Given the increased scrutiny around pension plan arrangements, plan sponsors today are spending more time monitoring and discussing plan design, contribution levels, risk appetite and investment mandates. And, with increasing frequency, they’re finding it necessary to make changes.
Change is never easy, but there are both good and bad ways to manage it. These three case studies show how preparation, leadership buy-in, key stakeholder discussions and a well-communicated analysis will go a long way toward making pension plan changes successful.
Case study #1: Changing plan design
The challenge
This plan provided the greater of a DB and a DC pension (i.e., a hybrid plan). But under the current economic environment, as with most plans in the broader public sector, the plan had a tight budget with no room for rising pension contributions.
As part of a review of its investments, the plan sponsor agreed to an exercise to model the plan’s funding levels and expected future contributions 15 years into the future. Modelling was done using a stochastic process, which tested thousands of economic scenarios to come up with a range of probable outcomes. The analysis showed that unless the plan sponsor made a change to the plan design, there was a significant probability that contribution levels could escalate to the point where the plan would not be sustainable.
The change
The first step was to bring the executive team into the loop. Explaining the issues and the path for change was key to the success of this initiative. Throughout the eight-month process, the plan’s leaders were all on the same page and were able to address the questions asked in a uniform voice.
Meetings were then scheduled with the leaders of each of the organization’s key stakeholder groups. Some of these leaders had limited exposure to pension issues, requiring a clear delivery of the facts and analysis. Sometimes, multiple discussions were required to ensure that the stakeholder leaders could explain the required changes to their constituents and build an understanding of the need for sustainability. The discussions also explored potential solutions, which helped to uncover which plan design terms were sacred and which were modifiable.
Once the stakeholders agreed on the need for change, the plan sponsor communicated this to the entire membership. The specific actions were ultimately part of bargaining discussions with the unionized groups, and the negotiations went smoothly due to the work done upfront.
The outcome
All involved in the plan felt it was better to have a stronger and sustainable retirement benefit than a higher termination benefit. As a result, the plan no longer has a hybrid component for future service, since the DC component mainly provided higher benefits for terminated employees.