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1991 – 2006: 15 Years Of Regress For DB Plans

By: Paul Owens

The last 15 years have been difficult ones for pension plans in general and Defined Benefit plans in particular – not that anyone should come to the conclusion that the prior 15 year period from 1976 to 1991 represented a period of tranquillity and peace for the pension industry either.

It is hard to select the single most significant event impacting pension plans over the last 15 years – there are, unfortunately, so many candidates.

A quick, and by no means complete, listing of the usual suspects produces the following for consideration broken down into our assessment of whether they were ʻgoodʼ or ʻbadʼ for the pension system. We do not pretend the allocation to ʻgoodʼ or ʻbadʼ is devoid of subjectivity.

Good Events

Bad Events

The bad events outnumber the good events, not only in straight numbers, but in terms of cumulative impact.

The consequences of all of the above activities, where the bad outcomes outweigh the good ones, are:

When one looks at all the negative events from far enough away, one no longer sees a group of unrelated individual events, but rather a major and, if one believed in conspiracy theories, a concerted and deliberate attack on the DB pension system.

An outsider could question the logic of why anyone would continue to chip away at eroding what was a reasonably workable retirement wealth accumulation system.

Fragmentation Of Pension System

This leads us back to identifying the biggest development over the past 15 years – the fragmentation of the pension system and the repeated focus on maximizing the constituent parts of a DB system as opposed to ensuring the viability and growth of the system as a whole.

To be sure, each of the ʻbadʼ events is important in its own way. However, none, on its own, would have caused the pension system to deteriorate to the precarious state it is in today.

A DB pension plan was designed to deliver a defined benefit and had a long-term focus or time horizon – now up to as long as 75 years. One of the consequences of a DB plan is that risks are pooled or shared. While the value of the plan as a whole is maximized, it is impossible to maximize the value of each individualʼs entitlement each and every year. Cross subsidization is inherent in a DB plan. It becomes mathematically impossible to achieve intergenerational equity at any point in time, let alone over a period of time.

We provide two examples to illustrate the dangers of focusing on the components:

Particular Enemy

Whose fault is it?

While it is convenient to single out a particular villain, to quote Walt Kellyʼs Pogo, “We have met the enemy, and he is us.”

Each group, by trying to maximize its own entitlement at a particular point in time, has threatened the viability of the system as a whole and has diminished the magnitude of the ultimate amount of retirement wealth that can be accumulated.

Itʼs a classic case of killing the goose that lays the golden egg.

However, there may be a faint glimmer of hope. As this article was being written, the McGuinty government announced the formation of an expert commission to review Ontario pension legislation. Maybe, this will turn out to be the most significant event when the next 15 years are reviewed.

Paul Owens Paul Owens is plan manager and chief executive officer for the Colleges of Applied Arts and Technology (CAAT) Pension Plan.

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