Modern DB Plans Combine the Best of DB and DC Pensions

CAAT CEO Derek Dobson on how to build the perfect pension plan.

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Looking to the past, employers offering a workplace pension plan chose between two basic plan designs: a single-employer defined benefit plan or a defined contribution plan. Each model has its own advantages and disadvantages. For instance, defined benefit plans provide secure lifetime pensions achieved through longevity, investment and risk pooling. But employers own the risks, and defined benefit plans can have unpredictable contributions and higher operating costs.

With defined contributions plans, the concept of a savings account is simple to understand. However, each individual employee owns the majority of the risk and the stress of investment, including market-timing their retirement and making decumulation decisions. For employers, defined contribution plans offer contribution stability and lower operating costs, but are considered an inferior tool for attraction, retention and workforce management. Beyond lower retirement incomes for the vast majority, employees have a higher level of stress. This can impact time off, benefit costs and overall engagement.

In August 2016, the Canadian Public Pension Leadership Council surveyed around 1,000 Canadians from across the country about their attitudes on a range of retirement issues. It found Canadians want the features typically found in defined benefit plans, such as predictable lifetime income in retirement, and they’re willing to pay more to get them.

Nearly all (97 per cent) respondents said a predictable retirement income was desirable and 90 per cent said they were willing to pay more for it. Ninety-one per cent said they would be willing to pay more of their income to guarantee their retirement income would be secure and paid for the rest of their life.

As the charts below illustrate, these responses hold across all age groups.

Looking to the future, there are evolving options beyond the old defined benefit/defined contribution dichotomy. Modern defined benefit plans take the best features and minimize the worst to create a valuable alternative that will improve the pension landscape for plan members and sponsors.

Modern defined benefit plans are jointly governed, with members and sponsors equally sharing the decisions about contributions, benefits and the risks of running the plan. They’re more sustainable and efficient than single-employer defined benefit plans, offering employers and employees higher value at a lower risk, cost and complexity. They’re designed to deliver predictable and secure lifetime retirement income.

In essence, modern defined benefit plans provide desirable benefits to plan members but operate like a defined contribution plan for sponsors. They’re a strong choice for employers that want to offer an attractive, valuable retirement program that, with employees’ contributions and lower operating costs, is also affordable and sustainable.

Employers with single-employer defined benefit plans and those with defined contribution plans are already choosing modern defined benefit pension plans. Recently, the Sherbrooke Restoration Commission transferred its defined benefit pension plan into Nova Scotia’s public service superannuation plan. Last month, more than 200 Cape Breton University employees who were previously members of the university’s existing defined contribution pension joined the PSPP. Several other university defined benefit plans have transferred into the PSPP, including Université Sainte-Anne, the University of King’s College and Acadia University.

I’ve written before about the advantages of the Royal Ontario Museum pension plan’s merger into the Colleges of Applied Arts and Technology pension plan. In summary, as a result of the merger the ROM plan will no longer incur the actuarial, legal and investment management costs of running a single-employer defined benefit plan. In addition, the ROM doesn’t have to worry about solvency funding payments because the CAAT plan is funded on a going-concern basis.

Modern defined benefit plans offer the best features of defined benefit and defined contribution plans while minimizing the risks. They’re more effective at delivering the benefits that Canadians want and they’re more cost-effective than single-employer defined benefit plans.

Canadians have shared their retirement goals and their willingness to contribute to a valuable and secure retirement. It’s time for sponsors and employers to consider the longer term and explore this new option.

Derek Dobson is chief executive officer of the Colleges of Applied Arts and Technology pension plan.

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