1
The Real Pension Crisis

• The Wall Street Journal (United States), October 6, 2014-Pension Dropouts Cause Pinch: "Motorola Solutions Inc. and Bristol-Myers Squibb Co. are the latest companies to cast off billions in pension burdens, fueling a trend that could weaken the government's ability to protect the payouts other employers have promised millions of retired workers. . Only 14 percent of the nation's private-sector workers were covered by defined benefit plans in 2011, less than half the 38 percent in 1979. ."
• The Guardian (U.K.), February 22, 2013-Pension scheme membership at 15-year low: "Membership of workplace pension schemes fell for the 11th year running in 2012, to 46% of the British workforce, official figures have shown . Defined benefit pension schemes, also known as final salary, continue to disappear from workplaces . The figures show that 91% of public sector employees with workplace pensions had a final salary scheme in 2012, against just 26% in the private sector."
• The Globe and Mail (Canada), February 20, 2014-Shift from defined benefit pensions reinforces need for retirement planning: "For decades, most workers relied on a promise of how much they would receive in retirement from their company pensions. . But that pension certainty is fading as many companies-faced with large unfunded liabilities and deficits amid low interest rates-moved employees, especially new recruits, to defined contribution plans that guarantee contributions but not final monthly pensions."
• The Sunday Morning Herald (Australia), May 10, 2014-Superannuation well managed could avert a huge blowout on pensions: "A recent report by CPA Australia, based on analysis of more than 8,000 households across the nation, claims Boomers-those born between 1946 and 1965-are using super savings as a windfall to prop up lifestyles during their working lives rather than as an investment to be nurtured for the 25 years of retirement expected for the average person reaching 65 years. According to the Actuaries Institute, most people's superannuation account balances are increasing but will not be enough to meet even a modest lifestyle, regardless of whether it is paid out as a lump sum, converted to an income stream, or ploughed into other investments."
• The New Zealand Herald, May 9, 2014-Private pensions for the lucky few: "Today, 1 in 10 retired people have an income stream from an occupational pension. . However, by the time today's 48-year-old arrives at retirement, the number getting any private pension at all will be very few, let alone pensions that are inflation protected. . What will today's 48-year-old do when she reaches retirement in 2031? How will she make her nest egg last?"

Chances are, if you picked up a newspaper over the past few months, or even years, you saw many alarming articles reporting on the dire state of retirement income systems throughout the regions we are focusing on in this book: the United States, the United Kingdom, Canada, Australia, and New Zealand. Flipping through the pages of your morning newspaper, you can find facts, figures, and commentary on the declining place of pensions in these countries, along with lots of agreement about the need for changes, or discussion about changes that are already taking place. Right now, there's an active debate about the future of pensions around the world. We are awash in expert commissions, opinions from public-policy think tanks, and calls for reform from ordinary citizens and voters. But what's the crisis? Why the need for reform? What reform is needed? And what difference does any of this make for you?

Up a Creek without a Pension Paddle

The recent, and very public, debate about the safety of retirement income is replete with startling statistics. In particular, reports quoted by all participants in the discussion note the declining rates of participation in employer-sponsored occupational or workplace pension plans. So let's review what belonging to this kind of pension plan means for those who participate. The common understanding is that if you participate in a workplace pension plan, when you retire, your "work paycheck" will seamlessly convert to a "retirement paycheck" that you'll receive for the rest of your life (which means that your relationship with your employer never really ends, as long as you are alive).

The unspoken implication of these discussions, of course, is that people without an employer-sponsored pension are "up a creek . without a pension paddle." In contrast to the lucky population with employer-sponsored pensions, they will be living on cat food in retirement, counting every penny as the days go by, and constantly fretting about outliving their savings (or if they aren't worried, they should be!).

At first glance, the available data seem to support this rather bleak picture. Let's take a look at the pension landscape in the countries where we are focusing our attention:

• In the United States, only 45 percent of the workforce is covered by an employer-sponsored pension plan.
• In the United Kingdom, front-page stories in 2012 announced that the proportion of U.K. workers enrolled in workplace pensions had fallen below 50 percent.
• In Canada, statistics show that a mere 33 percent of the Canadian labor force participated in a registered pension plan in 2012.
• In Australia, the introduction of compulsory superannuation (government-sponsored workplace pension plans) has led to the closure of many of the employer-sponsored pension plans that existed before superannuation: in 1995, there were approximately 4,200 plans, but by 2010, only 168 remained.
• And in New Zealand, coverage of occupational pension plans has been falling over time: the ratio of workers in employer-sponsored pension plans as a percentage of the employed workforce fell from almost 14 percent in 2003 to just over 10 percent in 2011, while in June 2012 the number of people enrolled in KiwiSaver accounts-voluntary long-term savings accounts intended for retirement-was equal to roughly 34 percent of the working-age population.

Ergo, it is no surprise that the public policy question du jour is what to do about those people who aren't fortunate enough, or savvy enough, to participate in employer-sponsored workplace pension plans over the course of their careers. Surely, conventional wisdom suggests, these are the people most at risk of inadequate retirement savings.

Mixing Defined Benefit Apples and Defined Contribution Oranges

But allow us to be contrarians for a moment. We are actually quite concerned not just for those people with no employer-sponsored pension plan, but also for a large fraction of the so-called "lucky" workers-those who think they will retire to a guaranteed pension income, when in fact they have nothing of the sort.

To understand this concern, we need to examine what we mean when we talk about pensions. If you are among the people contemplating retirement in the next decade, cast your memory back to what the world of work was like when you first joined it. Thirty years ago, many of the largest employers in North America and the United Kingdom offered what are known as defined benefit (DB) pensions to their employees. These are voluntary, occupational pension plans (in that their establishment is voluntary, not mandatory, for employers-who are the sponsors of the plans, while employees are the beneficiaries). This form of pension promises a lifetime of income to each retiree when he or she stops working, with the potential for a survivor pension for your spouse after you die, too. Note our emphasis on "promise" and "lifetime of income"-these are key distinctions in the world of pensions. If you started work for a large company 30 years ago in North America or the United Kingdom, chances are pretty good that you have a DB pension plan.

But over the past few decades, the proportion of companies offering DB pensions to new employees has steadily dropped. Today, if you work in the public sector, chances are you (still) have a DB pension plan. But if you work in the private sector, your chances aren't so good-if you have a pension plan, it is likely a defined contribution (DC) plan, also known as a money purchase plan (or you may have a hybrid or "target benefit" plan, both of which mix elements of DB and DC pensions-see Exhibit 1.1 for an overview of the differences between the various kinds of pension plans). Now, DC pensions are still considered pension plans for statistical or census purposes, so people who participate in DC plans are typically counted in the "lucky" group of participants who belong to a registered pension plan.

Exhibit 1.1 Defined Benefit versus Defined Contribution, Hybrid, and Target Benefit Pension Plans