Risks and solutions for mid-size plans

Although the risks and challenges are often the same, no matter the size of the plan, the solutions are ultimately different, says Steve Eadie, a partner and pension consultant with Robertson, Eadie & Associates.

While Eadie says a lot of plans have matured (boasting a large retiree group and a relatively small active group), he adds that a typical large plan can comfortably say it will continue to pay the retiree out of the pension plan fund and take on the longevity risk. At the same time, companies in the mid- and small-size range just can’t afford the continued risks during retirement, Eadie explains, and are busy developing strategies to deal with them. The decision for many mid-size or smaller plan sponsors is often whether or not to keep paying retired employees from the plan assets or to buy annuities.

“For many of our clients—the smaller mid-size ones—we’re often talking to them about whether or not to buy annuities and also how to go about doing that: how to make sure that we have the right assets in place and to make sure that we’re not placing the plan at risk,” says Eadie.

Similarly, mid-size companies are facing the task of making sure that employees start ramping up their own plan contributions, explains Neil Craig, senior pension consultant with Stevenson & Hunt Insurance Brokers.

“I think some of the plan sponsors are clearly concerned about that outcome issue at the back end.”

As a result, design changes to allow for auto-escalation of contribution levels may be on the radar for mid-size plan sponsors, says Craig. With the successful adoption of auto-escalation in the U.S. and the advent of pooled registered pension plans (PRPPs) in Canada—which, he says, address this issue in their framework documents and in Bill C-25—Craig believes the required relaxation of regulations surrounding electronic and auto-enrollment will soon be addressed here.

Investment volatility and opportunity
The current challenges in the pension sphere aren’t solely related to running and administering the plan. Rather, the volatility in the broader market and the concerns of employees on a 10-year horizon to retirement are two factors that mid-size companies share with even their largest counterparts, explains Bruce McLeod, vice-president of HR with Bioniche Life Sciences in Belleville, Ont.

But while large plans have the opportunity to diversify by getting into hedge funds or alternative investments and directly using professional, independent investment managers, this remains a challenge for those in the mid-size and smaller categories. These plan sponsors typically have to obtain such services through a third party and, because of that, often have to pay a higher fee, says Eadie.

For small and mid-size companies—particularly those with DB plans— everything from gaining access to alternative investments and putting the right monitoring process in place is more difficult, says Shawn Cohen, vice-president, investment consulting practice, with Aon Hewitt. And while open-ended pooled vehicles enabling small and mid-size firms to get access to various alternative investments such as real estate are increasing, he says, smaller plans still face limited availability in this space.

With about 850 members in the St. Mary’s University pension plan, Larry Corrigan, vice-president of finance and chair of the university’s pension committee, says there are opportunities to co-invest. He explains that a consortium of universities in Eastern Canada, under the umbrella of Interuniversity Services Inc. (ISI), is currently looking at the possibility of a multi-employer plan.

“Some of the ISI universities without an established DC plan, or members with a very small plan, may benefit from a joint effort,” he says. “[But] discussion of such a possibility is still at an early stage.”

At the same time, pooling assets through multi-employer plans remains difficult for companies that are not part of a trade union or association, Cohen remarks.

While recent legislation affords new opportunities—for example, Ontario introduced legislation in 2009 that would allow larger pension funds, specifically the Ontario Teachers’ Pension Plan and OMERS, to administer investments for smaller organizations—Cohen says these opportunities are not readily available and need to be developed further.

Also, PRPPs may provide an opportunity for DC plan sponsors of a smaller size to address challenges around both administrative and investment management costs and fiduciary risk, says Cohen.

Indeed, two-thirds of participants in a recent Canadian Life and Health Insurance Association survey of more than 800 small and medium-size enterprise owners and executives believe their employees will be interested in participating in PRPPs.

Helen Burnett-Nichols is a freelance writer in Hamilton, Ont. helen@burnettnichols.com

Get a PDF of our series on mid-size plan management.