For me, September has a very specific association. When I start seeing TV ads for stationery supplies and fall clothing “essentials,” I always have an urge to run out and buy a new pack of highlighters. There’s a shift as subtle as the change in season, signalling that the relaxed days of summer are over and it’s time to get down to business.
This year, that back-to-school mentality has special relevance for the pension industry. There are important lessons to be learned from the recent economic situation—which, though it remains volatile, seems to be turning around.
In an interview with Jim Keohane of HOOPP, we talked about the status of many pension plans today: underfunded and facing significant contribution increases or benefits reductions as a result. He said that, in his view, a number of pension funds invested in exotic trades where they didn’t fully understand the downside risk of the trade and the cash flow management required to maintain those positions. The overly ambitious pension funds who unknowingly took on too much risk suffered severely when the equity and credit markets took a dive.
Cracking out our notebooks and our felt-tipped pens, what’s the lesson here? It’s time for pension funds and the industry at large to get back to basics: the theme of our Top 50 DC Plans Report (page 10).
Getting back to basics means a number of things. It means focusing more on plan governance and administration: making sure that the plan is managed efficiently and that plan documentation is up to date. It means communicating with members about their plans and the basics of investing—particularly with defined contribution plans, so that there are no unpleasant surprises during periods of volatility. It means greater transparency: understanding what the plan is investing in and why, and ensuring that these investments fit the plan’s risk profile and return objectives. Most important, it means being mindful of the plan’s true purpose: to generate retirement income for its members.
I’ve been asking around for opinions on whether or not the pension industry will take these lessons to heart. Not surprisingly, few want to speculate. But it’s my hope that we’ll learn them by rote so that the next time we have a major market correction, we won’t see so much red ink on the pages of companies’ financial statements.
Alyssa Hodder is Editor of Benefits Canada.
alyssa.hodder@rci.rogers.com
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© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the September 2009 edition of BENEFITS CANADA magazine.