Three ways to change your pension plan

The plan’s trustees adhere closely to a governance framework that integrates investment, funding and communication policies. Annual actuarial valuations are prepared to assess the appropriateness of all key assumptions and the sustainability of projected benefits under alternative experience scenarios.

The January 2012 actuarial valuation analysis showed that benefit sustainability had fallen outside of the funding policy’s acceptable range, primarily because of poor investment returns in 2011 and lower model return expectations. This situation was not totally unexpected: the trustees had been monitoring it for a number of years and had developed potential action strategies should the plan breech any of the sustainability measures. Actions taken early on included implementing a comprehensive communications program to educate plan members on pension plan funding issues and potential corrective actions (if needed).

Given that action was now required, the trustees turned to their funding policy, which includes guidance on the following elements:

• adjusting the level of benefits;
• considering the ability to increase contributions;
• reviewing the investment strategy;
• assessing plan risks with respect to any contemplated change(s) versus the status quo;
• requiring the trustees to act impartially between different classes of members and former members in assessing any changes; and
• communicating with members on the issues.

Extensive analysis led to a number of potential options, including shifting investments to a riskier strategy with a higher expected return and reducing benefits in different ways.

The change
The trustees concluded that assuming additional investment risk is not appropriate for this plan. They decided on the following plan changes:

1. active members would be asked to increase their contributions to improve the plan’s financial position;
2. the pension accrual rate would be reduced; and
3. benefits for members no longer accruing benefits would be reduced.

Since members may choose not to increase their contributions, the trustees decided to present members with different accrual rate and benefit reduction combinations. All of the choices had approximately the same expected financial impact on the plan.

In line with the plan’s communications policy, members received regular bulletins keeping them updated on the plan’s benefits and investment and funding issues. Members accessed these bulletins online, and they received a personalized contribution report and pension projection calculator.

The outcome
While implementing benefit reductions is never easy, the communication program has allowed members to understand the plan’s benefits, risks and funded status, as well as the governance process followed by the trustees. The most recent member bulletin updated members on the plan’s current funding situation and projections and presented two options for membership vote, each consisting of a different combination of the three changes noted above.

The governance structure, which includes comprehensive funding and communications policies, provided the trustees with the necessary road map to work through a difficult period in an extremely short amount of time. In the end, the members elected an option that increased contributions to the maximum permissible in order to preserve as strong a pension as possible.

Plan design changes require outside-the-box thinking, engagement of key stakeholders and communication with the affected members. A particular plan design may be best suited to an organization’s needs—but if members don’t understand how it works or why the changes are being made, acceptance will be low. When managing pension plan changes, preparation, facilitation and communication are the keys to success.

Ian Edelist is a principal and the pension practice leader in Toronto at Eckler Ltd.; Mark Davis is a principal and actuarial consultant with Eckler Ltd.; and Daniella Vega is an actuarial consultant with Eckler Ltd. iedelist@eckler.ca; mdavis@eckler.ca; dvega@eckler.ca

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