Canadian Organizations Less Willing to Close DB Plans than US or UK Counterparts
TORONTO, May 30, 2011 – Despite the challenges defined benefit (DB) pension plans have faced in Canada over the last two decades, Canadian employers that sponsor these plans seem more committed to maintaining them than organizations in the United States and the United Kingdom, according to the third annual 2011 Global Pension Risk Survey, conducted by Aon Hewitt, the global human resources consulting and outsourcing business of Aon Corporation (NYSE: AON). As a result, these Canadian plan sponsors are increasingly developing long-term risk management strategies
Of the 630 plan sponsors that responded to the global survey earlier this year, 106 were from Canada. These Canadian plans covered $65 billion in total assets and 525,000 members. Sixty-eight percent of the Canadian respondents were private sector plan sponsors. For more information regarding the survey results and pension risk strategies specifically, plan sponsors are invited to attend Aon Hewitt’s complimentary seminar series: www.aon.ca/events/pension/
Prevalence and Rationale for DB Plans
“There has certainly been a decline in the number of Canadian organizations with defined benefit plans over the years,” stated Tom Ault, a senior retirement consultant in Aon Hewitt’s Vancouver office. “Nevertheless, there are more ongoing DB plans, relatively speaking, in this country than there are in other economies. In the 2011 survey, 39 per cent of Canadian respondents had closed their DB plans for existing members. That figure is close to 80 per cent in the US and the UK, according to survey feedback.”
When asked why they continue to offer DB plans, Canadian sponsors identified three primary reasons:
- A DB plan aligns with the organization’s total rewards philosophy (26 per cent);
- Union pressure (21 per cent);
- Competitive issues (15 per cent).
“These are all good reasons for staying with a DB plan,” said Ault. “The accommodating response of regulators to the funding crisis makes it possible to maintain these plans. However, to keep DB feasible for the long term, organizations are considering the risk management strategies available to them.”
Pension Risk Management
Given the commitment to DB plan sponsorship that exists in Canada, it is encouraging that the proportion of respondents that have no long-term strategy for their plans has dropped substantially from 44 per cent a year ago to just 25 per cent today.
“Just over half of the respondents this year indicated that their long-term strategy is to reduce risk, most often using a strategy that is tied to the funded status of their plan,” said Janet Jul�, a principal with Aon Hewitt in Regina. “Typically, organizations expect to achieve their long-term strategy over the next five to ten years. In many provinces, this timeline ties nicely into the end of the current funding relief period and the five-year amortization of the expected solvency deficiencies that will exist at that time.”
Measures that plan sponsors are adopting to reduce risk include making plan design modifications, as well as changing investment policy � increasing diversification out of Canadian equities and intermediate bonds and shifting to global equities, long bonds and alternatives. In addition, organizations are taking another look at their funding policy and contribution strategy.
Dynamic investment policies are also expected to become more prevalent. While five per cent of respondents had already implemented some form of dynamic policy, another 19 per cent intend to do so over the coming year. The uptake is due to the fact that dynamic policies, in particular dynamic de-risking policies, which reduce risk as a plan’s funded ratio improves, are perceived to be a prudent approach to reducing risk and long-term costs, while taking the emotional element out of asset mix decisions.
Whatever course DB plan sponsors follow, it’s important to note that effective pension risk management includes measuring success. “Monitoring a plan’s risk exposures on an ongoing basis is a critical component of an effective risk management strategy,” said Ault. “Survey responses indicate that the number of plan sponsors monitoring their pension risks on a regular basis continues to increase. In the 2009 survey, 45 per cent of respondents indicated they were monitoring pension risks. This figure increased to 57 per cent in this year’s survey. Monitoring risks includes reviewing plan assets, liabilities and funded ratio on a regular basis.”
Because pension risk management � especially when dynamic strategies and funded ratio monitoring are involved � places considerable demands on a plan sponsor’s resources, survey respondents also indicated growing interest in delegating more of their investment management processes. “Sponsors realize that, in fast-moving markets, decision-making on a quarterly basis means that opportunities can be missed,” stated Jul�. “Equally, the growing complexity of the investment landscape with new asset categories, mandates and products imposes a significant strain on pension committee members.” Most organizations are already familiar with delegating certain areas of plan management to a third party. Increasingly, plan sponsors are contemplating a broad array of new delegated investment service opportunities. The number of plan sponsors indicating they had or were likely to delegate implementation of their entire investment policy jumped from 20 per cent in 2009 to 37 per cent this year.
To receive a copy of Aon Hewitt’s 2011 Global Pension Risk Survey for Canada, please contact [email protected]
About Aon Hewitt
Aon Hewitt is the global leader in human resource consulting and outsourcing solutions. The company partners with organizations to solve their most complex benefits, talent and related financial challenges, and improve business performance. Aon Hewitt designs, implements, communicates and administers a wide range of human capital, retirement, investment management, health care, compensation and talent management strategies. With more than 29,000 professionals in 90 countries, Aon Hewitt makes the world a better place to work for clients and their employees. For more information on Aon Hewitt, please visit www.aonhewitt.com.
Aon Corporation (NYSE: AON) is the leading global provider of risk management services, insurance and reinsurance brokerage, and human resources solutions and outsourcing. Through its more than 59,000 colleagues worldwide, Aon unites to deliver distinctive client value via innovative and effective risk management and workforce productivity solutions. Aon’s industry-leading global resources and technical expertise are delivered locally in over 120 countries. Named the world’s best broker by Euromoney magazine’s 2008, 2009 and 2010 Insurance Survey, Aon also ranked highest on Business Insurance’s listing of the world’s insurance brokers based on commercial retail, wholesale, reinsurance and personal lines brokerage revenues in 2008 and 2009. A.M. Best deemed Aon the number one insurance broker based on revenues in 2007, 2008 and 2009, and Aon was voted best insurance intermediary 2007-2010, best reinsurance intermediary 2006-2010, best captives manager 2009-2010, and best employee benefits consulting firm 2007-2009 by the readers of Business Insurance. Visit http://www.aon.com for more information on Aon and http://www.aon.com/manchesterunited to learn about Aon’s global partnership and shirt sponsorship with Manchester United.