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30,000 Feet

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30,000 feet - third quarter, 2014

The biggest stories of the quarter with significant ongoing impact

DB plan proponents resist

In the latest quarter, the proponents of DB plans had some reason to cheer. Alberta killed two bills that would have converted its public sector pension plans into a form of Target Benefit Plans (TBPs) and allowed private sector plans to convert accrued DB pensions to target benefits. In Thunder Bay, Unifor members managed to preserve their DB plan for current and future members after being on strike for more than 8 weeks. In Newfoundland, government employees agreed to a number of cutbacks in their DB pension in the wake of a huge pension deficit but still managed to maintain the DB format for future service. At the time of writing, it appears that Regina civic employees will also keep their DB plan though they will have to make some concessions to do so. And in Quebec, unions and retiree associations have complained loudly about the Bill that would allow municipal plans to remove future indexing that was previously negotiated for accrued pensions.

Why plan sponsors should care

While the ultimate fate of DB plans is still a question mark, such plans will continue to exist for a long time to come, especially in collectively bargained situations. We are not close to a tipping point which would see most remaining DB plans switch to DC or TBP. If we can avoid a major stock market correction and if interest rates rise significantly, the perception of risk will recede and with it the pressure to convert remaining DB plans to DC. This is far from a renaissance for DB but it is possible that the extraordinary pressure placed on DB plans by the 2008-2009 financial crisis has finally started to ease.

Cost of running CPP is not so cheap

A Fraser Institute study during the quarter alerted us to the fact that the cost of running the Canada Pension Plan, including administration costs and investment costs, now exceeds $2 billion annually, representing over 1% of assets (i.e. 1.30% and 1.15% in the last two fiscal years).

Why plan sponsors should care

Managing an entity as large as the CPPIB is a daunting task. As a fund becomes so huge, it needs to work much harder at seeking attractive investments. At some point it likely faces diseconomies of scale. Any hint that the CPPIB is becoming unwieldy could hinder future proposals to expand the Canada Pension Plan. An expanded CPP would mean increased contributions and the resulting increase in assets could make the fund too large to manage effectively without a change in governance.

Decumulation is growing in importance

Proposed regulations affecting federally regulated pension plans would permit DC plans to pay benefits directly out of the fund on a monthly basis rather than forcing retiring members to buy an annuity or transfer their monies to a LIF.

Why plan sponsors should care

Limited decumulation options constitute one of the biggest weaknesses of DC pension plans. The ability to pay benefits directly out of the fund on an ongoing basis has been allowed by the Income Tax Act for a few years already, but the necessary pension legislation changes have been slow to come, except in Western provinces. While such a new option may increase the administrative burden in DC plans and extend the employer’s fiduciary liability into the retirement phase, it may also represent a big improvement for DC plan participants. This will be an increasingly important issue as DC plans start to mature and participants retire in larger numbers.


30,000 feet - third quarter 2014 (PDF)