What keeps MEPP decision-makers up at night?
Multi-employer pension plans (MEPPs) experience challenges that other types of DB retirement plans don’t. Valuation methodologies, stagnant plan membership and market volatility, to name a few, result in multiple issues for plan sponsors and their actuaries. Here are a few of the concerns that those responsible for MEPPs face.
Valuations – In 2013, many Canadian plans posted returns well in excess of the rate assumed in their valuations (depending on their actual asset mix), both inside and outside of the MEPP world. But actuaries don’t typically use market values in MEPP valuations. Instead, they use a smoothed value, which means that the 2013 return for these plans would still be positive but lower than what other plans might have achieved. The full return will come through over time as the smoothing method unwinds—provided that these plans don’t have losses in future years.
Smoothing keeps us up at night, because it can be hard to explain where a plan stands financially and what rate of return is required going forward. Plus, using asset values greater than market values for actuarial valuation purposes complicates member understanding and buy-in.
The Economy – Although 2013 brought some encouraging economic results, many must be taken with a pinch of salt—especially from the MEPP perspective. The rise of interest rates reduced liability values, but this isn’t very relevant to MEPPs, as most of them are exempt from solvency and accounting due to provincial legislation and the rules set by the Accounting Standards Board.
Plan sponsors would like to see some stability and growth in the economy. If we can’t consistently earn a reasonable rate of return going forward, it’s going to be more difficult for MEPPs to maintain benefits at their current levels. We are almost at a point where the stock markets do not work as an investment vehicle because they are so volatile.
Membership – Plan membership numbers in MEPPs have been stagnant. Life is easier with a growing plan and a growing membership, where some margin in the contribution rate can absorb some of the underperformance and volatility in the markets.
Without that, volatility and low returns can lead to benefits cuts, which are difficult for members to understand. But this is always a possibility when the active/non-active ratio is trending the wrong way.
Communications – Pensions are complex and hard to comprehend. Trustees worry that members don’t value most communication materials and often don’t read them. A communications strategy that provides clarity and cuts through the weeds of pension regulations would create a better dialogue.
New Approaches – Some provincial legislation is drifting away from solvency toward other methods for plan design and valuation—but that’s not comforting.
As provinces enact different approaches to providing benefits (e.g., Alberta, British Columbia and New Brunswick), maintaining MEPPs across different provinces continues to cause nightmares.
Mortality – Canadians are living longer. Over time, increased longevity puts more pressure on all but the largest plans, which can use their own experience to support alternate actuarial assumptions.
It’s easy to imagine that improved investment results will solve all problems. But in fact, the issues that MEPPs are facing right now may keep us up at night for quite awhile.
Cameron McNeill is a senior vice-president and the Canadian business leader in Segal Consulting’s Toronto office.
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