After another year of volatile market performance de-risking is gaining momentum
A new survey of 115 Canadian Defined Benefit (DB) and Defined Contribution (DC) pension / Capital Accumulation (CAP) plan sponsors from global professional services firm Towers Watson suggests that a growing sense of pessimism is settling over the Canadian pension landscape. The study reveals that 65% of DB respondents (compared to just 56% in 2011) believe that Canada is experiencing a pension crisis that will be long-lasting and likely to worsen in the next 12 months. DB and DC/CAP survey respondents alike are also concerned about ensuring adequate retirement income for their plan members when a pension plan re-design is underway, with more than 70% of DC/CAP survey respondents anticipating that CAP-related litigation will increase in the coming years, citing inadequate retiree income as a key factor.
In response to the on-going funding crisis, more than half (54%) of DB respondents indicate they are currently planning or considering investment strategy changes, typically to de-risk their portfolios. In contrast to prior years when plan sponsors were more focused on seeking higher returns, 53% of 2012 respondents (compared to only 36% in last year’s survey) appear willing to accept lower returns in favour of reduced risk.
David Service, Director of Towers Watson Investment Services, confirms the shift in attitude. He notes that “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.” He adds, “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.”
As the funded status of DB plans continues to decline, pension funding reform is increasingly important to survey participants. When asked to identify their main concerns in regard to pension legislation, funding issues top the list, with a majority of respondents citing permanent extension of amortization periods (59%) and extensions to temporary funding relief (57%) as being within their top three priorities, followed by calls for greater harmonization of pension legislation across Canada (49%).
Plan design changes appear to be a somewhat less viable de-risking tactic for employers, with only 2% of current private sector DB plan sponsors expecting to switch to a DC/CAP arrangement for new hires in the next 12 months. A further 8% of respondents are considering this move in the future. As Ian Markham, Canadian Retirement Innovation Leader at Towers Watson observes, “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. Just 36% 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%) agree that their employees are more concerned about pensions now than they were 24 months ago. Mirroring this anxiety, the pension risk survey confirms that many plan sponsors feel the same.
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