Benefits & Pensions
DB pensions are a powerful attraction, retention tool – and maybe not as costly as you think: CAAT CEO
For decades, employers have been dumping defined benefit (DB) pension plans — viewing them as expensive bottom-line liabilities — and moving to defined contribution (DC) plans and group RRSPs in a quest for cost certainty.
Employees, though, still covet DB plans and the certainty they bring to retirement. And in an era of chronic labour shortages and a fight to boost retention rates, going back to a defined benefit model and the certainty it brings workers could be a significant advantage for employers.
Derek Dobson, CEO of the Toronto-based CAAT Pension Plan, said DB plans are within reach of nearly every employer — and new plan designs mean employers can offer them while still enjoying a DC plan’s cost certainty.
CAAT was originally created to support the Ontario college system, but now has more than 300 participating employers in 16 industries representing more than 86,000 people, including for-profit, not-for-profit and the broader public sector.
The ‘modern DB’
Dobson calls the plan a “modern DB.” It’s attractive to employers, and won’t make the CFO keel over, because it’s off the balance sheet, he said.
“It’s a fixed cost. They get to choose the contribution rates that are affordable for that company,” he said.
If an employee is contributing 5% now, and the employer is matching that amount, those contributions can continue as is, he said.
“We’re really just saying take your current DC or RRSP and just make it way more efficient,” he said.
The actual pension payable to employees will vary based on their contributions, but Dobson said — as a rule of thumb — the average DB plan should deliver about $8 to $10 back for every $1 contributed and matched by the employer.
The obligation from an employer perspective is the contributions on current pay. And that ends when the worker retires, just as it would with a DC or group RRSP, he said.
“(Workers) are always getting 100 per cent of the pension promised,” he said. “Our legislation that covers our pension plan says that you can never reduce benefits that you’ve committed to pay.”
Benefits to employers
DB plans can play a big role in attraction and retention, he said. Nearly nine in 10 (86%) of CAAT plan members said the defined benefit pension was a key reason why they joined their employer, said Dobson.
“Some of the employers we’ve interacted with said they expect to see a 50% reduction in involuntary departures,” he said. “We’re seeing turnover in that 15% to 25% range, and as high as 40% in some industries. If you can cut that in half, that’s magic for employers.”
Dobson said the “war for talent” is really a “marathon for talent.” The demographics show a supply and demand imbalance, in the favour of workers, and there are four million Canadians eligible to retire today, he said.
“That’s a huge gap. This marathon for talent is making companies think harder about what’s going to help me with my attraction-retention scheme,” he said.
Who can join?
There aren’t any real restrictions on what companies can participate in the DB, he said. CAAT, for example, has members in every province, including the Yukon and Northwest Territories.
“Our job as a pension plan — not the employer’s job, not the member’s job — is to make sure we’re compliant with pension benefits standards across all those jurisdictions,” he said.
As for company size, Dobson said the board at not-for-profit CAAT gave the organization a purpose statement that, boiled down, is “pensions for everyone.”
“We have allowed in employers with one employee, and we have no upside limit as well because it’s completely scalable,” he said. “It’s all in one pool. It doesn’t matter if you’re working for an employer with 50,000 employees. It’s money in, invest it, money out.”
Why it’s attractive to employees
The average worker doesn’t have the skill, or interest, to monitor their pension savings and invest in markets, said Dobson.
“People really are not comfortable being the investment experts that they need to be around securing their retirement,” he said. “Predictable, lifetime income secured by an expert in the field — these are things that are really appealing to members.”
It takes away some basic questions that workers with DC or group RRSP plans have when they approach retirement, including: How long will I live? What’s my comfort level with risk as I age? How will I cope with high inflation?
“These things are all associated with a modern DB,” said Dobson. “Whereas in a DC or group RRSP, it’s like: ‘Choose your investments wisely and try to protect against those risks. But those risks are very, very difficult to mitigate on an individual basis.”
It also relieves a lot of stress and anxiety about retirement income, he said.
Too good to be true?
Dobson gets the question about the plan being “too good to be true” fairly often.
“It comes up in almost every conversation we have with an employer board,” he said. Among their non-academic partners are the Canadian Bar Insurance Association, Brinks Canada, Greater Toronto Airports Authority and Rio Tinto, he said.
“All these organizations have done a tremendous amount of due diligence with lawyers and actuaries,” he said. “And they’ve always come away with, ‘This is awesome. It’s true. We’re protected.’”
When pressed about downsides or drawbacks, Dobson said the only one that comes to mind is a loss of some flexibility. For example, if you have a group RRSP program, you could shut down the program overnight, he said.
“Where in our plan, because we do everything free of charge — free onboarding, free decision support analysis, free member sessions. We have to set up our systems, so we require a five-year commitment as a minimum,” he said. “I don’t know enough about participation agreements with RSP providers, but my guess is they’re a little more flexible.”
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