In early 2016, Rogers Communications Inc. announced it would be closing its defined benefit plan to new entrants and replacing it with a defined contribution plan. The company offered staff six months to enrol in the DB plan before its closure on July 1, 2016.

While it faced several challenges in administering the DB plan, a significant reason for the change was that the funding requirements were too onerous, says Jason Traetto, the media company’s senior manager of benefits and wealth accumulation programs.

The DB plan was underfunded on a solvency basis, he says, noting the plan was a liability from a risk management perspective because it represented a great deal of uncertainty around planning future business objectives. “Any swing in the interest rate can have a material impact on the financial position of the plan.”

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Rogers isn’t unique. Many plan sponsors, especially in the private sector, are following suit by shutting their DB plans to new employees or winding up existing plans, says Linda Byron, senior partner of retirement at Aon. “There’s some collectively bargained plans that are still open and there are some corporate plans that are still open, but they would be in the minority.”

The prevalence of DB plans has declined at a steady pace, says Manuel Monteiro, partner and leader of Mercer’s financial strategy group. Seventy per cent of Mercer’s plan sponsors had a DB plan before the financial crisis in 2008, but only 30 per cent of this group have kept their plans, he says. “Those that are still open are looking at closing, so I would say the trend has certainly been very much away from DB plans in the private sector.”

Catalyst for DB exodus

Provincial regulations requiring DB pensions to be funded on a solvency basis have played a major role in their decline, says Monteiro, adding market volatility and low interest rates in recent years have also left many employers with a negative impression of these plans.

“We’ve had some major downturns in the equity markets and interest rates have been so low,” he says. “And when you have to fund on a solvency basis, that means the cost just goes up.”

The unpredictability was especially challenging for employers in cash-focused industries, says Monteiro. “Contributions could go up by huge amounts and you have to fund the deficit over a five-year period. And so a lot of companies, which have large DB plans, their contributions just became a huge impediment to the way they run their business. They just couldn’t predict what those contributions would be.”

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Many employers also felt burdened by the accounting requirements of sponsoring a DB plan, says Byron. “With the continued decline in corporate bond yields and changes in accounting that required the asset or liability to be shown right on the balance sheet, there was a lot more transparency on corporate statements around pension liability,” she says. “That was a driver for increased visibility as to the costs of pensions. And I think that, once the accounting trend was mark to market, that’s where we started seeing plan closure and conversions sort of starting around the world.”

As provincial policy-makers began recognizing the solvency struggles faced by many plan sponsors, Quebec was the first jurisdiction, in 2016, to shift to going-concern obligations for funding valuations. Ontario followed in 2018, lowering its definition of a funded status to 85 per cent.

Other provinces, such as British Columbia, Alberta, Manitoba, Nova Scotia and Saskatchewan, are reviewing their funding requirements. But it could be a while before they make the switch, says Jana Steele, a partner in the pension and benefits group at Osler, Hoskin & Harcourt LLP. “It’s not a decision that a government would make lightly. They want to make sure they’re getting all the information and making the decision that’s right for that jurisdiction.”

Moving on

Despite solvency reforms across Canada, it’s unlikely plan sponsors will re-open their DB plans. But it’s also unlikely the plans will become obsolete because of questions around how DC plan decumulation will play out in the future, says Monteiro. “There’s obviously concerns when all of the risk is with the member. Are they making appropriate decisions with respect to investments and decumulation and other things?”

Regulations on member disclosure, investment choices and decumulation from DC plans are likely to become stricter as they grow in prevalence, notes Monteiro. “As of right now, I think DC plans are generally becoming better governed and [plan sponsors are] voluntarily doing the right things for their plan members. But I can see, especially if things don’t go well, the regulators might want to make things more prescriptive.”

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But even if other provinces loosen their funding requirements, Monteiro feels it’s a little too late. He doesn’t believe solvency reform will revive DB plans. “If these changes had been made 10, 15 years ago, I think we could be looking at a very different situation. But in many ways, the horse has left the barn already.”

Solvency reform will likely just slow plan sponsors’ departure from DB pensions, says Joe De Dominicis, vice-president and retirement solutions leader for Ontario at Morneau Shepell Ltd. “I think the reforms [in Ontario and Quebec] have certainly helped in terms of limiting the volatility and onerous contributions that solvency provisions have generated, but I think it’s more that sponsors will be less in a hurry to exit DB plans.”

Changing workforce

Besides solvency funding requirements, the workplace’s changing demographics are a major reason many plan sponsors are considering alternative pension plan designs, says De Dominicis, referring to baby boomers reaching retirement and the growth of the gig economy.

Indeed, demographics played a large role in Rogers’ decision to move to a DC plan, says Traetto. He believes millennials, who make up a sizeable portion of today’s workforce, don’t want DB plans. “They want more flexibility with contributions. They want to manage their own funds.”

As well, the organization found it easier to communicate the DC plan, he says, noting employees found it difficult to understand the value of a DB plan. “They’re complicated and employees don’t always understand it. Whenever anybody came here, they would be like, ‘OK, I’m putting in an X amount of money. What are you putting in as an organization?’ And it’s very difficult [for us] to quantify that number.”

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About 3,000 employees have enrolled in the DC plan to date, says Traetto. “We’ve actually seen quite a bit of an uptake in our under-30 population as well as our employees in a lower wage bracket, which is awesome because that was part of our objective.”

But while DC plans may provide more flexibility for today’s workforce, Monteiro believes they could affect workplace management in the years to come. “I think 10 years from now, 15 years from now, once we’ve had people who’ve spent their entire career in a DC plan, and there’s a realization from corporations — ‘My employees can’t afford to retire and that’s causing me issues with how I manage my workforce’ — that could cause people to go back and think about, ‘Well, maybe we should go back to DB plans.’”

What’s next in pension benefits?

While many plan sponsors are replacing their DB plans with a DC arrangement, employers that still want to share responsibility with their staff are looking at other plan designs, such as shared risk or target benefits, says Monteiro.

British Columbia, Alberta and New Brunswick are the only jurisdictions with legislation permitting target-benefit plans, and Ontario is considering it for the multi-employer space, says Steele, noting plan sponsors aren’t required to fund these plans on a solvency basis.

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“They’ll have different funding requirements around them because target benefits are in the spectrum between DB and DC. So you have fixed contributions to a target-benefit plan like you do in a DC plan and you have a targeted benefit. The benefit is defined in a way, but it’s not promised.”

Some employers from similar industries are looking at banding together to form multi-employer or industry pension plans, says De Dominicis. “I do think there are ways to tweak the defined benefit design to make them better vehicles in today’s world and for today’s worker.”

For instance, in February, faculty associations at the University of Guelph, the University of Toronto and Queen’s University, as well as certain affiliated unions, voted to convert their various existing pension arrangements into a jointly sponsored plan.

As well, since Ontario enacted legislation in 2015 to permit the merger of certain single-employer plans with jointly sponsored arrangements, several smaller plans have joined larger ones, like the College of Applied Arts and Technology pension plan. In 2018, it also launched DBplus, a new plan that’s available to employers in the broader public, private and not-for-profit sectors across Canada.

In Numbers

Percentage of active members in a workplace DB plan80%67%
Percentage in the private sector67%41%
Percentage in the public sector93%91%

Source: The Office of the Superintendent of Financial Institutions

Long live DB?

Despite their gradual decline, DB plans, from an employee perspective, are the best, most effective way to save for retirement, says De Dominicis, especially where an employee stays with one employer or one industry for their whole career.

“DB plans are a great option to provide retirement income. I think they’re the most efficient option. They work for some employers, but I think there are a lot of other factors affecting the way employers provide benefits going forward. And certainly the solvency regulations combined with the economic environment have made DB plans potentially a lot riskier and costlier. Certainly, removing [the solvency requirements] is going to keep employers in those types of plans longer, but I don’t see a lot of new plans. I don’t see a wave of new DB plans coming forward because of it.”

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Indeed, DB plans today are much more prevalent in the public sector, which isn’t required to report on a quarterly basis, doesn’t typically have shareholders and includes a lot of union collective bargaining, says Byron. “And some of the large plans would have solvency exemptions . . . . the JSPPs aren’t subject to solvency funding and they’re jointly trusteed . . . so to make that change, there would be a lot of governance.

“And when you look at the public sector, they certainly have cost issues the same as corporate plans did, so there’s definitely challenges from a cost perspective for the public sector, but they’ve tended to increase contributions or make some benefit changes for future service anyway. That’s where they’ve focused on trying to manage cost and volatility.”

Jann Lee is a former associate editor at Benefits Canada.