Given the double whammy over the last decade of a difficult investment climate coupled with falling interest rates, it isn’t surprising that more than one quarter of DB plan sponsors are considering making plan design changes within the next five years. But this doesn’t necessarily mean a complete move away from DB plan design—only 12% of plan sponsors are considering moving to capital accumulation plans over the next five years, and just over 10% are considering winding up their DB plans.
Employers are generally contributing more to DB plans, and a full 60% of plan sponsors are directing contributions toward solvency and other funding deficiencies. It’s interesting to note that even with the combined negative effects of the market downturn at the beginning of the decade and the falling interest rates, 21% of plans are still able to take a contribution holiday.
Governance also continues to be a hot topic and has become more important to DB plan sponsors since ACS/Buck’s last survey in 2003. The majority of respondents (81%) have a documented governance process in place, and almost all plans have a pension committee or a comparable entity involved in the governance process.
Websites now figure prominently in the communications strategies of many of the respondents. More than half (58%) of plan sponsors rank websites as integral to their employee communications, and more plan administrators are using web tools to communicate and reinforce pension messages. Various types of online calculators are also being made available to plan members to help ease the burden on busy administrators.
Adapting to New Demographics
The burgeoning phenomenon of the aging workforce is also having a significant impact on DB plans. The fact that DB plans can provide generous early retirement benefits, such as an unreduced pension, is one of the main reasons for their prevalence in Canada. However, employees are increasingly choosing to work beyond retirement age—either because they want to or because they are financially unable to retire as early as they would have liked. And with the changes to the Income Tax Act in 2007, DB plan sponsors now have more flexibility in the benefits they can offer to these workers.
Concerned about the potential loss of experience and “corporate memory” as baby boomers begin to reach retirement age, organizations are expanding their retirement incentives. Some organizations now offer phased retirement— providing a partial pension to an individual while he or she continues to work part-time—as part of their strategies to retain mature employees. Organizations may also need to look at their nonpension benefits plans in light of any potential age discrimination issues, given the recent changes to the laws relating to mandatory retirement. Aligning an organization’s HR strategy with its approach to pensions and other benefits will be key to managing impending labour shortages.
Strategies for DB Plan Sponsors
Plan sponsors have a number of action items to consider. If cost containment is the primary issue, plan sponsors may need to look at investment strategies, plan benefits changes, the use of letters of credit and even plan conversions or windups. For those employers concerned with the battle for talent, implementing a phased retirement benefit, along with other changes in working conditions, may entice retiring workers to stay longer.
The last few years have been busy ones, with new court decisions, legislative amendments, volatile markets and workforce demographics all contributing to the continually evolving DB pension landscape. Plan sponsors that continually adapt their reward strategies to address emerging issues, while keeping their overall HR strategies and company goals in mind, will be well positioned to handle future changes.
Steven Laird is a communications consultant with ACS/Buck Consultants. steven.laird@acs-hro.com
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