MARK BLINCH/Reuters
Defined contribution pension plans still account for a tiny minority of all pension assets in Canada even though they have emerged as the dominant pension vehicle in the United States.
A global study of pension assets by consulting firm Towers Watson shows 96 per cent of registered pension assets in Canada are held in defined benefit (DB) pension plans, while only 4 per cent are held in defined contribution (DC) plans.
In the U.S., by comparison, just 42 per cent of pension assets were in DB plans in 2014, while 58 per cent were held in DC accounts, the study says.
DB plans are traditional pension plans that provide a guaranteed level of payment in retirement, while DC plans operate like savings accounts with the final value of payouts dependent on investment choices and market performance.
Many companies have been moving their workers into DC plans so they do not have to fund shortfalls and do not face funding volatility as investments rise and fall. But the trend has advanced far more quickly in some countries than others.
While many Canadian companies have shifted workers into new DC accounts – typically by closing their DB plans to new hires – the proportion of pension assets held by workers in their DC accounts remains a tiny minority of all pension assets in the country.
The huge Canada Pension Plan, with assets of $234-billion, remains Canada's largest DB pension fund, while most other government workers have large scale DB plans, and major DB plans continue to exist in the private sector.
Canada's division of assets between DB and DC plans has remained virtually unchanged over the past decade, with DC assets shifting from 3 per cent to 4 per cent of all pension holdings between 2004 and 2014. By contrast, DC plans in the U.S. have grown from 52 per cent of pension assets in 2004 to 58 per cent by 2014.
On a global basis, the Towers Watson study says DC plans now account for 47 per cent of pension assets, up from 38 per cent in 2004.
"The inexorable shift to DC, which we believe will soon constitute the majority of pension fund assets, means it is becoming the dominant global pension model," said Towers Watson global investment director Roger Urwin.
Mr. Urwin said in a statement Tuesday that the DC shift "brings with it a transfer of risk," with the onus for ensuring adequate retirement incomes shifting from employers to employees.
"These billions of new pension members have high and immediate expectations in a world of low returns," he warned.
Among the seven countries with the largest pension holdings, only Japan has a lower proportion of DC pension assets than Canada. In Japan, 97 per cent of assets are in DB plans and only 3 per cent are DC holdings. A decade ago, all pension assets in Japan were in DB accounts.
In contrast, 85 per cent of all pension assets in Australia are now held in DC accounts, due to the country's large superannuation savings plans, which cover all workers in the country in DC-style accounts.
British companies have aggressively moved workers into DC plans, which now account for 29 per cent of all registered pension assets, but the country still has large legacy DB plans under management.
The Towers Watson study also shows pension assets in the world's 16 major markets grew by 6 per cent in 2014 to a total of $36-trillion (U.S.) after posting a 10-per-cent growth rate in 2013.
Over the past 10 years, global pension assets have increased by an average of 6 per cent per year. DB plan assets have climbed by 4.3 per cent per year, while DC assets increased by 7 per cent annually.
The report shows pension plans are increasingly investing in global equities outside of their home country. Since 1998, the weight of domestic equities in pension portfolios has fallen from 65 per cent to 43 per cent by 2014. U.S. pension plans continue to have the greatest propensity to invest in domestic equities, while Canada and Switzerland are the least likely to invest in domestic stocks.
In Canada, 33 per cent of pension assets are in domestic equities, but 98 per cent of fixed income investments such as bonds remain Canadian-based, the study says.
Janet McFarland