Risk sharing key to reintroducing defined benefit pensions to private sector: Fuller

Creating a sustainable system to provide Canadians with adequate retirement income may seem a daunting task, but Mark Fuller, president and CEO of the Ontario Pension Board (OPB), believes that is the task at hand.

Fuller envisions a day when a retirement structure built on shared risk is introduced to the private sector, recreating the increasingly scare workplace component of the traditional three legged stool of retirement: occupational pension, personal savings, and public pension supports.

At a Toronto Board of Trade conference on Canada’s ‘pension conundrum’ last February, Fuller said that while most of the retirement debate focuses on defined benefit versus defined contribution, the real issue is risk sharing.

“Trying to build a sound system that delivers adequate retirement income through risk sharing can be very polarizing, and this has deflected us away from solutions,” he stated.

To deliver adequate retirement income “systemic economic efficiency” must be a basic principle of any plan, he continued.

“My passion is on a public and private system that enables all Canadians to build adequate retirement income, a system that facilitates, for the greatest number of citizens, adequate retirement income at a reasonable savings rate.”

In a recent interview with ARIA, Fuller said many of the risk sharing elements of a successful private sector retirement plan are already present in many public sector plans. And proponents of dismantling an efficient and effective method of producing a secure and adequate stream of retirement income are not recognizing or acknowledging the steps already taken, and underway, to share risks in the defined benefit (DB) model, he said.

Critics of the traditional pension approach claim it carries too much risk for the sponsor, and in the public sector, that’s the government. They cite unfunded liabilities, largely caused by the ‘Great Recession’ of 2008, as being too much of a burden to carry.

However, plans have adapted to share risk, offers Fuller, who points to higher contribution rates, lower benefits, including eliminating guaranteed inflation protection, and increased retirement ages as measures taken to share risk with sponsors.

“It’s neither necessary not desirable to deal with the problem of potential risk sharing imbalances in existing DB plans by throwing out the model.”

The OPB manages Ontario’s Public Service Pension Plan (PSPP), a DB fund with more than 42,711 members, 35,361 pensioners and 4,391 deferred members. It has more than $17 billion in assets, making it one of the largest plans, and one of the oldest, in Canada.

Ten years ago, the issue under discussion was how to manage surpluses in plans, continues Fuller. Now, the dialogue has changed to managing the shortfalls. But even as this debate plays out, there are signs that risk sharing changes and different investment strategies are starting to pay dividends, closing the liability gap.

The evolution of risk sharing plans may present the best chance to reintroduce occupational pensions to the private sector. Rebuilding private sector pensions should be a top focus of public policy, he says.

“The three legged stool approach to retirement that Canada has always had is a sound one … I think we need to rebuild that three-legged stool somehow.”

Much has been written about the success of the “Canadian model’ of pension provision; a feature in The Economist last year, Maple Revolutionaries, told the story of how Canada’s pension funds are making a global impact through their investment and management strategies.

Much of that success, says Fuller, is determined by structure: big, collectively and expertly run, overseen and governed pension plans that have become world leaders at managing not just the investment side, but also the liability, management and service components.

However, the success of the model shouldn’t prevent risk sharing changes required to protect plan sustainability, he says. Evolving a model that shares risk between sponsor and employee remains key to getting occupational pensions working again in the private sector – allowing private sector employees to participate in the same kind of delivery mechanism and model that exists in the public sector.

“I think we have ample evidence that the delivery mechanism is highly successful and if it was replicated for the private sector, it could be the public policy fix that once and for all deals with the retirement challenges that we face.”