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Canadian defined benefit pension plans: Better together?

To counter low yields and strengthen long-term sustainability, pension plans could consider consolidating

For Canadian defined benefit pension plans, counteracting the impact of low interest rates is a pressing concern. A 2017 World Bank report on the state of Canadian defined benefit pensions identified challenges facing plans.1 These include:

Key insights

  • Canadian defined benefit pension plans face a range of challenges and asset consolidation through plan pooling may provide a solution
  • Pension plan consolidation is increasingly a favoured option in the European Union, with the Netherlands leading the way
  • The possible benefits of consolidation—lower costs, better capabilities and an expanded investment universe—must be weighed against the potential drawbacks, including cost complexity and the risk of failure
  • lower expected returns and interest rates
  • demographic and structural workforce changes transforming the population served by defined benefit plans
  • concern that public support for pensions may be eroding

To help offset low yields, many plans are looking towards alternative investments in search of long-term, stable returns.2 Another potential solution is surfacing as plans consider consolidating through asset pooling. Plan consolidation has experienced growing take-up in global pension markets, and its proponents say consolidation can enhance investment returns, reduce operational expenses and support plan sustainability over time.

The European experience

The global move to pension consolidation has been led by the Netherlands where the number of pension funds has fallen by 75 percent in the past two decades, from approximately 1,060 plans in 1997 to 268 by 2017.3

The United Kingdom (UK) is also pursuing pension asset pooling. The UK's over 6,000 pension funds each require investment management expertise and administration, a board of trustees, professional advisors, as well as governance, systems, and control processes.4 This large contingent of plans is serviced by relatively few asset management consultants, actuarial and legal advisors. Current commentary in the UK suggests that consolidating plans to increase their scale and bargaining power makes sense “from a macroeconomic perspective".5

Pro-pooling arguments

Today, the move to asset consolidation may be considered a function of good governance. Proponents of pooling say the benefits include:

  • lower costs, which translate into more assets available to support payments to members and maintain plan sustainability over the long term
  • better capabilities in plan management
  • a broadening of the available investment universe

A reduction in ongoing administrative costs can have a cumulative impact on fund size. PensionsEurope secretary and CEO Matti Leppälä comments that “admin costs make all the difference," as lowering these ongoing costs by even a small amount can have a big effect over time.6

Plans that consolidate may also gain better capabilities by having a deeper bench of talent. A review of workplace pensions by the UK Office of Fair Trading found that smaller pension funds may be at risk of delivering poor value for money due to “lower standards of trustee engagement and capability".7

Plan consolidation has experienced growing take-up in global pension markets

Pooled plans may also gain access to asset classes such as alternative investments that might otherwise be out of reach for smaller plans. AXA Investment Manager's 2013 report, “Is Big Better?" notes that smaller pension funds “often find it difficult to justify the incremental benefit" of an allocation to alternative investments “against the cost (the time, expertise and budget) required to research and monitor these opportunities".8 When plans consolidate, their combined assets can more readily meet required minimum allocations imposed by asset managers, in addition to increasing access to specialized investment research and expertise.

Consolidation at what cost?

Despite the perceived advantages of asset pooling, the decision to consolidate is still complex, and the process is not without challenge and risk. Consolidation critics say its disadvantages include:

  • an upper limit on associated cost savings, coupled with overall larger expenditures by larger plans
  • the time, cost and complexity of consolidation, which will not be successfully implemented in all cases

Jaap Bikker, economist and senior researcher at De Nederlandsche Bank says cost reductions resulting from asset consolidation are subject to an optimal scale, with increases beyond that point providing no additional benefit.9 Researcher David Hollanders at Tilburg University in the Netherlands adds that pension costs rise year-over-year whether plans are small or large, with larger managers incurring greater costs “in both absolute and relative terms."10

Pooled plans may also gain access to asset classes such as alternative investments that might otherwise be out of reach

The process of consolidation is also complex, and can be costly and takes time to execute. When plans consolidate, their respective assets, solvency levels, funding formulas, and rights and entitlements of members must be considered and coordinated, along with the legal costs that will be incurred and the legal and regulatory approvals that will need to be obtained. Further, in any proposed consolidation, there is a risk that an ultimate agreement between potential consolidators will not be reached.

Despite these concerns, the impetus for consolidation is to improve the overall health and stability of plans, which will help to ensure plan members get the pension benefits they are expecting. As defined benefit plans in Canada and abroad search for ways to counteract the impacts of persistent low yields and adapt to additional challenges going forward, pooling assets through plan consolidation may be an option worth considering.

Canadian consolidation efforts

  • Starting in July 2017, the new Investment Management Corporation of Ontario (IMCO) began to manage the assets of its first two clients, the Workplace Safety Insurance Board (WSIB) and the Ontario Pension Board (OPB), as it pools 'like' plans under the same investment umbrella
  • Effective January 1, 2018, the Colleges of Applied Arts and Technology (CAAT) Pension Plan merged with the Youth Services Bureau of Ottawa pension plan, following the CAAT pension merger with the Royal Ontario Museum (ROM) pension plan in 2016
  • In the final quarter of 2018, the merger of five City of Toronto pre-OMERS pension plans with the Ontario Municipal Employees Retirement System (OMERS) pension plan is expected to be carried out, subject to regulatory approval


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  1. World Bank (November 17, 2017) The evolution of the Canadian pension model: practical lessons for building world-class pension organizations
  2. RBC Investor & Treasury Services (December 18, 2017)A Confident Outlook: Canadian Defined Benefit Pension Poll
  3. Dutch News (August 29, 2017) Dutch pension funds consolidate, numbers plunge 75% in 20 years
  4. Bart Heenk, PensionsExpert.com (July 5, 2017) How consultants can prepare for scheme consolidation
  5.  Ibid.
  6. Laura Blows, EuropeanPensions.net (February/March 2014) Better together
  7. Office of Fair Trading (February 2014) Defined contribution pension market study
  8. AXA Investment Consultants (September 2013) Is Big Better? An investment perspective on the impact of pension fund consolidation
  9. Leen Pressman, IPE.com (March 2015) Best hands on deck: The consolidation of Dutch pension funds
  10. Ibid