Within the pension industry, thoughtful discussion about ideal pension plan designs has moved beyond the defined benefit versus defined contribution debate to focus on a broader range of pension plan designs and reform options.

Canada, however, still has some policy advocacy groups and some political parties that are advocating wholesale conversion of Canada’s public sector pension plans from their diverse current arrangements to defined contribution.

Converting public sector pensions not a new idea

Converting public sector pension plans to defined contribution is not a new idea. Some jurisdictions have converted their public sector pension plans in the past. Some of those pension plans have subsequently been converted back to defined benefit. Other jurisdictions have formally studied and modelled converting their public sector pension plans to defined contribution, and then rejected the idea.

Although this experience is a matter of public record, none of it has been brought into the Canadian pension policy debate.

The real-world experience with public sector pension conversions to defined contribution has been brought to light in a new report entitled Shifting Public Sector defined benefit Plans to defined contribution – The Experience So Far and Implications for Canada. The report’s authors are Dr. Robert Brown, a retired professor of actuarial science (University of Waterloo) and current president of the International Actuarial Association, and Craig McInnes, a writer and journalist.

The report finds that of the 50 U.S. states, only four (Michigan, Alaska, West Virginia and Nebraska) have converted their public sector pension plans to mandatory defined contribution arrangements. In all four cases, the conversions have resulted in adverse impacts for the many stakeholders of the public sector pension plans. Two of these states (West Virginia and Nebraska) converted back to defined benefit arrangements after experiencing higher administration costs, lower investment returns and inadequate retirement benefits in their defined contribution plans.

Michigan has stuck with its defined contribution arrangements in parallel with its closed defined benefit plan. The funding of the closed defined benefit plan has deteriorated since the conversion from 108 per cent funded to 60.3 per cent funded, and members in the defined contribution plan are experiencing much lower retirement benefits than those who remain in the closed defined benefit plan (about one-third as much).

Alaska’s experience has been similar, with unfunded liabilities of the closed defined benefit plan increasing by $11.9 billion since the conversion, lower retirement incomes coming from the defined contribution plan, and concern about recruitment and retention issues for public sector employers.

public sector pensionsThere is an ongoing campaign in Alaska to convert their plans back to defined benefit.

In addition to these four states, many other jurisdictions in the U.S. have seriously considered converting their public sector pension plans to defined contribution. Minnesota, Nevada, Texas, Wisconsin and New York City commissioned experts to investigate and model the likely results, and then rejected the defined contribution option.

These carefully considered decisions can’t easily be dismissed as coming from governments that are overly sensitive to the welfare of their employees. The report by Brown and McInnes documents the studies and findings in these five jurisdictions.

Canada’s experience with conversion to defined contribution has been similar to the U.S. experience. Of the 10 Canadian provinces, only one has converted public sector pension plans to defined contribution. Saskatchewan implemented defined contribution arrangements for its teachers and provincial employees in 1977, but in 1991 Saskatchewan’s teachers were re-converted to a member-sponsored DB plan. As in the U.S. experience, half of Canada’s conversions to DC have been subsequently reversed.

Saskatchewan is not a model for reform

Today, almost four decades after its conversion to defined contribution, Saskatchewan has the highest ratio among the provinces of government-supported unfunded pension liabilities to provincial revenues. Amazingly, some policy advocates still advance Saskatchewan as a model of how to reform public sector pension arrangements.

The report by Brown and McInnes also reviews the theory and literature on why defined contribution plans are less efficient than defined benefit plans, and models the potential impacts of converting a large Canadian public sector pension plan to defined contribution.

For anyone interested in understanding the likely impacts of converting public sector pension plans to defined contribution, it is well worth reading. It is also a useful source for tracking down the many other reports from other jurisdictions that have come up with similar results.

Source: Troy Media