Leading the world on pensions
The federal government’s introduction of Bill C-27, legislation to facilitate the offering of target-benefit (TB) pension plans, has reignited the tiresome debate over defined- benefit ( DB) versus defined- contribution ( DC) and which is the better design for Canadian workplace pension plans. Countries that lead in pension innovation ( such as Australia and the Netherlands) have moved on, and are now debating how TB plans should be designed and managed. In this sense, the Bill C-27 initiative should be applauded, as it creates an updated legal platform for necessary innovation in workplace pension- plan design in Canada.
Why are TB pension plans a logical response to the 21st-century workplace pen- sion- plan design question? Because this form of plan integrates the best elements of the traditional DB and DC plans: an explicit target pension benefit; a recognition that long-term compounding of investment returns makes the target benefit affordable; and it offers fair and sustainable risk-pooling and clearly spelled- out property rights and obligations among the employer, employees, pensioners and the pension-management organization.
TB plans are not a totally novel idea in Canada. A number of thought- leading public-sector pension plans have been steadily moving away from DB plans, where employers bear all of the embedded investment and longevity risks. Increasingly, such risks are being spread more fairly in these plans, thus ensuring their long-term viability in a world of increasing lifespans and more modest investment-return prospects.
These positive public-sector pension developments raise an important question. While the workplace pension plans of Canada’s publicsector employees and retirees are mainly managed by world-class expert pension-management organizations, this is not the case in the private sector. For starters, fewer than 25 per cent of privatesector workers are members of a workplace pension plan at all. Even for this fortunate minority, the pension- management functions created by private- sector employers don’t have the scale, skill sets or governance design of their world- class public- sector counterparts. Meanwhile, those without any workplace pension plan at all are largely left to fend for themselves in a confusing world of RRSPs, TFSAs, RRIFs, financial advisers and high- cost mutual funds. The general result is inadequate retirement income security at a too high a cost. Inevitably, that will become a public policy problem.
Of course there is a better way. Canada’s major financial institutions have the scale and skills needed to offer cost- effective workplace TB plans with the key features set out above and with requisite expertise in investing, actuarial modelling and member administration and communications. They could deliver such TB plans not only across Canada, but also in the U. S. and other parts of the world not as lucky with their workplace pensions as the Australians and the Dutch. Offering such TB plans represents a major opportunity for Canada’s financial sector to innovate on a global scale and to demonstrate its ability to design and cost-effectively deliver a high- value financial service to millions of workers inside Canada and beyond. What better opportunity for our financial services sector to develop products and services with high revenue potential and high-impact social benefit?