The financial crisis has heightened Canadian executives’ concerns about both defined benefit (DB) and defined contribution (DC) pension plans, according to the findings of Watson Wyatt’s sixth annual Survey of Pension Risk, released Monday.

The survey of 161 chief financial officers and vice presidents of human resources reveals that 88% believe DB plans are in a widespread funding crisis. Thirty-five per cent of respondents view the current funding issues as a cyclical problem, while 53% think the crisis will be long-lasting. This represents a significant shift from last year, when only 34% of survey respondents said Canada was facing a long-lasting pension crisis.

“Drastic stock market declines have had a profound impact on the private pension landscape,” says Ian Markham, director of pension innovation for Watson Wyatt’s Canadian offices. “Without temporary funding relief, large, required pension contributions will limit plan sponsors’ ability to make critical investments in their businesses. This could have a domino effect on the Canadian economy — reducing demand for other companies’ goods and services and hindering job growth.”

Three-quarters of corporate DB plan sponsors said without government funding relief they would make large or moderate reductions to their capital spending in order to have funds for massive solvency deficit contributions. While some jurisdictions have passed temporary solvency relief measures, the scope of relief varies and there are a number of proposals that are still under consideration.

Despite these challenges, the number of DB plan sponsors making substantial changes to their plan designs has not increased as a result of the financial crisis. Forty-one per cent say they have no intention of converting their DB pension schemes to DC plans, compared with last year’s 42%. There is also no clear indication of a shift to more conservative investment strategies. While increasing bond weighting and lengthening bond duration are popular strategies to stabilize costs, we have not yet seen a substantial movement away from equities and other growth assets.

“Sizable funding deficits are prompting many DB plan sponsors to rethink their risk appetite and investment strategies,” says Janet Rabovsky, investment consulting leader for Watson Wyatt’s central Canadian offices. “When the dust settles, we could see a number of companies move to more conservative investment strategies.”

Executives cite insufficient retirement savings — due to low contributions and poor investment returns — as the most serious threat to the long-term sustainability of DC plans. Yet, most DC plan sponsors do not believe that it is their responsibility to establish and aim for a certain income replacement target for their plan members and 90% expect their employer contribution levels to remain unchanged in the next three years.

“The threat of workers having insufficient savings to retire has become more acute since the financial crisis began,” says David Burke, Watson Wyatt’s Canadian retirement practice director. “Employees who cannot afford to retire can pose a significant challenge for plan sponsors that are trying to streamline their operations to survive the current recession. This is particularly true for sponsors of DC plans.”

IE