This is the second of two parts. Part 1 was published on Wednesday.
Canada Post’s recent dramatic decision to cut back some of its services to stay profitable put a spotlight on the challenges faced by businesses with a significantly underfunded pension plan.
The timing couldn’t have been better for the panel discussion at Benefits Canada’s 2013 DB Summit on the long-term sustainability of DB pension plans.
Panellists:
- Derek Burleton, vice-president and deputy chief economist, TD Economics
- Derek Dobson, CEO and plan manager, CAAT Pension Plan
- Paul Forestell, retirement business leader for Canada and senior partner, Mercer
- Blair Richards, CEO, Halifax Port ILA/HEA Pension Plan
Q: How have developments in the past year changed your views on DB sustainability, and what do you expect for 2014?
Burleton: We knew the past year was going to be a tough year for the global economy and stock markets. It also underscored how low interest rates are going to remain over the medium term. The biggest shock of 2013 was inflation, running below 1% in Canada. It will likely remain low globally, given the weakness in Europe and central banks printing money, trying to keep bond yields down. Also, while U.S. equity markets gained 20%, Canada underperformed. There is room for convergence.
Forestell: The non-indexed Canadian pension plans are in a much better position now than they were at the start of 2013. It does take some of the pressure off, in terms of whether or not we can afford a plan, with bond yields picking up. There may still be opportunities to adjust asset mix to better manage that risk going forward so things that happened in the last five years don’t get repeated.
Q: What is the single biggest challenge facing DB plans today?
Forestell: Right now, it’s the low interest rate. It’s driving solvency liabilities up and dropping expected returns. It’s made plans more expensive without any adjustments to benefits.
Burleton: When you look at where the funding comes from, it’s not so much [from] contributions but from returns over time. So I do think low return on investment is the No. 1 challenge to DB plans today.
Dobson: I think apathy is a real risk: apathy around adequately saving for retirement or understanding what the needs are in retirement. People have no understanding of how valuable their retirement program will be to their financial security.
Richards: It’d help to get away from traditional thinking around retirement date. You should be able to know whether or not retirement is possible at some point in time based on a replacement ratio of some sort.
Q: What strategies are DB plan sponsors using to achieve sustainability?
Dobson: Across the industry, more people are talking about risk-sharing and cost-sharing, which are important aspects of any long-term solution. As well, we should be articulating what our risk tolerance is. Some progressive employers are making renewed commitments to DB plans, but they’re also taking some of the risk off the table, which is critical.
Forestell: One of the pillars is investments in infrastructure, private debt and private equity. These are ways to enhance and diversify returns, and potentially reduce overall risk in the plan. Further, as you move toward risk-sharing with employees, there should also be a move to get employees involved in the governance of the plan. If they have skin in the game, they should have a say.
Q: What role will annuitizations play in the DB world going forward?
Forestell: We’ll see more of annuitization. When a plan becomes very large relative to the size of the organization, annuitization is an option to keep it at a manageable size. But a lot will depend on the annuity pricing.
Richards: We are likely to see more of it. Plan members want to know, at the end of the day, what they are going to have for a pension. If people are going to collect for 30 to 35 years, it’s perfectly understandable why taxpayers or corporate elites don’t want to be tied into that kind of a commitment.
Q: If DB plans become better funded, will the pressure to close them subside? Do you think it’s likely that plan sponsors would reopen closed DB plans?
Forestell: Alberta seems to be the only place where new DB plans or reopening of DB plans is happening. But it’s not due to the funded position of the plan but more [due to] the labour shortage situation and the need to attract mid-career hires.
Burleton: Better funding can help keep DB plans alive. Also, I do think there is a good story on the relative competitiveness angle [that DB] can offer, as part of the broader compensation spectrum.
Richards: Better funding will help but won’t change the trend. DB plans were once valued by corporations. Not anymore—companies don’t want to have their businesses threatened by a pension obligation. However, there are pension models that work in all situations without risking the business. We can solve problems from corporations’ and taxpayers’ perspectives without sacrificing DB plans.
Vikram Barhat is a Toronto-based business and financial journalist. vikrambarhath@gmail.com
Click here to view photos from the event.