As many traditional pension plans struggle to meet their goals, a report from the C.D. Howe Institute released on Thursday is calling for a “new pension paradigm.”
The paper recommended abandoning classic defined benefit (DB) plans, in which all the risks are borne by the plan sponsors, as well as defined contribution (DC) plans, in which all the risks are borne by employees, and moving toward a model in which risks are shared “among all willing stakeholders.”
“It can be called a Pooled Target DB Pension Plan or it can be called a Collective or Commingled DC plan,” the report said. “That does not matter since these two plans are actuarially equivalent.”
While these plans would, respectively, have DB and DC characteristics, the report said the plans would share commonalities including:
- the pooling of funds across multiple employers to reduce risks for sponsors and lower contributions from members;
- target benefits to share the risk between sponsors and members;
- scale, with optimum asset sizes of at least $1 billion; and
- independent management boards.
The report also called for such plans to be made available to small and medium employers to ensure the majority of working Canadians can participate.
“Policies encouraging larger collective, pooled pension plans governed by independent management boards are the way forward,” the report said. “In Canada, such solutions are becoming common in the public sector but need to be encouraged in the private sector.”