The Pros and Cons of Defined-Benefit vs. Defined-Contribution Plans (w/ Jim Keohane)
ED HARRISON: I feel like we should talk about now that you're on the verge of retirement, when you think about your legacy and what you can tell people about what needs to be done for the future, what are the takeaways? I mean, one of the big takeaways for me is that defined benefit is good. JIM KEOHANE: Yeah. So a defined benefit-- I think in today's vernacular, you wouldn't call HOOPP a pure defined benefit plan. It's a target benefit plan. ED HARRISON: And tell me what what's the difference between those two. JIM KEOHANE: So the difference is our objective is to meet that pension obligation to the member. And that's very much ingrained in our DNA in the organization. But if that didn't happen, you'd have to do things like adjust the COLA or if it got worse than that, you may have to actually reduce people's benefits. We don't want to do that, but it's possible that could happen in a really extreme negative scenario. So that's why we try to make sure we never get into that. So effectively, the risk is in HOOPP. So it's not in the employer. So that model actually, I think, is one that could work going forward for employers. It gets around the accounting issue. So it becomes acceptable to employers. So you can create something that looks a lot like a defined benefit plan, which is way better-- most people are way better off in that type of structure than trying to do it on their own. So really, what we want to do is try to move people away you-- the trend is very much moving from traditional defined benefit plans to individual plans. And I think unless something happens, that trend is going to be unstoppable. And so I think we need to try and think about what solutions can we have that will work in today's world that are going to move things back in the other direction. And I think a structure like our plan is one that could work in the private sector if you had the right public policy that allows that to happen. ED HARRISON: Right. Some people, they don't have any access to target or a defined benefit plan. So the question is, what can public policy do for them? JIM KEOHANE: Well, it can create-- again, so we create entities that are run the pension plan. So I think the important thing is to move the management and operation of the pension away from the employer to these third party entities. ED HARRISON: OK, yes. JIM KEOHANE: Which is what would our structure is. And so if you look at Australia, that's effectively what they've done. So in Australian, all Australians have to be in a pension plan. Their structure is defined contribution. But I think you could take it one step further make it look like our plan. And those entities are set up away from the employer. So each state has one. So there's a Victoria state plan, there's a New South Wales plan. So each state has one. Plus, you could choose a private solution if you want to. And so there's a bunch of industry funds set up. So you have to be in a fund. You pick the one you want to be in. So a portion of your paycheck every month goes into that fund. And the employer in some cases, matches, some cases, doesn't. But then it becomes pretty portable-- wherever you work, you can stay on that fund. So portability is another drawback in the current world to the traditional corporate DB plan, because people don't tend to stay in the same job their entire life, which used to be true. And so portability is an important factor as well. So having third party entities that are separate from the corporation alleviates that issue. The other issues that that alleviates is that the life of the pension plan is very long. And so if a Canadian rolls it forward, it sounds infinite. So we have current liabilities that go at 70, 80 years. Very few corporations survive 70, 80 years. So there's a mismatch between the life of the plan and the life of the corporation, too. So the traditional idea that the corporation sponsors the plan doesn't work very well in today's world. So again, there's a bunch of things that I think our model deals with that are challenges in the current environment. ED HARRISON: And can you talk to the generational issue that is what I would call baby boomers, who are retiring now, Gen X, people like myself, and millennials, who are coming? The types of things that you're talking about, who would benefit from them the most, and how do you deal with those different generations in terms of what they can expect to achieve? JIM KEOHANE: Yeah, I think it's probably too late to deal with the baby boomer generation, because the baby boomer generation, those people like me, they're entering retirement. ED HARRISON: Right. JIM KEOHANE: And so if you haven't dealt with it, you should have dealt with it 20 or 30 years ago. But it's too late for that. It's like the expression, when is the best time to plant a tree is 25 years ago. But the next best time is today. ED HARRISON: Right. JIM KEOHANE: So you can take the learnings from today and apply them to the next generations coming up so they don't have the issue. And I think in a lot of the current generation, actually, we're in DP plans, so it's not as acute an issue for the current group of retirees. It will be a problem for your generation, because a lot of-- I'm sure a lot of you and your peers don't have defined benefit plans. But if you start the process today, it's going to be a lot better than it would be otherwise. And so it's not going to fix the current acute problem, but you can take those learnings and make it better for future generations. And if you don't fix it, you're going to have the problem. And [indiscernible] doesn't have a problem. And so I always say they should be the ones paying the most attention to this, not the current generation, because it's going to affect them the most.