Will Defined Benefit Pensions Be Replaced By Defined Contribution? (w/ Leo Kolivakis)
ED HARRISON: I want to wrap it up by pulling some threads together. I'm thinking about it in terms of something that you were telling me the last time that we spoke about defined benefit versus defined contribution pension plans. The sense that I get is we're now going through a reckoning, if you will, in terms of stability of various pension systems and governance. One of the things is that obviously, defined contribution tells you is that there's more stability over the longer term. Coming out of this, do you think that it shows the model of defined contribution or defined benefit as being better, or has your thinking changed on that level? LEO KOLIVAKIS: My thinking has not changed on that level, my thinking remains that over the long run, people are much better served by well-governed defined benefit plans that diversify their assets across the world, across public and private markets. Pretty much what the Canadian model is, what I would like to see that model, more and more individuals being able to access that model, whether it's in Canada or across the world. The key here is to have well-governed pensions who're able to manage money properly in the best interests of their members, and then invest that money appropriately across public and private markets throughout the world. I think that model is the model that will ensure we have less pension poverty in developed nations. What I worry about right now is with interest rates at record low levels, the reality is defined contribution plans which are mostly being invested in public markets are not going to generate the required returns that people need to have good retirement savings in a capital level. The other problem with defined contribution plans is they don't pool investment risks, they don't pool longevity risks so you can outlive your savings very easily. There's just a whole host of problems with defined contribution plans. They are great to help people save money. 401Ks are great savings vehicles, but they become the de facto pension plans for too many Americans. The reality is too many Americans are going to fall through the cracks because they're not going to have enough money to retire through these it seems.