Changes are afoot in the DB world in Canada. Private sector pension liabilities are increasing relative to the size of corporations. As a result, large swings in funded positions can have a significant impact on corporate balance sheets and cash flows. For many plan sponsors, this means that financial issues have become far more important than HR considerations in influencing changes to DB plans.
More than 90% of the 150 respondents to Towers Watson’s 2011 Survey on Pension Risk indicated that their top priorities are containing costs and volatility. This focus on mitigating financial risk is moving Canada’s private sector inexorably toward DC pension plans.
Of the private sector DB plans surveyed, 49% remain open to all employees (down from 58% in 2008), and there are no signs that the pace of DB to DC conversions will slow in the near future.
The main impetus for the move to DC is pension de-risking. While this notion has been around for years, many plan sponsors did not take advantage of the de-risking opportunities that existed in 2006/07 when their DB plans were close to fully funded. However, the 2008 financial crisis appears to have driven many senior finance executives to action. More than half (59%) of respondents from publicly traded companies considering changes to their largest DB plan indicated that they are developing or have developed a de-risking strategy. It is critical for plan sponsors to develop such a strategy in advance in order to be able to de-risk quickly when the next opportunity arises.
The survey results suggest that plan sponsors are considering the role of fixed income in de-risking strategies, with 20% of respondents planning to materially increase their fixed income weighting over the next three years and 18% intending to lengthen the duration of their fixed income portfolio.
Evidence suggests that the number of open DB plans will continue to decline. However, many Canadian jurisdictions are attempting to reverse this trend by modernizing pension legislation and considering or implementing alternative approaches such as target benefit and jointly sponsored pension plans for sharing risk between plan sponsors and plan members. Whether these potential legislative changes are enough to persuade companies not to move away from their DB plans or to adopt new design approaches outside of the typical DB or DC paradigm, it’s clear they will not affect most corporate decisions in the short term. Survey respondents that are considering a DB to DC conversion said they plan to implement it regardless of improved economic conditions (69%) or a more plan sponsor-friendly legislative environment (63%).
In light of the importance placed on addressing financial challenges, are plan sponsors at all concerned about HR issues? While 52% of the respondents considering plan design changes have significant concerns about the possible negative impact on employee attraction and retention, just 23% noted that concerns about their employees’ potential to retire with inadequate savings play a large role in their evaluation of prospective changes.
Ultimately, it will be up to individual plan members to take an active role in maximizing their retirement income, but many Canadians lack the knowledge to do this effectively. While the government and industry are taking steps to improve the state of financial literacy, it will likely take many years before they have a positive impact.
In the meantime, employers should consider not only the extent that they can reduce risk for shareholders but also the critical role they can play in helping their employees build reasonable retirement income.