Most downturns are bad for pension plans, and that is bad for pension recipients and contributors, especially when it comes to the public sector.
The equity market turmoil that ended 2018 and ushered in 2019 resurrects questions over the long-term economic viability of the pension benefits afforded public-sector workers compared with their private-sector counterparts.
Bull markets ensure that most major public-sector pension funds remain solvent, regardless of how rich their benefits are; but that solvency often evaporates when bull runs end.
As the Mercer Pension Health Index noted recently, the solvency of defined-benefit pension plans fell sharply in 2018’s fourth quarter.
That bodes ill for Canadian taxpayers because defined-benefit pension plans guarantee levels of return for their recipients, regardless of equity market investment success. And, as the Fraser Institute has pointed out, more than 86% of government workers in B.C. have defined-benefit pension plans.
That compares with around 8% of workers in the private sector.
Most private-sector workers, if they are lucky enough to have a pension plan at all, have defined-contribution plans under which the employee bears the plan’s investment risks. So the employee, rather than the employer, is on the hook for shortfalls in pension plan investments caused by market volatility or poor investment decisions. The defined-benefits folk need not worry about pension plan investment ineptitude. And in the public sector, the employer need not worry much either because, ultimately, the taxpayer will be on the hook for poor market returns.
Pension benefits will become increasingly important to more people as B.C. and the rest of Canada’s population ages and longer lifespans stretch the limits of pension plan solvency.
Canada needs a hybrid pension plan option that spreads investment risk more equitably between employers and employees. That would encourage both to help more Canadians build the financial resources they’ll need when they retire, because pension shortfalls harm far more than retirees.
