A tenant walks in a corridor of La Maison Astrolabe in Cahuzac-sur-Vere, southwestern France, on Jan. 16.MATTHIEU RONDEL/Getty Images
Murray Gold is a senior pension lawyer and counsel to Koskie Minsky LLP. He is a former expert adviser to the Ontario Expert Commission on Pensions and is the recipient of the Ontario Bar Association’s Award for Excellence in Pension and Benefits Law.
Over the past two years, the Bank of Canada has hiked its policy rate to 5 per cent. High interest rates are bad news for many, but they are good news for anyone saving for retirement. They need secure, predictable returns on their savings, and high interest rates can deliver those returns with low risk.
The news is particularly good for defined-benefit pension plans. They work best when a significant portion of their assets is invested in fixed-income investments over long periods of time. Strong returns can produce 80 per cent or more of the payments defined-benefit plans make to their members. This means that when investment returns are high, contribution rates can be low.
That is good news because, over the past 40 years, defined-benefit plans have had a bumpy ride. They have prospered in the public sector and in the executive suite. Otherwise, they have been closed, wound up, and replaced with less effective and often more expensive group RRSPs or defined contribution accounts. Outside the unionized sector, defined-benefit plans are rare specimens indeed.
To make a comeback, they must face the twin challenges of costs and risk. Costs are mitigated through high investment returns. Higher interest rates are thus very helpful. Risk is more complicated, but higher rates help alleviate it as well.
Typically, risk is associated with seeking high returns, which require higher levels of investment risk. If high risk leads to investment losses, a defined-benefit plan can fall into deficiency, and additional employer contributions will be required to make up the loss. If investment losses coincide with a business recession, corporate plan sponsors may feel the pinch.
Economy-wide plans, such as the Canada Pension Plan, can weather these risks. They are not so vulnerable to the business cycle and can spread gains and losses out over lengthy periods of time. Government-sponsored plans are also able to absorb cyclical losses. But corporate-sponsored plans face greater challenges in managing their risks.
The decline in defined-benefit plans over the past 40 years corresponds both to a jump in anticipated costs, because of the decline in interest rates, and to greater anxiety in the wake of a series of financial market meltdowns. Higher interest rates help with risk because they offer good returns with little risk.
The new, more favourable environment for defined-benefit plans is great for companies and workers alike.
Traditionally, such plans have been important ways to attract and retain employees. Their benefit formulae offer secure and predictable retirement incomes that members earn over long periods of service. RRSPs and defined-contribution plans don’t depend on long-term employment attachments; rather, they support a mobile work force. In sectors concerned with labour shortages, defined-benefit plans may be quite valuable.
They are also best for members. Members never outlive their savings; by pooling mortality risks, the plan saves enough for the covered group, so individual members need not worry that their personal savings will fall short. Similarly, by pooling retirement savings, defined-benefit plans can invest their assets at relatively low cost in diversified, professionally managed portfolios.
A revival in defined-benefit pensions is badly needed. Over all, Canada’s retirement picture remains problematic. Statistics Canada reports that only 38 per cent of paid workers were covered by any kind of registered pension plan in 2021, down from 39.7 per cent in 2020. This means that more than 60 per cent of Canadian employees are not covered by any kind of pension plan at all. In retirement, employees with no pension income will not be able to sustain their standard of living. They will be hard-pressed in their golden years to achieve a middle-class retirement.
Family members will no doubt step up to assist older members without adequate retirement incomes, and Canada’s social safety net will be called upon as well. But this is not what we as Canadians aspire to. Seniors deserve secure and predictable retirement incomes, earned as a result of their participation in the work force and the community and delivered through the CPP and supplemental arrangements. The prospect of inadequate retirement incomes for most Canadian workers remains a troubling and disappointing legacy of our incomplete retirement system.
Higher interest rates are not a magic bullet for defined-benefit plans. Other innovations are also restoring such plans in Canada. But higher interest rates are a big help.
Partly as a result of higher rates, and partly because of other innovations, Unifor was able to reintroduce a defined-benefit plan for auto workers in the last round of collective bargaining. It would be great to see a lot more of this in Canada.