When faced with issues regarding the sustainability of its DB pension plan, Saint John Energy, an electrical distribution utility servicing the City of Saint John, N.B., took an innovative approach to implement a leading-edge solution. As a result, Saint John Energy has been able to make changes to its plan design with member approval.
Saint John Energy had a mature DB pension plan that had been in existence for 80 years. Following the 2008 recession and ensuing low interest rates, however, the organization found it difficult to meet its increased solvency funding requirements. In the Jan. 1, 2009, actuarial valuation, the going concern funded level had dropped to 83% from 113% three years earlier. Employer minimum contributions jumped from 0% of payroll in 2008 to 22.3% in 2009 and 54% in 2013. Employees also saw their contributions increase from 0% to 8.3% of annual payroll in 2009 and thereafter. This quick and dramatic change in total minimum contribution requirements from 0% to 62% of payroll gave both the plan sponsor and members cause for concern.
Given the challenges involved in funding the plan and acting on the recommendation of its finance team, Saint John Energy’s board was keen to review the current DB design and alternatives. Maintaining the status quo was a choice the board discarded in light of the 54% of payroll contribution level, especially once it understood how wide the range of variability in future contribution requirements was. Marta Kelly, vice-president, finance and administration, at Saint John’s Energy, sums up the situation: “We would have had to consider layoffs if we’d kept the existing plan. We weren’t prepared to do that.”
Other possibilities included keeping the DB plan but reducing benefits, a solution that was rejected because of the other problems inherent in traditional DB plans such as ongoing risk, rising costs, accounting volatility and intergenerational inequity. The board also considered converting to a DC plan and implementing a shared-risk pension plan (SRPP). “A DC plan would have transferred too much risk to employees,” says Kelly. “However, other employers in New Brunswick had successfully introduced an SRPP, and we knew it was our most viable option.”
Factors that influenced Saint John Energy’s decision to implement an SRPP included the following:
- the board could set an employer contribution level it felt the organization could afford;
- contributions would forever be stable within a predefined range; and
- members would still continue to pool risk (unlike the DC alternative).
Saint John Energy held two education sessions for its approximately 200 active employees and retirees, first informing them about the pension plan situation and then explaining the alternatives and the decision to implement an SRPP. “Our approach was to be frank and transparent—not pull any punches,” explains president and CEO Ray Robinson.
This collaborative approach continued once the board established the employer contribution commitment. Saint John Energy called for employee volunteers to form a working group that would recommend an SRPP design operating within this contribution budget. “The group represented our plan member population: all ages, career stages—including retirees—and levels within the organization, as well as union members,” states Kelly.
Andrew Dowling was one of those who volunteered to be on the working group. “I was the youngest member, but I really wanted to learn first-hand about our pension plan.” The working group developed a recommended plan design including, among other issues, the employee contribution rate, the benefit accrual rate, retirement age, disability benefits and bridge benefits.
Not only was the working group able to reach a consensus on all key points, it did so in record time—something Saint John Energy greatly appreciated. “The group was formed in April 2013, and we initially gave them a July 1 deadline,” explains Kelly. “However, it was able to make its recommendations by June 1, saving the organization $200,000 in solvency payments.”
All of the working group’s recommendations were adopted. “It says a lot that the organization trusted its employees to be involved and help design the pension plan,” says Dowling.
Robinson is also very positive about member participation: “The working group really enhanced the credibility of the process. Members of the group have gone on to become ambassadors for the plan amongst the other plan members.”
Now that the SRPP is in place, Robinson sums up employee response to the new plan: “Our members may be mourning the death of our DB plan, but they’re not hanging on to the past.” He attributes this attitude to the organization’s transparent communication and employee involvement.
“People were engaged in the process and had opportunities to ask questions and get involved. They recognized why change was needed, understood why the status quo was not sustainable and appreciated that an SRPP was the best alternative. I’m thankful that a shared risk pension plan was an option for us.”
Mel Bartlett is Morneau Shepell’s managing partner, Atlantic region: firstname.lastname@example.org. Paul Lai Fatt, principal, also works in Morneau Shepell’s Halifax office: email@example.com. The views expressed are those of the authors and not necessarily those of Benefits Canada.