SPRING 2014
FMI
*
IGF JOURNAL
45
POPULAR (MIS)PERCEPTIONS REGARDING PENSION PLANS: RELATIONSHIP TO PUBLIC SECTOR PENSION PLANS
the government/plan sponsor
4
then the
deficits will too
5
.
A defined benefit pension fund surplus
or deficit is an actuarial conclusion/
construct based on a number of
assumptions that may or may not hold
true in the future. The importance
of recognizing this is that declaration
of a surplus by the actuaries does not
necessarily mean future liabilities will
be met by accumulated assets – nor does
a deficit necessarily mean that assets
will fall short of required liabilities
since at least some actuarial assumptions
will prove to be inaccurate
. “Because of
[this] actuarial surpluses and deficits
are not definitive representations of the
funding status of a plan and are subject
to large swings as actuarial assumptions
change”
6
.
Claim: Defined contribution
plans are the answer and will save
taxpayers money.
This is by no means a certainty. Moving
employees to a defined contribution
scheme simply moves risk from a
large pool to the individual employee.
The change would still entail costs to
taxpayers. In fact, by my analysis the
cost to taxpayers could reasonably be
expected to be significantly higher than
is currently the case with the defined
benefit pension plans. I say this for
two reasons.
One, in a public sector setting (OPS
and much of the broader public sector),
moving to a defined contribution plan
will not remove the participation
of taxpayers in the plan since all
contributions to the plan are ultimately
funded by taxpayers. This is true
because employee contributions under
the revised methodology will (still) be
paid out of employee salaries – which
for most public sector workers are
funded from government’s tax revenue
7
.
It is quite likely that general salary
levels (taxpayer dollars) will increase to
compensate for the risk of not having
an adequate level of (deferred) income
available at retirement.
Two, defined contribution plans
managed by individuals
8
have been
proven to perform less well than
professionally managed, large, defined
benefit plans
9
. In a Canadian context,
this has significant implications for the
individual entering retirement and the
taxpayer.
For the individual on a defined
contribution plan who retires with
a smaller – or no -payout in a market
downturn, the loss of income will make
them less economically independent
than they otherwise would have been.
This lack of financial independence will
likelymake themmore dependent on the
state’s resources (including potentially
Old Age Security-OAS that is a pay as
you go system with all the attendant
problems previously mentioned
10
). In
particular, it has been shown that less
financial independence often leads to
worse health outcomes
11
(resulting
from adverse factors including, but not
limited to, increased stress and a poorer
diet; two items that impact health and
are directly related to income concerns).
In the Canadian context that would
lead to pressure on the universal health
care system.
Using this metric alone
12
, the
adverse outcome of the change would be
expected to be more costly for taxpayers
simply because of the increased costs that
would accrue to the health care system.
Given the resources, individuals manage
their health at less expense to the public
purse than otherwise would be the case.
With poorer health outcomes resulting
from income insecurity, one can easily
imagine increased costs to the public
purse given that the medical system is
more attuned to more expensive critical
care than it is to primary or preventative
care. Paradoxically, even if expenditure
on health care is then increased as a
7
It may be argued that employees of crown
corporations are public sector employees that are
paid from non-tax revenues.
8
This is not always the case. The pension plan
for public sector workers in Saskatchewan is a
centrally managed defined contribution plan.
Saskatchewan also has a centrally managed
Defined Contribution Plan, the Saskatchewan
Pension Plan (SPP).
9
“DC plans generally require more dollars
of contributions than DB plans to produce
the same number of dollars of benefits on
retirement…A DB plan is more than 34%
cheaper from the point of view of employer and
employee combined than a DC plan in providing
a comparable benefit”. P. ii-iii :
Submission to
the Expert Commission on Pensions by the Ontario
Pension Board Oct. 2007.
10
In Pay as You Go Plans, new entrants in the plan
pay the obligations of pension recipients who are
currently reaping the payoff from the plan. This
becomes dangerous when the number of retirees
(recipients) exceed the number of new entrants
(contributors) as is the case demographically with
the baby boom generation retiring.
11
It has been known for some time that the better
off people are in terms of income, social status,
social networks, sense of control over their lives,
self-esteem and education, the healthier they are.
Higher incomes are related to better health not
only because wealthier people can buy more food,
clothing, shelter and other necessities, but also
because wealthier people have more choices and
control over decisions in their lives. This sense of
overall security is intrinsic to good health.
Thus,
security of income is just as important as the
income level itself.”
(emphasis mine).
“More health
care doesn’t mean better health”
: Globe and Mail,
Sep. 05, 2012 by Robert Brown.
12
There are others to consider. Because of their
economies of scale leading to lower management
fees, employment of professional investors, the
ability to spread risk across a large member base
and access to private equity placements and other
investment vehicles often inaccessible to smaller
plans, Defined Benefit Plans allow for better
retirement planning for members compared to
small or individually managed plans as is often
the case with defined contribution plans –
o this contributes to less reliance on the CPP
by retirees.
o healthy market for goods and services
purchased by Seniors.
o minimization of welfare costs and strong tax
revenues.
Move away from Defined Benefit Plans and
its pooled investment fund management may
lead to a decrease in capital market activity (from
large investments by pension funds) and thus
local investment stimulus and its positive impact
on economic growth. Pp.14-15 :
Submission to
the Expert Commission on Pensions by the Ontario
Pension Board Oct. 2007.
4
There is some question on the legal framework
governing the type of uses to which plan sponsors
can put plan surpluses. There is reference to
this in the Report of the Expert Commission on
Pensions titled “A Fine Balance: Safe Pensions,
Affordable Plans, Fair Rules” in its section on
Single Employer Pension Plans (SEPPs). There
is, however, precedent on employers accessing
pension funds though in the United States.
“Corporations removed $21 billion from their
employees’’ pension plans during the 1980’s;
overall nearly 2,000 corporations dipped into
employee pension funds for at least $1 million
each.”
Taken from p.163 of “America: What Went
Wrong” by Donald L. Bartlett and James B.
Steele. The book, published in the 1990’s also
contains the prescient statement re pensions
“…watch for the coming war between those who
work for government and those who don’t.”
5
The employer is not necessarily the sole plan
sponsor. The OPSEU Pension Plan and Teachers
Pension Plan are jointly sponsored meaning
both employer and employees are responsible for
funding shortfalls and are entitled to surpluses.
The Public Service Pension Plan is a single
employer pension plan.
6
P.4.
Vulnerabilities in Defined Benefit Pension
Plans; Discussion Paper 2007-3
, Bank of Canada by
Jack Selody.
