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© Copyright 2000 Rogers Media. The following article first appeared in the March 2001 edition of
BENEFITS CANADA magazine.
Weathering the storm
Despite an economic slowdown, DC plan conversion still has steam. Individual choice and access to
surplus will fuel the trend well into the future.
By Dian Cohen
The North American economy, which has been growing by 4%, 5%, and even 6% for the last several years, is now at
a standstill as forecasting gurus spar about whether the economy will have a soft or hard landing. It's logical
to wonder whether all of the volatility in capital markets might curb the pace at which defined benefit (DB)
pension plan sponsors are converting to defined contribution (DC) plans. Well, to date, there's no evidence of
a slowdown on the conversion front.
"Far from slowing down, the pace of DC conversions is accelerating, particularly in the U.S., and
particularly in the American public sector," says John Por, president of Cortex Applied Research, a
Mississauga, Ont.-based pension risk management advisory firm. Randy Bauslaugh, a partner with
Toronto-based Blake, Cassels and Graydon LLP, concurs.
It is possible though that it's just too early to tell whether DC conversions are slowing down--after all
DB sponsors have been moving to DC plans for the better part of a decade in Canada, and half again as long
as that in the U.S. At some point, despite the economic climate, there just won't be many more plans to
convert.
But Por says we're nowhere near that period yet. Although he adds that if global capital markets declined
for several years, maybe there would be a decrease in conversions. "The decisions to convert have very long
half-lives," he says. "Plans being converted today would have required sponsor/collective bargaining unit
or member agreement as long ago as 18 or 24 months."
DC DRIVERS
A major driver of the pace of conversion has been a combination of the phenomenal performance of capital
markets and the maturing of the financial services industry that profits from managing pension assets.
People who don't expect to have a long tenure on the job, as well as young workers, believe they can do
much better financially when they have more choice and more control over their invested assets. This
attitude is pervasive in the U.S., including the public service where Por's firm recently helped Florida's
public servants design a DC plan with assets totaling a whopping US$100 billion.
In Canada, the move to convert DB plans is similarly motivated, with the added kicker that solid market
performance over several years, combined with downsizing (or rightsizing), has created large surpluses that
are locked and growing inside DB plans.
Many firms have taken contribution holidays and have seen their plan surpluses continue to grow. In order
to get access to some of the surplus, organizations have negotiated with their collective bargaining units
or the members to wind up the DB plan and design a DC plan.
"Under Ontario law, a sponsor cannot withdraw even surplus pension funds without 100% member consent," says
Bauslaugh. "But designing a DC plan is a way to share the surplus funds and empower the members of the
plan."
It remains to be seen whether the conversion rate to DC plans continues. Personally, I'm betting it will.
Aside from the drivers mentioned, we should remember that surpluses are appearing in other places than DB
plans. In the U.S., the 30-year treasury bond that was auctioned early in February will likely be the last
long bond issued by the treasury until the middle of the next decade.
Things aren't quite that rosy in Canada. But Canadians, like Americans, are increasingly opting for freedom
of investment choice.
Dian Cohen is an economics consultant with a special interest in pension issues. dcohen@interlinx.qc.ca.
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CONFERENCES
Pension Fund Governance and Administration
March 26 to 29, 2001
Toronto
Topics include putting governance theory into practice and legal decisions impacting governance. Call (800)
941-9403.
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