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FMI
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IGF JOURNAL
VOLUME 25, NO. 2
POPULAR (MIS)PERCEPTIONS REGARDING PENSION PLANS: RELATIONSHIP TO PUBLIC SECTOR PENSION PLANS
result - to the exclusion of other public
spending – it may result in a
decline
in
the overall health of the population
13
.
To summarize, for the employee who
is on a defined contribution plan and is
unlucky enough to retire in a market
downturn – even if that downturn is
temporary and the market corrects
shortly after – the die is cast and a
critical pillar in that individual’s income
security is sacrificed for the rest of that
individual’s life. This even after diligent
saving on the part of that employee
over their working years. The saying
is “invest for the long run” but in some
cases (as with the retirees under this
scenario) to paraphrase John Keynes, in
the long run we are all dead.
Conversely, for the individual on
a defined benefit plan, if said plan is
underfunded the day an employee
retires that underfunding can be
reversed during the retirees lifetime,
potentially in very short order, by a
market turnaround, an increase in
interest rates or more likely both
14
. This
would remove the pressure on taxpayers
to fund benefits for that retiree even
while providing income security for the
retiree over the entire period. In this
case, the long run works.
Conclusion
In seeking pension reform in the public
sector many of the claims made in the
press are erroneous. This paper has
sought to identify these and provide
factual information.
Further, in the Canadian market the
solutions proposed in the press may
paradoxically result in an increased
burden on government resources –
and thus taxpayers – not less
15
. In fact,
one shocking implication of this is that
private sector actors moving to defined
contribution plans are uploading risk
to the taxpayer! This paper lays out the
analysis behind this counter-intuitive
conclusion.
Of course this conclusion is not
definitive – a definitive statement would
have to rest on empirical evidence.
The actual outcomes of the changes
suggested in the press would be impacted
by a number of factors in addition to that
explored above, including the impact of
the loss of significant pooled investment
funds to the economy and the impact of
any change to pension plans on length
and quality of life of pension recipients.
Assuming, however, that the changes
to pension plans do not significantly
increase mortality among pension
recipients, the conclusion stated above
would be reasonably expected to hold
true.
Finally, in a public sector setting
moving to a defined contribution plan
from a defined benefit plan only changes
the area in the public sector in which
expenditure pressures are created.
The final conclusion to be drawn from
our investigation may well be that in
pursuing solutions, a holistic view is
mandatory and the uncritical application
of private sector solutions in a Canadian
public sector setting may well be
counterproductive.
13
“A society that spends so much on health care
that it cannot or will not spend adequately on
other health-enhancing activities may actually
be reducing the health of its population”.
“More
health care doesn’t mean better health”:
Globe and
Mail, Sep. 05, 2012 by Robert Brown.
14
This statement has proven to be prescient.
In the year since this paper was originally
written Mercer released a study showing that
in 2013 pension plans sponsored by S&P500
companies eliminated over 80% of their pension
underfunding. As at December 31, 2013, $454
billion of the estimated $557 billion deficit
at December 2012 was wiped out. This took
place in
one year
without any significant upward
movement in interest rates. Source: 2013 Best
Year on Record for US Pension Gains; Sponsors
Now Acting to Protect their Winnings.
15
This will depend on how the loss of resources,
or the security of those resources, impacts the
person’s length of life and thus extent of required
support from the public purse.
About the Author:
Richard Wright has a passion for contributing to solutions, whether to problematic
economic/finance issues or more local process inefficiencies. He has studied and worked
extensively in the finance/economics field. He received his undergraduate degree in
history and economics from the University of the West Indies and graduate degrees in
economics from Howard University in the United States and York University in Canada.
He also has an MBA from the Schulich School of Business. Over the past 10 years,
Richard has worked in the Ontario Provincial Government in the areas of finance, as well
as policy. Richard currently lives in the GTA (Ajax) with his wife Sandra and their two
daughters.
No one can question Marcel
Boulianne’s fervour for FMI. The FMI
National President brought his fmi
*
igf
Journal along with him while diving
off the coast of Grand Turk Island, the
capital island of the Turks and Caicos.
See other destinations of
“The Travelling Journal”
at
.
