ARMSTRONG: Pensions gold standard has become tarnished

Michael Armstrong, an associate professor of operations research in Brock’s Goodman School of Business, wrote a piece recently published in the Hamilton Spectator about the risks to employee pensions when businesses go bust.

Armstrong writes:

Sears Canada’s bankruptcy is eliminating 12,000 jobs, including 5,400 in Ontario. It’s also leaving 16,000 retirees worried about their pensions. This is the latest signal that workers and regulators need better approaches to defined-benefit pensions.

Pensions are promises to employees. With defined-contribution plans, employers make short-term promises to invest each year. The resulting pensions depend on investment performance.

With defined-benefit plans, employers also promise to invest more if returns are poor. That reassurance makes those plans the “gold standard.”

But such top-ups may be needed decades later. If you start work at 25 and retire at 65, pension cheques start arriving 40 years after the first paycheque. That long-term promise poses two risks for employees.

First, the promise might not be kept. Defined-benefit plans should out-pay defined-contribution plans during recessions. But that’s when employers are least able to invest.

Continue reading the full article here.

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