The clock is ticking for the Ontario Teachers’ Pension Plan. Along with its plan sponsors (the Ontario Teachers’ Federation and the provincial government), Teachers’ has until September to file a balanced funding valuation with regulators—no easy task, considering the projected $12.7 billion shortfall for 2008. So what’s a large public defined benefit (DB) plan to do when it’s short on cash? Depending on whom you ask, its choices consist of increased contributions, reduced benefits or both.

Jim Leech, president and chief executive officer of Teachers’, saw the shortfall coming two years ago. He got tentative approval from plan members to boost contributions to 12.5% and had them choose from changing the 85 rule (which allows Ontario teachers to retire when their age and years of service add up to 85), cutting benefits by 10% or introducing conditional inflation. Plan members chose the last option. He then commissioned an actuarial study on the plan’s valuation process and sought lessons from other Canadian pension plans in similar circumstances, the findings of which will remain confidential until the valuation has been filed. Leech says that for the plan sponsors, all options are on the table and no ideas will be dismissed out of hand. “Everybody’s experience comes into play here,” he adds.

Kevin Gaudet, Ontario director of the Canadian Taxpayers Federation, feels that there are more options available than are currently being discussed. He’d like to see the plan rolled into a defined contribution (DC) plan and points to the conversion of Ontario MPP pension plans from DB to DC under Premier Mike Harris as a model. “It’s one of the rare cases where politicians have set the example,” he says. “It wouldn’t be a simple process to roll it over, but if you change the plan into a DC plan, it would reduce the future liability under the plan, which would reduce the $12.7 billion deficit.”

“That’s a pretty big move,” says Leech. “If contribution rates got way out of line, they might have to look at it, but I would think the plan sponsors would like to maintain the DB plan.”

Gaudet also says the 85 rule should be up for discussion. “When a plan issues a report that says it’s got as large an unfunded liability as this does, I think it behooves contributors and managers of the plan to be looking at any number of ways to reduce that unfunded liability,” he says. “They need to make a massive change. Status quo clearly is a problem here.”


World View

It’s All in the Genes

U.S. President George W. Bush has signed into law the Genetic Information Nondiscrimination Act (GINA ), which is designed to stop the improper use of genetic information when it comes to insuring or employing workers. The legislation will prevent group health plans and health insurers from denying coverage or charging higher premiums to healthy people based solely on the possibility that they may develop a disease because of a genetic predisposition. It’s already illegal to bar an individual from a group plan based on his or her genetic profile. The legislation will also prohibit employers from using individuals’ genetic information when making hiring, firing, job placement or promotion decisions. Employers could be fined as much as US$300,000 per violation.

Working for Benefits

American workers over the age of 50 without healthcare insurance options are more likely to put off retiring in order to stay covered under an employer’s plan, according to an analysis by Watson Wyatt. Workers who depend upon the company for healthcare coverage and don’t expect to receive post-retirement employee benefits are 16.5 percentage points less likely to retire in any given year than workers with access to coverage through another source, such as a spouse’s plan or public health insurance. Other factors, such as whether or not the employee has a pension, also contribute to the decision. For example, having a defined benefit plan increases the likelihood of retirement by 4.1 percentage points. The firm analyzed data collected from 1992 to 2004 as part of the University of Michigan’s Health and Retirement Study, a biannual survey of 22,000 older U.S. workers.


Choices Cause Confusion

Although 81% of Canadian employers that responded to the recent Moving Forward—An Overview of Capital Accumulation Plans (CAPs) survey by Buck Consultants say they have a communication strategy in place, almost three-quarters say they think their employees are confused over the investment options in their CAPs.

When it comes to communication, organizations need to know the financial literacy level of their members and find the right mix, says Peter Arnold, national practice leader for investment and defined contribution consulting, with Buck Consultants. “It’s about finding the right strategy for the right group of people. One collective strategy isn’t necessarily going to work.” He adds that there is going to be a spectrum of members with different financial literacy levels, and communications plans need to reflect that.

However, much of the confusion among plan members could simply be because companies are overwhelming them with information and options. The survey, which polled 150 Canadian employers, found that 57% of sponsors offer more than 10 investment choices—up from 40% in 2003.

“The more options you give employees, the less likely they are to actually make informed choices, and that can fuel investment by default,” says Arnold. “Generally speaking, a program with less options is going to be more cost-effective, is going to be simpler and easier to communicate and, chances are, can get members better engaged.”

Since plan sponsors feel that their members don’t fully understand their options, it’s no surprise that 86% of sponsors feel the investment education they are currently providing is inadequate. Providing more education in the future was identified as a top priority among the survey respondents.

“A lot of time and effort has been spent on education. I think the next five-year cycle is going to be a push on how members can get better advice,” says Arnold.

Currently, 59% of respondents say they use an outside vendor for investment education. Only 17% offer investment advice from an outside supplier.

In addition, plan sponsors say that adding investment modelling tools and introducing or changing the levels of company-matching contributions are among their future resolutions.

Other concerns that are top of mind with employers include governance and compliance issues (68%), benefit adequacy (68%), employee satisfaction (66%) and cost containment (64%). — April Scott-Clarke



At a Premium

In its latest budget, Alberta has decided to eliminate healthcare premiums starting in 2009, which could create a potential windfall for plan sponsors that pay all or part of the premiums in that province, according to Hewitt Associates. Currently, annual health premium rates in Alberta are $528 per individual and $1,056 per family. For a company in Alberta with 100 employees that pays provincial premiums, this could mean a savings of about $100,000 annually. The change could also have an impact on post-retirement benefits. Although healthcare premiums have already been eliminated for Albertans over age 65, some plan sponsors continue to pay premiums for those retirees under age 65.

Getting Together

Morneau Sobeco and Shepell·fgi are joining forces in a deal that will double the size of the company. “Employers face increasing challenges in managing the health and productivity of their workforce,” says William Morneau, chair and chief executive officer of Morneau Sobeco. “Shepell·fgi’s recognized leadership in workplace health and productivity solutions will complement our firm’s leadership in pensions and benefits, and thereby serve a broader spectrum of organizations’ human resource management needs.” Each company will maintain its existing leadership team and brand identity, and will serve clients independently using its current service model.

The Award Goes to…

The Canadian Pension & Benefits Institute’s board of directors has selected David Kapeluck as the first recipient of its National Volunteer of the Year Award. He has been involved with the organization for nearly two decades in a number of roles. The regional volunteer winners are Wendy Brodkin (Ontario), Ryan Johnson (Atlantic), Gale Feindel (Manitoba), Narinder Kempa (Saskatchewan), Tony Martin (Northern Alberta), Larry Findlay (Southern Alberta) and Anthony E. May (Pacific).

For a PDF version of this article, click here.

© Copyright 2008 Rogers Publishing Ltd. This article first appeared in the June 2008 edition of BENEFITS CANADA magazine.