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DB Versus DC Debated


‘What's Better DB or DC?’ That was the focus of a panel discussion with Robert Brown, a consultant, retired professor of actuarial science at the University of Waterloo; and a past president of the Canadian Institute of Actuaries; Diane Oakley, executive director for the National Institute for Retirement Security; and Tom Reid, senior vice-president, group retirement services, at Sun Life Financial; at the CPBI Forum. Brown and Oakley argued that defined benefit pension plans were better while Reid said changes in defined contribution plan have made them comparable to DB plans. Brown said the move to DC from DB is being driven by a private sector hoping to reduce costs by switching. However, in the private sector, the only stakeholders are the shareholders and they are more concerned with the bottom line. The impact on society is not a consideration. However, this is a short-term view and retirees with inadequate income will fall back on welfare transfers like the Guaranteed Income Supplement and Old Age Security which the government is responsible for and which come out of tax revenues. Oakley outlined a number of advantages of DB plans over DC. She said DB plans pool the longevity risk of large numbers of individuals, allow plan sponsors and retirees to predict cash flows; maintain optimally balanced investment portfolios which do not have down-shift over time to lower risk/return allocations; achieve higher returns as compared to individual investors; and have lower fees. She said DB plans have built in economic efficiencies which result in a 50 per cost advantage. In fact, claims that DC plans save money and reduce underfunding need careful evaluation as investing in DB pensions is a key advantage over individuals and other products. Reid, however, said DC has changed a lot and most of everything held true about DC is outdated. In fact, the pace of change in DC has been really quite remarkable with innovations designed to get investors to better outcomes. DB has significant risks that are hard to manage, he said. Right now, it is longevity risk and plan sponsors always seem to be running hard to catch up to longevity. This, along with low interest rates and volatility in markets, helps explain why no new DB plans are coming on the market. DC has “come of age,” he said. Fees for DC are now the same as in DB and the returns are the same because they are investing in the same pools as DB plans.

Courtesy of Benefits and Pensions Monitor website News Alerts 

 

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