The key driver of these changes, according to David Burke, retirement practice director for Watson Wyatt
Worldwide in Montreal, is volatility. “Most organizations, most CFOs in particular, are more concerned about the volatility of pension costs than the absolute level [of the costs]. If it’s predictable, you can manage it, even if it’s a higher level. If it’s not predictable, then you can’t.”
While close to one fifth of the organizations surveyed reported making the move to DC, approximately half affected only new hires. The balance also affected current employees in some way. So Nortel, which began offering a DC plan to new hires as of 1999, certainly wasn’t an exception. But is the company’s more recent move a signal of more conversions to come?
“Nortel has got a pretty significant set of challenges. To say that Nortel is leading a new wave is premature,” says Burke. But he does point out that there’s an increase in plan sponsors who are concerned about pension risk—whether investment risk, design risk or funding risk. “These are all just different components of the risks of sponsoring a pension plan. I can’t think of any of the clients that I work with or any others that don’t have some degree of concern.”
And these risks have many DB plan sponsors looking at the DC option, according to Andrew Kitchen, managing director, solutions with SEI in Toronto. “Somewhere around a third to 40% of plan sponsors are probably looking to understand the implication of a change [to DC],” he says. However, the number of conversions hasn’t reached the levels of a decade ago, primarily due to the fact that many more DB plans are currently in a deficit situation, making conversion more difficult. “Back in the mid-90s you had a big flurry of activity as people were going to the DC world and I think at the time it was almost easier because there were surpluses in the plan.”
While Kitchen does expect to see a lot more activity over the short term, he predicts it won’t take the form of outright conversions. “Where you might see more activity is somewhere along the lines of freezing the [DB] plan and putting a sister DC plan in to make up for it.”
Scott Perkin, president of the Association of Canadian Pension Management, agrees that the shift may be more gradual than in the past. “I think what we may start to see in the private sector are more hybrid arrangements where there’s a minimum defined benefit [plan] which is sort of a floor but with increased retirement buying power coming with a CAP component—DC or Group RRSP—on top of that.”
But topping off a DB plan with a DC option leaves plan sponsors having to deal with the challenges associated with both. And if plan sponsors think that converting to a DC plan for new hires is going to reduce the volatility in their DB pension costs, they are mistaken, says Burke. “They’ve got this legacy DB promise and that’s what’s going to drive the volatility for a long time to come. So the only way to really get rid of the volatility completely through plan design is to wind up the plan.” But taking this drastic step will likely have consequences for employee relations, attraction, retention and productivity, he adds. “A sole focus on managing financial risks will increase human capital risks.”
Before moving to DC, there are a number of factors and options plan sponsors need to consider, says Kitchen. “They should really steer clear of just thinking about a short-term benefit costing to make their decision. There are lots of things on the investment side and the corporate side from a risk management perspective that they can utilize to make sure their actions are sustainable and are consistent with a strategic plan,” he says.
And while the DC option is the right one for many plan sponsors, there are a number of challenges facing DC plan sponsors—including those on this year’s Top 50 DC Pension Plans list.
“With CAP arrangements come issues of increasing risk for plan members,” says Perkin. “And the expectation perhaps that plan members need to become more informed so that, at the end of the day, they will have an adequate level of retirement income.”
The Watson Wyatt survey confirms that plan member communication and education remain the biggest hurdles for existing DC plan sponsors. “The reality is that most people don’t do a good job of managing their investments,” says Burke. “So if I’m a DC plan sponsor, what I want to do is make sure that I’m providing adequate choice and appropriate education. It sounds easy to do, but it’s very, very hard to do.”
The other option is to offer investment products, such as target-date retirement funds—for which plan members’ asset mix is decided for them and varies throughout their career based on years to retirement. But Burke warns that such products aren’t a panacea.
“I think having more products out there like this is a good thing. But the danger is, I have yet to see a one size fits all, and too much choice can be as bad as too little.”
| PLANTING THE SEEDS
Agricore is tending to its employees’ investment knowledge to help them grow their retirement savings.
Richard Whitbread knew he had done something right when his plan members stopped calling. As pension and benefits manager for Agricore United, his department has to field the anxious calls of plan members when the markets take a bad turn. Or at least it used to.
Four years ago when Whitbread joined the Winnipeg-based agri-business he felt there was a member education shortfall. A year later he had internally developed an education plan and brought over Jane Cox from human resources(HR)with 25 years of experience to be the educator of retirement and savings programs. Together they produced the educational materials, developed the presentations, planned the sessions, organized travel and accommodation for the participants, kept a database to track attendees, and continually researched and improved the classroom materials. “We laughingly joke that we didn’t know what we couldn’t do, so we went out and did it,” says Whitbread.
Agricore has about 2,500 members in its mandatory defined contribution plan with 17 investment options and a zero tolerance for default. With a paternalistic approach to retirement saving, it introduced three mandatory full-day, classroom-style education sessions. The first one—which started in 2004 and is held 60 times a year—is a fundamental program that explains how the markets work and explores fund choices offered to members.
The second workshop will not focus on financial planning but on how to use the Agricore plan more effectively. The third is for employees who are nearing retirement and need to plan for the next steps.
Whitbread is also initiating optional lunch and learns to supplement the class material. There will be six sessions for employees to attend and each will focus on a different part of the plan, such as the registered pension plan or the stock purchase plan. “It is a quick summary of what’s in the plan and how it works,” says Whitbread.
To further engage employees and foster good plan governance, Agricore has an active employee pension committee. There are three pension administrators from the company, nine volunteer employees and one retired member on the team who provide guidance and feedback about member needs and requests. “They are a sounding board for our education process as well,” says Whitbread. “They sit in the pilot projects because they are probably the most informed members in the plan.”
In two years, the average enrollment rates in the plan and in the optional offerings, such as the RRSP and stock purchase plan, have increased along with the contribution amounts. “The information they are receiving is proving to be valuable and it is affecting their decision making.” And that’s why the phone calls have stopped. “These are really simple concepts that we put into the workshops [and they] seem to have taken hold.”
Whitbread credits the success of the program to two factors. The first is Cox. “She really is the reason it has been so successful,” he says. “She has a presence about her in the classroom that reaches out to the employees.” The second is the support of senior management. “They have been incredibly supportive of this from the first day we brought it forward,” he says. “They have not faltered one step in challenging us to go forward with this education agenda.” —Leigh Doyle
Don Bisch is editor of Benefits Canada. With files from Leigh Doyle.
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