After stronger market performances in 2009 and 2010, returns took a turn for the worse in 2011.

The TSX declined by 11%, and lower interest rates increased pension liabilities. The Mercer Pension Health Index showed that a typical pension plan was 60% funded at the end of 2011, down from 73% at the end of 2010. And while that indicator has risen slightly (to 63%, at the end of Q1 2012), plan sponsors faced with increasing pension commitments aren’t waiting around for the economy to stabilize.

For the full list of Top 100 Pension Funds, download the PDF of this article.

A look at the numbers in this year’s Top 100 Pension Funds Report doesn’t suggest that stabilization is imminent. While last year’s report showed just three plans with decreases in pension assets, this year, 26 of the 100 biggest pension plans in Canada reported negative asset growth. And while 62 of the plans on last year’s report had double-digit growth in assets, just 18 on this year’s list had increases over 10%.

“It’s been a decade of uncertainty,” comments Paul Forestell, a senior partner with Mercer. “Plan sponsors have finally decided, ‘The uncertainty isn’t going away, and we’d better figure out how we can best manage it going forward.’ ”

How best to manage it depends on a number of factors. But according to Forestell and other industry experts, in 2011, the majority of plan sponsors considered or implemented changes to plan design and governance, as well as making adjustments to what and how they communicate to plan members.

Managing risk by design
Ian Markham, Canadian retirement innovation leader with Towers Watson, says most of the plan design changes seen in 2011 were driven by a desire to reduce risk. He points to the results of Towers Watson’s 2012 Pension Risk Survey: more than half (53%) of DB plan sponsors said they would be willing to accept lower investment returns in favour of reduced risk, up from 36% the previous year.

“As DB plans mature, you’re going to get more long-term volatility as plan members move into retirement,” he explains. “So short-term volatility concerns will be replaced by more long-term volatility, unless actions are taken.”

For many plans, taking action meant continuing to move away from the traditional 60/40 split of equities and fixed income toward a heavier focus on the latter. Forestell says that decision may have benefited many plans in 2011. But whether that will hold true over the long term, as interest rates rise, is another story.

“The challenge with fixed income is that bond yields are low, based on historic levels, and plan sponsors are asking if this is the right time to buy them,” he explains. “But there is also nervousness around equity markets. So there’s no place to hide, and you’re not going to know for a year or two whether you made the right decision. In some cases, it could be 20 years before you know.”

The big decision
For a growing number of DB plan sponsors, that uncertainty—along with the struggle to maintain a healthy funding ratio—is becoming too much of a drag on the bottom line. Add in International Financial Reporting Standards accounting rules adopted in Canada on Jan. 1, 2011, which will make pension liabilities more visible on the balance sheets of publicly traded companies, and it’s not surprising that some are considering closing their plans to new hires. While just 2% of DB plan sponsor respondents to the Pension Risk Survey indicated that they plan to switch to a DC or capital accumulation plan arrangement for new hires in the next 12 months, another 8% are considering such a move for a future date.

RBC (No. 22 on the Top 100 list), despite its considerable size and strong returns since 2008, closed its DB plan to new hires as of Jan. 1, 2012. Forestell, who worked with the bank on the move to DC, says the change will ensure more predictable pension costs in the future.

With this change, RBC is also building in enhancements to its current DC plan. As of July 1, 2012, eligible employees will be automatically enrolled, members will have the option for auto-escalation of contributions, and an automatic employer contribution will be made to ensure a minimum level of savings for all members.

Forestell expects more DC plans to be enhanced as corporations move their employees away from DB. “A DC plan that was put in place awhile ago was probably a lot more plain vanilla than what we’re seeing now. I do think we’ll see more innovation in the DC space.”

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