Pension funding crisis long lasting: Survey

Majority of plan sponsors focusing on reducing costs, mitigating risk
||Last Updated: 04/22/2010

With an ongoing, and likely sustained, funding crisis for defined benefit (DB) pension plans, most employers are taking steps to control costs and reduce risk, according to a new survey.

Professional services firm Towers Watson surveyed 110 Canadian DB plan sponsors and found 71 per cent of them have already taken or are considering action to control rising pension costs and mitigate risk.

The 2010 Towers Watson Pension Risk Survey also found close to 40 per cent of plan sponsors have recently updated or are intending to update their investment strategy in the coming 12 months, and 34 per cent are considering changes in the future.

These changes include increasing fixed income investments and duration, implementing cash flow matching and other risk-reducing strategies.

Also, 22 per cent have recently made or will be making plan design changes to contain cost and volatility. Of these, 10 per cent have switched or will be switching in the next 12 months to a capital accumulation or defined contribution (DC) plan, while 13 per cent have implemented other design changes or plan to do so.

“Additional changes to DB pension plans are likely to occur unless legislation becomes more favourable to plan sponsors,” said Martine Ferland, Canadian retirement leader at Towers Watson.

“Employer actions may not be enough to offset rising pension costs. It’s good to see governments across the country looking at making significant changes to increase the sustainability of private sector pensions.”

One-half of respondents (52 per cent) see the pension funding crisis as long-lasting, compared to just 34 per cent who held this view in 2008. Just under one-third (32 per cent) perceive the current crisis as cyclical phenomenon.

“Normally, when economic conditions and pension plan funding levels improve, plan sponsors’ perception of a DB funding crisis also improves. This is what we observed in early 2000s, but not this time,” said Ian Markham, Canadian retirement innovation leader at Towers Watson.

“This year’s results suggest that the recent financial crisis will have a more long-lasting effect, resulting in even greater focus on risk management strategies.”

Plan sponsors admit significant challenges to maintaining a DB plan for their workers. Nearly all plan sponsors (91 per cent) rank volatility of funding contributions and accounting expense as a top challenge they face in today’s economic environment, while 88 per cent rank the cost of maintaining and funding DB plans as a top choice. More than three-quarters view these challenges as more severe now than in 2008.

The challenges are too great for many publicly traded companies with 53 per cent of these respondents saying they have closed their DB pension plans to new hires and one-third planning to close them in the future.

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