A new survey of Canadian pension plan sponsors finds a growing fear of funding pressures, which is leading plans to alter their investment strategies.
The survey of 115 defined benefit and defined contribution pension/capital accumulation plan sponsors by Towers Watson suggests that there’s a growing sense of pessimism within the Canadian pension landscape. It finds that 65% of DB respondents believe that Canada is experiencing a pension crisis that will be long-lasting and likely to worsen in the next 12 months, up from 56% in 2011.
It reports that survey respondents are concerned about ensuring adequate retirement income for their plan members when a plan re-design is underway, with more than 70% of DC/CAP respondents anticipating that CAP-related litigation will increase in the coming years, citing inadequate retiree income as a key factor.
In response to the funding crisis, the survey found that 54% of DB respondents indicate they are currently planning or considering investment strategy changes, typically to de-risk their portfolios. And, in contrast to prior years when plan sponsors were more focused on seeking higher returns, 53% of 2012 respondents appear willing to accept lower returns in favour of reduced risk, compared to 36% in last year’s survey.
David Service, director of Towers Watson Investment Services, 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.”
As a result, he says “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 seen as increasingly important to respondents the survey also found. It reports that, 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%).
Shifting from DB plans to DC/CAP plans is not a popular de-risking tactic for employers, the survey also found, with only 2% of current private sector DB plan sponsors expecting to switch for new hires in the next 12 months. Another 8% of respondents are considering this move in the future.
“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,” says Ian Markham, Canadian Retirement Innovation Leader at Towers Watson. “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%) also agree that their employees are more concerned about pensions now than they were 24 months ago, it says, adding that many plan sponsors feel the same.