A new research study by the Canadian Financial Executives Research Foundation—the research arm of Financial Executives International Canada (FEI)—indicates that almost 60% of pension plan sponsors say their plan poses either a moderate or substantial risk to their business.
According to Michael Conway, chief executive and national president of FEI Canada, this suggests Canadian plan sponsors need to improve their de-risking efforts. “The results indicate that hope for better days is not enough and that Canadian corporations must stop depending on investment returns or increasing interest rates to cover pension funding deficits. Organizations need to plan ahead to lower risk to their plans, through a combination of strategies,” he says.
At the end of 2012, only about one in 20 Canadian DB pension plans was fully funded on a solvency basis. Historically low long-term interest rates, poor asset returns, demographic pressures and the increasing maturity of pension plans have played their part.
“DB plan sponsors that wish to de-risk their pension plans do have options,” noted Manuel Monteiro, a partner in the financial strategy group at Mercer, which sponsored the research. Monteiro offered the following.
• Risks could be transferred to another party such as an insurance company through an annuity purchase for some or all of the plan members.
• The benefit policy could be changed to transfer or share risks with employees (such as moving to a DC plan or a target benefit structure).
• The investment policy could be changed to reduce the mismatch between assets and liabilities, or to protect against extreme events.
• Funding policy strategies could be employed in order to manage the amount and plan the timing of contributions.
“Each of the de-risking strategies have their pros and cons—some take effect quickly but are very painful to implement, some will likely only defer the pain, and others are very effective in the long term but do not provide much short-term relief. This suggests that an effective de-risking strategy will often involve the use of multiple approaches working in concert,” says Monteiro.
Of survey respondents with DB plans, 58% remain open to all employees, 37% are closed to new entrants with existing employees continuing to accrue DB benefits, and 6% are closed to new entrants with no further DB accruals for current employees. Almost one-third of participants said they were either somewhat likely or very likely to close existing DB plans to new employees while continuing benefit accruals for current employees.
The majority (62%) of organizations that have made or are considering changes to their DB plans cited the level and volatility of funding contributions as a key reason.
Read the full report here.