Canadian Pension Hopes for “DB Renaissance”

Terry Flanagan

Pensions struggling to stay funded may be ready to switch to defined contribution model, but the Healthcare of Ontario Pension Plan still believes in providing defined benefit plans.

According to the Mercer Pension Health Index, Canadian pension plans experienced significant losses on both sides of the balance sheet in the third quarter of 2011. The index measures the ratio of assets to liabilities for a model pension plan. It stood at 60% on September 30, down from 71% on June 30.

The Healthcare of Ontario Pension Plan (HOOPP) is best known as one of the world’s fewest fully funded pension plans. Managing $35.7 billion with a return of 13.68% has undoubtedly been an impressive feat for a public pension, during the era of struggling to stay funded.

HOOPP’s chief executive, John Crocker, was recently awarded the Lifetime Achievement award from Benefits Canada. Crocker still believes in the efficacy of the defined benefit model, despite its difficulties.

“The defined benefit (DB) model is the most efficient, effective way to deliver adequate retirement income to people,” Crocker told Markets Media. “With DB, you take fees out of play; most DB plans operate with fees that are far lower than those charged by retail mutual funds, which are typically used in defined contribution plans.”

An essential key to maintaining a defined benefit plan is the “collaborative effort between member and employer.”

“You need a sound investment strategy that aligns with the future income needs of the membership,” Crocker noted, highlighting that sound governance and diligence is necessary for running a pension on a long-term investing horizon.

“You need professional investing, and having good governance ensures that the long-term needs of the membership are being addressed, and without it, you’re running a pension plan with a long time horizon with short-term decision making—a non-starter.”

In many parts of the world, pensions are moving to a defined contribution (DC) model, to alleviate some of the pressures on employers alone providing a defined benefit plan. Defined contribution plans are the norm, especially in Australia, but to the country’s detriment, noted Crocker.

“Australia’s move to DC certainly addressed a coverage problem, but people are finding that when they retire, they haven’t got enough money in their DC plans to fund their retirement.”

Half of Australian seniors are living below the poverty line, and two-thirds use up their DC plan funds by age 75, according to Crocker.

“Any savings gained by going to a lesser system will be offset by future social support costs for poor seniors. I am hopeful there will be a DB renaissance one day, and a renewed focus on pension outcomes rather than pension costs,” he said.

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