Canadian Sponsors Moving on Funding Concerns

A news release from Towers Watson said 70% of plan sponsors surveyed have already taken or are considering action to control rising pension costs and mitigate risk.

Close to 40% of plan sponsors have recently updated or are intending to update their investment strategy in the coming 12 months, and 34% are considering changes in the future. These changes include increasing fixed income investments and duration, implementing cash flow matching, and other risk reducing strategies.

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

The survey also found that 52% see the pension funding crisis as long-lasting, compared to just 34% who held this view in 2008, before the recession. Just under one-third (32%) perceive the current crisis as a 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, in the news release. “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.”

Ninety-one percent of sponsors polled rank volatility of funding contributions and accounting expense as a top challenge they face in today’s economic environment, while 88% rank the cost of maintaining and funding DB plans as the top challenge. More than three-quarters view these challenges as more severe now than in 2008, Towers Watson said.

Other findings from the survey include:

• More than half (53%) of publicly traded companies indicate their DB pension plans are already closed to new hires. Even among those that have plans open to new hires, approximately one-third plan to close them in the future.
• Beyond plan design, many plan sponsors continue to support the call for pension reform legislation. Most are interested in measures that will reduce the cost and volatility of private DB plans. Among publicly-traded companies, 68% are in support of new mechanisms to improve plan sponsor access to surplus assets.

The findings are part of Towers Watson’s 2010 Pension Risk Survey of Canadian defined benefit plan sponsors covering more than 110 organizations.