Tough year for benefits, pensions

2002 WAS a “pretty awful” year for pension plan sponsors and it’s unlikely to get much better any time soon, according to a leading HR consulting firm.

Stumbling stock markets drove plan assets down, said Paul Purcell, a pension specialist with Mercer Human Resource Consulting. At the same time, “we also saw lower long-term interest rates, which helps bond portfolios, but drives up liabilities for pensions.” With assets going down and liabilities going up, the upshot for employers with defined benefit pension plans is increased plan contributions. “There is no question that (sponsors) are seeing dramatically higher costs this year,” he said.

The hit will seem particularly harsh after years of robust pension plan growth translated into smaller contributions, and surpluses and contribution holidays.

“We rarely end up in the equilibrium,” said Purcell of the swing back to higher contributions. Costs are either too low or too high. For the past few years, sponsors were underpaying and now for the next few years they can expect to pay more than the true value of the plan, he said. In some cases it may prompt employers to make the move to defined contribution plans as a way to contain costs, or they may consider getting out of pension plans all together.

“One of the trends that I have seen to a very small degree is the next step from DC which is instead of putting money into a DC is just giving them the cash,” said Purcell. Employees have the option of putting the money in an RRSP or putting it toward mortgages, for example.

Meanwhile, many Canadian HR departments will be looking for ways to contain rising benefits costs in 2003, said Marg French, a health and group benefits specialist with Mercer.

Employers can look forward to prescription drug increases in the 16 to 18 per-cent range with dental costs also likely to rise by as much as 12 per cent, she said.

Changes to the health-care system, as recommended in the Romanow and Kirby commissions, could have a positive effect on employer-sponsored health plans — both reports recommended increased government support for drug costs beyond a certain threshold — but HR departments shouldn’t wait for the government to take action, said French.

Employers need to have a very clear picture of what is driving costs in the plan. There is little sense in eliminating the most expensive drugs from a plan if most of the spending is on Tylenol 3, she said.

It is also a good idea to review what they have been getting, and what they should expect from, their providers. “I think employers should be asking for more accountability from the insurance providers,” she said.

New products and services, such as facilitated return-to-work programs, are regularly being introduced by providers but they need to do a better job of demonstrating the value in those products. “If I buy a facilitated return-to-work process, what if it doesn’t work? What guarantees come with the service you are selling? Are there rebates?”

Beyond this, 2003 will likely see growing interest in reviewing post-retirement benefit offerings. Most organizations won’t be too eager to reduce benefits for current retirees, but with the knowledge that the cost of future retiree benefits is likely to go up, more organizations will look to make changes to retirement provisions for current employees.

Stress-related claims also continue to drive up benefits costs, she said. By one estimate, they represent as much as 40 per cent of disability claims. Employers are going to have to deal with this issue if they hope to contain benefits costs, she said.

Aside from a disappointing year in the markets, the other big pension event of 2002 was the Monsanto court decision and subsequent retreat by the Ontario government on legislation that would have protected employers from employee claims for plan surplus in the event of a partial windup. (For more on the Monsanto story see the "Related articles" link below. go to www.hrreporter.com click on search and enter article # 2190.)

Employers will want to see one of two things happen on this issue, said Purcell. Either Monsanto will appeal and get the decision reversed or the issue will need to be resolved through legislation.

“If neither of those two things happens, plan sponsors are really facing an ugly scenario,” he said, with former employees looking for payouts from their old pension plans. “They could face all kinds of members crawling out of the woodwork saying, ‘I didn’t think I had anything at stake, but I want my situation declared a partial windup.’”

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