Robert L. Brown, FCIA, FSA, ACAS, FIA (Hons)

Canada

(co-author, Tyler Meredith)

Proposed Paper for ICA 2014

Summary

More than 60 percent of working Canadians currently don’t have a workplace pension. For

those who do have one, it does not guarantee them retirement security. With employers

increasingly opting for defined-contribution (DC) rather than defined-benefit (DB) pension

plans, the burden of managing the risks associated with a pension — such as longevity and

the market performance of assets — has shifted to the worker.

While this shift may have curtailed pension costs for businesses, as the paper argues, it has also left workers more vulnerable financially, since many do not have the wherewithal to plan effectively for retirement. In this study the author explores ways to improve pension coverage and better manage risk for pension members, while also providing cost predictability for employers.

The paper proposes a voluntary pooled target-benefit pension plan (PTBPP). It would involve commingling assets across all participating workplaces to maximize scale efficiencies in investment and manage actuarial risk. Employers’ matching contributions would be

mandatory but fixed, as in a DC plan. It would be available to individuals

and the self-employed.

Most importantly, upon retirement, members could expect a benefit within a target range,

depending on market performance. The paper suggests a minimum benchmark of 50 percent

income replacement, requiring a slightly higher contribution rate than in many DC plans today.

While the target-benefit design would not eliminate the risk that benefits decrease due to market

underperformance, the model proposed includes mechanisms to mitigate this risk. The

plan would be managed by actuaries and investment managers, instead of by workers. To curtail

administrative costs, the PTBPPs would be required to maintain a minimum pool of $10

billion, with management fees capped at 40 basis points, which would be considerably more

cost-efficient than are most DC plans and RRSPs today (250 to 300 basis points).

In sum, for employers the proposed model would provide protection from pension cost

volatility, and for employees it would offer more effective retirement saving through low

administrative costs and reasonable retirement benefits. For many workers and employers this

would be a vast improvement over their situation today.