When Dave Schaub scans the business headlines, the news about a corporate pension crisis is strikingly familiar.
“Where most plans are today is where we were in 1992,” says Mr. Schaub, chairman of the Pulp and Paper Industry Pension Plan (PPIP), which invests the pension money of 18,400 forestry workers and retirees.
Back then, the plan was facing a dire funding crisis. Its assets were worth just 50 per cent of liabilities, a chasm that was the result of generous improvements to benefits and weak investment returns that made those commitments impossible to fulfill. Without major changes, thousands of workers who relied on the plan faced the risk of having their future pensions slashed.
The solution was tough medicine: A new lower-risk structure, a change in the way benefits are paid, and a requirement that employees begin contributing to the plan. It still took years of improved investment returns to make up millions of dollars of shortfalls. But today, the plan is in a healthy surplus, its assets “virtually unaffected” by last fall’s stock market meltdown.
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“When we look back at what we’ve done, it’s been very beneficial to the employers and the plan members,” Mr. Schaub says.
If the fix at the PPIP was both long and arduous, it also holds out hope that creaky pension plans can be put right. Indeed, the debate in Canada’s executive suites is now over just what sort of fix holds out the best hope of providing for adequate retirements without crippling employers.
The proposed solutions range from the simple to the radical. One school of thought is that the answer lies in Ottawa, with less onerous federal rules on funding traditional pension plans. At the other extreme is a movement to get rid of those plans entirely, end the era of defined-benefit pensions, and transfer the responsibility for funding retirement to the shoulders of employees by giving them defined-contribution plans.
In the middle are a variety of alternatives that, not surprisingly, are dubbed hybrid plans.
No matter which route is taken, hard choices lie ahead – for companies, their employees and for government policy makers.
The great debate
Many Canadian companies with pension plans have been hit by a double whammy of low interest rates over the long term and a dramatic drop in stock markets in the short term. The combination has knocked the daylights out of returns, typically leaving plans currently with assets equal to about 80 per cent of liabilities. Traditional pension funds in Canada’s private sector currently have a solvency deficit of about $50-billion, according to pension consulting firm Watson Wyatt.
As companies weigh alternatives for the future, a crucial choice comes down to a pair of innocuously simple-looking bits of shorthand: Will the future be DB or DC? Those four letters house a world of difference.
Traditional pension plans are DB, defined benefit. A retiree covered by the plan is guaranteed a given level of income. If the plan falls short, the employer is on the hook.
