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Mark-Fuller“My passion is for a public and private system that enables all Canadians to build adequate lifetime retirement income, a system that facilitates, for the greatest number of citizens, adequate retirement income at a reasonable savings rate.” – Mark Fuller, president and CEO of the Ontario Pension Board


 

By John Devine

(May 24, 2013) Creating a sustainable system to provide Canadians with adequate retirement income may seem a daunting task, but Mark Fuller, president and CEO of the Ontario Pension Board (OPB), believes that is the task at hand.
Fuller envisions a day when workplace pension coverage is restored as a solid leg in the traditional three legged stool of Canada’s retirement system: public pensions, workplace pensions and personal savings. He argues for a pension model that incorporates risk and asset pooling among members as well as risk sharing between members and employers that is acceptable to employers.
At a Toronto Board of Trade conference on Canada’s ‘pension conundrum’ last February, Fuller said that the shift from defined benefit (DB) to defined contribution (DC) plans has been driven mostly by risk sharing concerns. Many private sector employers are no longer prepared to sign up for the pension expense risk that accompanies the funding guarantees underlying traditional DB pension plans.

“The DB to DC shift addresses employers’ concern with pension expense risk but in doing so many of the valuable attributes of the DB model are also unnecessarily discarded. By unnecessary, I mean that they are attributes that do not create pension expense risk for employers. The singular focus on removing employer pension expense risk has deflected us away from other solutions that would serve both employer and employee needs better than DC plans,” he stated. 

To deliver adequate retirement income, “systemic economic efficiency” must be a basic principle of any sound retirement plan, he continued.
“My passion is for a public and private system that enables all Canadians to build adequate lifetime retirement income, a system that facilitates, for the greatest number of citizens, adequate retirement income at a reasonable savings rate.”
In a recent interview with ARIA, Fuller said that the key elements of economic efficiency and risk sharing that could make for successful private sector retirement plans are already present in many public sector plans. Proponents of dismantling an efficient and effective method of producing a secure and adequate stream of retirement income are not recognizing or acknowledging the innovations already taken, and underway, in the defined benefit pension world to achieve a more balanced sharing of risks, he said.
Critics of the traditional pension approach claim it carries too much risk for the sponsor. They cite unfunded liabilities, largely caused by the ‘Great Recession’ of 2008, as being too much of a burden to carry.
However, the manner in which plans in the public sector have been addressing funding shortfalls has shown that employees in those plans bear a substantial portion of the funding risk, offers Fuller, who points to subsequent higher member contribution rates and reduced benefits, including eliminating guaranteed inflation protection, and increased retirement ages.
“It’s neither necessary nor desirable to deal with the problem of potential risk sharing imbalances in existing DB plans by throwing out the model.”
OPB manages Ontario’s Public Service Pension Plan (PSPP), a DB fund that was established in the 1920s and now has approximately 42,000 members, 36,000 pensioners and 4,800 deferred members. It has more than $19 billion in assets, making it one of the largest plans, and one of the oldest, in Canada.
The evolution of the traditional defined benefit plan toward greater risk sharing may present the best chance to rebuild workplace pension coverage in the private sector. Rebuilding private sector pensions should be a top priority for all involved in the retirement system, he says.
“Evolving, rather than discarding, the DB model offers the best chance of building a sound and sustainable retirement system that achieves both coverage and adequacy,” Fuller says.
That is because the DB model incorporates risk and asset pooling among members and it is that which delivers the systemic efficiency so essential to achieving an adequate lifetime retirement income at a reasonable savings rate. One of the problems has been that the regulatory framework for pensions has not enabled the creation of single-employer shared-risk pension plans. In other words, it has not enabled innovation and evolution of the DB model.
However, Fuller noted that the Ontario Government indicated in its recent budget that it will explore this innovation.
Internationally, much has been written about the success of the “Canadian model’ of pension provision; a feature in The Economist last year, Maple Revolutionaries, told the story of how Canada’s pension funds are making a global impact through their investment and management strategies.
Much of that success, says Fuller, is determined by structure: risk and asset pooled plans and funds with the benefit of  scale that are expertly run, overseen and governed and that have become world leaders at managing not just the investment side, but also the liability, management and service components.
Evolving the DB model to one that shares risk between sponsors and employees could be the key to getting workplace pension coverage rising again in the private sector, says Fuller, adding that risk and asset pooling will be key elements to achieving adequacy.
“In an ideal world we would move toward an approach that enables private sector employees to participate in the same kind of pension delivery mechanism and model that exists in the public sector … I think we have ample evidence that the delivery mechanism is highly successful and if it was replicated in some way for the private sector, it, together with risk sharing, could be the fix needed to solve the retirement challenges that we face.”

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