Similar to 2022, the coming year will present both challenges and opportunities for defined benefit pension plan sponsors, with the rewards going to plan sponsors that are resilient, embrace change and are willing and able to act when opportunities arise.
Several trends that will be top of mind in the year ahead are:
The consumer price index was above five per cent for the first 11 months of 2022 and reached a 2022 high of 8.1 per cent in June. With the CPI likely to stay at elevated levels well into 2023, inflation will continue to have a major effect on the Canadian retirement system.
Read: BoC efforts to cool inflation attracting long-term institutional investors: expert
In 2022, retirees and individuals close to retirement were hit by the double whammy of an increase in their cost of living and a material reduction in their retirement savings balances caused by negative investment returns. In addition to this, interest rate payments on mortgages and other debt have increased, while Canada and Quebec Pension Plan contribution rates are increasing as the enhancements to these programs are phased in.
The combination of these factors will likely lead to a reduction in the standard of living for some retirees, as well as the deferral of retirement for many people close to retirement. Retirees and unions are likely to ask for one-time cost-of-living increases to DB plans that don’t provide automatic increases. It’s also likely some retirees will re-enter the workforce out of financial necessity.
In an attempt to get inflation under control, the Bank of Canada and other central banks have increased their policy interest rates and implemented quantitative tightening. These actions are lowering economic growth and are expected by some to lead to a recession. This may mean continued volatility in the equity and bond markets.
Read: Expert panel: Tips for DB plan sponsors as interest rates continue to rise
The increase in long-term interest rates in 2022 — which is common during periods of high inflation — has significantly decreased DB pension liabilities. However, when assessing pension plans’ funded statuses, the decrease in liabilities has been at least partially offset by negative investment returns on plan assets.
In addition, high salary increases due to high inflation and tight labour markets will act to increase the liabilities of plans with benefits that are linked to member earnings. When all these factors are considered, most DB pension plans are ending the year in a relatively strong financial position, but many risks remain in this high inflationary environment.
- Bill C-228
In November, the House of Commons passed Bill C-228, which is currently under review by the Senate. If the bill becomes law, it will give super-priority to pension plan members in the case of employer bankruptcy or insolvency. While the goal of the bill is to protect DB pension plan members when a company runs into financial difficulty, the bill may have a number of unintended consequences for plan sponsors.
Read: Pension super-priority bill passes in House of Commons
These consequences may include making borrowing more difficult and expensive for some private sector companies that sponsor DB plans. In response, these plan sponsors may increase their focus on DB plan risk reduction and windups.
If Bill C-228 does become law in 2023, private sector DB plan sponsors will need to assess whether they should make any changes to the funding, risk management and governance policies of their pension plans.
With the coronavirus pandemic accelerating the retirement of baby boomers, many industries are experiencing a shortage of skilled workers that may continue for the foreseeable future.
When strategizing as to how to attract and retain the talent they need, employers should consider that sponsoring the right retirement program can be a key differentiator. Therefore, it’s likely the trend of innovation within the retirement system will continue in 2023. These innovations may include additional products that pool risks faced by individuals in retirement, including longevity risk.
The coming year may also see new multi-employer pension plans that enable employers to outsource their pension programs to a large plan or an increase in the number of plans that share risk between employers and plan members.