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• Termination values. DB plans do not have optimal
termination values. While DC plans may have an advantage here, they also have
volatile replacement ratios. Hybrid plans can offer a solution. A typical design
consists of a DC plan account with a DB benefit component such as a guaranteed
minimum pension. Upon termination, employees receive the funds in their larger
DC accounts, but as they near retirement they get the more stable DB promise.
Hybrid plans can be difficult to communicate, expensive to administer and
result in high PAs. Other options include offering a minimum termination value
of twice the employee contribution as well as automatic indexing. The latter
arrangement significantly increases termination values for younger employees,
without increasing plan costs significantly.
The important thing to remember about termination benefits is that they are
only of concern for employees who leave the plan prior to retirement. While
sponsors consider the needs of younger, more mobile employees, they should not
forget about older employees.
• Employer risk. Sponsors should pay attention to
statements of investment policy and goals/procedures and consider how asset
allocation aligns with organizational goals. This is an important element of
managing risk.
• Funding and accounting strategies. Although
actuarial reviews are only required every three years, organizations caught by
the market slide and prevailing low solvency rates can benefit from more
frequent reviews. In addition, as stated earlier, DB plan sponsors should take
advantage of accounting rules to offset volatility and stabilize pension
expenses, and use smoothing methods and the 10% corridor.
Employers can also contribute more than the minimum funding amount to shore
up depressed assets and reduce pension expenses. It is helpful to ensure that
the plan does not accumulate large amounts of surplus. It is also helpful to
maximize plan expenses paid out of the pension trust and benchmark costs against
other organizations.
• Demographics. Pension plans should be aligned with
an organization's human capital strategy. Early retirement windows, incentives
or phased-in retirement policies need to accommodate the current and projected
workforce.
• Clarity. Employers may need to conduct education
sessions about the company's DB plan. It is best to involve employees in the
plan design stage.
Many organizations--particularly small- and medium-size employers--have moved
from DB plans to DC plans over the last 10 years in response to legislative
complexities that create headaches and higher costs. However, most large
employers still sponsor DB plans.
With sagging profit margins and volatile fund returns, employees and
employers are revisiting DB plans and recognizing the value of their security.
This, combined with our aging population, indicates we may yet see a DB
renaissance. BC
David Burke is the national retirement
practice director and Anne Cowling is a pension consultant with Watson Wyatt
Canada in Toronto. infocanada@watsonwyatt.com.
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