Over two thirds (71 per cent) of plan sponsors surveyed have already taken or are considering action to control rising pension costs and mitigate risk, according to the 2010 Towers Watson Pension Risk Survey of Canadian plan sponsors.
Close to 40 per cent of plan sponsors have recently updated or are intending to update their investment strategy in the coming 12 months, and 34 per cent are considering changes in the future. These changes include increasing fixed income investments and duration, implementing cash flow matching and other risk reducing strategies.
Almost a quarter (22 per cent) have recently made or will be making plan design changes to contain cost and volatility. Of these, 10 per cent have switched or will be switching in the next 12 months to a capital accumulation or defined contribution (DC) plan, while 13 per cent have implemented other design changes or plan to do so.
The survey also found that more than half of respondents (52 per cent) see the pension funding crisis as long-lasting, compared to just 34 per cent who held this view in 2008, prior to the recession. Just under one-third (32 per cent) perceive the current crisis as cyclical phenomenon.
“Normally, when economic conditions and pension plan funding levels improve, plan sponsors’ perception of a DB funding crisis also improves. This is what we observed in early 2000s, but not this time,” says Ian Markham, Canadian retirement innovation leader at Towers Watson. “This year’s results suggest that the recent financial crisis will have a more long-lasting effect, resulting in even greater focus on risk management strategies.”
Plan sponsors admit significant challenges to maintaining a DB plan for their workers. Nearly all plan sponsors (91 per cent) rank volatility of funding contributions and accounting expense as a top challenge they face in today’s economic environment, while 88 per cent rank the cost of maintaining and funding DB plans as a top choice. More than three-quarters view these challenges as more severe now than in 2008, before the financial crisis.
“Additional changes to DB pension plans are likely to occur unless legislation becomes more favourable to plan sponsors,” says Martine Ferland, Canadian retirement leader for Towers Watson. “Employer actions may not be enough to offset rising pension costs. It’s good to see governments across the country looking at making significant changes to increase the sustainability of private sector pensions. We strongly encourage them to continue down this path in the best interests of current and future generations of Canadians.”
Other findings from the survey include:
• More than half (53 per cent) of publicly traded companies indicate their DB pension plans are already closed to new hires. Even amongst those that have plans open to new hires, approximately one-third plan to close them in the future.
• Beyond plan design, many plan sponsors continue to support the call for pension reform legislation. Most are interested in measures that will reduce the cost and volatility of private DB plans. Among publicly-traded companies, 68 per cent are in support of new mechanisms to improve plan sponsor access to surplus assets.
These findings are part of Towers Watson’s 2010 Pension Risk Survey of Canadian defined benefit plan sponsors. With insight from senior executives at more than 110 organizations, the Pension Risk Survey is the most current and comprehensive study of post-recession DB pension plan management available today. The research builds upon six previous pension risk surveys to provide organizations and governments with actionable insights on the current and future state of DB pension plans in Canada.
Towers Watson is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers solutions in the areas of employee benefits, talent management, rewards, and risk and capital management. For more information, visit www.towerswatson.com.