Costs top list of concerns for DB plan sponsors: Survey <!-- sponsoredarticle -->

Employers walk fine line between cutting costs and keeping employees happy

An aging workforce and market volatility have cost containment topping the list when it comes to the most important issues facing defined benefit (DB) plan sponsors in Canada. That’s according to a study of 153 companies with pension plans covering non-union salaried employees, by HR and benefits consulting firm Buck Consultants.

Coming a very close second this time was asset management (at 42 per cent, with cost containment at 43 per cent), followed by adequacy of benefits (35 per cent), which didn’t show up in the survey four years ago (when employee communications ranked number one).

“The jockeying of issues is interesting because it seemed to change a fair bit,” said Marc-André Vinson, a senior consultant for Buck in Toronto. “I’m surprised it changed as much as it did.”

The focus on costs is understandable, he said, considering the hostile climate that has affected DB plans in the last few years. Many employers have kept the DB plan intact or lessened the early-retirement provisions while introducing defined contribution (DC) components or separate DC plans for new employees. These plans have more predictable costs but less generous provisions.

Employers want to contain costs, but they don’t want to upset or anger employees with radical measures, he said, so it’s a draw between the two.

The new survey also places employee understanding (24 per cent) and employee satisfaction (20 per cent) lower as issues of concern, compared to 2003 when they were in the top three.

It’s not that employers don’t care — paternalism is not dead, said Vinson, but other issues have emerged and a lot of effort has gone into addressing employee understanding and appreciation.

“Four years ago, everybody was talking about the new regulations that required communication to employees, educating them, letting them know what’s going on, so that probably would have been on the top of the list,” said Al Schreiber, president of Kitchener, Ont.-based A.W. Schreiber Benefit Consultants.

“Interest rates and the stock market weren’t as bad as they are now so that’s sort of changed the functions, the priorities for people. They’re worried about how this is going to look on the actuarial report when they do their three-year costing.”

The survey also found nearly 90 per cent of respondents contribute more than five per cent of total payroll costs to the DB plan, well above typical rates for DC plans. But these current service costs were probably not as high when the plan started or even a decade ago, said Vinson.

“As the population ages, so too do the memberships in DB plans and that means an increase in costs,” he said. “That’s why there are many DC replacements, to lower costs.”

With these challenges, it’s not surprising nearly one-quarter (23 per cent) of the companies surveyed are thinking about moving to a DC plan or winding up the DB plan and more than one-half (56 per cent) have made, or are considering making, DB plan design changes

“That stat has been growing and been there for probably the last decade,” said Schreiber. “Everybody in that type of DB plan wants to go to the DC plan to control and manage costs.”

But this trend may be flattening to some extent, as alternatives come into play, said Vinson. These include moving away from subsidized early-retirement provisions to phased retirement programs or flexible pension plans.

In addition, the uncertainties of DC plans can affect quality of life, with people very sensitive about how they spend their precious money, and that’s less true for DB, he said.

“There are parts to them that make them more attractive than DC plans,” he said. “I like to think there’s a place for defined benefit plans and they should be saved.”

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