Buck Consultants Survey Finds Cost Containment Is Top Corporate Concern for Pensions in Canada

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<strong>Toronto &mdash; Feb. 20</strong><br />Canadian employers who sponsor defined benefit (DB) pension plans have put cost containment at the top of their "to do" agenda, according to a nationwide survey of Canadian pension plans released by Buck Consultants.<br /><br />The study, "Moving Forward: An Overview of Defined Benefit Plans in Canada," found that 43 percent of plan sponsors identified cost containment as the most important issue they now face. This is a significant change from the previous Buck survey, conducted in 2003, in which employee understanding of pensions was the top concern. The just-released Buck Consultants survey was conducted in the third quarter of 2007 and included more than 150 respondents.<br /><br />"The current concern about costs is not surprising, when you consider the hostile economic climate that has reigned over DB plans during the last several years," said Marc-André Vinson, a senior consultant for Buck.<br /><br />"We have recently seen clients take aggressive action to contain costs," said Vinson. "Most chose to keep the DB plan intact for existing employees, but provide new hires with a different pension promise &mdash; one with more predictable, and usually lower, costs." Survey respondents expressed additional DB pension concerns. Forty-two percent noted asset management as a major issue, and 22 percent are struggling with pension governance.<br /><br />"Oversight boards are turning their attention to pension plans not only because of Sarbanes-Oxley, but also because of the significant pressures these plans have placed on the company balance sheets in recent years," said Charlene Moriarty, a consulting actuary for Buck. Moriarty pointed out that with the increase in court challenges involving pensions, judges want to know that the appropriate governance processes are being followed.<br /><br />The survey found that nearly 90 percent of respondents now contribute more than 5 percent of total payroll costs for their DB plan in Canada, well above the typical contribution rates for defined contribution (DC) plans.<br /><br />Sixty percent of respondents indicated that additional contributions are required to resolve funding and solvency deficiencies in their DB plans. "The combination of low interest rates and poor investment returns contributed to this funding problem," said Vinson. "In Canada, we may continue to see solvency pressures having a significant impact on contribution requirements &mdash; perhaps influencing plan changes."<br /><br />The Buck survey found that 23 percent are considering either moving to a DC plan, or winding up their DB plan in the next five years. A further 56 percent of respondents have made, or are considering making, DB plan design changes.<br /><br />"Some of those changes will likely include a move away from generous early retirement provisions and automatic cost-of-living increases," said Vinson. "Alternative DB designs, such as flexible pension plans, can be positive, innovative approaches to controlling pension costs."<br /><br />"Ironically," added Moriarty, "the career average plan, a design that was much more prominent a few decades ago, can provide some risk sharing. It was quite common to use a conservative interest rate to value the liabilities of a career average plan and then use the investment gains to provide regular career average upgrades. This is a form of risk sharing. Employees aren&#39;t guaranteed a final average plan: that form of inflation protection is dependent on the fund achieving sufficient returns. And the conservative interest rate offers more downside risk for the plan sponsor."<br />

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