Retirement 20/20: Innovation in Pension Design

Today, both the United States and Canada are experiencing a decline in Single-Employer Sponsored Defined Benefit (DB) Pension plans. In some instances, they are being replaced by Defined Contribution (DC) or Individual Account [e.g., 401(k)] plans; in other cases, by nothing. It appears that traditional sponsors of DB plans have concluded that their cost (or its variability) is larger than the rewards (e.g., a loyal work force). At the same time, two stock market meltdowns in less than a decade have indicated to all the frailties of Individual Account DC systems. What we need is a new pension system that brings most of the advantages of the DB and DC plans to the participants, while minimizing their disadvantages. We must also recognize the skill set of the participants (e.g., do not expect a blue collar worker to be an investment professional) and not anticipate or require anomalous markets (e.g., ever-stronger equity returns). Size matters. Larger plans can run at lower per unit expense ratios, and can also achieve entry into a wide variety of investment products (e.g., private placements) not available to a small plan. Larger funds also benefit from risk sharing through “Law of Large Numbers”. The model proposed is a “Jointly Governed Target Benefit Pension plan”. Such plans would have many features in common with today’s Ontario Multi-Employer Pension Plans (MEPPs), the Canada/Quebec Pension Plans (C/QPP), TIAA-CREF in the United States and the Dutch national plan. For the plan sponsor, this is a DC plan. Inherent in the concept are that smaller plans (and even individual plans) could commingle their assets to achieve “size” (e.g. a minimum investment portfolio of $10B). Investment management would be at arm’s length from the plan itself.