2021 Top 100 Pension Funds Report: DB plans shining bright amid pandemic clouds

The CAAT’s annual report reveals the plan sailed through, ending 2020 with a funding status of 118.8 per cent, up slightly from the 117.9 per cent recorded in December 2019. That improved position came despite a discount rate that had been slashed by 20 basis points to 4.95 per cent, reflecting lower expectations for investment returns over the next couple of decades.

Read: CAAT posts 11.1% return for 2020

The contrast isn’t lost on Derek Dobson, the plan’s chief executive officer, who is a little sheepish as he reels off some of the CAAT’s impressive metrics: $3.3 billion in funding reserves, $15.8 billion in assets and an investment return of 11.1 per cent, net of fees. “I hate to say it, but it was a really good year from a pension plan sustainability point of view.”

Dobson credits the CAAT’s approach to funding policy — a multi-year plan focused on benefit security and contribution stability — for allowing its decision-makers to treat the pandemic as just another bump in the road, albeit a fairly significant one.

“You know [these bumps] will come, although the source is difficult to predict,” he says. “We look to the long term, rather than worrying about annual results. That’s not what’s going to win the race on plan sustainability.”

A banner year

The CAAT wasn’t the only defined benefit pension plan enjoying a banner year as the pandemic raged, according to data from several sources.

For instance, the Financial Services Regulatory Authority of Ontario recently found the median solvency ratio of DB plans in the province stood at 103 per cent at the end of 2021’s first quarter — the highest level recorded since before the 2008/09 financial crisis and a marked improvement from the 85 per cent median reported at the end of March 2020, the month the global pandemic was declared.

In addition, around 60 per cent of the plans reporting to the FSRA were fully funded, with only four per cent slipping below the 85 per cent solvency ratio threshold that triggers the requirement for special top-up payments.

Read: Ontario DB pension solvency up again in third quarter: FSRA

The provincial agency only tracks DB pensions that are subject to solvency funding — the stringent standard used for most private sector funds — which values a plan’s assets and liabilities as if it were forced to wind up immediately. Multi-employer and jointly sponsored pensions such as the CAAT are exempt from those rules and report funding on the generally more forgiving going-concern basis.

Mercer Canada’s plan sponsor clients followed a similar pattern, improving their median solvency to 104 per cent in the first quarter of 2021. Its pension health index — a hypothetical asset-to-liability ratio based on a model plan — also reached 124 per cent, an all-time high since it was launched in 1999.

“It’s a very good sign for pensions, especially when you consider where things were at the end of March 2020,” says Ben Ukonga, a principal in Mercer’s financial strategy group.

He puts the index’s unprecedented spike down primarily to a strong equity market rally in the latter months of 2020, followed by a sharp rise in early 2021 for long-term bond yields, which are used to peg discount rates for determining plans’ future liabilities — both the U.S Treasury and Canadian 10-year bonds increased by more than 75 basis points in the first quarter.

But he also warns against complacency, noting funding levels are prone to volatility depending on equity market performance and other economic indicators.

Read: Canadian DB pension plans see improved funded positions in Q1: reports

Indeed, a prolonged slump in solvency ratios following the global financial crisis more than a decade ago was finally arrested and reversed largely on the strength of a surge in Canadian long-term bond yields, only for solvency levels to plunge again in 2015, sparking calls for provincial governments to step in with relief measures.

Regulatory reform

However, regulatory developments since then have paved the road for a smoother exit from the pandemic crisis for DB pensions, says Marc Drolet, a principal in the asset and risk management practice at LifeWorks Inc. (formerly Morneau Shepell Ltd.).

In 2018, Ontario followed the example of solvency reform trailblazers British Columbia, Alberta and Quebec by loosening its own strict requirements. In return for a cut from 100 to 85 per cent in the solvency funding threshold at which special top-up payments kick in, the province required DB plans to maintain a 100 per cent funding ratio on a going-concern basis, along with contributions to maintain a reserve fund, known as a provision for adverse deviation.

“Solvency levels could drop again for sure, but it won’t hit as hard,” says Drolet. “I believe the financial impact will be less than a few years ago, when sponsors actually had to commit more contributions to the plan.”

Whatever DB plans’ current financial positions, he says risk management should be taking centre stage for sponsors. “Depending on what sector they’re in, some sponsors might have undergone a permanent change in their business model and their risk tolerance may not look the same as it did before the pandemic.”

Read: A look at the landscape for pension solvency funding reform across Canada

In many ways, the pandemic has created a unique de-risking opportunity, he adds, since the brief equity market crash in March and April 2020 delivered a shock to plan sponsors without any of the long-term financial consequences. “I have clients that were hit severely, losing more than 10 to 13 per cent in a single month. Luckily, they rebounded at record speed. I think they’re aware that they dodged a bullet and will be considering changes to their asset mix.

“There’s an opportunity cost here that I’m trying to make clients aware of, because who knows what’s going to happen in the future,” he adds.

Nathan LaPierre, a partner in Aon’s retirement solutions group, says annuity purchases and defensive asset allocations are some of the measures available to pension plans, depending on their active status and investment horizon.

“The plans generally looking at de-risking are corporate plans, especially those that don’t have any new entrants. Even if they have members still accruing benefits, we’ll likely see them looking at their de-risking options.”

Read: What options are available for de-risking DB pension plans?

But risk management is a concern beyond the private sector, as the Healthcare of Ontario Pension Plan demonstrated when it made the creation of a new risk division a priority in 2020, welcoming Saskia Goedhart as its first-ever chief risk officer.

“As we grow in size and complexity, we need to be thinking about how to get even better at managing risk,” says Jeff Wendling, the HOOPP’s president and CEO.

Pension interest on the rise

Another pandemic side-effect for DB plans could be a resurgence in interest from both employees and employers.

Workers have long been sold on the idea, but a survey commissioned by the HOOPP in late 2020 suggested the economic upheaval of the last year has enhanced the case for strong retirement savings programs. According to the survey, 79 per cent of respondents would rather their employer make pension contributions than receive the money as salary, even if their finances had been negatively affected by the coronavirus. In addition, 74 per cent said they’d take a lower salary in exchange for a better pension plan.

“One of the great things about a DB pension is that [plan members] don’t have to worry about volatility in the stock market,” says Jason Heath, a financial planner at Objective Financial Partners Inc. “People place more value on that type of retirement solution when there is uncertainty.

Read: Most Canadians would choose greater retirement security over more money now: survey

“You have to wonder if there’ll be an inflection point where employers decide to start offering plans to employees in order to attract talent,” he adds, noting that plans such as the CAAT’s DBplus and the OPSEU Pension Trust’s OPTrust Select have the potential to remove the administrative headaches that plan sponsors traditionally associate with a DB offering.

At the CAAT, where DBplus opened to new employers in 2019, Dobson believes that inflection point may have already been reached. He says he feared the onset of the pandemic would slow the pace of expansion as talks with prospective employers halted. “There were a lot of pause buttons hit, because people just needed to survive and their focus was elsewhere.”

However, the pandemic has proved a net positive for the popularity of DBplus, with the void left by distracted employers more than filled by fresh expressions of interest from organizations looking to satisfy employees newly confined to home offices. “They want to put their money where their mouth is to retain employees because the mobile workforce can now work for anyone,” says Dobson. “Employers are turning the corner. They’re all saying employees are their most important asset, so having an ineffective pension system or none at all doesn’t really resonate.”

Since it was founded for employees of Ontario’s 24 colleges, the CAAT now serves more than 100 employers. In 2020 alone, it added 7,500 new members from 35 different employers, but Dobson expects the number to at least double in 2021, predicting somewhere between 14,000 and 25,000 new arrivals. “We’re on an exponential curve.”

Read: Tips for moving from a single-employer to a jointly sponsored pension plan

When it comes to a pension plan’s existing members, the pandemic has also proved to be a boon for engagement, says Gary Yee, chair of the board of trustees at B.C.’s Municipal Pension Plan. He says the board expected the surge of enquiries from members looking for reassurance about the safety of their pension savings as financial markets bounced around erratically at the onset of the coronavirus crisis. However, that interest was sustained through the pandemic’s quieter months until the plan’s annual general meeting, which went online in October 2020.

“We had over 500 participants, which is a record for us,” he says, noting an approximate doubling of the usual number of attendees. “Going virtual has allowed us to get the involvement of a lot of different members, including ones who hadn’t been able to travel before to participate.”

Educational and informational workshops for plan members have also transformed into online webinars, although Yee is looking forward to the day when they can be offered in-person again. “The webinars have gone very well and I think we’ll continue to run them both online and in-person, because some people get more out of it when they can be in the room.

“We’re always looking for potential efficiencies we can implement and we have learned a lot of good lessons out of this pandemic.”

Michael McKiernan is a freelance writer.

Download a PDF of the 2021 Top 100 Pension Funds Report.