Detroit thread. Post Kwame, Monica, and $1 houses here.

[Admiral Yi]

How common are DB plans in Canada?

[Barrister]

How common are DB plans in Canada?

I have one.

But I think our experience mirrors the US - few private sector DB plans these days.

[Jacob]

Yeah, there used to be some single employer FB plans but most of them no longer enroll new members (because they're too expensive, generally). If you have a DB plan, you're either a gov't employee or in a union, or both.

The same trend and trouble coming down the road due to the wholesafe shift away from DB towards DC applies on Canada (and elsewhere, where the same trend applies).

[DGuller]

What does it mean for a DB plan to be "too expensive"?  Are administrative costs atrocious?  Or is it "expensive" because of the level of benefits it provides to retirees?  If it's the second, then isn't a switch to DC just a hidden way to reduce retiree benefits and/or increase the risk of retiree benefits, under the guise of giving people choice and control?

[MadImmortalMan]

The managers charge too much overhead a lot of the time. In an age of no-load mutual funds that shit just doesn't fly anymore.

[Jacob]

What does it mean for a DB plan to be "too expensive"?  Are administrative costs atrocious?  Or is it "expensive" because of the level of benefits it provides to retirees?

The expense (as I understand it, this is all second hand ) are down to a few factors:

- the administrative overhead is higher, for sure
- the benefits themselves are typically more expensive
- the company (or rather the fund) has to spend time and money to ensure compliance with regulatory schemes, which are more complex than for DC plans (at least if it's not to be poorly managed and thus basically pointless).
- there's more risk on the employer, which carries a cost to manage

If it's the second, then isn't a switch to DC just a hidden way to reduce retiree benefits and/or increase the risk of retiree benefits, under the guise of giving people choice and control?

Basically, yes.

It seems to me that the dynamic is that employers have made savings by passing off the risks to employees; but while on the employers side it's (rightly) seen as a significant savings, it's been sold to employees as cost-neutral choice and control. But yeah, it has a price.

... I didn't realize I had so much to say about pensions until this thread 

[crazy canuck]

What does it mean for a DB plan to be "too expensive"?  Are administrative costs atrocious?  Or is it "expensive" because of the level of benefits it provides to retirees?  If it's the second, then isn't a switch to DC just a hidden way to reduce retiree benefits and/or increase the risk of retiree benefits, under the guise of giving people choice and control?

The main expense of DB plans, at least in Canada, is making sure the plan is sufficiently funded to provide the benefits defined in the plan.  Back in the day when these things were first created and the number of workers far outnumbered the numbers expected to be given the benefits these costs were not very signficant.  But over time, as life spans increased and numbers of new workers declined, it became a signficant issue.  Iirc sometime in the late 80s and then into the 90s alarm bells were being sounded all over Corporate Canada that DB plans were becoming underfunded and unsustainable.  A great deal of litigation ensued as companies made the transition from DB to DC plans.  Its a complex area of the law but the upshot of all of that was that the beneficiaries of the DB plans were given a kind of superpriority over the assets which should have been used to fund the DB plan.

And so we come to the situation today where there are very few private sector DB plans left.  Government, at all levels, still have them.  Which is a bone of contention for people who complain about "gold plated" government pensions.

Looking at the issue in Detroit, very briefly, it seems that similar protections are not afforded to DB plan members in the US - or at least that State.

[crazy canuck]

It seems to me that the dynamic is that employers have made savings by passing off the risks to employees; but while on the employers side it's (rightly) seen as a significant savings, it's been sold to employees as cost-neutral choice and control. But yeah, it has a price.... I didn't realize I had so much to say about pensions until this thread 

I am not aware of this being the case.  In all the situations of which I am aware employees (both unionized and otherwise) have been expressly told that it is a question of affordability.  DB plans have simply become too expensive and risky for private sector businesses to fund.

[DGuller]

I don't see how the ratio of workers to retirees matters for pre-funded DBs.  DBs are not funded by pay-as-you-go system, current workers are not paying current retirees.  Current retirees are paid from investments into the pension fund when they were working.

[crazy canuck]

I don't see how the ratio of workers to retirees matters for pre-funded DBs.  DBs are not funded by pay-as-you-go system, current workers are not paying current retirees.  Current retirees are paid from investments into the pension fund when they were working.

And what happens when the investments from contributions doesnt cover the benefits because the amount of benefits have increased due to longer life spans and the amount of contributions declines from the numbers the plans had assumed?  There is only one payor left....

edit: I suppose we could shoot all the actuaries that thought this wouldn't be a problem.

[Eddie Teach]

edit: I suppose we could shoot all the actuaries that thought this wouldn't be a problem.

You really want to set a precedent for culling people based on occupation?

[DGuller]

And what happens when the investments from contributions doesnt cover the benefits because the amount of benefits have increased due to longer life spans and the amount of contributions declines from the numbers the plans had assumed?  There is only one payor left....

edit: I suppose we could shoot all the actuaries that thought this wouldn't be a problem.

None of the reasons you cite are the inherent high costs.  They're all miscalculations.  Obviously defined benefit plans would be expensive if you intentionally or unintentionally underfunded them in the past, because now you have to fund them for both the current workers and the past workers, but that's just a sign of badly designed DB plan.

[crazy canuck]

edit: I suppose we could shoot all the actuaries that thought this wouldn't be a problem.

You really want to set a precedent for culling people based on occupation?

I got nothing to lose there.  Just want some company.

[crazy canuck]

And what happens when the investments from contributions doesnt cover the benefits because the amount of benefits have increased due to longer life spans and the amount of contributions declines from the numbers the plans had assumed?  There is only one payor left....

edit: I suppose we could shoot all the actuaries that thought this wouldn't be a problem.

None of the reasons you cite are the inherent high costs.  They're all miscalculations. 

Ok, however you want to define your terms, it costs too much and it is too risky to have defined benefit plans because people in your profession are not infallable. 

[DGuller]

Ok, however you want to define your terms, it costs too much and it is too risky to have defined benefit plans because people in your profession are not infallable.

It's debatable whether pension actuaries screwed up, or just gave in to the people paying their salaries who really had incentives to under-fund their plans, but I agree that they are partly responsible for the DB mess (and I said as much earlier in this thread).  The stated reason for subjecting actuarial students to actuarial exam hazing process is that our society can't afford to put its trust on just any Joe Blow's opinion on the adequacy of some actuarial projection.  Well, that logic hasn't really proven itself when it comes to DB plans, has it?