Pensions – The More You Know, the Better They Look

Pensions of all kinds have come under fire in Canada. The people who attack them raise many arguments: they’re too costly; people with good pensions are just the privileged few so no one should have them; employees are better off managing their own pension. Retirement income is incredibly important. When looking at pensions, knowing the facts is essential.

That includes the fact that, when a defined benefit pension has been eliminated, and people manage their own money, the overwhelming majority of people who do so end up worse off than if there had been a company pension.

It includes the fact that people who manage their own money have to make individual decisions that mean even smart single investors can’t be goo pension investors – they can’t spread risk over the long term.

It includes the fact that employers who move from defined benefit pensions to other forms of pensions get less pension value for the same amount of money. That problem is made even worse if employers pay less money. Self-managed pensions are just less efficient. Can you imagine any other part of an employment relationship where the parties would agree to something that was lose-lose.

When employers move from defined benefit to other kinds of pensions, they often end up with greater deficits than if they had simply continued with the plan.

Added to all of that, the problem is even greater for public employees. People with inadequate pensions have to rely more heavily on government subsidies and assistance programs. People with incomes in their senior years can fund their cost of living and will continue to put money into the economy rather than draining it out. Cutting public sector pensions is a classic case of “short-term gain for long-term pain”.

That’s just a few of the reason strong pension plans make sense.

Add to that the fact that pension plans are doing better and better, according to the people who actually look at the numbers, like Mercer – the international pension consulting company – and the investment firm Aon Hewitt. By midyear this year, Mercer said that the solvency funded status of the overwhelming majority of Canadian pension plans are within plus or minus 10% of a fully funded status, and improving.

There are many ways to make good, efficient and cost effective pension plans work in many sectors of the economy. The arguments to strip employees of pension benefits need to be looked at carefully, and challenged with real facts.