Jointly sponsored pension plans, which allow plan decision making and funding of benefits to be decided by both the employer and employees, seem to have a better understanding of the plan’s priorities and work better together than those that don’t, a Toronto pension conference has been told.The comments came during a Lancaster House pension conference in December from four public defined-benefit (DB) pension plans: OPSEU Pension Trust (OPTrust), Healthcare of Ontario Pension Plan (HOOPP), Ontario Teachers’ Pension Plan (OTPP) and The Colleges of Applied Arts and Technology (CAAT) Pension Plan. Collectively, these four plans have 700,000 plan members and beneficiaries and are all jointly sponsored. In all these cases, the employer is the government of Ontario.
In addition to being jointly sponsored, OPTrust also happens to be jointly trusteed, meaning that the administration of the plan is also shared, said Michael Grimaldi, vice-chair of OPTrust’s board of trustees.
Having these structures means those sitting on both sides of the table have an equal stake and responsibility in the direction of a pension plan and how it affects current members and retirees, said Grimaldi.
“The fact of the matter is that when you have jointly sponsored and jointly trusteed plans you now have people from both sides at the table so one side cannot abdicate their responsibility,” he said. “There has to be discussions about how you manage risks responsibly.”
Grimaldi said OPTrust went through the same 2008 financial crisis as private sector plans. The result of that crisis meant many of those plans changed from DB plans to defined contribution (DC) plans – much to the chagrin of their members. However, these four pension plans managed their funds effectively, coming through with fairly stable pension plans. “I think that really says something about managing risk fairly and managing risk intelligently and I think that’s what our plans have done.”
At the end of OPTrust’s 2012 fiscal year (the last year for which numbers are available), the plan’s funding valuation was fully funded with a surplus of $34 million.
Grimaldi said that when the pension plan was just run by the province, the plan was always in a deficit position, but OPTrust fought for 20 years to get the plan jointly sponsored with equal representation from the government and the union on its 10-member board. He said there has never been an incident in which discussions broke down to a five-against-five, them-vs-us situation.
It’s no surprise that retirement is more expensive now and younger generations will need to put aside more for retirement than the current baby boomer generation, said Evan Howard, director of policy at the CAAT Pension Plan, which is a jointly sponsored multi-employer pension plan.
So it’s essential for plan sponsors to keep in mind all the tools they need to make sure that becomes a reality.
“The fact of the matter is that when you have jointly sponsored and jointly trusteed plans you now have people from both sides at the table so one side cannot abdicate their responsibility.”
– Michael Grimaldi
“What makes our plan sustainable is good governance and good governance doesn’t come by magic. You have to nurture it,” said Howard. “Good governance enables difficult decisions to be made.”
Despite the benefits that come from jointly sponsored plans, each plan has its own particular set of risks.
For example, the OTPP, which invests the pension fund’s assets and administers the pensions of 303,000 active and retired teachers in Ontario, it’s the subject of “intergenerational fairness” that causes some grief among members.
Plan members in elementary schools shifted to primarily female many years ago. Because women tend to live longer than men, the OTPP had to switch from using regular actuarial tables to crafting its own, said Eileen Mercier, chair of the OTPP. Now younger teachers are facing a double whammy.
“We have a burden that is being placed on the younger employee to cover not only their own funding benefits but also the funding of the difference between what people who are currently retired and what it is actually costing them to fund their retirement,” said Mercier.
In the end, the big issue for OTPP is that it bears a higher level of risk than the average plan and by law, cannot reduce the amount of benefits currently being paid out.
“Our people are living so much longer than anyone ever thought they would. As a result of that fact, we have to plan our asset mix and our liability management in relationship to the fact that we are very mature.”
The effect of demographics and low interest rates were seen in OTPP’s most recent funding report, which showed OTPP 97% funded (as of Jan. 1, 2013.) That means the plan expects to have 97% of the assets required to meet its pension obligations looking out 70 years or more. The shortfall stems from the fact that future projected pension costs rose faster than projected plan assets, mainly because of increased life expectancy, longer periods of retirement and historically low interest rates, which are driving up pension costs.
Jim Keohane, president and CEO of HOOPP, said the biggest problems facing pension plans today is not costs, but transferring of risk. DC plans shift all the responsibility to workers who then have to figure out on their own how to fund their retirement.
The problem here is that the average person doesn’t have the same kind of temperament or experience to look after their own retirement – as evidenced by the relatively low percentage of people who put money into their RRSPs or TFSAs, said Keohane.
Many people tend to think that DB plans are higher cost than DC plans. But Keohane cited a recent study by Boston Consulting Group suggesting Canadian retirees with DB pensions are far less likely than other retirees to collect the guaranteed income supplement (GIS). The study showed that only about 10%-15% of DB retirees collect the GIS, compared with 45%-50% of other Canadian retirees. This means, the study said, that DB pensions reduce the payout of GIS by about $2 billion-$3 billion a year, saving the government money.
The study was commissioned by a group of DB pension plans, including HOOPP, OPTrust, OTPP and Ontario Municipal Employees Retirement System (OMERS).
Creating new solutions
“We need to shift the policy discussion about creating solutions and create retirement savings vehicles which can provide adequate and secure retirement for all workers,” said Keohane.
The pension conference also heard from a panel of experts on New Brunswick’s new shared-risk pension model, a way some see as another way of de-risking a pension plan. Under the traditional DB plan, the risk of guaranteeing benefits to pensioners is on the employer’s shoulder, whereas the risk in a DC plan lies with the employee. With a shared-risk model, the experts say, some benefits are guaranteed and some are conditional.
Paul Lai Fatt, a principal with Morneau Shepell Ltd., said that not all pension plans took the time to think about the range of possible outcomes that could affect a pension and its payouts, including demographics and low interest rates.
Shared risks plans are less about predicting what’s going to happen, said Lai Fatt. Rather, it’s about everyone understanding what could happen to pensions and benefits if, for example, there is prolonged market volatility.
What is needed is a plan that requires both sides to understand their plans and look at what would happen if benefits become unaffordable.
“Shared risk plans force you to do that,” he said.