Interview with Ian Markham, Canadian Retirement Innovation Leader at Towers Watson
Q: Are DB plans threatened?
A: Yes, they are under threat. If you were to go back 20 years, the people who were generally making decisions were HR officers, because pension plans were seen as a significant part of total compensation. But then the legislation got more punitive to defined plan sponsors and then you had the 2001 market crash. Financial people became much more interested in DB plans, and then you had the 2008 crash.
Meanwhile, throughout this whole period, we didn’t see much evidence of government policy-makers being able to see the picture from the eyes of financial officers. They could see the picture through the eyes of voters and plan members. Finance looks at these things not as total compensation quite so much as ‘this is a weird financial subsidiary that we have and it’s actually becoming bigger and it’s out of control.’
There is a major positive that would be going for DB plans these days, from the plan sponsor’s perspective. The boomers are retiring. There’s not enough people to replace them. That means, there will be an increasing focus by HR to keep older workers.
DB plans can help toward that goal.
Q: How does de-risking work for DB plans, good and bad?
A: I see de-risking as something that is usually healthy for most stakeholders in helping deliver the promised benefits over the long term. But if you de-risk by changing your asset mix from 60% equities and 40% bonds to 40/60, say, it generally means that the funding of the plan and the pension accounting expense will increase over time. So there is a downside to de-risking, and that’s the reason why it’s done gradually.
This is where the concept of ‘journey planning’ comes in. De-risking can happen through plan design, but usually we think in terms of improving the asset-liability mismatch. The first [question] is, ‘Do we want to de-risk?’ If the answer is yes, the strategy may be ‘Not now, but if ever our funded position gets to a certain level or if interest rates get to a specified level, we might then want to de-risk.’
Q: To what extent is funded status right now a function of low interest rates rather than poor equity markets?
A: I’d say that the typical solvency funded position of private sector DB plans is around 85% to 90%. The historical drop in long bond yields has been the primary culprit keeping it that low. It doesn’t take much for that to go zipping right up to 100% again.
Q: Are DB plans looking at increasing contributions? Do they need to?
A: Generally speaking, they don’t have any choice. Actuarial valuations in Canada have to be filed at least every three years, but in a number of jurisdictions, they have to be filed every year if the plan’s funded status is below a certain threshold.
Q: Are the contributions coming from employers, employees or both?
A: It’s mostly employers. I’m definitely aware of organizations that are looking at their plan designs as ways in which they can cut either the volatility of their employer contributions or the level of them, or both. Organizations that might be looking to increase employee contributions will likely, at the same time, look to make more drastic changes to their plan designs.
Q: Are there ways to make DB plans more robust?
A: We must answer that question largely from the finance officer’s perspective these days, as it is they who have to manage financial risk for their enterprise. DB plans have been run with a significant asset-liability mismatch, with very few exceptions, in Canada. Either that mismatch must be addressed over time, while being honest with plan members by explaining to them the true nature of that DB risk, or a new plan design is needed that changes the degree to which each party is bearing which risk, and again, communicated carefully. There are different types of DB-based plan designs that can achieve this, without having to impose on members all the risks inherent in a DC plan.
There needs to be a movement by government to view DB plans as longer term in nature, and for these governments to be able to withstand the crises caused when well-known companies, household names, go under—tough though that is for the plan members. Governments need the courage to articulate that
DB benefits are not guaranteed in the private sector because they are dependent on a healthy enterprise.
Scot Blythe is a freelance writer in Toronto.
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