Like any deferred compensation arrangement, pension plans have their technical aspects, but we need not delve far into them to recognize their parallels with health care system capacity planning and funding. Those parallels include the challenge of quantifying the current and future obligations that must be fulfilled for a predefined population, and managing resources to ensure they are available when required.
HOOPP serves more than 250,000 working and retired health care professionals with 240 participating employers. About half the employers are hospitals. HOOPP is also offered at other health care-related organizations, including diagnostic clinics, Community Care Access Centres, laundry and supply chain organizations, food services providers, construction firms, and most recently Family Health Teams and community health centres.As the CEO of one of Canada’s largest pension plans, I can assure readers and plan members alike that the influence of demographics on the health of our plan occupies much of my daily thinking, planning and action. Our organization published a white paper on the topic of demographics in March 2010, and among other findings, we raised awareness of an impending shortage of health care professionals as the result of workforce aging.
A Pension Primer
Because of the vital role they play in Canada’s retirement income system, pension plans are highly regulated at both the federal and provincial levels. There are two basic types of savings programs: Defined Contribution vehicles and Defined Benefit pension plans. Both ways of saving are regulated by the same legislative regimes and require employer contributions. But this is where the similarities end.
DC programs are often referred to as capital accumulation plans and their contribution rates are set at a predefined rate or level, such as a fixed percentage of plan member earnings. Contributions are known in advance but the actual benefits are unknown until members convert the accumulated value of their DC account to retirement income. While planning tools are often made available to help employees make investment decisions along the way, the responsibility for investing is on their shoulders.DB pension plans predefine not only the members’ contributions, but the benefits as well, each according to separate formulas. Contributions are pooled, and together with the investment earnings on those contributions are referred to as the plan’s assets. If insufficient plan assets are available to “fund” the benefits (the liability) promised according to the benefits formula, the difference must be made up over a period of time. Well-managed plans avoid this eventuality. Similarly, if assets exceed those expected to be required to pay the benefits, the sponsor (often the employer) and/or the employee may be required to take a “contribution holiday” until the ratio of assets to liabilities returns to acceptable levels.
When it comes to retirement income, many employees place a high value on income predictability and certainty. For that reason alone, DB plans are superior to DC programs, which explains why such plans tend to form a prominent part of so many collective agreements.
Aligning Pension Obligations with Resources
At HOOPP, although we are fully funded, we conduct our valuations annually. When government pensions are factored into the standard benefit formula, HOOPP provides a pension equal to approximately 2% of the best five consecutive years of annualized earnings multiplied by the number of years of service. In most Canadian jurisdictions, DB plan sponsors must conduct a valuation of their plan at least every three years.As a pension plan manager we must consider a number of factors that also influence the demand for health services. Our plan actuary takes a number of common and liability-specific factors into account, including investment returns, mortality, morbidity (since HOOPP offers a disability benefit), years of service, pensionable earnings, the number of beneficiaries who receive survivor benefits, and the actual benefits received – all of which are important because of their potential impact on our funding ratio.
In my view, the backbone of any retirement program should be a defined benefit pension plan. This predictable retirement income can be counted upon throughout one’s retirement, regardless of what happens in financial markets. In other words, with a defined benefit plan comes a pension promise: members receive lifetime pensions based on a percentage of their pre-retirement earnings.
A Shared Sense of Stewardship
Public health care planning, funding and delivery are enormously complex undertakings, particularly when considering the demands that will be placed on the system in the next twenty or thirty years. Expectations of quality care will not change, nor will the expectations regarding its outcomes. At HOOPP, we know we can play our part by fulfilling our obligations to our health care membership base, and in so doing, attract and retain qualified professionals for the system in whose health we all have a stake. gggJohn Crocker is President and CEO of HOOPP, the Healthcare of Ontario Pension Plan.
