The principles identified for successful retirement design are:
- Strong governance framework
- Alignment of roles with skills
- Presence of self-adjusting mechanisms
- Solidarity among plan participants
- A degree of independence from the employer
- Use of groups, i.e. allow groups to participate in a larger plan
- Use of nearly default free discount rates for measurement
Some of these principles may be challenging to meet. For example, the presence of self-adjusting mechanisms is intended as a risk sharing mechanism that would permit the plan to adjust benefits or contributions based on plan experience. It should allow the plan to increase its investment risk and if, say, equities outperform risk-free assets, the members could enjoy higher benefits or lower contributions. But current mechanisms for doing this have showed that they are not robust enough to withstand significant market corrections. The mechanisms are based on old efficient market theories that need to be reworked. Adjustment mechanisms may also fail when an industry plan faces a major decline in its industry.
Some of the solution may come back to stronger governance. Here Retirement 20/20 makes a number of suggestions:
- Independent boards made up, in whole or in part, of retirement and investment experts.
- Board members chosen by employees or employers, but who do not act as representatives of those choosing them.
- Having pre-set rules about how to change contributions or benefit levels.
- Contribution rates are set by the board and are not negotiable - members may have to contribute any extra that is needed.
- Benefit levels that are common for all members.
- Where members are union members, benefits are not subject to negotiation (benefit levels are set by the board, on which the union has representation).
A presumption made by Retirement 20/20 is that DB plans are a form of insurance for individuals, paying fixed benefits to a retiree for life. DB plans provide guarantees both as to amount of payment and for as long as the retiree lives. On the other hand, DC plans are an investment, building wealth to be used to meet retirement needs. The choice is then between insurance or investment wealth, or a regulatory approved combination.
Assuming that DB plans are a form of insurance, sponsors and trustees should view the plan as if it is a captive annuity writer and manage the risks accordingly. Unfortunately, in Canada, this is seldom the case. The courts have been very lax and treat a DB plan more like an endowment fund rather than a financial instrument, which would be more consistent with members' views. Trustees and plan sponsors bear little or no responsibility for plan cutbacks or failures, regardless of the degree to which they overstated promised benefits or failed to ensure proper securitization. I suggest two changes need to happen to correct the situation - remove the market as the prime excuse for losses, and have retirees intervene in court proceedings.
Retirement 20/20 stands a good chance of moving the bar in the right direction - to-date the start is good.