Canadian HR Reporter

CANADIAN HR REPORTER JULY 2019 12 NEWS Payroll Reporter www.payroll-reporter.com New pension paradigm needed to better serve employees: Report 'Policies encouraging larger, collective pooled pension plans governed by independent management boards are the way forward,' says expert BY MARCEL VANDER WIER T he time is right for Can- ada to adopt a pension model that serves the workforce more appropriately, according to a report by the C.D. Howe Institute in Toronto. " e Canadian pension system is failing," said Stephen Eadie, report co-author and partner at Robertson, Eadie and Associates in Oakville, Ont. "It's been dying for a while and we're having the funeral soon." With traditional pension mod- els largely falling short of their goals, the industry must focus intently on the framework of the future, according to e Great Pension Debate: Finding Common Ground. At present, pension dis- cussions continue to be divided into two camps — defi ned bene- fi t (DB) and defi ned contribution (DC), said Eadie. Employers hold the lion's share of risk in the fully guaranteed DB plan, while employees take on most risk in the DC framework, he said. It's time to drop the traditional debate of DB or DC and move towards more realistic solutions, said Eadie. e pension model of the future ultimately lies some- where in between, in a pooled target DB plan or a collective or comingled DC plan — actuarially equivalent frameworks. "Policies encouraging larger, collective pooled pension plans governed by independent man- agement boards are the way for- ward," he said. "We need to do something about the failing Ca- nadian pension industry." This type of pension model would be open to a diverse group of members, and design would ensure fairness for participants making different choices or changing careers, said Eadie. The current single-employer pension plan is failing because it's sponsored by people who don't want to be in the business of pro- viding pensions in the fi rst place, he said. "We want to provide pension plans to private sector employers so that they can treat the pension plan much like the Canada Pen- sion Plan (CPP)," said Eadie. " eir responsibility is to se- lect that pension plan and to make the contributions on be- half of their employees, and then they're done. It is the manage- ment board, the board of trust- ees of the pension plan, who will worry about managing that pen- sion fund well." e optimum asset size would be $1 billion and up, with pool- ing across multiple employers to reduce the risk for plan sponsors and lower contributions from members, he said. e pension would also remain in place for workers who change jobs often throughout their ca- reer, said Eadie. "In Canada, such solutions are becoming common in the public sector, but need to be encouraged in the private sector," he said. "Having a dynamic, well-funded pension system for the public sec- tor and not for the private sector is just not something that we think is sustainable." And while target benefi t plans or jointly sponsored frameworks have been available in the public sector and larger private sector unions for some time, the same isn't true for small employers, said Eadie. "You can't retire and maintain your lifestyle if you're making anything close to an average wage through the Canada Pension Plan and OAS (Old Age Security) alone," he said. " at's not enough. Private sector Canadians need to have access to real pensions." Implications of move to DC plans still unknown When it comes to pensions, to- day's employers are moving away from liabilities associated with DB plans, according to Janice Holman, principal of Eckler, an actuary consultancy in Toronto. " ey are happy to off er their employees a retirement savings plan," she said. " ey use it for at- traction, retention of employees, but they also don't want it to be- come a second job, just managing these plans." Alongside market volatility, a continued decrease in interest rates is driving up pension plan costs, said Holman. Employers have been trending away from DB towards DC, and are now moving towards group registered retirement savings plans (RRSPs) or tax-free savings accounts to get out from under onerous pension plan report- ing and to give employees maxi- mum fl exibility on retirement, she said. e transition has been hap- pening over the past two decades, said Andrew Hamilton, partner in retirement and investment at AON, a professional services fi rm in Toronto. "If you look historically at when (DB) plans were put in place, or certainly when they were thriv- ing, it was in a very different economic environment where interest rates were much higher and the expected cost of those programs was commensurately lower," he said. "Now that rates have been his- torically low for an awful long time, the ongoing costs of those plans — because expected re- turns are lower — is quite high, and maybe more than sponsors had envisioned when the plans were put in place." at migration from DB to DC hasn't really slowed down, said Hamilton. "One challenge will be now that we've seen a big move from defi ned benefi t to defi ned con- tribution, we're probably going to see… fewer larger, well-run defi ned benefi t plans that share risk a little diff erently between the sponsor organizations and members," he said. e fallout of the large change- over to DC plans has yet to be ex- perienced, said Hamilton. " at's something that, as a so- ciety, we haven't really had to deal with yet — signifi cant numbers or certainly a majority of Canadians retiring with those programs," he said. "But when we do fi nd ourselves in that situation, I think we're go- ing to have to come up with in- novative ways to help members generate lifetime incomes from those account-based groups." Workers continue to fi nd it dif- fi cult to save for retirement and worry about post-retirement sav- ings, according to an AON survey of 1,003 Canadians. Of those expecting to fully retire, two-thirds expect to do so by age 66, but 30 per cent be- lieve they will continue working forever. Less than one-quarter of Ca- nadian private sector employees have workplace pensions, while one in 10 have access to a pension plan that provides adequate re- tirement income, said Eadie. "There's a number of retire- ment savings arrangements, but not pension plans," he said. "And many of these defined benefi t plans are being terminat- ed. ey're really becoming quite rare." Retirement savings remain popular perk Employers have much to gain by off ering retirement savings plans, said Holman. "If you survey across the gener- ations, it's actually one of the most valued benefi ts that an employer off ers," she said. "It is an attrac- tion and retention tool." Some organizations and in- dustry sectors are moving away from pensions in favour of group RRSPs, in an eff ort to have work- ers take on more fi nancial and management responsibility, said Holman. And converting retirement options from a pension to RRSP is possible for employers, if con- tribution amounts remain un- changed, she said. "It's not that diffi cult to go from DC to RSP, as long as you main- tain the same fi nancial commit- ment to it." Millennials continue to see val- ue in employer-off ered pensions. And DB plans can be a great lever to attract talent into an organiza- tion, especially as fewer employ- ers off er them, said Holman. "Pensions are still important," she said. "( ey're) still going to be front and centre for a long time." Response from regulators has been to protect pensions by mak- ing them as safe and secure as possible, said Holman. "It's a delicate balance between creating the regulation that's fl ex- ible enough that employers will continue to off er the plans, but also ensuring that it's stringent enough that the security is there for the plan members," she said. "It's a fi ne balance." Removing the burden of pen- sion plan management from small employers is a major driver towards fi nding a middle ground on pensions, said Eadie. "If you're an HR professional, now I can get my head around what I'm buying and recom- mending for our company, but I don't have to run the day-to-day aspect of this; I just need to treat it much like I do the Canada Pen- sion Plan," he said. " at's really what this is all about." "We are promoting this be- cause we think that this not only is a viable solution, but it is a nec- essary solution. We cannot have a society that does not provide for responsible retirement income to our elderly," said Eadie. "A pension plan, managed well, is the best way to provide this kind of income… Society fails without responsible pensions." And pensions can still be a solid option for employers look- ing to provide retirement sav- ings options to staff , according to Hamilton. "I think we have a viable model; I think we have a healthy system here," he said. "You can still, today, design a perfectly adequate sustainable defi ned benefi t plan. I think if you were starting with a clean sheet of paper, you could do that quite eff ectively, and manage the risk of those programs so that the cost and variability — the risk in those programs — was palatable to an organization." Canadians continue to find it difficult to save for retirement, and worry about post-retirement savings, according to a 2018 survey of 1,003 workers conducted by AON. Credit: Flamingo Images (Shutterstock) Removing the burden of pension plan management from small employers is a major driver towards fi nding a middle ground on pensions.

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