HR more pessimistic than CFOs about pensions

HR will guide pension plan design in future

Chief financial officers (CFOs) and senior HR executives have different views when it comes to the pension “crisis” and how bad it will be. But down the road, they’re expected to play equally important roles in deciding what pension plans will look like.

That’s according to Watson Wyatt’s fifth annual Survey on Pension Risk, which found CFOs less concerned about pension funding issues than vice-presidents of HR. Conducted in the first quarter of 2008, it found more than one-half (57 per cent) of CFOs believe there is a pension crisis in Canada, down considerably from 80 per cent in 2006. More importantly, only 26 per cent believe the crisis will be long-lasting, noticeably lower than 49 per cent in 2007 and 61 per cent in 2006.

“People jump on the headline and see a decrease, but that is more from a long-term perspective than short-term — there’s still significant concern out there,” said David Burke, retirement practice director at Watson Wyatt in Toronto. “It shows a much more significant decrease in those who believe it’s long-lasting than those who believe there’s still a crisis, whether long or short.”

Among HR respondents, 62 per cent believe there is a crisis, down from 78 per cent two years ago. And 43 per cent of respondents view the crisis as long-lasting, up slightly from 40 per cent in 2007 (though down from a high of 67 per cent in 2006).

The differing views between finance and HR are largely explained by the contrasting focus of each group, said Burke. CFOs tend to look at how pension costs impact the company’s income statement and balance sheet. And the yields on high-quality corporate bonds — which determine the costs — increased, so the downturn in the equity market did not depress funded ratios, he said.

“Even though the asset returns weren’t great, the costs of the liabilities went down so the overall situation still looks better at end of 2007 than 2006,” he said.

The survey began in 2004 when interest rates were down and returns weren’t too bad, said Burke. Concern about pensions was high during this period but since then, people have become used to some degree of volatility, so that’s probably diminished some of the concern.

“The TSX has had record returns over the last year, it’s produced 15 per cent, so CFOs might be saying, ‘We’ve done okay over the last five years so we’re not as worried as we used to be,’” said James Cartin, president of Calgary-based employee benefit consultants Cartin & Associates.

“If I were a CFO, I’d be concerned, given the year we had in the stock markets,” said Cartin. “What it’s saying to me is they’re still concerned and rightfully so, they should be,” particularly with defined benefit (DB) plans, which are subject to unfunded liabilities.

The survey has a relatively small sampling, at 168 organizations (with 58 per cent having more than 1,000 employees), and that makes a difference, as does the type of employer and sector, said Cartin. (More than 95 per cent of businesses in Canada have fewer than 50 employees, according to Statistics Canada).

“That is an issue,” he said. “You have to segment this between large companies, mid-size and smaller companies, because you start getting into smaller companies and owner-managed companies and they don’t want anything to do with unfunded liabilities.”

Attraction and retention

While CFOs realize pensions are there to provide benefits to attract, retain, motivate and help people retire, their primary focus is going to be financial issues while HR is very concerned about attracting and retaining people, said Burke. What’s more, people coming in the door increasingly understand DB or defined contribution (DC) plans or group RRSPs, said Cartin.

“HR is out there to spend money and attract employees, they’re not a profit-making division, but they’re important from the standpoint to attract and retain good people, so there’s payback in that,” he said.

However, the belief CFOs should be heavily involved in plan design decisions could be on the decline. While one-half of respondents think financial considerations outweigh HR issues when making plan design decisions today, only 30 per cent believe the same will hold true in five years. And 58 per cent believe HR and financial functions will play equally important roles in future plan design decisions (compared to 44 per cent today).

It’s unhealthy to have it skewed significantly one way or the other, said Burke.

“The reason these plans were created and exist is because organizations believe they will help them from a business and capital management perspective, otherwise they shouldn’t have them,” he said. “But as these plans mature and get bigger and assets grow and accounting rules move things even closer to market-to-market, clearly there are financial issues.”

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