Defined benefit plan sponsors across the country are looking for ways to reduce risk using tools such as plan design or investment strategy.
At Benefits Canada’s DB Investment Forum on Dec. 11, 2015, five consultants discussed trends in changes to plan design and how they relate to investment decisions.
Jason Campbell from Eckler, Ken Choi from Towers Watson, Hrvoje Lakota, principal from Mercer, Lucy Paglione from Buck Consultants Ltd. and Brian White from Aon Hewitt participated in the discussion.
When it comes to plan design, a current trend involves employers closing their defined benefit plans to new members. When plans close or freeze, the investment time horizon changes dramatically.
“A lot of the time, what the plan sponsor is looking to do is, at some point in time, exit the pension game, which then starts placing constraints on the types of investments that you can deploy in order to generate the returns that the plan needs,” said Lakota.
“For example if your goal is, ‘I want to get my plan to fully funded on a solvency basis and annuitize it as soon as possible,’ private equity might be a beautiful asset class,” said Lakota. “But if you have a 15-year lock-up on a fund that you’re putting money into, that can become almost a constraint that you can’t go past.”
Another plan design change that came up was the target benefit model.
Choi said he thinks the investment implications of a target benefit plan model are huge.
He noted that the level of benefit an employer has promised, the amount of variability in that commitment and the funding margins will affect the investment strategy. For example, if a plan has a generous benefit promise with conservative funding, it may choose to take a certain amount of investment risk. “On the other hand, if you have a low level of benefit that’s funded with slim margins, then you wouldn’t be able to take the same kind of investment risk,” said Choi.
He said that in the target benefit space, there’s a demand for contribution stability. From an investment perspective, that means the necessity to have a greater diversity of investment return drivers within a portfolio and one way to accomplish that is through alternatives.
“In a regime like New Brunswick, which does have target benefit plans, the rules there around funding and around the variability of benefits are so rigorous that not only are alternatives a benefit to your investment strategy, they’re almost a necessity,” said Choi.
The consultants agreed that plan sponsors shouldn’t underestimate the link between plan design and investment strategy.
“Asset mix is not something that you can necessarily change overnight and you want to have enough time to think about what is my plan going to look like after my annuity purchase or what is my plan going to look like after my plan design change,” said Choi.
“You really need to have your plan design and your investment strategy aligned and working together and if either one of those pieces is not aligned, sustainability long term is going to be challenging,” said Campbell.
All the articles from the event can be found in our special section: 2015 DB Investment Forum coverage.