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Research on the implications of shifting public sector defined benefit plans to direct contribution

posting date Posted: October 10, 2014

TORONTO, October 10, 2014 - On October 9, a new research paper was released:  Shifting Public Sector DB Plans to DC – The Experience So Far and Implications for Canada.  The paper was authored by actuary Robert Brown and journalist Craig McInnes and was sponsored by the Canadian Public Pension Leadership Council, a group of which OPTrust is a member.

The research identifies five stakeholders in the conversion debate and examines whether in every case a shift to a DC arrangement would solve problems or create them. The stakeholder groups are: employers, including governments; employees and their dependents; current taxpayers; future generations of taxpayers; and society at large.

The paper also examines the claim that converting public sector DB plans to DC is in the best interests of taxpayers and other stakeholders by studying the experience of other jurisdictions, including Australia, Michigan, Nebraska, New York City, Saskatchewan and Texas and applying those lessons here.

After examining the literature on the experience in other jurisdictions and modelling what the ramifications would be in converting a large Canadian DB plan to DC, the paper concludes that none of the stakeholders, including taxpayers, would ultimately be better off.

It also shows that for an efficient $10 Billion DB plan, converting to individual-account DC arrangements to provide the same value of pension benefit would increase the ongoing cost of the plan by about 26 to 77 per cent, depending on how the funds are invested, and increase the required contribution rates accordingly.

Rather than saving money as conversion proponents argue, converting to DC increases costs and reduces efficiency.