Bring pensions into public policy debate

(September 17, 2004) The search for solutions to problems plaguing Canada’s pension system was the focus of the 2004 conference of the Association of Canadian Pension Management (ACPM) this week in Vancouver. A number of speakers said establishing pensions as a public policy issue could play an influential role in the search for answers.

With the challenges facing defined benefit (DB) pension plans well publicized over the past few years, several speakers at the ACPM conference presented the 350 delegates with ideas for dealing with key issues.

“I think we are going to see far greater exposure to alternative asset classes to gain added value to the indices,” said Ron Abraham, a principal with Towers Perrin in Calgary, during the opening plenary session. Abraham says alternative assets will attract more attention as plan sponsors try to fund their liabilities in a low-return environment, but he noted that a public discussion on pension issues is necessary to meet the challenges facing the industry.

In addition, Abraham said risk-sensitive plan sponsors will try to strike a balance in the risks within their investment portfolios. “I think, in the next few years, plan sponsors will increasingly divide assets into two categories: financially non-risky assets and financially risky assets.”

Doug Pearce, CEO of the B.C. Investment Management Corporation, said the pension industry and the public at large both had a “wake-up call” about the stresses and strains on the system. Given our aging society and the fact that only one third of Canadian workers is covered by a pension plan, he said it is time for sensible, but significant, change.

“I think we are faced with slower economic growth and a higher number of dependents [per working Canadian],” Pearce said.

Pearce suggested that the federal government relax the 30% foreign property rule by exempting the United States and Mexico. This would improve the opportunity for investment diversification in pension portfolios.

He also recommended that pension funds be allowed to save more during times of bullish markets, and that the Canada-U.S. tax treaty be simplified and modernized with respect to tax-exempt funds.

The future design of DB plans will be influenced more and more by the ability of the plan sponsor to make good on deficits, said Jeff Klein, national practice director, investment consulting, with Watson Wyatt, in the second plenary session. At the same time, Klein said the sharing of risks in a DB plan must be clarified and better communicated, in part, to emphasize the inter-connections between investment policy and plan design.

“All the participants, all the stakeholders need to understand what the nature of risk-sharing is in the plan,” he said.

During the same session, Tom Fuller, director of projects with the Alberta Federation of Labour in Edmonton, offered a union response to the serious challenges facing pension funds. Fuller said unions want to cooperate with employers to protect DB plans and preserve benefits, but, in many cases, will resist further conversions to defined contribution (DC) plans. He also said unions would push pension funds to exercise their proxies and encourage employers to develop sustainable HR policies.

“An economy that does not generate good jobs will not support healthy pension plans. And pension funds have been part of the problem; they must now become part of the solution,” said Fuller.

Paul Owens, plan manager and CEO of the Colleges of Applied Arts and Technology Pension Plan in Mississauga, Ontario, said there has been too much focus on the distribution of pension wealth, and not enough on the growth of pension wealth. Owens wants to shift the focus.

Related News Stories

Pension plans must grapple with embedded liability risks Pension plan members seeking independent advice, says expert

“We need to have a philosophy in the pension industry, and this covers everyone, that simply says that the objective of the Canadian occupational pension system is to maximize pension coverage across the working population with risk pre-defined, so that we know up front who owns the surplus and who owns the deficit,” said Owens.

Owens presented a wish-list during his presentation, including a call for the elimination of the foreign property rule, increasing the allowable pension funding limit from 110% to 150%, and boosting the annual pension accrual from $2,000 to $5,000. He also argued in favour of creating a national pension benefit act, but acknowledged a more practical solution might be to let an employer be governed by the pension act in the province where its plan is registered, even if it has plan members in other provinces.

Jim MacDonald is the editor of Benefits Canada.

(09/17/04)