DC isn’t the only way

But DC isn’t the only route for plan sponsors frustrated by the trials of DB. Stephanie Kalinowski and Rachel Arbour, lawyers with Hicks Morley, recently presented alternative arrangements for DB plan sponsors at the law firm’s 2009 Pension and Benefits Update in Toronto.

DC plans
The DC plan—the traditional alternative to DB arrangements—provides stable employer contributions and is perceived to be an easier plan to administer (compared with a DB plan). However, administration and governance do not necessarily decrease with a DC arrangement, and some employers may eventually face litigation over inadequate retirement benefits. Also, with no benefit certainty for members, this type of plan is not overly popular with unions.

Multi-employer pension plans
On the other hand, a multi-employer pension plan (MEPP), administered by a board of trustees, usually does have union appeal. It’s also an alternative to a DC plan to retain members in a DB arrangement, says Kalinowski.

Challenges with a MEPP, however, include a lack of control over plan terms, potential liability of employer and employee representatives on the board and possible investigations (if recent Financial Services Commission of Ontario investigations of MEPPs are any indication).

Jointly sponsored pension plans
In a jointly sponsored pension plan, members share responsibility for governance, plan administration and plan terms. It’s a contributory DB plan, with equal employee and employer contributions, and members share the costs of funding deficits. Kalinowski says this plan is usually a compromise for unions when there is an impasse at the bargaining table.

Employees and unions like this type of plan because of the joint governance and equal contributions, and employers like that members share in both the surplus and deficits. However, fluctuating contributions and shared governance can pose challenges.

Fixed contribution pension plans
A fixed contribution pension plan is a single-employer (or related employers) plan—but not a MEPP—and the employer contribution is fixed in the collective agreement. As a result, however, if there are insufficient assets, the benefit decreases.

Employer challenges with the fixed contribution plan include pressure in bargaining to increase contributions instead of decrease benefits, and demands from a union for a share in governance in exchange for the fixed contribution feature.

Superfunds
Superfunds are large public sector plans (e.g., OMERS and the Ontario Teachers’ Pension Plan) that invest and do the recordkeeping for smaller plans. While employers can get institutional expertise and potential cost savings, monitoring and reporting can be a challenge. The plan sponsor has a responsibility as an administrator to monitor the action of the superfund and review the fees. Similarly, the suitability of the superfund’s investments could be an issue. The superfund’s asset structure may not be an appropriate structure for your smaller plan, says Arbour.

Outsourcing
One trend that is occurring in the U.S. is outsourcing fiduciary functions to a third party, saving the employer time and freeing up internal resources. However, the employer, as the legal plan administrator, would have to monitor the actions of the third party and have a clear understanding of what it is doing.

Supplementary CPP
The supplementary Canada Pension Plan (CPP)—also known as CPP-plus—is a voluntary supplementary plan on top of the CPP. While the CPP-plus is not available yet, there is much discussion and support for it in several provinces.

Even though DB is tricky, DC does not have to be the only option for plan sponsors to consider if they want to make a plan switch. There is not one perfect option, says Kalinowski. On the plus side, necessity is the mother of invention, she adds. “Do your research and find the best solution that works for you and your situation.”

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