on strategies to de-risk or even exit when the
financial position of their plans improve.”

 

Tower
Watson’s 2011 Pension Risk Survey, which collected information from
150 defined-benefit plan sponsors, indicates that 51 per cent of
private sector defined-benefit plan respondents have now converted
their plans to defined-contribution arrangements — up from 42 per cent
in 2008.

 

“The
defined-benefit plan has come under considerable attack because
there’s been tremendous pressure to shift to defined contribution
plans, which are seen by employers to be more predictable,” said
Toronto Centre Liberal MP Bob Rae.

 

Rae was addressing the Conference Board of Canada’s Summit on the Future of Pensions on Wednesday.

 

Defined-contribution
plans pay out on retirement according to the investment’s performance,
while defined-benefit plans promise a set monthly amount calculated
according to a retiree’s average salary and years of work.
Defined-contribution plans tend to be less risky for employers, but
depend on the worker’s ability to manage his or her own investment
portfolio.

 

Although
the economy is improving, the Towers Watson study showed senior
executives are more pessimistic about pension funding. According to the
survey, 56 per cent believe the funding crisis will persist for the
long term, compared with 34 per cent polled in 2008, before the onset
of the recession.

 

“We
have our work cut out for us to try to deliver a better return on
assets than market value,” said Leo J. de Bever, CEO and CIO of the
Alberta Investment Management Corporation.

 

He
said pension fund returns have been “barely positive” over the past 10
years and doesn’t expect much better over the next five, adding
Canadian pensions will be more difficult to fund as they come to
maturity in the near future.

 

Rae said pension reform is now critical for Canadians.

 

“People
talk about something when they have to . . . On the pension issue,
we’re getting up to that point,” he said, adding 75 per cent of
Canadians eligible for an RRSP don’t have one.

 

“Those who can save, do; those who can’t save, don’t,” he said.

 

Rae,
62, joked that “60 is the new 40,” but was serious when he urged a
discussion of public policy to address the fact that Canadians no
longer follow the traditional path of graduating from school, getting a
job, contributing to a pension and retiring at age 65.

 

Contract
work, career changes and a longer, more active retirement have changed
what Canadians need from a pension. In addition, two out of every
three Canadians have no workplace pensions and 1.6 million seniors are
living on less than $15,000 a year in government support, says seniors
advocacy group CARP.

 

“There
is, I think, a very strong consensus that we need to continue to focus
on the needs of people who are poor and people who are struggling,”
Rae said. “We have a gap in our coverage for people.”

 

The
Liberals and NDP have promised to add $700 million to the Guaranteed
Income Supplement, with the Conservatives proposing a $300 million
annual increase. On the Canada Pension Plan, the NDP would double the
CPP and QPP, while the Liberals would gradually increase defined CPP
benefits and allow for a new, voluntary supplement to the CPP, called
the Secure Retirement Option. The Conservatives have proposed
defined-contribution, pooled, registered pension plans that would be
privately run.

I thought Leo de Bever's
comments were interesting. Pension fund returns have been “barely
positive” over the past 10 years and he doesn’t expect much better
over the next five, adding Canadian pensions will be more difficult to
fund as they come to maturity in the near future.

Leo de Bever is also worried about what happens when the music stops. In a recent FT article, Canadians get creative with infrastructure acquisitions,
de Bever said that AIMCo's 50 per cent stake in Autopista central, a
motorway in Santiago, Chile, made sound sense because some
infrastructure funds still carry 2-and-20 style fees (2 per cent of
assets and 20 per cent of profits) but are not throwing up the returns
of private equity funds. He's very fussy with infrastructure deals, picking
his spots carefully.

Now, getting back to the topic of Canadian
companies fleeing DB plans. As I wrote in my last comment, I believe
that most Canadian companies shouldn't be in the defined benefit pension
business at all. Instead, companies should transfer this risk to
existing and new public sector pension plans and have professional
pension fund managers manage these retirement funds.

I want to clarify something. I know of private companies with excellent
DB plans. Right here in Montreal, CN Investment Division, which for many
years was run by Tullio Cedrashi
(now run by Russell Hiscock), is an example of a top-performing private
DB plan managing billions in assets. It's arguably one of the best DB
plans in Canada with a long, stellar track record. The people at CN
Investment Division are excellent pension fund managers who consistently
deliver top decile performance.

But there is only one CN
Investment Division. Most Canadian companies have terrible DB plans
which are severely underfunded. It's hardly surprising to see them opt
out of DB plans and switch over to DC plans, placing the retirement onus
entirely on employees. This is why I believe we should scrap private DB
plans altogether, and create new public DB plans to manage these
assets. Instead of transferring over the risk to banks and insurance companies,
getting raped on fees in the process, companies would transfer the risk
to Crown corporations with world class pension governance standards.
You have to compensate these pension fund managers properly and even
hire the people at CN Investment Division to manage these entities (why
not?).

Again, I believe companies should worry about their
business, not pensions. We have some of the world's best pension fund
managers in Canada who can worry about pensions. Employees need to have
the peace of mind that comes with a well managed DB plan. Period, end of
story.

Listen to Leo de Bever, he knows the challenges that lie ahead for
pension funds. Let me end by repeating something I've stated many times
before: switching over to a DC plan is a cop-out, a defeatist approach
which is not in the best interest of employees. The trend of switching
over to a DC plan will only ensure more pension poverty down the road.
It's high time Canada takes the lead in crafting better pension
policies, ensuring more people retire with dignity.