It is the nature of optimists to look on the bright side—to search for the good amidst the bad. If there’s a silver lining in the financial crisis of 2008/09, it may be that its impact on defined benefit (DB) pension plans, and the balance sheets of DB plan sponsors, has caused governments to pay more attention to issues stakeholders have been citing for years. However, while many economists are saying the recession is over, the same cannot be said for the issues and problems plaguing Canadian pension plans.
In Towers Watson’s 2010 Survey of Pension Risk, more than 110 senior finance and HR executives expressed their views on a wide range of topics, including reactions to legislative pension reform. The survey results provided insight into how DB plan sponsors responded to the short-term challenges caused by recent economic events, as well as future strategies for improving the long-term sustainability of the Canadian retirement system.
Despite general improvements in plan-funded ratios since March 2009, organizations that rely on traditional pensions to help their workers adequately prepare for retirement continue to face a rough road ahead. Fifty-two percent of respondents believe Canada is facing a long-lasting crisis, similar to last year’s record-high responses.
Given plan sponsors’ views of the system as a whole, it is not surprising their main challenges are controlling volatility (91%) and containing costs (88%), as they have been for the past several years. To address these concerns, a large number of respondents have taken (or are planning to take) steps designed to reduce cost and/or volatility. These include changes to plan design, conversion to a capital accumulation plan (CAP) and—with even greater prevalence—new investment strategies.
Despite these changes, many people tend to think Canadian plan sponsors are more likely to keep their DB plans, compared to those in other countries such as the U.S. and the U.K. At first glance, the survey results appear to support this common perception. Approximately two-thirds of the respondents indicated their DB plans remain open to all new hires. Yet, there is a notable difference between the private and government sectors. While very few survey participants in the government sector have moved away from DB, that is clearly not the case in the private sector. More than half of respondents from publicly traded companies indicated their DB plans are either closed to new hires or frozen. And, this situation is likely to worsen in coming years. Only 30% of these companies are committed to keeping their DB plans open and are not considering any changes to CAPs in the future. In the absence of changes to the current rules governing DB pensions, the prospect of a secure source of employer pension income for a significant portion of Canadians is slim.
Recent high-profile restructurings and insolvencies, and their impact on pension plans and their members, have increased calls for reform to address a range of issues relating to DB plan funding and benefit security. In the past two years, Alberta, British Columbia, Nova Scotia, Ontario and the federal government have all established commissions and task forces to look into private pension reform. However, the pace of change has, to date, been dishearteningly slow. In order to address the current crisis, reform must include measures that meaningfully address DB plan sponsor concerns about managing plan costs and volatility. While it is impossible to predict the future, without such changes, optimism may be in short supply for Canada’s DB pension system. BC
Ian Markham is Towers Watson’s Canadian retirement innovation leader and Karen DeBortoli is manager of the firm’s Canadian Research and Innovation Centre.
ian.markham@towerswatson.com
karen.debortoli@towerswatson.com
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© Copyright 2010 Rogers Publishing Ltd. This article first appeared in the June 2010 edition of BENEFITS CANADA magazine.