The research paper, Shifting Public Sector DB Plans to DC – The Experience so far and Implications for Canada, examines the claim that converting public sector DB plans to DC is in the best interests of taxpayers and other stakeholders by studying the experience of other jurisdictions, including Australia, Michigan, Nebraska, New York City, Saskatchewan and Texas and applying those lessons here.

Shifting Public Sector DB Plans to DC – The Experience so far and Implications for Canada is written by Robert L. Brown, retired professor from the University of Waterloo and president of the International Actuarial Association, and Craig McInnes, a business journalist and writer. The research paper explores the implications of converting large public sector DB pension plans to individually controlled and pooled DC arrangements.

While the subject of the research paper is primarily a comparison of DB and DC plans, the authors note that many public sector plans have already evolved to the point where they are no longer pure DB plans in which only employers own the risks. Most large provincial and sector-based plans have already moved towards more risk sharing with plan members.

“We ask what are we trying to achieve through converting large public sector pension plans from DB to DC and then look at whether those goals would be achieved, not just for public sector employers but for everyone who would be affected either directly or indirectly.”

The paper concludes: “after examining the literature on the experience in other jurisdictions and modelling what the ramifications would be in converting a large Canadian DB plan to DC, we found that none of the stakeholders would ultimately be better off.”

Funding for the research paper was made possible by the CPPLC, a non-partisan group of public pension plans from across the country working together to help inform the debate about income security in retirement.

A research paper by a renowned actuary demonstrates that converting large public sector defined benefit (DB) pension plans to defined contribution (DC) arrangements is not a financial panacea. Instead, it would create higher costs, inefficiencies and increased risks for employers, taxpayers and members.

Shifting Public Sector DB Plans to DC – The Experience so far and Implications for Canada, is written by Robert L. Brown, retired professor from the University of Waterloo and president of the International Actuarial Association, and Craig McInnes, a journalist and writer, and explores the implications of converting large public sector DB pension plans to individually controlled and pooled DC arrangements.

The paper examines the claim that converting public sector DB plans to DC is in the best interests of taxpayers and other stakeholders by studying the experience of other jurisdictions, including Australia, Michigan, Nebraska, New York City, Saskatchewan and Texas and applying those lessons here.

After examining the literature on the experience in other jurisdictions and modelling what the ramifications would be in converting a large Canadian DB plan to DC, the paper concludes that none of the stakeholders, including taxpayers, would ultimately be better off.

“The perceived advantages to closing DB pension plans in the private sector do not translate directly into the public sector,” says Brown.

“We ask what are we trying to achieve through converting large public sector pension plans from DB to DC and then look at whether those goals would be achieved, not just for public sector employers but for everyone who would be affected either directly or indirectly, including taxpayers.”

The authors identify five stakeholders in the conversion debate and examine whether in every case a shift to a DC arrangement would solve problems or create them. The stakeholder groups are: Employers, including governments; Employees and their dependents; Current taxpayers; Future generations of taxpayers; and Society at large.

“Our modelling has shown us that for an efficient $10 Billion DB plan, converting to individual-account DC arrangements to provide the same value of pension benefit would increase the ongoing cost of the plan by about 77 per cent, and increase the required contribution rates accordingly,” say Brown and McInnes. The authors add that even with the use of pooled DC pension arrangements, ongoing costs would still increase by 26%.

While the subject of the research paper is primarily an analysis of converting DB to DC plans, the authors note that many public sector plans have already evolved to the point where they are no longer pure DB plans in which only employers own the risks. Most large provincial and sector-based plans have already moved towards more risk sharing with plan members. Some are jointly sponsored, which means that costs and the risk of unforeseen variance in those costs are shared equally between members and employers. Some have contingent benefits, such as a partial inflation adjustment, that are not paid unless the plan is fully funded. In short, many public sector plans are well governed and well managed.

The paper will be the subject of a panel discussion at the Second National Summit on Pension Reform tomorrow in Toronto. The event has been organized by the Public Policy Forum.

Funding for this study was made possible by the Canadian Public Pension Leadership Council (CPPLC). The Co-Chairs of the CPPLC are Derek W. Dobson, CEO and Plan Manager of the CAAT Pension Plan in Ontario, and Bruce Kennedy, Executive Director College Pension Plan, Teachers’ Pension Plan, and Public Service Pension Plan in British Columbia.