Are shared-risk plans the answer to Canada’s looming pension crisis?

The pension crisis may be one of the most under-reported stories in Canada. I'm not talking about the Canada Pension Plan, which is very healthy thanks to major reforms in the mid-1990s, but rather private- and public-sector plans that are increasingly underfunded.

The problem has many pension experts and managers watching closely at a New Brunswick initiative that may serve as a model to other troubled pension plans.

Many plans are technically under water like bad mortgages, meaning investment returns and contributions from employers and employees aren't enough to fully fund all of its obligations.

It's a little like paying only the interest on your credit card. The debt keeps growing but disaster is avoided as long as no one calls it in. The danger with underfunded pension plans is that the benefits could fall well short of what people thought they'd get when they retired.

The crisis developed over the last decade as years of low interest rates and volatile stock markets combined with a growing wave of boomer retirees to put pension plans under pressure.

The problem is mainly with defined-benefit plans, which cover almost 4.5 million Canadians. Employers and employees make contributions and workers receive guaranteed payments, often indexed to inflation, when they retire. The employer is responsible for any underfunding shortfall. Most public-sector plans fall into this category and that can leave taxpayers on the hook.

[ Related: Does New Brunswick have the answer to Canada's pension-funding crisis? ]

The federal Office of the Superintendent of Financial Institutions (OSFI) reported that the number of underfunded private-sector defined-benefit plans on its watch list more than doubled to 115 from 49 in 2011, the Globe and Mail reported last fall. It said 93 per cent of the defined-benefit plans it oversees have deficits.

Many companies have transitioned out of defined-benefit plans into so-called defined-contribution plans that don't spell out how much workers will get when they retire, which depend on how the fund's investments perform. That shifts most of the future risk onto employees.

That's why the New Brunswick experiment is in the spotlight.

The pension plan covering employees of the city of Saint John, N.B., is at least $195 million in the hole and city council has voted to to adopt a so-called shared-risk plan now popular in Europe, CBC News reports.

Shared-risk plans put the onus equally employer and employee, CBC News said. New Brunswick embraced them after a task force report last year on the pension crisis.

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Under enabling legislation passed in the New Brunswick legislature, such plans provide base retirement benefits funded by joint contributions affordable by both sides.

The approach gives employers some certainty on their contribution liability while workers get the security of knowing there'll be a basic payment when they retire, CBC News said. Any cost-of-living increases would depend on how the pension fund's investments perform.

While basic benefits aren't completely guaranteed, 20,000 computer-simulated "stress tests" used to measure pension-plan viability showed a 97.5 per cent probability that base benefits would not be reduced, CBC News reported.

The hybrid plans in New Brunswick also require employees to contribute slightly more than they did for defined-benefit plans, retirement age would be edged up to 65 from 60 over a 40-year phase-in period and pensions would be based on an "enhanced career average" formula instead of the employee's highest-earning years, CBC News said.

If New Brunswick manages the transition to shared-risk plans smoothly, watch for public-sector plans elsewhere in Canada to consider them. They're bound to be politically popular since it takes the burden for making up shortfalls off taxpayers' shoulders.

"There’s widespread interest across the country," task force chairwoman Susan Rowland told CBC News. "It’s a model that will work with almost every pension plan."