Cost containment is the No. 1 issue for defined benefit (DB) plan sponsors, according to the results of the 2007 ACS/Buck Consultants Survey Of Defined Benefit Pension Plans In Canada.
The results were unveiled in a seminar Wednesday at the Toronto Board of Trade. Marc-André Vinson, senior consultant, and Charlene Moriarty, consulting actuary, served as panelists, while Steven Laird, communications consultant at ACS/Buck, moderated the discussion.
When asked about the major issues facing plan sponsors today, 43% of respondents identified cost containment as the most important issue—a marked difference from the 2003 results, which showed employee communication as the main concern.
Adequacy of benefits was a close second, at 42%. Vinson believes that the paternalistic mindset and behaviour of many plan sponsors is one reason for this result. “Employers do still look out for their employees’ wellbeing, and that extends to their retirement needs,” he said. “Most employees are not well prepared for retirement, and save too little if left entirely on their own. Employers who recognize this want to help ensure that their employees can make that great transition from their active work life to a new life as retirees.” And, with the recent legislative changes relating to phased retirement, DB plans may play a significant role in retaining valued employees in the future, Moriarty added.
Other results support this view. When asked about reasons for having a DB plan, 40% of respondents cited retirement income adequacy. A whopping 87% of plan sponsors provide the maximum benefit allowed by the Income Tax Act. And, while a large percentage are considering changes in plan design (31%) or have made significant changes to plan design within the last five years (25%), only 12% of plan sponsors are considering converting to a capital accumulation plan within the next five years.
So how do you reconcile a focus on cost containment with a genuine concern for plan members’ wellbeing and financial security in retirement? There are a few strategies that plan sponsors are considering.
Some plan sponsors maintain legacy DB plans for existing employees, but offer only defined contribution (DC) arrangements to new ones. Others are pulling back from generous early retirement provisions or automatic cost-of-living increases. Still others are looking at alternative DB plan designs, including flexible pension plans, to provide a basic benefit to plan members while controlling costs.
Although DC plans may be growing in popularity, DB plans remain an important part of the Canadian pension system. “While the move to DC may solve some problems for clients, it is not a panacea,” Vinson cautioned. “DC plans do not work very well as an HR management tool.”
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