While pension risk remains a concern for Canadian organizations, many executives no longer view the situation as a long-term crisis, according to the results of the 2008 Survey on Pension Risk conducted by the Conference Board of Canada and Watson Wyatt Worldwide.
Analyzing the responses from chief executive officers (CFOs) and vice-presidents of human resources (VPs HR) at 168 Canadian organizations, the survey found that just over one-quarter of CFOs see the pension funding crisis as long-lasting—a significant decrease from 61% in 2006 and 48% in 2007. However, 68% of respondents still see the volatility of funding contributions as a major issue. “There’s a lot of concern about volatility out there…and there’s an increasing focus on liability-driven investment strategies,” says David Burke, Canadian retirement practice director, with Watson Wyatt Worldwide.
Most respondents view the finance function as more influential than HR when it comes to plan design. “Today, and in the last few years, many plan design decisions have been heavily driven by financial considerations,” Burke affirms. However, this may be about to change—58% of respondents said they believe that HR and financial functions will play equally important roles in the future.
The results also show that the conversion rate from defined benefit (DB) to defined contribution (DC) plans is slowing. Less than 3% of respondents said they will be converting from DB to DC within the next 12 months—a marked decrease from previous years. “About 30% of plan sponsors have made conversions in the last several years,” says Burke, “and there’s about 40% that are not considering any changes in the future. So you’ve got a group of about 30% that is not totally decided, but is not necessarily committed to going to DC either.” The slowdown may be due, in part, to the plan conversions that have already taken place. “There’s a good chance that those who really wanted to get out, have gotten out,” he adds.
Other possible reasons for this trend include concerns about the adequacy of DC plans from an income replacement perspective, and as a means of attracting and retaining talent. “DB plans are perceived as being a significantly better retention tool than other types of plans,” says Burke. And that’s a serious consideration for many organizations—70% of respondents said they are very concerned with attracting highly skilled workers and 76% said the same about retaining high-performing employees. “Some organizations see the importance of the pension plan not just from a pure benefit perspective, but also from a workforce management perspective,” he adds.
Burke also draws attention to the plan sponsor’s ongoing challenge of balancing people management and risk management—strategies that are interrelated but not always completely aligned. To address this challenge, he says, plan sponsors should look at their business management and human capital needs, assess what these needs will be in the future and then determine how the people strategy and pension plan will fit into the big picture.
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