As a tumultuous 2008 draws to a close, defined benefit (DB) plan sponsors are collectively holding their breath for 2009.

By and large, DB plan sponsors remain committed to their plan as the best vehicle to consistently provide an appropriate retirement income for their employees. And, historically, sponsors have been willing to undertake the lion’s share of the risks involved in operating a DB plan. But, the constant stream of pressures, exacerbated by the events of 2008, has made even the most steadfast DB sponsors reconsider their options. These pressures include:

  • the 2008 market decline and credit crunch, particularly with respect to the resulting impact on sponsor contribution requirements;
  • impending changes to accounting standards, which is adding a new dimension to the volatility that a DB plan will bring to the sponsor’s financials; and
  • the impact of cases like Kerry, following in the footsteps of Monsanto and TransAmerica, which continues to remind sponsors of the litigation risks that can be brought to bear in respect of DB plans.

However, a new year brings with it renewed hope. In this case, renewed hope that 2009 will unfold with relief, in every sense of the word, for DB plan sponsors. What might this look like? In the spirit of the holiday season, I have compiled for your consideration a selected wish list:

Market stability—everyone knows that markets go up and down, but the movement in 2008 was unprecedented. With the changes in pension accounting, the level of volatility can only serve to increase pressure on companies to curtail or windup their DB pension plans. While recovering from the market decline may take some time, let us hope that the day-to-day and week-to-week volatility will subside.

Legislated solvency funding relief—legislators will have a difficult time trying to determine the appropriate balance between the need to secure benefits for members and the need to assist plan sponsors as they grapple with significant increases in their required contributions. All we ask is that they carefully consider the needs of all stakeholders and find a balance between these objectives.

Application of surpluses—for many sponsors, this may not be an immediate issue. But those who survived 2008 with a surplus, or anticipate a surplus again soon, will hope that the Supreme Court of Canada supports the Ontario Court of Appeal ruling in Kerry to confirm a plan sponsor’s ability to apply DB actuarial surpluses for DB and DC contribution holidays.

Asymmetry of surplus/deficit ownership—Until a more level playing field evolves between the treatment of deficits, which are generally borne by the sponsors, and surpluses, which are a regular source of disputes between sponsors and members (particularly in jurisdictions that permit partial windups), fewer and fewer companies will be willing to contribute more than the minimum under pension law. Schmidt, Monsanto and Kerry are three key cases that have had bearing on this issue, but there are a number of issues still to be resolved. While it is unlikely that surplus/deficit equity can be fully addressed before the end of 2009, let us hope that legislators start down the path of careful consideration of the issues.

Standardization of pension legislation—this has been on the wish list for more than 20 years. The DB plan sponsor with members in multiple jurisdictions is still grappling with the evolving variations of pension legislation across the country. Let’s hope that simplified rules for multi-jurisdictional plans make it on a priority list in 2009 so that progress is made toward providing administrative relief for plan sponsors. If that is too lofty a wish, then let’s hope that there will be no further differences introduced.

Phased retirement—with so many plan members whose personal retirement savings took a beating in 2008, increasingly plan sponsors and members will be interested in viable options for phased retirement. Let’s hope for phased retirement regulations which are clear, administrable, flexible, fair, and most of all, final.

DB plan sponsors are not the only stakeholders with hopes for significant improvement in 2009.

Defined contribution (DC) plan sponsors and members can expect a difficult year in 2009 as many plan members who might otherwise have been ready to retire may find their account balances insufficient to support retirement. This may well test an organization’s ability to manage its workforce. Certainly, all DC stakeholders will be hoping that the markets recover substantially, if not completely, over 2009. DC sponsors will also have their work cut out for them ramping up the education components of their DC plans to ensure that members have a better understanding of market volatility and invest at a level of risk appropriate to their individual circumstances, particularly members approaching retirement.

DB plan members enter the year with a decreased level of benefit security in their plans and there is the increasing risk that some DB plan sponsors may take steps to curtail future DB accruals or windup their plans. Compared to their DC brethren, hopefully DB members bring into 2009 a much greater appreciation of the value of the DB promise, and will be understanding of their plan sponsor’s plight in restoring the plan’s funded status.

As fast away the old year passes, let’s hope for 2009 that wishes do come true.

Happy holidays.