It’s not too far-fetched to assume that if one sees a problem coming, one would try to avoid it by making a change or taking an offensive stance. But that doesn’t appear to be the case for plan sponsors. A new report from the Ottawa-based Conference Board of Canada shows that Canadian plan sponsors admittedly see challenges ahead, given the aging of the workforce, but are slow to react to it.
The report, Too Few People, Too Little Time: The Employer Challenge of an Aging Workforce, which surveyed 137 corporate executives, says that four out of five of them will experience the consequences of an aging workforce within the next five years. But, according to the study “responses…suggest that, for the most part, Canadian employers are doing little to tackle the aging workforce issue from a strategic perspective.”
Why aren’t they doing anything about it? Owen Parker, a senior research associate and author of the report says simply that plan sponsors are too busy tackling today’s issues. “We’re talking 10 to 15 years down the road…and you are dealing with managers and executives trying to deal with current issues of globalization and competitive challenges and these things are much more immediate,” he notes.
Parker says employers expect certain challenges including skill and leadership shortages. He adds that benefit costs will rise as companies retain experienced workers beyond retirement age. In fact, a recent Statistics Canada report shows people aged 55 to 64 are working longer and spending less time in leisure activities.
However, given the inevitability of the issue, Parker adds that we need not sound the alarm bells just yet. “It’s going to be a challenge but I’m not sure at this early stage how much of a crisis it’s going to be.” He adds that there will be costs associated with these challenges in order to bring in more training and bring in the unemployed or underemployed.
The report states that there are three fundamental ways of dealing with the expected changes of an aging workforce: keeping employees one already has, increasing the supply of workers and boosting productivity of current workers.
Owen and the report suggest plan sponsors need to lobby government for change to pension and benefits regulations, look to change tax provisions and alter employment standards. Otherwise, as the report points out, “regulatory disincentives to hiring mature workers will continue.”
The U.K.’s top companies continue to increase contributions to help close their pension deficits. A recent study by
European actuaries, Land Clark & Peacock(LCP), revealed the deficit among the FTSE 100 firms is £36 billion($75.7 billion)down from £54 billion($113.6 billion)in January 2006.
However, LCP said the top 50 blue chip companies have a combined deficit of €136 billion($196 billion)with €53 billion($76.3 billion)of it not on balance sheets. LCP predicts most European companies will close their defined benefit plans within six years.
THE WORST IN GERMANY
Large German companies have the worst pension deficits in Europe but are doing more to reduce them. Research published by Mercer Human Resource Consulting found that pension liabilities of the DAX 30 companies amount to 31% of their market capitalization, which is three times the level of French companies’ and a fifth more than those in the Netherlands or the U.K.
German companies are not required to fund their pension plans, but have been increasing contributions to boost their credit rating.
DO IT YOURSELF
South Africa’s pension fund adjudicator has ruled that trustees must conduct their own inquires into disability claims by members of pension funds and not depend on the decisions of insurers. This is in line with a common theme in adjudicator’s previous rulings that trustees have a job of ensuring pension funds are run properly and responsibly.
In his ruling the adjudicator said: “In my view trustees abdicate their responsibility to the insurer if they merely act as a conduit to pass on the insurer’s findings to the member.”
It’s been a generation since a major overhaul of U.S. pension legislation. As a result, the new Pension Protection Act of 2006, signed into law by U.S. President George Bush on August 17th, is comprehensive and—as some reports have called it—mammoth. Canadian companies that sponsor retirement plans for employees in the U.S. need to pay attention to this act.
BENEFITS CANADA talked to Osler, Hoskin & Harcourt LLP to distil the three most important aspects plans in
Canada should know. Heidi Winzeler, counsel in the pension and benefits department of the
New York office, highlights the following:
• Changes to defined benefit plan funding rules—Beginning in 2008, a new system of determining minimum funding requirements will be in place. Plans have seven years to become 100% funded, compared to 90% funded before the legislation. If a plan is below 80% funded, it has to make accelerated contributions and faces other restrictions.
• Changes to defined contribution plans—In addition to faster vesting requirements and allowing members with company stock to diversify out of it, the act encourages automatic enrolment of employees into 401(k)plans as long as there is an option for them to elect out and a number of rules are followed. Fiduciary advisers of a plan can now offer tailored investment advice to individual plan members without violating fiduciary duties, provided that they follow many new requirements.
• Changes to investment rules—Private equity and hedge funds in the U.S. are now more open to foreign pension plans as investors. Foreign investors don’t count toward a 25% limit on benefit plan investors that such funds need to comply with in order to avoid fiduciary responsibility under Employee Retirement Income Security Act.
A STUDY IN CHANGE
With the future of defined benefit(DB)plans looking so bleak, an appealing option is to freeze, close or switch plans. New research from SEI, a global provider of outsourced asset management, indicates that the usual way of analyzing plan design changes is problematic and can lead to significant financial burdens for an organization.
According to a white paper titled Pension Freeze Frame: Before Making Plan Changes, Design Studies Need to be
Expanded, plan sponsors seeking to change their DB plans need to be more holistic when it comes to plan design studies. The key for plan sponsors says Jon Waite, chief actuary in Oaks, Penn., and author of the paper is “making sure that as you start to re-evaluate your plan look at the entire package, and not from a siloed perspective.” If they do take a limited approach, he warns, one of the consequences is any budgeting and planning put into an evaluation may not be valid. “If [a plan] starts talking to their investment managers, they can find that there are different asset solutions that would change the profile of their asset side and materially change their projections.”
When undertaking a comprehensive plan design study Waite suggests plan sponsors must start with a detailed understanding of the interplay of liability and asset management. “We have a situation where pension plans are so big that a lot of people have underestimated what a profound impact the pension plan can have on the well-being of the sponsoring company,” says Andrew Kitchen, managing director of solutions with SEI in Toronto. “Getting a good grasp of how the assets and liabilities of the plan interact with the corporate sponsor will give [plan sponsors] a far better grasp of what their risk tolerances are and what the strategic direction of their benefits needs to be.”
Once plan sponsors have thoroughly considered this relationship, they are in a better position to understand and include investment management in the plan analysis stage. This, writes Waite, ensures development of a plan design strategy that matches an organization’s risk tolerance. It also allows for an improved forecast of financial outcomes, which, in turn, provides a company with a more accurate picture of the future. —Leigh Doyle
In August Statistics Canada revealed it had been miscalculating the consumer price index for the past five years, understating inflation on average by 0.1% since early 2001. Avery Shenfeld, senior economist at CIBC World Markets says investors with real return instruments should not hold their breath waiting for any remedy. “The CPI is not going to be revised. It’s water under the bridge at this point.” People currently receiving pension benefits may fare a little better, but only if StatsCan factors the miscalculation into its next CPI report and adjusts the official rate of inflation to reflect the error.
“If they try to incorporate or reflect the miscalculation in the next CPI figures, there might be an impact, but we can’t judge what that would be until we know if and by how much they are going to readjust the number,” says Karen DeBortoli, director of the Canadian research and innovation centre at Watson Wyatt Worldwide.
Even then, any adjustment would be minimal. “Those pension plans that provide automatic increases based on inflation will just do a one time catch-up next time around to reflect the error,” says Steve Bonnar, principal of Towers Perrin. “Those sponsors that provide ad hoc increases periodically round so generously that a difference of 0.1% is just not going to be very meaningful.”
Twelve years ago when Steve Mantis was part of a national injured workers association, his team approached the provincial compensation boards to ask what happens to workers with permanent disabilities in the long term. No one had any answers. “None of them were tracking employment outcome, health status, healthcare usage,” says Mantis, a volunteer at the Thunder Bay and District Injured Workers’ Support Group. “How can you plan effectively if you don’t know what’s really happening to these workers long term?”
Today, he’s a community lead in a new research collaboration that has just been granted $1 million through a federal research program to study the long-term impacts of workplace injuries. The group, known as the Community- University Research Alliance on the Consequences of Work Injury(the alliance), involves nine community associations and eight university/academic organizations. It will spend the next five years collecting wide-ranging, concrete data on the effects injuries—both physical and mental—with the hope of informing policy makers in the government and private sectors.
The areas of study are varied with the immediate focus on the impact of workers compensation legislation on health outcomes, quality of life, employment and income security. Other areas include looking at the medical aspects of programs, workers’ involvement in policy development and more straightforward areas, like comparing definitions of disability between the Canada Pension Plan, workers compensation boards and private insurers.
“There is clearly a need to think on a larger scale about how these programs can work together better to address the issues of people who have a work injury or illness,” says Emile Tompa, a scientist with the Institute for Work and Health and the Alliance’s academic lead. “We realized very quickly that very little work has been done on these issues,” he says. —Leigh Doyle
FX TO THE RESCUE
Will the saviour of underfunded pension plans come in the form of currency trading? New research from Deutsche Bank suggests that the answer to future funding problems is foreign exchange.
The author of the report, Bilal Hafeez, global head of FX strategy at the bank, says: “We feel that foreign exchange should be viewed as an asset class similar to bonds and equities. It has exhibited long-term systematic returns or beta which is comparable, if not better, than both bonds and equities since 1980. It also has greater liquidity than both.”
The report, titled Currencies: Pensions Saviour? suggests that for global portfolios to benefit the most from foreign exchange, allocations to it should be at 20%-30%. This will enhance the quality of returns by considerably reducing the duration and magnitude of phases of returns underperformance. Foreign exchange has often been viewed as an alternative asset class, rather than as a comparable asset class to bonds and equities. This is due, in part, to the lack of a widely followed benchmark and lack of knowledge when it comes to return characteristics of foreign exchange, writes Hazeez.
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