Defined benefit pension plans strike back

Eckler principal and pension actuary, Jill Wagman, explains why the industry is no longer a "dying industry" and why DB plans are making a comeback

Defined benefit pension plans strike back
Jill Wagman, principal and pension actuary at Eckler

When Jill Wagman first entered the pension space roughly 30 years ago, she recalls the tone around defined benefit pension plans and the industry as a whole was a “dying industry.” No one would want to get into the pension business and be a pension consultant because there would be no plans left to work with.

Now, she says, it’s performed a complete 180-reversal.

“The industry is really energized and vibrant,” Wagman, principal and pension actuary at Eckler, says. “Not to mention, the baby boomers are all retiring now too so there is a newfound interest in retirement in general. I even hear it with my daughter's generation where they're pretty excited if a pension is part of their total rewards package. Pension has made a comeback, largely due to demographics and longevity.”

Wagman, who was recently named as one of BPM’s Elite Women, believes the pension space is undergoing a few radical changes. For example, she says the pension industry is going through a “fair bit of innovation”, largely in part because the defined contribution model, which has been used for the past 20 years, is broken. Despite being eligible to retire, many Canadians can’t afford to because they don't have enough money in their DC accounts.

“If they do retire, they are very likely to run out of their DC pension funds too soon, because people underestimate how long they're going to live,” Wagman highlighted. “I think this move to shared risk and pooling of risk and joint sponsorship, to name a few, will be beneficial for society.”

The industry is experiencing more of a move to shared risk and pooling of risk typically in the form of jointly sponsored plans where members and sponsors share the risk and funding, Wagman explains. Because the DC model doesn’t work anymore, there’s been an increased shift back to the defined benefit pension model, which she says, “is really important for society.”

“Defined contribution plans put all the risk on the member. A member may not understand how to invest or manage the money throughout their retirement. DC plans just don't make a lot of sense when there's an opportunity to pool the risk and give them income security in their retirement,” Wagman says.

Employers and sponsors are also starting to become more in tune with their employees, she highlighted, as plan sponsors aren’t solely focused on delivering pensions but are also looking at supporting members more holistically through financial education, and financial literacy support.

“They’re making sure that their members’ financial security goes beyond getting a pension when they retire. More holistic financial wellness programs take into account things like savings, mortgages, and investing all throughout their career. We’re definitely seeing trends in terms of employers delivering financial wellness products and financial literacy education,” she said.

Another innovation and trend in the pension space is the consolidation of plans, Wagman noted. Several industries are seeing large public sector plans and quasi-public sector plans merging with smaller plans because “from an economies of scale perspective, it doesn't make sense for them to go it alone,” Wagman explains.

“They join these larger plans to have the funds professionally managed and that's a great situation for the members,” she says. “I think that helps to sustain coverage for some of the non-viable plans that may have had to convert to defined contribution or wind up in the extreme. Now, joining another entity and merging with them is a viable option and it offers more coverage opportunity.”

For the up-and-coming generation and future leaders of the pension space, Wagman shares her own advice she’s learned over the years. For starters, it’s important to find the right educational materials and learn what’s the best investment vehicle for your situation.

“Take advantage of educating yourself because small changes now for a 30-year-old can have a significant impact 20 or 30 years from now, when you're ready to retire. Put that money in an appropriate savings vehicle,” Wagman says. “It’s tough but knowing what the right behaviours are early on will allow you to benefit from the magic of compound interest and tax deferred savings and other vehicles. It's never too soon to think about saving and being careful with your money.”

“Don't underestimate what kind of impact you can make on society at large,” Wagman added. “The pension industry plays a very significant role in the well-being and the protection of Canadians. It is a very important and often overlooked space because pensions aren't very sexy. Anything that is way into the future, people tend not to care about it because we're all more focused on our immediate rewards.”

For those who are committed to making sure there's a solid and sustainable pension system for future retirees, Wagman knows they’ll make all the difference.