Communication continues to vex, pension plan sponsors say
Some days, David O’Brien wonders what it will take to get the full attention of McCain Foods’ 5,000 employees. O’Brien, McCain’s vice-president, risk management, pensions and counsel, runs the company’s hybrid pension plan, essentially a defined contribution (DC) plan with an optional defined benefit (DB) “guarantee” provision that employees can elect to take on retirement.
Using the company’s pension calculation formula, employees are able to replace 70 per cent of their pre-retirement income after 35 years’ service under the DB option, which was introduced in mid-2002. It’s a generous offering that eliminates some of the inherent investment risk of a DC pension, but it often simply doesn’t register with younger employees, O’Brien said.
“Employees tend to be more passive about pension benefits than pension professionals might think,” he said. “Then they get to 55 and they become obsessed with it.”
O’Brien’s plight isn’t unusual. A survey of 10 plan sponsors by benefits consulting firm Morneau Sobeco reveals that, regardless of the type of plan a company runs or the quality of its benefit provisions, effectively communicating an understanding of the plan and the benefits of participating in it remains a major concern for plan sponsors in 2004.
Petro-Canada
“I think one of the biggest challenges is continuing to properly inform employees about pension matters,” said Elaine Noel-Bentley, senior director, total compensation, for Petro-Canada. “We’ve undertaken to ensure that we’re giving good information to employees and that continues to be a challenge.”
Like many other firms, Petro-Canada is using the Internet as a bridge to employees. The company has just completed development of its online retirement planner, which allows employees to key in assumptions about income, age and other factors to determine what their retirement benefits will be.
Canadian Automobile Association
A similar approach has been taken at the Canadian Automobile Association (CAA). Its pension website combines a layman’s description of the DB plan with an interactive modelling tool. This is backed up with monthly statements that update salary and other data so employees can go online and build their own retirement benefit forecasts.
“Our biggest challenge has been to help people understand the complexity of the plan,” said Cindy Hillaby, vice-president human resources at CAA. “We’ve just spent an inordinate amount of time educating people on what the plan is and its competitive position and just trying to help them understand what they can do to enhance their benefits.”
Cascades
Others are considering more traditional incentives to inform employees. At Cascades, a product packaging manufacturer, corporate actuary Sonia Turcotte said she’s trying to organize one-on-one meetings between employees and the plan’s administrator to provide information and allow employees the opportunity to ask any questions they have about the firm’s DC plan.
Staples
And at Staples, vice-president of human resources Al Ward said he’s considering running contests to encourage enrolment in the company’s group RSP and deferred profit sharing plan.
“We have to find a way to stage communications and to make it meaningful and create some impact,” said Ward.
Sponsors say communications is innately difficult because pensions are complicated, particularly DB plans, which have contribution formulas, tax adjustments and commuted values that quickly befuddle the average employee. Likewise, different companies have very different employee demographics in their workforces, necessitating more nuanced communications styles.
At Johnson & Johnson, director of pension financial services Normand Lepine said a typical employee is slightly older than 40, is beginning to think about retirement and is most likely to prefer the company’s DB offering over its DC plan.
Staples’ Al Ward, meanwhile, is dealing with employee “associates” who are mostly in their early 20s and disinclined to participate in company benefits programs at all, despite the generous provisions.
“It’s a young organization,” he said of the 250-store chain, “and young people don’t necessarily think in those terms.”
Labatt
Some have to deal with complex demographics under the same roof. Labatt runs both DB and DC plans for non-union employees on the commercial side of the business, many of whom are in sales and marketing jobs. These employees tend to be in their 20s and 30s and will likely stay with the company from three-to-five years, said Chris Faulkner, the company’s director of HR rewards. For them, Labatt’s DB plan doesn’t make a lot of sense because they won’t get much value when they leave and pension adjustments will eat up their RSP contribution room, Faulkner said.
By contrast, the company’s 18 Canadian breweries are populated by older unionized employees who prefer DB plans because they tend to remain with the company throughout their careers and obtain the maximum benefit from DB pensions, he said.
Johnson & Johnson
An additional complication for sponsors is the range of attitudes and expectations they see in employees. At Johnson & Johnson, Lepine notes that one reason employees are inclined to switch to the DC side of the company’s hybrid pension plan is the assumption that DB benefits could someday diminish.
“A lot of people are cynical about DB plans. They think benefits will be cut back later,” he said. “But when they have money in their DC account, then they feel more comfortable. It’s a very widespread fear.”
Cindy Hillaby, meanwhile, sees almost the opposite phenomenon at the CAA – a workforce that’s older and almost too accepting of the organization’s plan provisions until they get close to retirement.
“We have people who stay such a long time and they just think that the CAA is supposed to look after them,” said Hillaby.
The backdrop of the communications issue is the continuing trend in the pension sector toward DC plans, most often as an option to existing DB plans. One major reason for the shift is that, despite improving equity markets through 2003, sponsors remain concerned about the impact of lower investment returns on their ability to sustain the DB components of their pension offerings.
3M Canada
“There’s so much uncertainty in the market,” said 3M Canada’s Phyllis Retty. “Who knows if we’ll ever again see double digit returns on a consistent basis. In 2002, the total return on our fund was a negative 9.3 per cent. The benchmark was negative 8.6 per cent. Our four-year return ending in December 2002 was 1.6 per cent.We don’t have the numbers for 2003 yet and it will be better, but four years at 1.6 per cent is a long way from our assumed rate of return of nine per cent.”
Pension fund performance is also an ongoing worry at Labatt, said Faulkner. He said the company’s conservative approach to investments means the fund underperforms in rising markets and holds its own when they fall. Nevertheless, Labatt’s DB fund, which covers the majority of the company’s 4,000 employees, took a “significant hit” in 2001 and 2002, he said. The mood hasn’t dissipated with the stock market revival.
“Actually 2003 was a particularly good year and we’re in a much better position, but when you have bad markets, you start to question whether you want to have a DB pension plan because you’ve got all that liability and the employee has none,” said Faulkner.
While there’s a large degree of stoic acceptance that poor markets have to be endured, there’s also a creeping impatience. At 3M Canada, Retty noted one of the problems their plan has faced is weak investment management.
“In the past 10 or 12 years we’ve probably turned over our Canadian equity managers five or six times,” Retty said. “What can you do? You have to monitor them more, and when you’re not happy you’ve got to get out and cut your losses earlier.”
Sponsors also say the shift toward DC plans reflects a desire for simplicity on the part of employers. DC plans avoid the complex accounting of DB plans and face somewhat less regulatory complexity federally and provincially, said Petro-Canada’s Noel-Bentley.
“DC plans come under the same jurisdictions as DB plans, but there’s not the same amount of impact,” she said. “DC plans are much simpler conceptually and so the rules around actuarial valuations and terms and conditions are not as significant as in a DB plan. It’s still an irritation; it’s just a little less so.”
Sobeys Inc.
Brian Morrissey, senior vice-president of corporate administration at grocery giant Sobeys Inc., said DC plans also appeal increasingly to employees because they offer long-term investment potential (versus the fixed benefit of a DB plan) with fewer complexities.
“With DC, portability is far more transparent and easier,” he said. “Your DC account is your DC account and if you leave an organization, you take it with you — full value — whereas in a DB environment, there are actuarial valuations and commuted values,” he said. “And most people are disappointed when they find out that, in the 10 years they worked for a company, their pension is only worth so much. DB plans really reward people for staying in one place for long periods of time, but that’s not today’s workplace environment.”
But DC plans may also pose growing responsibilities for sponsors. The Joint Forum of Financial Market Regulators, a body with representatives from insurance, pension and securities regulators, introduced proposed guidelines for Capital Accumulation Plans in 2003 that incorporate the rights and responsibilities of DC plan sponsors.
Laurentian Bank
France Gagne, vice-president of compensation and benefits at Laurentian Bank, said her organization is currently evaluating the guidelines, particularly for the implications they may have for employee training in investments. In a sense, it all goes back to the need for good communications, particularly since DC plans transfer greater responsibility for investment decisions onto the shoulders of employees.
Said Labatt’s Chris Faulkner: “Honestly, we would have had employees who would have lost 20 per cent to 25 per cent from their DC plans in the past couple of years, and that’s not necessarily bad, given that the market would have lost 30 per cent or 35 per cent. But you need to make them understand that equity investments are more risky than bonds.”
Making them understand, though, can be rewarding, said Sobeys’ Brian Morrissey. The company’s effort to provide more details about its DC plan, along with more transparent reporting and online tools is making headway with the company’s roughly 14,000 employees, he said.
“We’ve got people at the stage where they’re doing some real planning and modelling,” Morrissey said. “That’s where the real understanding gets created.”
Charles Davies is a Toronto-based financial writer. He can be reached at [email protected].
Using the company’s pension calculation formula, employees are able to replace 70 per cent of their pre-retirement income after 35 years’ service under the DB option, which was introduced in mid-2002. It’s a generous offering that eliminates some of the inherent investment risk of a DC pension, but it often simply doesn’t register with younger employees, O’Brien said.
“Employees tend to be more passive about pension benefits than pension professionals might think,” he said. “Then they get to 55 and they become obsessed with it.”
O’Brien’s plight isn’t unusual. A survey of 10 plan sponsors by benefits consulting firm Morneau Sobeco reveals that, regardless of the type of plan a company runs or the quality of its benefit provisions, effectively communicating an understanding of the plan and the benefits of participating in it remains a major concern for plan sponsors in 2004.
Petro-Canada
“I think one of the biggest challenges is continuing to properly inform employees about pension matters,” said Elaine Noel-Bentley, senior director, total compensation, for Petro-Canada. “We’ve undertaken to ensure that we’re giving good information to employees and that continues to be a challenge.”
Like many other firms, Petro-Canada is using the Internet as a bridge to employees. The company has just completed development of its online retirement planner, which allows employees to key in assumptions about income, age and other factors to determine what their retirement benefits will be.
Canadian Automobile Association
A similar approach has been taken at the Canadian Automobile Association (CAA). Its pension website combines a layman’s description of the DB plan with an interactive modelling tool. This is backed up with monthly statements that update salary and other data so employees can go online and build their own retirement benefit forecasts.
“Our biggest challenge has been to help people understand the complexity of the plan,” said Cindy Hillaby, vice-president human resources at CAA. “We’ve just spent an inordinate amount of time educating people on what the plan is and its competitive position and just trying to help them understand what they can do to enhance their benefits.”
Cascades
Others are considering more traditional incentives to inform employees. At Cascades, a product packaging manufacturer, corporate actuary Sonia Turcotte said she’s trying to organize one-on-one meetings between employees and the plan’s administrator to provide information and allow employees the opportunity to ask any questions they have about the firm’s DC plan.
Staples
And at Staples, vice-president of human resources Al Ward said he’s considering running contests to encourage enrolment in the company’s group RSP and deferred profit sharing plan.
“We have to find a way to stage communications and to make it meaningful and create some impact,” said Ward.
Sponsors say communications is innately difficult because pensions are complicated, particularly DB plans, which have contribution formulas, tax adjustments and commuted values that quickly befuddle the average employee. Likewise, different companies have very different employee demographics in their workforces, necessitating more nuanced communications styles.
At Johnson & Johnson, director of pension financial services Normand Lepine said a typical employee is slightly older than 40, is beginning to think about retirement and is most likely to prefer the company’s DB offering over its DC plan.
Staples’ Al Ward, meanwhile, is dealing with employee “associates” who are mostly in their early 20s and disinclined to participate in company benefits programs at all, despite the generous provisions.
“It’s a young organization,” he said of the 250-store chain, “and young people don’t necessarily think in those terms.”
Labatt
Some have to deal with complex demographics under the same roof. Labatt runs both DB and DC plans for non-union employees on the commercial side of the business, many of whom are in sales and marketing jobs. These employees tend to be in their 20s and 30s and will likely stay with the company from three-to-five years, said Chris Faulkner, the company’s director of HR rewards. For them, Labatt’s DB plan doesn’t make a lot of sense because they won’t get much value when they leave and pension adjustments will eat up their RSP contribution room, Faulkner said.
By contrast, the company’s 18 Canadian breweries are populated by older unionized employees who prefer DB plans because they tend to remain with the company throughout their careers and obtain the maximum benefit from DB pensions, he said.
Johnson & Johnson
An additional complication for sponsors is the range of attitudes and expectations they see in employees. At Johnson & Johnson, Lepine notes that one reason employees are inclined to switch to the DC side of the company’s hybrid pension plan is the assumption that DB benefits could someday diminish.
“A lot of people are cynical about DB plans. They think benefits will be cut back later,” he said. “But when they have money in their DC account, then they feel more comfortable. It’s a very widespread fear.”
Cindy Hillaby, meanwhile, sees almost the opposite phenomenon at the CAA – a workforce that’s older and almost too accepting of the organization’s plan provisions until they get close to retirement.
“We have people who stay such a long time and they just think that the CAA is supposed to look after them,” said Hillaby.
The backdrop of the communications issue is the continuing trend in the pension sector toward DC plans, most often as an option to existing DB plans. One major reason for the shift is that, despite improving equity markets through 2003, sponsors remain concerned about the impact of lower investment returns on their ability to sustain the DB components of their pension offerings.
3M Canada
“There’s so much uncertainty in the market,” said 3M Canada’s Phyllis Retty. “Who knows if we’ll ever again see double digit returns on a consistent basis. In 2002, the total return on our fund was a negative 9.3 per cent. The benchmark was negative 8.6 per cent. Our four-year return ending in December 2002 was 1.6 per cent.We don’t have the numbers for 2003 yet and it will be better, but four years at 1.6 per cent is a long way from our assumed rate of return of nine per cent.”
Pension fund performance is also an ongoing worry at Labatt, said Faulkner. He said the company’s conservative approach to investments means the fund underperforms in rising markets and holds its own when they fall. Nevertheless, Labatt’s DB fund, which covers the majority of the company’s 4,000 employees, took a “significant hit” in 2001 and 2002, he said. The mood hasn’t dissipated with the stock market revival.
“Actually 2003 was a particularly good year and we’re in a much better position, but when you have bad markets, you start to question whether you want to have a DB pension plan because you’ve got all that liability and the employee has none,” said Faulkner.
While there’s a large degree of stoic acceptance that poor markets have to be endured, there’s also a creeping impatience. At 3M Canada, Retty noted one of the problems their plan has faced is weak investment management.
“In the past 10 or 12 years we’ve probably turned over our Canadian equity managers five or six times,” Retty said. “What can you do? You have to monitor them more, and when you’re not happy you’ve got to get out and cut your losses earlier.”
Sponsors also say the shift toward DC plans reflects a desire for simplicity on the part of employers. DC plans avoid the complex accounting of DB plans and face somewhat less regulatory complexity federally and provincially, said Petro-Canada’s Noel-Bentley.
“DC plans come under the same jurisdictions as DB plans, but there’s not the same amount of impact,” she said. “DC plans are much simpler conceptually and so the rules around actuarial valuations and terms and conditions are not as significant as in a DB plan. It’s still an irritation; it’s just a little less so.”
Sobeys Inc.
Brian Morrissey, senior vice-president of corporate administration at grocery giant Sobeys Inc., said DC plans also appeal increasingly to employees because they offer long-term investment potential (versus the fixed benefit of a DB plan) with fewer complexities.
“With DC, portability is far more transparent and easier,” he said. “Your DC account is your DC account and if you leave an organization, you take it with you — full value — whereas in a DB environment, there are actuarial valuations and commuted values,” he said. “And most people are disappointed when they find out that, in the 10 years they worked for a company, their pension is only worth so much. DB plans really reward people for staying in one place for long periods of time, but that’s not today’s workplace environment.”
But DC plans may also pose growing responsibilities for sponsors. The Joint Forum of Financial Market Regulators, a body with representatives from insurance, pension and securities regulators, introduced proposed guidelines for Capital Accumulation Plans in 2003 that incorporate the rights and responsibilities of DC plan sponsors.
Laurentian Bank
France Gagne, vice-president of compensation and benefits at Laurentian Bank, said her organization is currently evaluating the guidelines, particularly for the implications they may have for employee training in investments. In a sense, it all goes back to the need for good communications, particularly since DC plans transfer greater responsibility for investment decisions onto the shoulders of employees.
Said Labatt’s Chris Faulkner: “Honestly, we would have had employees who would have lost 20 per cent to 25 per cent from their DC plans in the past couple of years, and that’s not necessarily bad, given that the market would have lost 30 per cent or 35 per cent. But you need to make them understand that equity investments are more risky than bonds.”
Making them understand, though, can be rewarding, said Sobeys’ Brian Morrissey. The company’s effort to provide more details about its DC plan, along with more transparent reporting and online tools is making headway with the company’s roughly 14,000 employees, he said.
“We’ve got people at the stage where they’re doing some real planning and modelling,” Morrissey said. “That’s where the real understanding gets created.”
Charles Davies is a Toronto-based financial writer. He can be reached at [email protected].
