Pension worries rise for DB, DC plan sponsors: Survey

After another volatile year, ‘de-risking’ gains momentum
||Last Updated: 03/08/2012

A growing sense of pessimism is settling over the Canadian pension landscape, according to a survey by Towers Watson of 115 defined benefit (DB) and defined contribution (DC) pension/capital accumulation (CAP) plan sponsors.

Almost two-thirds (65 per cent) of DB respondents (compared to just 56 per cent in 2011) believe Canada is experiencing a pension crisis that will be long-lasting and likely worsen in the next 12 months.

In response to the ongoing funding crisis, 54 per cent of DB respondents are planning or considering investment strategy changes, typically to de-risk their portfolios, said Towers Watson. In contrast to prior years when plan sponsors were more focused on seeking higher returns, 53 per cent of the 2012 respondents (compared to only 36 per cent in last year’s survey) appear willing to accept lower returns in favour of reduced risk.

DB and DC/CAP plan sponsors are also concerned about ensuring adequate retirement income for plan members when a pension plan redesign is underway, found the survey. More than 70 per cent of DC/CAP survey respondents anticipate CAP-related litigation will increase in the coming years, with inadequate retiree income a key factor.

“Until a few years ago, plan sponsors remained caught in the mindset that de-risking meant giving up more return than they felt was worthwhile,” said David Service, director of Towers Watson investment services. “Many plan sponsors did not take advantage of the de-risking opportunity that existed in 2006 and 2007 when their DB plans were close to fully funded. After another volatile year of market performance and declining funded status, sponsors now seem more inclined to focus on de-risking their DB plan — even if at the price of lower returns.”

When asked to identify their main concerns in regard to pension legislation, funding issues topped the list, with more than one-half of respondents citing permanent extension of amortization periods (59 per cent) and extensions to temporary funding relief (57 per cent) as one of their top three priorities, followed by calls for greater harmonization of pension legislation across Canada (49 per cent).

Plan design changes appear to be a somewhat less viable de-risking tactic for employers, said Towers Watson, with only two per cent of private sector DB plan sponsors expecting to switch to a DC/CAP arrangement for new hires in the next 12 months. A further eight per cent of respondents are considering this move in the future.

“While the trend to move from DB to DC/CAP is continuing, many of these plan changes, especially in the private sector, have already occurred,” said Ian Markham, Canadian retirement innovation leader at Towers Watson. “Just 36 per cent of private sector survey participants are still keeping their DB plans open to current members and future hires — a far cry from the levels we saw in the past.”

Regardless of plan type or sector, the majority of survey participants (72 per cent) agreed employees are more concerned about pensions now than they were 24 months ago.

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