Concerning matters

Plan sponsors and industry experts get to the bottom of their concerns: employee health and retirement

The Future of Canada’s Pension System

At the Benefits & Pension Summit in April, Benefits Canada asked five of Canada’s pension thought leaders about de-risking, target benefits plans and what the next 10 years in the industry will look like. Here’s what they said.

Benefits Canada: How many Canadian pension plans are really in the process of de-risking?

Ian Markham, Towers Watson Canada: We’re seeing trade-offs between return-seeking and liability-matching assets. And, among the return-seeking assets, we’re seeing interest in those with reduced volatility. A concern for the mid-term future is that some of the money in DB plans could become trapped surplus if and when interest rates go up.

Leo de Bever, Alberta Investment Management Corp.: De-risking is holding assets that look like your liabilities. The problem in pension plans is, it’s difficult to do. HOOPP is seen as the leader in doing this in Canada. What’s more important going forward is, do you want to implement this strategy with today’s low rates and chance that they will rise? It makes no sense right now. The time to do it was in the 2000s—not in 2013.

Malcolm Hamilton, C.D. Howe Institute: The opportunity cost of de-risking now is enormous. A sensible pension plan with a flexible policy would know what it means to de-risk, know the opportunity costs associated with de-risking and decide that de-risking, at this time, is inopportune. If the sponsor is able to bare risk, it should do so until interest rates increase.

Benefits Canada: Are target benefit plans a viable solution?

Derek Dobson, CAAT Pension Plan: They are viable. I think they are more apt to be used in a multi-employer environment. They need strong governance and funding policies and principles to determine what actually happens in various situations. The viability rests on what we do and is done from a regulatory and legislative perspec- tive on how these plans will be managed. Many private employers will prefer to choose to convert to DC instead of waiting for the legislation to come forward.

Hamilton: Target benefit plans are unproven at this point. This is not something that small plans will be doing in the foreseeable future. However, target benefit plans are inevitable because traditional DB plans are unaffordable when real interest rates are 0%.

Benefits Canada: Where do you see the pension landscape in Canada in 2023?

Dobson: Retirement income security is a key issue that is here to stay. I’d like to see more sector-based plans. They are more efficient, and they reduce employer risks. I’d like to see more financial literacy improved. I believe we’ll see an expansion of the CPP both in the DB and also in a new DC component.

Markham: We may see outsourcing of fiduciary obligations to external organizations so employers can get back to the business they are in. Also being allowed to post actual, real collateral as security for a pension plan’s solvency deficit.

Hamilton: The most transparent system is one where members bare the risk. If members don’t bare the risk, then they will need to pay someone else to bare it for them. In my view, the best outcome for members is not to pay others to bare their retirement risks. They should bare it themselves as participants in a collective plan that takes and manages risk intelligently.

de Bever:
I don’t believe the future is going to be as dire as most economists think. But the crucial factor will be how the economy performs over the next decade.

View: 2013 Benefits & Pension Summit Photos

Case Study: How to Manage Drug Plan Costs

By 2008, Toromont Industries Inc. had an unsustainable drug plan. It saw a 15% increase for three straight years. “We needed to create a plan design that would provide meaningful cost containment that was sustainable—not just a quick fix,” says David Wetherald, vice-president, HR and legal, with Toromont Industries Ltd., which has more than 3,000 employees in Canada and the U.S.

Later that year, Toromont introduced a two-tier drug plan that included one tier with grandfathered brand name drugs and therapeutic alternatives at 100% co-insurance. The second tier had brand name drugs at 80% co-insurance. Employees had an out-of-pocket limit of $1,000 and a dispensing fee cap of $10. The company also invested in proactive services such as Best Doctors (a medical diagnosis service that helps patients navigate the healthcare system and confirms diagnosis and treatment options), depression care and financial incentives for checkups and completing the health risk assessment.

After an eight-month communication plan, Toromont saw a 9.6% decrease in plan spending in 2009. The company has made additional tweaks to its drug plan since, including the addition of a wellness program.

“Now employee out-of-pocket expenses have decreased by 23%. Plan spending increase has been only 3.2% since 2010, despite more than $350,000 spent on specialty drugs,” said Wetherald. He continues to tweak the plan and intends to introduce mandatory generics and specialty drug case management into the plan this year. “We estimate these changes will save an additional $280,000 per year.”

Chronic Disease in the Workplace

When it comes to chronic diseases in the workplace, prevalence is really important, said Dr. Debra Lerner, director of the Program on Health, Work and Productivity, Institute for Clinical Research and Health Policy Studies, at Tufts Medical Center in Boston. Through her 20-plus years of research into the impact of chronic disease and productivity, she has learned that employees with such diseases as depression, pain and arthritis suffer every day. “[There are] three defining characteristics of costly problems in the workplace: they are prevalent; employees are experiencing their symptoms, like pain and irritability; and they impede employees’ ability to function,” she said.

While Lerner’s research data may demonstrate obvious realities for plan sponsors, it also shows an area where they might not be paying enough attention. “The really high-cost health problems are not just chronic diseases but also the risk factors, such as nutrition and exercise risk—which are poor eating habits and a sedentary lifestyle. They do not have a huge impact on productivity loss, but so many employees have the problem that, on an aggregate basis, it becomes very expensive. It’s worth considering because the strategies you use to address risk factors are very different from the strategies you would use for depression or chronic back pain,” Lerner said.

Fail Forward for Success

“Fifty percent of people under 30 have never known life without the Internet,” said David Shing, AOL’s digital profit. But what does this mean for the benefits and pension industry? “The digital experience allows us to have better human experiences. It can help people make little decisions to make their lives better,” he said.

In order for plan sponsors and providers to create digital and mobile tools, Shing said organizations must engage with their target audience, not shy away from innovative approaches and use a “fail-forward” mentality to allow for risk taking to see what strategies will work best.

The case for global bond investing

Delegate question: Since the management fees for global bonds are higher than the fees for Canadian bonds, are they still worth the investment?

Xavier Baraton, HSBC: “It is a little bit higher. But with the additional yield you can capture, I believe it’s worth it. For example, for asset classes well covered by asset managers, like emerging market debt, fees will be 15 to 20 basis points more. But you get 150 to 300 basis points above the returns of domestic bonds. I think it’s justified if you rely on an active and experienced manager, supported by a global platform to best understand where your risks are spread.”

Top 10 most expensive chronic disease states

Dr. Debra Lerner, director of the Program on Health, Work and Productivity, Institute for Clinical Research and Health Policy Studies, at Tufts Medical Center in Boston, has uncovered the diseases causing plan sponsors more financial strain due to productivity loss. Some might surprise you.

  • Depression
  • Low-back Pain
  • Obesity
  • Arthritis
  • Headaches
  • Allergy
  • Diabetes
  • Asthma
  • Hypertension
  • High Cholesterol

Three pillars of an absence management strategy

“In the example given, a 1% reduction in absence costs is the equivalent of $112,500 in foregone revenue or $750,000 in gross sales,” said Tom Gergely, national practice leader, 360 Absence Solutions, with Aon Hewitt, talking about how the opportunity cost of absence translates to a corproate measure. “Create a business case for your CFO. Then they can be fully informed about absence risks and opportunities.” The absence management strategy must include the following three elements. First, the use of analytics to identify risk areas, pinpoint causes and find change opportunities. Second, the design and planning of the strategy must reflect the opportunities to develop a tailored solution. Third, the delivery or execution must include measurable results and align with the organization’s overall HR goals.

Leigh Doyle is a freelancer writer based in Toronto.

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