Defined contribution pension plans on rise: StatsCan
More and more Canadians are relying upon defined-contribution pension plans for their retirement, according to a new study released by Statistics Canada Tuesday.
The agency said that the number of private-sector employees covered by defined-contribution schemes rose by almost 400,000 people — or a population the size of St. Catharines, Ont. — between 1991 and 2006.
By contrast, defined-benefit plans covered 2.03 million workers in the non-public sector in 2006, a figure that represented a drop of 270,000 employees since 1991.
Smaller payout, smaller risk
Private companies are switching over their retirement schemes to the less-costly defined contribution arrangements in order to reduce the potential cost of their pensions, Statistics Canada said.
"Although DC plans have some undeniable advantages for employees, their increased prevalence suggests a transfer of risk from employers to workers since 1991," the agency said.
Defined-benefit pension plans establish the payouts for employees once they retire. Thus, in times of economic distress, companies are forced to make up any funding shortfalls resulting from lower investment returns in their pension funds.
At the end of 2007, for instance, big U.S. pension plans posted a surplus of $60 billion US, according to Mercer, a large consultancy
By March 2009, that surplus had changed into a $215-billion deficit, meaning firms could theoretically be forced to cover this shortfall.
By contrast, defined-contribution plans set out how much cash workers and companies put into the retirement pot, not how much gets paid out, experts said.
As a result, firms face far fewer problems funding their pensions.
"Because of the weak economy, companies have been forced to take these actions," said Anthony Pugh, U.K. defined-contribution leader for Mercer.
Cutting defined-benefit plans
By 2009, 45 of the Fortune 100 companies offered employees a defined-benefit plan, down from 90 in 1985, Mercer estimated.
The number of firms giving their workers a defined-contribution set-up jumped to 55 in 2009 versus only 10 companies 25 years earlier.
In Canada, the story is roughly the same.
The number of private sector workers covered by the less lucrative defined-contribution pensions rose to 27 per cent in 2006. That was almost doubled from the 14 per cent of non-governmental employees who had these kind of pensions in 1991.
Still, Statistics Canada pointed out, defined-benefits dominate employee retirements.
In 1991, 41 per cent of all Canadian workers were covered by defined-benefit plans. By 2006, that portion had fallen to 30 per cent.
Defined contribution coverage rose to six per cent of the employee total, up from four per cent in 1991.