Study: Canadian Funds Accelerate Move to DC

(April 7, 2011) — A new study by Towers Watson of more than 150 Canadian pension plan sponsors has indicated that defined benefit (DB) pensions are at a tipping point.

The pessimistic predictions come as no surprise as longer life expectancies, retirement periods that exceed working years, and low real interest rates strain pension schemes. This week, the Ontario Teachers’ Pension Plan (Teachers’) announced that despite a 14% annual return in 2010, the fund continues to face funding challenges, with an estimated funding shortfall that increased to C$17.2 billion from C$17.1 billion a year earlier.

“The 2008 crisis may have been the final straw for senior finance officers,” said David Service, director of Towers Watson Investment Services in a release on the study. “While plan sponsors may not be able to afford to make changes right now, many are working on strategies to de-risk or even exit when the financial position of their plans improve.”

The survey showed that just over half (51%) of the private sector DB plan respondents have now converted their plans to defined contribution (DC) arrangements for current or future employees – up from 42% in 2008. The study suggests that this trend will continue to gain steam.

“The financial crisis has caused a shift in plan sponsor attitudes,” said Ian Markham, Canadian retirement innovation leader at Towers Watson, in a release. “This year’s survey results show that employers planning a conversion to DC are intent on doing so regardless of whether economic conditions improve, or a more sponsor-friendly legislative environment appears, or even in lieu of less dramatic changes to plan design or investment strategy.”

As financial markets continue to improve, the percentage of plan sponsors who are preparing to implement changes has significantly increased, the survey revealed. Of the private sector DB plan sponsors considering adjustments to their plan design, funding policy or investment strategy, more than half (52%) indicate that they have prepared a “journey plan” of measures to contain cost and volatility.

Last year, a report issued by the Pew Center on the States showed that more states are taking action to reduce pension liabilities. The brief, posted on the center’s website, showed that nineteen states made an effort to reduce their schemes’ liabilities by reducing benefits or upping employee contribution requirements. While 11 other states took similar action in 2009, eight did so in 2008. Yet, according to the study, states continue to be in a severe fiscal crunch because they’ve been promising more in retirement benefits than they’re able to pay, resulting in an alarming $452 billion total deficit for state and local governments in fiscal 2008. To deal with the large deficits, states are weighing proposals that range from switching from DB to DC plans to upping the retirement age. Illinois, for example, took action on improving its pension system, the worst-funded in the nation according to Pew, by raising the retirement age to 67, the highest of any state. The inaction to tackle the deficit in Illinois has reportedly boosted the state’s borrowing costs by as much as $551 million a year.