Pension Plan Sponsors Walk Tightrope between Recovering Asset Values & Reducing Corporate Financial Risk – According to Towers Perrin/CFO Research Study
Toronto, July 29, 2009 – Despite reeling from the financial impact of the economic downturn on company pension plans and their businesses, Canadian organizations remain cautiously optimistic on the financial viability of their defined benefit (DB) plans, with 71% of finance executives committed to maintaining the long-term viability of plans and 86% who feel confident they have adequate cash to fund their plans for the next two years, according to the third CFO Research Services study conducted in conjunction with professional services firm Towers Perrin.
The study – which included 439 finance executives across Canada, the U.S. and the U.K. (137 from Canada) – found that even though Canadian organizations feel the hardest hit by the impact of the economic downturn on DB pension plans, they are also the most optimistic in their outlook – both in terms of future pension funding and the overall economic outlook.
Overall, Canadian finance executives felt worse-off compared to those in the U.S. and the U.K., with 87% who believe their DB plans’ financial strength was negatively impacted by the financial downturn (compared to 67% in the U.S. and 49% in the U.K.). More than half (63%) of Canadian respondents also report that their DB plan had a negative impact on their company’s financial statements (compared to 59% in the U.S. and 37% in the U.K.). Amid funding shortfalls and poor business performance, Canadian executives foresee the biggest concerns over the next two years to be the DB’s impact on cash flow (61%), followed by impact on their income statement (44%).
Despite the economic impact on their pension plans, the study indicates that for the time being Canadian organizations remain committed to staying the course with a cautiously optimistic outlook on the viability of their DB plans. The majority (71%) of Canadian respondents said their focus is to ensure the long-term viability of their plans rather than seeking alternatives. But executives continue to walk the tightrope between recovering asset values and reducing corporate financial risk. Consistent with past studies, executives recognize the importance of managing risk or ‘de-risking their plans’ as part of their long-term strategy (78% of respondents overall cite managing risk as their focus versus 22% citing increasing returns).
“Our advice to plan sponsors remains the same as two years ago when we encouraged sponsors to begin ‘using the calm before the storm’ to implement pension risk management programs. This still holds true. When the calm finally emerges after this storm, sponsors will have the opportunity to embrace evolving tools and strategies to address the ever-increasing pension risk challenges while also seeking the optimal level of returns,” says Monica McIntosh, national leader of Towers Perrin’s Asset Consulting Practice in Canada.
Interestingly, Canadian DB plan sponsors are the most optimistic in their outlook – both in terms of future pension funding and the overall economic outlook – compared to those in the U.S. and U.K. While finance executives are concerned about the cash flow impact of their DB plans, 86% are confident that they have adequate cash to fund their plans for the next two years (82% in the U.S. and 62% in the U.K). This optimism may be spurred in part by a view that the worst is behind us, with the majority (69%) of Canadian respondents believing the equity markets were at their lowest point for this cycle at the time of the survey in April/May this year (53% in the U.S; 36% in the U.K.).
New Retirement Reality on the Horizon
However, the study findings do support the notion that a “new retirement reality” is on the horizon. There is no doubt that recessionary pressures have acted as a catalyst to change, potentially changing Canada’s retirement outlook for decades to come. The study showed that 87% of finance executives from Canadian companies (72% in the U.S. and 37% in the U.K.) believe that the downturn is “causing a long-term shift in how companies and workers prepare for retirement.” From an employee perspective, a recent Towers Perrin survey of employers indicated that nearly half (49%) report their employees plan to postpone retirement in light of the current economic climate.
“Organizations, employees and investors are reaching a point where the status quo of the Canadian retirement landscape is not sustainable,” said McIntosh. “Companies cannot afford to let pension plans impact their company’s financial performance, at the mercy of economic cycles. At the same time, a significant portion of the workforce is in an untenable position, being forced to postpone retirement after the severe battering the financial storm has inflicted on their retirement savings. Even before the downturn, there was a need for a complete government overhaul to implement a pension system that works for all stakeholders and ensures Canadians have adequate retirement income.”
On an encouraging note, Canadian finance executives report that the impact of the economic downturn on DB plans does have an upside in terms of their workforce relationships, with 61% of respondents who report that the recent economic events have had a positive effect on their employees’ appreciation of their DB plan.
Defined benefit plans are pension plans sponsored by the employer where the employer (and sometimes employees) makes monetary contributions in view of providing a defined retirement income.
About the Survey
The third annual “CFO Pension Risk Survey” was developed by Towers Perrin and CFO Research in an effort to understand the effects of the economic downturn on companies’ DB plans. The research program focused on plan funding policies, investment strategies and risk management and plan alternatives. The study included 439 senior finance executive responses from large U.S., U.K. and Canadian organizations across all industries as well as an extensive interview program with senior finance executives. The online survey was conducted during April and May 2009.
About CFO Research Services
CFO Research Services is the sponsored research group within CFO Publishing Corporation, which produces CFO magazine, CFO.com and CFO Conferences. CFO Publishing is part of The Economist Group. More information about CFO Publishing is available at www.cfo.com.
About Towers Perrin
Towers Perrin is a global professional services firm that helps organizations improve performance through effective people, risk and financial management. The firm provides innovative solutions in the areas of human capital strategy, program design and management, and in the areas of risk and capital management, insurance and reinsurance intermediary services, and actuarial consulting. Towers Perrin has offices and alliance partners in the United States, Canada, Europe, Asia, Latin America, the Middle East, South Africa, Australia and New Zealand. More information about Towers Perrin is available at www.towersperrin.com.