The results of Towers Watson’s annual Pensions Risk Survey—presented today at The Conference Board of Canada’s 2011 Summit on the Future of Pensions: Rebuilding Pensions, Rethinking Retirement in Toronto—indicated that DB plan sponsors continue to convert to DC arrangements for current or future employees.
“In the ’70s and ’80s, DB was in its heyday,” said Ian Markham, Canadian retirement innovation leader with Towers Watson. “Funding was based on going-concern funding.”
“Pension risk was not the focus,” chimed in David Service, director, investment consulting, with Towers Watson. “[The thought was] pensions are a long-term commitment, and people were thinking in 30-year time horizons.”
Solvency funding introduced contributions based on mark-to-market measures, where those are based on bond yields, explained Service. “In 1988, at the time, the Ontario government didn’t think solvency was going to dominate funding.”
Many plans missed the golden opportunity to begin de-risking back in 2006/2007, he continued, when plans were 96% or 97% funded. “Unfortunately, many plans didn’t de-risk.”
So what’s a DB plan to do?
Well, according to the Towers Watson survey, of private sector DB plans surveyed, 51% have actually converted their plans to DC for current or future employees. This is up from 42% in 2008. Change is definitely afoot.
Indeed, 70% of respondents are planning one (or more) of the following changes:
• investment strategy (50%)
• funding policy (18%)
• switching/converting to DC/capital accumulation plan (CAP) (11%)
• plan design excluding DC/CAP) conversion (12%)
• annuity purchases (10%)
• windup of inactive obligations (7%)
• offer/encourage former plan members to elect commuted value transfers (7%)
Of the private sector DB plan respondents considering changes to their plan design, funding policy or investment strategy, 52% indicated that they have a “journey plan” of measures to contain cost and volatility.
But of those organizations considering plan design changes, the potential impact on attraction and retention of talent is a major concern (52%).
Markham left the audience with four key points:
• Seventy percent of organizations surveyed are planning at least one change.
• Organizations’ main reason for the changes is to avoid volatility in the long run and cut costs in the short run.
• Many private companies are planning to de-risk through plan design, investment strategy or funding.
• The trend of moving to a DC plan will continue.
The 8th annual Pension Risk Survey polled 153 organizations from diverse sectors and institution types across Canada (40% publicly traded companies, 25% private, 24% public sector and 10% not for profit).