There has been a good deal of negative comment on the Harper’s government’s introduction of pooled registered pension plans (PRPPs), which has intensified now that the federal legislation has finally been tabled. Respected personal finance commentators, such as Moshe A. Milevsky of Moneyville, have criticized the plans on the basis that they are not actually pensions, given that they don’t supply a guaranteed result. Therefore they believe PRPPs should be regarded simply as investment plans, with all the risks they bring.
And there is no doubt that the criticisms are literally correct. Defined contribution plans in all jurisdictions are by definition just investment plans with various sweeteners in the form of forced employer contributions or tax benefits or a combination of both. Moshe, in particular, seems to feel that the only good pension scheme is one that pays out guaranteed benefits, like the defined benefit schemes that are slowly but surely fading out of history.
This thinking is common in most western countries but is it based on reality or a rosy view of times past that doesn’t exactly stand up to close examination.
From the end of WWII there was a massive increase in the amount of people with pension coverage, proper defined benefit pension coverage, which distorted our view of pensions. Everyone fell into the trap of believing that, if properly managed, these schemes could pay out guaranteed results despite market volatility and ever-increasing longevity. For decades, the results seemed to bear this out.
In reality, however, these defined benefit schemes have never been properly funded. Instead they have depended on an ever-increasing workforce entering the schemes, which allowed payouts to be made based on guarantees that the underlying investments and risks did not warrant.
In reality, the golden age of pensions was a giant ponzi scheme. Now, the workforces in western economies have either plateaued or started to shrink. As usual with ponzi schemes, this is where it all starts to fall apart. No new members, no ability to pay out an ever-increasing liability.
With hindsight, it’s hard to imagine how anybody could have thought that these schemes made sense. For a start, the liabilities depend on actuarial estimates; the key word here is estimate. Estimates are not actuals and therefore the liabilities were always going to be different. Add to that the fact that assumptions about investment performance invariably turn out to be wrong and it seems insane that we all held onto our belief that defined benefit schemes made sense.
Criticism of the Harper government’s plans are based on wishful thinking about a golden age of certainty that never really existed – it’s just that during a prolonged period of expansion of the workforce, an employment bubble, you couldn’t see where the flaws were. Now that the defects are revealed, we have no excuse for not grasping the reality that there is no guaranteed future and we have to invest carefully to provide one for ourselves. The Harper government deserves credit for resisting the siren call to expand the CPP and thus building up even more ‘guaranteed’ liabilities for future generations.