“Canadian pension funds have come a long way in a very short time and are well positioned for the future,” says Michael Barnett, executive vice-president with Fidelity Investments ULC. “Less than 10 years ago, many pension funds were overexposed to the equity markets and suffered when the markets declined in the early part of this decade.”
Contrary to many existing perceptions, he adds, research shows that Canadian pension funds are well funded and solvent. The average funding ratio, according to the survey, was 101%, with corporate plans reporting a 102% funding ratio and public sector plans reporting a 99% funding ratio. The average solvency ratio was 99%, with corporate plans reporting a 98% solvency ratio and public sector plans reporting a 99% solvency ratio.
However, there are issues other than funding and solvency to consider. Both corporate and public sector plan sponsors cite long-term costs and risk management as their top concerns (74% and 70%, respectively), with near-term market volatility ranking third on the list. “The focus on containing costs and managing risk indicates a strong focus on ensuring the long-term sustainability of these funds,” says Barnett.
Pension funds still continue to exhibit a home-country bias in how they invest, maintaining 45% of their equity investments in domestic companies while Canadian equity, as a percentage of the MSCI World Index, is just 4%. “However, our research shows that Canadian plans are beginning to increasingly look outside Canada for investing opportunities,” Barnett adds.
The majority of corporate and public sector plans have either implemented or are seriously considering a reduction in their allocations to Canadian equities with nearly 20% planning to reduce them by more than 10% within the next one to two years.
A total of 157 DB plans of all sizes (96 corporate plans and 61 public sector plans), representing more than $630 billion in assets, participated in the survey. Nearly 60% of the plans surveyed have more than $1 billion in assets, and 21 plans have more than $5 billion in assets.
Gen Y Wants Benefits
Baby boomers and Generation Y may have less of a generation gap than you might think when it comes to benefits, says a study called What Millennial Workers Want: How to Attract and Retain Gen Y Employees.
When asked to rank the importance of 11 factors relating to job opportunities, younger employees placed benefits, salary and opportunities for professional growth and advancement at the top of the list.
“The research depicts a pragmatic, future-oriented generation that holds many of the same values as its predecessors,” says Reesa Staten, senior vice-president and director of workplace research for Robert Half International, which co-produced the study with Yahoo! HotJobs. The benefits most valued by Gen Y include healthcare, paid vacation, dental care, pension plans, bonuses and flexible work hours/telecommuting.
Nearly three-quarters (73%) of Gen Y professionals are concerned about balancing a career with personal obligations. “You’ll encourage longer tenures and greater loyalty among employees if you offer perks and programs that help them achieve work-life balance,” the study says. “This may require you to rethink traditional career paths or timetables for advancement, or offer options such as jobsharing, telecommuting, compressed workweeks or alternative scheduling, when appropriate.” — Craig Sebastiano
The DC Train
Are Canadian companies all aboard for defined contribution (DC) pension plans? According to the Employee Benefits Survey: U.S. and Canada 2007, conducted by the International Foundation of Employee Benefit Plans (IFEBP), just over half of the 144 Canadian respondents offer a DC pension plan. The most popular type is the registered DC, or money purchase plan (70.3%), followed by the group registered retirement savings plan (54.1%).
But the prevalence of DC plans varies depending on the employment sector. Just over 60% of corporations and of professional service firms offer DC plans. Public employers and multi-employer plans, on the other hand, have a much lower DC plan count, at 33.3% and 38.1% respectively.
“It’s my impression that public employers and multi-employers are a little more traditional and still hold on to some of the more traditional benefits,” says Julie Stich, senior information/ research specialist with IFEBP. “Of the public employers in Canada that responded to us, 91.7% still have a DB [defined benefit] plan, so I think they’re moving a little bit more slowly—both they and the multi-employer—to get rid of the DB plans.” Whereas corporations and the professional firms, she notes, look at the DC plan as a way to save money or as some kind of rationale in their industry: “other people are moving to DC so we better move to DC, too.”
Still, some of those traditional employers may offer DC alongside their DB plans. “A large percentage of our overall Canadian respondents have a DB plan (61.1%),” says Stich. “And we had 51.4% with a DC, so we can assume there’s overlap.” But while corporations and professional firms are on the DC express, for the most part, traditional employers are still chugging along. — Brooke Smith
Highlights From the Ontario Expert Commission on Pensions (OECP)
ACS/Buck provided five solutions to the “millstones” that it believes are dragging defined benefit (DB) pension plans down.
1. Create clear and fair rules around surplus ownership.
2. Create a central “retiree” pension fund.
3. Allow plan sponsors more flexibility to change DB arrangements.
4. Abolish the Pension Benefits Guarantee Fund (PBGF).
5. Change solvency funding and grow-in rules, particularly as they apply to Multi-Employer Pension Plans and other public sector plans.
The firm also emphasized the need to make the traditional DB environment friendlier to plan sponsors.
Aon noted that surplus rights and deficit obligations are the biggest issues challenging the private pension regime. “We submit that, unless there are specific negotiated terms between sponsor and members defining the use of surplus, then the rights to surplus should be given in proportion to the parties’ responsibilities to fund deficits. The asymmetry in the system has been a major catalyst toward plan termination and underfunding. We have seen instances where funding policies specifically target minimum levels because of such asymmetries.”
Mercer recommended that two measures be implemented together to make the DB pension system stronger for single-employer plans.
1. Revise the minimum funding standard based on solvency to provide plan members with better protection against benefit loss on insolvent plan termination.
2. Rebalance the financial risks and rewards between the stakeholders by allocating rewards to the employer that bears the funding risk.
From Morneau Sobeco…
One of Morneau Sobeco’s recommendations was to permit a type of DB plan that is not currently allowed. “The problem is that existing pension legislation does not readily accommodate hybrid plans. To this day, the interpretation of that legislation does not allow for certain hybrid plans with both DB and DC features, even when such plans enhance individual security. It is important that the legislation be flexible enough to accommodate a variety of hybrid plan designs.”
From Towers Perrin…
Towers Perrin recommended the following.
1. Streamline the regulatory process, with a mandate to promote an increase in pension coverage.
2. Provide enough DB funding flexibility for sponsors to feel less need to increase and extend fixed-income weightings.
3. Eliminate partial windups.
4. Increase the funding limits in the federal Income Tax Act and regulations to roughly 125% of the greater of the going-concern liabilities and windup liabilities.
5. Commit to scheduled reviews of the Pension Benefits Act and its regulations.
From Watson Wyatt…
Today’s pension rules unfairly bind employers, forcing DB plan sponsors to take on excessive risk while offering little compensation, according to Watson Wyatt. “The current funding rules do not merely require prudence in the long-term funding regimes adopted by employers. They impose solvency minimums that ostensibly protect plan members from the loss of benefits in the event the plan sponsor becomes insolvent.”
For further coverage, please visit www.benefitscanada.com/oecp/
Re: OECP Coverage 2007
Perhaps you should share your articles “Half of Canadian Firms Offer a DC Plan” and “Fewer Canadians Receiving Private Pension Benefits” with the Ontario Expert Commission on Pensions (OECP). While it’s understandable that defined benefit (DB) plans represent a whole lot of retirement dollars, and therefore merit regulatory attention, I think that it is just as important for this commission to realize that small and mid-sized companies are turning to defined contribution (DC) plans, especially group RRSPs, to provide retirement savings opportunities to their employees. Judging by your articles, this is the sector where growth is taking place, not DB plans. Shouldn’t the “experts” on this commission be looking at removing barriers and excess administrative burden from all retirement plans in Ontario?
— Jeannie McQuaid, Supervisor, HR, Belshield Enterprises Limited
Athletes can benefit from a coach. But the cubicle- or assembly line-bound can benefit, too—from a “health” coach.
Health coaching is a recent initiative offered by some employers as part of their wellness programs. “Health coaches are typically not clinical health professionals,” says Barry Hall, a principal with Buck Consultants in Boston. Rather, their expertise is in counselling, and they often have a nutrition or exercise background. “Their primary skill set is helping facilitate people going through a process of goal setting and achieving that goal.” Goals such as losing weight, lowering stress levels or quitting smoking.
According to Buck Consultants’ 2007 Working Well survey, 42% of U.S. employers and 31% of Canadian employers offer health coaching as part of their wellness programs.
Why? Hall suggests that—at least in the U.S.—it has to do with the high cost of healthcare. “Wellness is one of the areas that does show a lot of promise for helping to control the [high-cost] trend.” (According to the survey, 33% of U.S. employers attribute a reduction in the trend rate to their wellness programs.) “At some organizations, there is almost a sense of desperation: what can we do to curb this rising cost? Health coaching is one of the ways employers deal with this.”
But resolving this desperation comes at a price. “You’re having professional one-on-one counselling,” says Hall. “It’s more expensive than offering a class that people can attend or printed [brochures] that are more generic, less personalized.” And, perhaps, not always as effective as one-on-one coaching.
The survey indicates that the well-established EAP is the most popular wellness initiative offered by employers (93% of American employers and 85% of Canadian employers). Despite its popularity and its reputation as a trusted, confidential source, it’s built on a different model than health coaching. “EAPs have been historically around providing resources, helping facilitate and getting people to third-party or community resources,” he says. “Health coaching is establishing an ongoing relationship around a specific goal.”—Brooke Smith
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