Recent news about the General Motors deal inspired me to write again about the pitfalls of participating Life Insurance Plans. There needs to be a better understanding of the risks of using non-guaranteed products like Participating Whole Life.
The article below, although speaking about “benefits”, articulates the environment of risk (and the transfer of risk) that consumers don’t fully appreciate.
This is the quote that captured my attention:
“The risk of not earning sufficient returns or under funding or longevity … all of a sudden you’re transferring it to the individual who
really is the least equipped person to actually deal with that… So I kind of laugh when I hear people cheering on what a great thing this is.
You obviously don’t understand that that risk just got dumped in your lap.”
Life Insurance products that rely on investment performance rather than guarantees, do exactly that, dump the risk in your lap.
I believe you should own a policy that puts the risk back onto the insurance company for reasons akin to the defined benefits discussion below.
Here is the article:
GM’s Pension Plan Loss Is A Blow ‘Defined benefits’ plans offer significant advantages compared to ‘defined contribution’ plans
The Toronto Star, Jennifer Wells, Sept, 2016
So how’s that workplace pension plan working for you?
Do you even know how it’s defined? Well, do you?
Let’s back up a step.
The rah-rah news that Unifor has struck a tentative deal with General Motors for new work in Oshawa — the line will be retooled to add the Chevy Silverado pick-up, according to Reuters — and in St. Catharines has drawn plentiful plaudits, a sort of turning-the-tide manufacturing tale. (Take that, Mexico.)
What was lost in bargaining — the vote on the deal is scheduled for Sunday — is the defined benefits (DB) part of the autoworkers’ hybrid pension plan, in favour of a defined contribution (DC) plan for all new hires.
This sweeping away of the DB plan has been cast as an inevitability, the interment of something old-fashioned or out of step with the new world of pensions. So, you know, too bad, but it had to happen.
So is everyone clear on what’s going on here?
Here’s how Jim Keohane sees it: “In a stealth way, the risk has been dumped from the corporation onto the Canadian taxpayer.”
Keohane is the chief executive officer of HOOPP, the Healthcare of Ontario Pension Plan, with $64 billion in assets under administration. Keohane has watched the charge of private sector corporations as they shed defined benefit pension plans from their balance sheets, a move pushed by displeased shareholders who want the companies in which they invest to quit the pension business.
“I think ultimately that’s going to drive virtually all corporations out of defined benefit plans, which is not a good thing,” he says.
There are a number of reasons why it’s not a good thing: one is that point about the transfer of risk. “The risk of not earning sufficient returns or under funding or longevity . . . all of a sudden you’re transferring it to the individual who really is the least equipped person to actually deal with that . . . So I kind of laugh when I hear people cheering on what a great thing this is. You obviously don’t understand that that risk just got dumped in your lap.”
At this point of the conversation, it’s not uncommon to hear a rattling of the brain as one attempts to recall whether one’s company pension plan is defined benefit — a guaranteed income for life — or defined contribution, which Keohane phrases like this: “At 65 you’re going to be handed a lump of money and ‘good luck to ya.’ ”
What is often not factored in is that DC plans are relatively expensive for the plan member, say, 2 per cent per annum, a crushing fee especially in an era of low interest rates. HOOPP’s total operating costs are about 0.3 per cent. “You start compounding that over the years, and the difference you come up with is staggering,” Keohane says.
Here’s another point: longevity.
The fear of outliving one’s pension income turns consumers into savers, so absent a guaranteed pension income, pensioners’ negative spending will have negative implications for the economy.
And this: a report commissioned by HOOPP, the Ontario Teachers’ Pension Plan and others from the Boston Consulting Group found, not surprisingly, that far fewer defined benefit beneficiaries collect supplemental pension payments from the federal government than other retirees. The study estimated that defined benefit pensions reduce the annual guaranteed income supplement payout by between $2 billion and $3 billion annually.
The very bad news? Jim Keohane foresees a crisis. “There’s going to be a lot of stress on the welfare system because people won’t be able to afford to retire.”
That’s some way off, of course. And maybe it won’t be a full-blown crisis. Maybe it will be just a full-blown misery.
So the fundamental question becomes: how do we fix this?
Keohane has been advocating, as have others, for a rethink. “There’s this very polarized view that you have to be one or the other (DC or DB). But there’s this big scope in between where you can actually create something that has some of the attributes of both that will work well for employers and employees.”
Target benefit plans would be an example, a real hot button in pension circles. Morneau Shepell defines a TBP thusly: “To plan members, it is virtually indistinguishable from a regular DB plan except that accrued benefits are subject to reduction if the funding level falls below a given threshold.”
So let’s say they’re run like DB plans, with flexibility. (HOOPP defines itself as a DB plan, though there are contingent benefits, such as cost of living increases, which could be reduced in the event of the plan not being fully funded.)
Others, such as Jim Leech, the former head of the Ontario Teachers’ Pension Plan, have advocated for an evolved benefit plan as the most effective, and least expensive, way to a secure retirement. Somehow, that conversation has been dropped. Into the void has stepped the autoworkers. Any workers who get stuck with DC plans are the losers. Sad to see future GM workers join those ranks.