Plan sponsors, pension plans taking lessons from 2020 to decade ahead

Following an unprecedented 2020, Canada’s plan sponsors and pension plans are incorporating the lessons of the last year as they prepare for a new decade, according to a recent webinar hosted by Mercer Canada.

The coming years will be marked by developments including increased geopolitical tensions and the lingering economic effects of the coronavirus pandemic, balanced with the growing influence of public policy on the economy and increased investor focus on environmental social and governance factors, said Yusuke Khan, senior consultant and director of strategic research at Mercer. “Investors will be ill-served by a backward-looking approach to risk and will be best served by an holistic approach, particularly one that employs scenarios.”

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On the global investment front, Khan said it’s particularly important for investors to consider regional exposures in their portfolio, given the recent trade tensions between a resilient China and the U.S. “We see a two-track system developing, especially around technology. Investors should consider the ramifications of this development and diversify appropriately.”

Also speaking during the webinar, Lisa Lavoie, senior wealth consultant at Mercer, said that 2020 holds several lessons for defined benefit pension plan sponsors. While the pandemic itself may have been unforeseen, she said pension plans need to expect the unexpected and tailor their risk management strategy accordingly. In addition, she said a strong governance structure can allow plan sponsors to seize on opportunities, citing plans that rebalanced their investments in the first quarter of 2020 to add value. An analysis of a plan’s investment structure will also lead to positive results in a low-return environment, she said.

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Regarding defined contribution pension plans, Lavoie said these plans are advised to consider multi-manager portfolios to mitigate single-manager risk, as well as to invest broadly and diversify into specialty asset classes outside of equities and bond investments, an area where ESG factors come into play. “Sustainable companies do better over the long-term. Companies with strong ESG processes are not only better positioned for long-term success but they’re also more resilient during a crisis.”

In addition to investment strategy, she said DC plans must also consider plan member and how the design of the plan itself helps achieve its stated goal. “Good governance of a DC plan is more than just reviewing how the investment fund performs relative to a benchmark. The focus should now be on how to improve outcomes and financial well-being and how best to support [plan members].”

Michele Boisvert, senior health consultant at the company, also took part in the discussion. In regards to liabilities related to post-retirement and employment benefits, she said larger plan sponsors can limit those risks through such measures as converting health-and-welfare trusts to employee life-and-health trusts, which can be done tax-free until the end of 2021, per recent legislation by Finance Canada.

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For smaller plans, she said a voluntary retiree buyout is an option to limit risk. “[It] provides the chance to remove a portion of the liability and reduce ongoing interest, costs and volatility. A voluntary retiree buyout with a pick-up rate of just under 10 per cent yielded six-to-one [return on investment] and released $3 million in liability and a reduction in $100,000 in annual [profits and loss] costs.”

Boisvert also said with an increase in disability claims, plan sponsors should take steps to avoid liabilities related to continued benefits coverage for employees on leave. She recommended plan sponsors take a three-fold approach, which includes benchmarking, adjustment of the plan design to trim excess costs and shopping for a different insurer in the currently-competitive marketplace. “And invest in a robust mental-health strategy, starting with senior management and having accountability at every level and every step.”

And Eleana Rodriguez, career products market leader for Canada at the consultancy, provided an update on compensation programs. Through a series of monthly surveys last year, she said Mercer found bonuses paid in 2020 were somewhat affected by the pandemic, with 76 per cent of Canadian companies paying out as planned with no reductions. While factors such as a company’s year-end financial results will affect bonuses in 2021, some respondents are already planning to reward employees on a discretionary basis for their extra efforts in 2020, she added.

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