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Canadian Companies Crossing ‘Pension Rubicon’?
Janet McFarland of the Globe and Mail reports in CTV, Companies cross ‘pension Rubicon’:
Canadian
companies have crossed a “pension Rubicon” and are continuing to
dismantle traditional defined benefit plans even as the economy
improves, according to a review by Towers Watson.
A survey of 150
Canadian pension plan sponsors found 51 per cent have converted to
defined contribution (DC) plans for current employees or new hires, up
from 42 per cent in 2008. Defined contribution plans do not pay a
guaranteed level of benefit at retirement like a traditional pension
plan, but instead pay a return that varies based on the performance of
the investments held by each member of the plan.
Companies
surveyed are continuing to convert their plans to DC accounts, with 12
per cent of those surveyed in 2010 saying they would convert to a DC
plan within 12 months – up from 5 per cent in 2008 – and a further 9 per
cent reporting plans to convert in 2011.
“The study suggests that this trend shows no signs of relenting – the Rubicon has been crossed ,” the Towers Watson report said.
Employers
have complained about the volatility and risk of maintaining a
traditional defined benefit pension plan in recent years as low interest
rates have reduced returns while simultaneously boosting the liability
that must be funded.
“Those considering a conversion are
generally intent on doing so regardless of improved economic
conditions, a more sponsor-friendly legislative environment or changes
in plan design or investment strategy,” the report said.
However,
Towers Watson said the survey showed one glimmer of hope for employee
pension plans. Employers acknowledged that workers in Canada’s aging
population will find defined benefit pension plans more valuable in the
future. Companies considering changing their plan design to reduce
risk said the potentially negative impact on employee attraction and
retention is a “major concern” for the company.
The
survey found 59 per cent of employers believe workers will find
defined benefit pension plans more valuable in the future, while only 9
per cent thought employees would find them less valuable and 32 per
cent said their perceived value will not change.
Towers Watson
said the findings are in line with a 2010 global work force study that
found a better pension plan is considered one of the main factors that
would influence Canadian workers to leave their current employers.
You can read the Towers Watson Canada press release below, Defined Benefit Pensions at a Tipping Point:
As
retirement savings adequacy and security becomes an election issue, a
new survey of more than 150 Canadian pension plan sponsors from global
professional services firm Towers Watson (NYSE, NASDAQ: TW), indicates
that just over half (51%) of the private sector Defined Benefit (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 shows no sign of relenting.
The
survey also reveals that recent improvements in economic conditions
have had virtually no impact on executives’ perception of a DB funding
crisis. The percentage of respondents who agree that there is a pension
funding crisis has remained at historic highs since the financial
downturn of 2008. The survey found that more than half of respondents
(56%) believe that the funding crisis will persist for the long-term
compared to 34% who held this view in 2008 before the onset of the
recession. Just under one-third (32%) perceive funding challenges to be
a cyclical phenomenon.
“The financial crisis has caused a shift
in plan sponsor attitudes,” said Ian Markham, Canadian Retirement
Innovation Leader at Towers Watson. “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.”
While
the economic conditions of 2009 and early 2010 prevented many plan
sponsors from taking drastic action, the percentage of plan sponsors
who are preparing to implement changes has significantly increased as
the financial markets continue to improve. 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.
“The 2008 crisis may have been the final straw for
senior finance officers,” said David Service, Director of Towers Watson
Investment Services. “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."
However, there may be some hope for traditional DB pension plans. With
an aging population, a majority of survey respondents (59%) agree that
employees will be showing a greater appreciation for DB pensions. The
potential impact on attraction and retention is also a major concern
for the majority (52%) of organizations that are considering plan
design changes. “Canadian employees tell us that the prospect of a
competitive pension is one of the top five factors that would influence
them to leave their current employer, “ said Martine Ferland, Canadian
Retirement Leader for Towers Watson. “As election rhetoric heats up the
pension debate, we hope to see additional measures proposed that will
increase the sustainability of private sector pensions.”
Companies
are increasingly nervous about liabilities attached to traditional
defined benefit (DB) plans so they're passing the buck to individuals by
shifting their employees to defined contribution (DC) plans. This is a
recurring theme throughout the developed world. In the UK, companies are transferring pension risk over to banks and insurance companies who are probably going to make a killing in the process.
But the survey showed a glimmer of hope for employee pension plans as
employers acknowledged that workers in Canada’s aging population will
find defined benefit pension plans more valuable in the future. I happen
to think that smart companies will figure out a way to shore up their
defined benefit plans to attract and retain good employees who are not
just looking at base salary and bonus. They're also thinking long term.
My
honest opinion, however, is that most companies shouldn't be in the
defined benefit pension business at all. Instead, companies should
transfer this risk to existing and new public sector pension plans and
have professional pension fund managers manage these retirement monies.
I'm the first person to acknowledge that Canadian public DB plans are
far from perfect, but they're way better than DC plans and the truth is
that it makes better economic sense for companies to worry about their
business and let public pension plans worry about pension risk. Just
make sure you get the governance right, aligning interests with the
workers, not the pension fund managers' pockets.
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Leo, perhaps posting as a contributor is not for you until you overcome your anger issues.
just sayin'
What anger issues? I'm fed up with morons like you who keep spewing garbage!
"I'm fed up with morons like you who keep spewing garbage!"
Leo, i'm saving that line for your gravestone you massive twat
Remember kids, when a DB plan becomes a DC plan, the company is offloading their risk on you. Hope your ready to take it on. No complaining, if you f#uck it up.
They are offloading your risk onto you. There is no binding the future.
BTW, the last "glimmer of hope" was most likely during the big "War for Talent" days in the early part of the 00's, when companies thought they might actually have to retain and attract older, more expensive "talent" to make up for the shortage of workers. Move ahead ten years and thanks to continuing improvements in technology and productivity in conjuction with a continued off-shoring of jobs as well as the ever-present preference for younger, cheaper "talent," especially in industries such as natural resources (which is big in the booming parts of Canada) and there is even less draw or justification for DB schemes.
Deleted
Dude, you have obviously never been a decision maker on this topic ... I have, and I can tell you that no matter how much sunshine there seems to be, DB schemes are chock full of twisters and t-storms just over the horizon, which is why you can't get away from them fast enough.
I really hate this "good pension - bad pension" drivel that we keep getting from vested interests in the industry.
Leo, Canadian companies have been wanting to get out of defined pensions since 1987, when they were no longer allowed to take pension holidays without 'permission" from the newly established OSFI. One reason why the office was formed is lobbying from the Unions. Ours was a little upset the company wanted to buy a jet with the excess pension funds. (truth)
So in the bad times, they still aren't too interested in offering a DB to employees... although at the executive levels I am sure it is still there as a choice.
Before 2008, many public plans were given the "permission" by OSFI to restructure, so 2008 was a catalyst for other plans to request restructuring as well and so if offered as restructure or downsize to lose your job, that has made a huge impact on choices to opt out, given the unemployment rates and poor economy.
I doubt many companies who have been given restructuring permission will regret that decision even in boom times as they can offer bonuses and higher contributions.
Is the American PPA a similar Government pension regulator?
Krasting was correct- defined benefit plans are dying a well-deserved death. They were always an attempt to pretend the risk didn't rest on the pensioner himself. A defined contribution plan is explicit on where the risk lies, and doesn't allow companies and unions to trick workers into accepting future promises to pay in return for work today.
I for one agree with Leo DB plans are a better bet if fiduciary responsibility is executed properly. Mine was because I had that fiduciary responsibility{with good advisors and pension planners} but alas, after I retired DB was converted to DC simply because it became unaffordable. This is same situation facing private and public sector pensions because USA is no longer creating wealth---just deficits, Therefore days of DB are limited despite all the great advice from experts like Leo
How's about everyone manage their own fucking retirement and stop looking at the business/government the way a sheep looks at his shepherd?
I'll invest my own money my own way Leo,
Governments stealing pension money to move to gernereal revenue is not my idea of good pension management.
As the politicians search for more cash from declining tax revenues your Utopian dream of nationalizing pensions will be the source of revenue they seek.
No thanks.
''I'll invest my own money my own way Leo''
Great, how's that working out for you??? Maybe you are one of the few who are able to do a decent job but I would still like to see your risk-adjusted results relative to a top Canadian DB fund. For most people, retirement investing is a nightmare in these wolf markets. They would prefer having their retirement savings managed by professional pension fund managers and have the peace of mind that comes with a DB plan. Those of you who think can do a better job, feel free to opt out.
''Pensions are doomed. Leo is in LaLa Land thinking the industry can re-design itself and not hit the iceberg and drown. But Leo is way too dumb to stop flogging a dead horse, his mega-tedious articles bare witness to the fact.''
Never fails, another moronic comment by Zero Brains! You keep embarrassing yourself with these idiotic comments. And as far as ''copy paste'', you couldn't do what I do on my blog day in, day out, in your wildest dreams. It's so easy to criticize me instead of thanking me for opening your eyes to a world most of you know absolutely nothing about.
Stop whining - it's unbecoming.
Not whining, just fed up of idiots here, but no worries, I'm unrelenting and will never go away.
You are unrelenting, an unrelenting bore
we'll see who the 'idiot' is although you may not have noticed how many times i've already shown you up to be clueless (the penny will drop one day soon enough)
you keep flogging a dead horse, keep re-arranging the deckchairs on the Titanic and like Bernank never see anything coming (if you do you deny it) because you're a public sector tosser (born loser)
the pension industry is totally doomed. It was once a remotely good idea many decades ago but is now a pompous Diva carrying 18 suitcases for a weekend in Cancun. It has like you gone so far up its own arse it can't see the wood for the trees and that its path is strewn with broken promises and its future path requires constant bailouts it's never going to get
Keep grasping at straws while it drowns Kockup, i'm going to enjoy watching you sink
Another stunning cut (copy) and paste article from ZH's resident bore
Pensions are doomed. Leo is in LaLa Land thinking the industry can re-design itself and not hit the iceberg and drown. But Leo is way too dumb to stop flogging a dead horse, his mega-tedious articles bare witness to the fact
The DB plan, no matter how valuable it maybe to employees, seems a relic from an earlier more stable time. Even if offered, how many employees will work for the same company ( and now even local or state government) for their entire career?
I note that even Japan, where lifetime employment in the private sector was perhaps strongest, is increasingly using contract and temporary employees.
In the west, the shrinkage of industrial unions and weak public finances are eroding the DB even where it once was common. The municipal utility where I worked no longer offers DB for new hires even though it does still offer lifetime employment.
Will a private pension fund company still have to go to the govt and re-instate their projections of 8.5% returns........How pathetic was that, think its still going on actually. So, the funds are going broke and no one knows why?? Hmmm, CA made some fairly optimistic projections and paid out accordingly, Everybody wins! I don't know much, but putting a politician in charge of forecasts was a bad idea. Private concerns will most definitely charge their sorry asses with new fees, but they're not stupid enough to kill their own golden goose, thus remaining just enough in line with mkt expecations to keep their own revenue stream alive. I know I know, its very hard to let go of the Pretend Account that is the US Govt, knowing that in the end they will bail out the politicians.
Companies are leaving the DB plans because they are becoming aware of the dangers to their bottom lines. The new plans may or may not better for the employees but they are sustainable and as governments tend to get involved and bail out pension plans (see Nortel) when large companies go down I for one welcome a change to a more sustainable model that does not put taxpayers on the hook for stupidity.
casey 13,
In the good years, companies were padding their earnings using investment gains in their pension funds. Now, after 2008, they want out of the DB plans. No problem, get out and transfer the pensions to professionally managed existing or new large DB plans. We have more than enough examples of well managed DB plans in Canada both in the public and private sector. Companies should only worry about their business, not pensions. But this doesn't mean switching over to DC plans. The gvt should create new large public DB palns to manage these private DB plans. Some companies in Canada, like CN, might not want because they have an excellent DB plan. Others will be glad to transfer over the risk to the gvt.
there you go, a gov't solution - we know their track record. see Ringo's Law.
maybe the public sector unions should try DB - oh wait, they do, and that's why so many states and municipalities are heading for bankruptcy.
looking at municipal bonds too, Leo?
Umm forexskin,
The structural problems of the large US DB plans are not going away and will require tough political choices ahead. Pension deficits are there because state governments didn't top up their plans for years and pension funds used rosy investment assumptions to keep the contribution rate low. Well reality bites! You have to increase contribution rates, decrease the discount rate, hike the retirement age, and if you have to, cut benefits and adjust COLAs. Tough luck, no choice. But to kill off public DB plans is drastic and just stupid...throwing the baby out with the bathwater.
Nah--let's kill 'em off!
the crux here is that virtually every macro problem related to fiscal and therefore monetary policy requires "tough political choices". you really think that's possible before a significant crisis? really?
maybe your perspective from an economy that doesn't have the ability to print reserve currency ad-infinitum biases your perspective in a way that's just not applicable here.
when the sun is shining in Montreal, its usually shining here too, but that's about it - the last time exchange rates were at parity i was a kid, and our weekend neighbor from Montreal gave me a silver loonie. back to the future.
Companies have been wanting out of the DB plans since well before 2008.
"Canadian companies have crossed a “pension Rubicon” and are continuing to dismantle traditional defined benefit plans even as the economy improves"
And not a moment too soon! This "contributor"/one-trick-pony just cannot stand to see the DB sinecure slowly dying off, under the pressure of its own bloated weight, regardless of the (belated) fiscal common sense in this phenomenon
For anyone interested in a serious look at the overwhelming debt pressures facing the developed world (yes, even Canada), I recommend the new book "Endgame" by John Mauldin.
Gordon Freeman and all of you who have no clue whatsoever of what you're talking about. DB plans are not dying, but they're getting attacked by banks and insurance companies who want to muscle in on the game and grab a big slice of the pension pie. Wake up, it's ideological warfare here at its worst.
What planet exactly are you living on?
Planet earth, what about you? Still shorting the stock market to the moon? Bwahahaha!!!!!!!!!!
Nope. Never did. Keep laughing though.
Actually the answer is to eliminate all DBs. I think that will happen over the next few years. They are things of the past, not the future.
Amen.
There you go again Bruce, slamming DB plans! Your taking an ideological stance that isn't based on facts! Bruce, DB plans in Canada aren't perfect but they have outperformed DC plans because they pool billions, lower costs, manage assets internally and invest in the best mutual fund, hedge fund and private equity fund managers throughout the world. Can you find me a low cost ETF that mimics the performance of Brevan Howard, Bridgewater, Texas Pacific Group, Apax, Lone Star, and many other top managers the Canadian DB plans are investing in? I know you can't. Stick to FX, Bruce, pensions aren't your strength.
Stick to FX, Bruce, pensions aren't your strength.
Hey moron, when are you going to acknowledge (a) there's no way pension plans can keep up with inflation / dollar debasement, (b) most pension plans are going to be looted dry, and (c) those escaping looting are going to be virtually worthless after Bernokio debases the dollar to nothing?
Common sense obviously isn't your strength.
cranky-old-geezer,
Don't know where you are, but the sun is shining in Montreal. Try being a little more optimistic in life. Must be a bitch waking up every single day waiting for the sky to fall and it never does!
Whereas logic and demographic facts aren't Leo's strong suits.
You mean demographic myths, right? I recently covered that too:
http://pensionpulse.blogspot.com/2011/04/canadas-demographic-time-bomb.html
cheers,
Leo
If 51% of the Canadian companies have switched to DC, it would seem that they have a big enough pool to hire Brevan Howard, Bridgewater, Texas Pacific Group, Apax, Lone Star, the many other top managers you mentioned. Whether DB or DC, pensions are a profit center to companies if they can earn more on the pension fund than the promised return to the employee; at least that's how it works in the US.
''If 51% of the Canadian companies have switched to DC, it would seem that they have a big enough pool to hire Brevan Howard, Bridgewater, Texas Pacific Group, Apax, Lone Star, the many other top managers you mentioned.''
WRONG!!!! They offer nothing but standard bank and insurance products (low risk, moderate risk, high risk) where the employees are getting raped on fees. Find me one, just ONE, DC plan that invests in the top managers the large Canadian DB plans invest in. Doesn't exist. PERIOD!
Leo, you are self-destructing before our eyes. You need to take some time and smell the roses. I would recommend you talk to your parish priest. I'm sure you mom is concerned about your change in mood and it would ease her mind if you discussed your troubles with someone who can help you.
Leo, you want return benchmarks lowered to low hanging fruit, yet you decry "high" fees. What is a net return that is reasonable to you? Decrying fee rates while ignoring overall performance does not do justice to the pensioners investments.
Leo, as a parting word of advice, don't invest too much of yourself in your opinions on this pension matter. Free people should be allowed to choose the methods to save for their future. Your public sector DB pension crap doesn't measure up to the dreams of many...
So let them opt out! Like Bruce, you're taking an ideological stance which isn't based on facts!!!
You are right, Leo. This shouldn't be about ideology or investment firms earning large fees. DC plans shift a tremendous amount of risk onto pensioners. Many are not sufficiently sophisticated to handle the necessary investment decisions.
... you're taking an ideological stance which isn't based on facts...
Leo, you're going over the top. Step back and look after yourself. Don't let personal demons get the better of you.
For all the talk about how Canadians always have better benefits and take better care of their people, it looks like they're starting to trend away from that image a bit. Canada's dollar is gonna be strong for awhile though
www.forecastfortomorrow.com