Canadian pension plan sponsors are preparing for sustained pension turmoil by making changes to plan design and investment strategies, according to results from Towers Watson’s 2012 Pension Risk Survey.
The poll reveals that both DB and DC/CAP plan sponsors anticipate plan challenges for an extended period of time. Of DB sponsor respondents, 65% believe that Canada is in the midst of a pension funding crisis that will be long-lasting and likely to worsen over the next 12 months—up from 56% who felt the same in 2011. Among DC/CAP sponsor respondents, 70% are bracing for an increase in plan-related litigation in the coming years, as members move into retirement and face inadequate income from their plans.
“There is, unfortunately, a degree of pessimism in the air in the pension world. These are very uncertain times,” Ian Markham, Canadian retirement innovation leader at Towers Watson, explained yesterday during a presentation focused on the survey at the Conference Board of Canada’s 2012 Pension Summit. “The mood is very much toward de-risking now, even if it’s at a cost.”
Indeed, more than half (54%, up from 50% in 2011) of DB respondents indicate they are currently planning or considering investment strategy changes. Of these sponsors, 49% say their long-term goal in changing investment strategy is specifically to de-risk, regardless of whether it means lower returns, while 41% say they are equally seeking higher returns and lower risk.
Markham explained that most DB plan sponsors are moving their target asset mix away from equities and into fixed income, with the average plan expecting to shift from a 50% allocation to domestic and international equities in 2012 to 46% 2015. Assets allocated to fixed income are expected to rise from 40% in 2012 to 45% in 2015.
Many are also looking at other changes to address plan challenges. One in five sponsors is eyeing funding policy changes, 18% are undertaking or anticipating other plan design changes, while 10% plan other de-risking strategies.
In a press release, David Service, director of Towers Watson Investment Services, commented that the shift in attitude toward de-risking now represents a missed opportunity for many plans. “Until a few years ago, plan sponsors remained caught in the mindset that de-risking meant giving up more return than they felt was worthwhile. Many plan sponsors did not take advantage of the de-risking opportunity that existed in 2006 and 2007 when their DB plans were close to fully funded.”
The move away from DB and into DC/CAP continues, as well. Of private sector respondents, 22% indicate they have either implemented a CAP plan for new hires over the past 24 months or will do so in the next year, with a further 8% considering such a move for an unspecified point in the future. In the public sector, while just 4% of respondents said they have implemented a CAP plan for new hires over the past 24 months, 7% will do so in the coming year, and 20% are eyeing such a move in the future.
Markham explained that Towers Watson’s 2012 Plan Change Survey asked 140 clients who’ve made such a shift in recent years why they did so. “By far [the leading reasons] were reducing cost volatility and reducing cost, which I think comes to no surprise to people.”
The Pension Risk Survey results also indicate that plan sponsors are making investment strategy and plan design changes with the understanding that members are increasingly aware of what’s going on with their plans. Asked whether they thought members were more concerned with their pensions than they were 24 months prior, 72% of plan sponsors said yes. As well, 41% of sponsors believe their plan members are more knowledgeable about their pensions than they were 24 months earlier.
“There seems to be concern by plan sponsors—whether they’re DB or DC—when they’re making plan changes to think about the adequacy of retirement income. I’m not sure they’re doing enough about it, but it’s a very complex set of factors that we’re dealing with, with lots of moving parts,” commented Markham.
Neil Faba is associate editor of Benefits Canada. neil.faba@rci.rogers.com