Mark Janson | CUPE Research
Defined benefit pension plans had a strong recovery over the last few quarters, despite the constant refrain from politicians and employers declaring their demise.
Pension consulting firm Mercer surveyed over 600 public and private defined benefit (DB) pension funds. They found that the average pension is currently 99.9 per cent funded, meaning they would have no trouble meeting obligations to plan members if they were wrapped up immediately.
Who’s the poster child in the pension recovery? None other than Air Canada. Their plan reached a surplus at the beginning of this year after recording a solvency deficit of $3.7 billion just a year ago. Changes in employee benefits saved the plan almost $1 billion, but by far most of the improvement came from higher investment returns and a slight increase in interest rates.
Canadian plans are not alone in experiencing strong recoveries. Large company plans in the U.S. reported their best returns on record in 2013, closing funding gaps caused by the financial crisis. The improvement in the health of pension plans is also helping to raise company stock prices, lower their borrowing costs and boost equity markets.
DB plans play an important role in the economy, paying out an average of $70 billion in benefits in Canada. That represents between six and nine per cent of total earnings in urban communities. These payouts further benefit the economy through increased spending, investment and taxes.
DB plans are better than target benefit, defined contribution or RRSP-style plans because they provide more secure retirement income and are better managed, at lower costs to employees and retirees.
Despite these benefits, DB plans are often attacked by politicians and business lobby groups as too expensive. Many are happy to keep their own generous and secure pensions, but want to avoid the risk of DB plans for workers.
As a result the proportion of employees registered in DB plans has continued to drop, particularly in the private sector, where coverage is below 25 per cent.
Unfortunately, provincial governments are now making big changes to DB plans in Alberta, New Brunswick and Prince Edward Island. Major discussions are also underway in Quebec and Newfoundland and Labrador. In each case, officials seek to lower employer cost and shift significant risk to workers.
One simple solution to these issues is to expand the Canada Pension Plan, which would reduce pressure on workplace plans and create real retirement security for all workers. Unfortunately, the federal government continues to stand in the way of this solution, despite the fact that many provinces support it.
The push to expand the CPP will continue, but recent evidence should not be ignored. DB plans are not only real retirement security for workers, but are also quite sustainable in the long run.