At Benefits Canada’s fourth annual Defined Benefit Summit in Toronto last week, the theme Keeping DB Alive was taken to heart as speakers not only probed the reasons behind the struggles of DB plans but also discussed strengths and survival strategies, including de-risking and exploring small cap and emerging markets.
The morning began with a session looking at suggested strategies on de-risking, presented by Charles Millard, managing director and head of pension relations with Citigroup. After reviewing the factors that have plunged DB into “near crisis” in North America, Millard noted several ways that plan managers are currently de-risking:
- • contributing to the plan to close the funding gap;
• issuing debt to replace one leverage with another;
• using letters of credit (possible in Canada, not in the U.S.);
• shifting plan assets toward fixed income and then liability driven investing; and
• paying lump sums, enacting buy-ins and buyouts.
While Millard noted that some plans were also being frozen, he argued that finding alternatives would keep funds healthier and more vibrant going forward. He also advised that plan managers could “use the problems of today to avoid the mistakes of yesterday tomorrow” by deciding in advance on actions to take once certain criteria came to pass; for instance, to commit to adjustments once a fund reaches a predetermined percentage.
Other calls to action
A common message in all presentations was that the time to act on de-risking is now. In Managing Pension Risk and Opportunity in a Low Bond Yield Environment, Lincluden Investment Management vice-president Wayne Wilson warned against complacency, even in assets perceived as low risk. In the next session, Ryan Taliaferro, senior vice-president with Acadian Asset Management LLC, took that cautionary tone even further, suggesting that traditionally accepted financial theories be taken with a grain of salt. Specifically, he sought to debunk the commonly held belief that high risk is always rewarded by high return.
For those already poised to take action, the summit’s other panels offered inspiration. Nick Hamilton, head of global equity products with Invesco, discussed overlooked small cap companies, while Heather Wolfe, Sunlife’s assistant vice-president, DB solutions, addressed issues in and solutions for longevity risk. Finally, two sessions on emerging markets by Christine Girvan and Thomas Melendez from MFS McLean Budden and then by Adam Borneleit of BlueBay Asset Management LLP probed the opportunities in emerging market equities. Watch for a feature on this topic in the February issue of Benefits Canada.
Big-picture thinking
The keynote panel that ended the summit shifted thinking toward big-picture topics: pension reform, DB’s viability, the needs of lower-income Canadians, the role of CPP, pooled registered pension plans and private sector plans. Yet while panelists Derek Dobson (CEO of CAAT Pension Plan), Allan Shapira (senior partner at Aon Hewitt) and Ian Markham (Towers Watson senior consulting actuary) gazed into the future, they continued to offer the concrete take-aways that had characterized the day. One of the liveliest conversations concerned misconceptions around public sector pensions. Dobson offered his top five:
- • the belief that public sector pension plans are Ponzi schemes;
• that such plans are 100% taxpayer funded;
• that all public employees retire at age 50, with a 70% replacement ratio (at CAAT, said Dobson, the average retirement age is 62);
• that taxpayers are on the hook for plan deficits; and
• that DC is cheaper in the public sector.
A discussion on public financial literacy ensued, from which Shapira shaped the ultimate question: how to get people to save for retirement. “Part of what we need is to ratchet up the issue of how people save and what they need to save,” he said, “and then we can discuss the most efficient delivery model.”