What Pension Plan Can Be Doing To Better Merge Their Pension Risk?

Pension Risk

New Brunswick was the first province to actually implement target benefit plans as a way of dealing with their public sector pension debt crisis, but target benefit plans have actually been under review in a number of Canadian jurisdictions for the last several years. Ontario and Nova Scotia has legislation that is on the books primarily focused on the collectively bargained pension plans but no regulations yet. PEI has legislation which has not yet been passed. Alberta and BC have legislation which has not yet passed nor are regulations available. Quebec has implemented target benefit arrangements primarily in the pulp and paper sector and has struck a task force to do a further review as to whether or not they’re going to widen the scope of target benefit plans and the Fed’s, the federal government, is looking at what the other jurisdictions are doing and considering its options.

Risk management issue

Finance has been meeting with industry experts and with other stakeholders but has yet to announce its plans. For temporary relief, a number of Canadian jurisdictions have solvency relief measures in place. The plan sponsors have been taking advantage of from time to time but they really only provide short-term solutions. I think the better way to think of this risk management issue and to frame the question is in terms of the spectrum of possibilities. So at one end of the risk management spectrum are things relating to plan investments: LDI (liability-driven investment) and other asset mix decisions, all those investment-related decisions that can impact on the pension plan and fund performance.

In the middle of the spectrum, which is where we’ve been talking about the target benefit plans, in the middle of the spectrum, is planned design and there are a number different possibilities on plan design: conversions from the traditional DB to defined contribution plans, austerity measures that reduced the future defined benefit formula, eliminate early retirement indexing and other ancillary benefits, or the most severe measure, completely wind up the plan and put in some other non-pension arrangement.

Lots to do in the middle of the spectrum for the employer in and around designing the plan and at the far end of the spectrum are the risk transference options and the employer or the sponsor in examining those options is really asking, how can I take this volatile liability that is represented by my defined benefit pension plan and transfer it off the books, reduce the volatility by transferring at least a part of that liability off my books and there are number of risk transference related options some of them have been in the press popularized quite a bit by what’s going in the UK and the US.

Members are being offered lump-sum settlements, former members are being offered lump-sum settlements and sponsors are initiating buyout annuities and buy in annuities and the primary issue here is where the risk goes. It’s not about the sponsor dumping the risk onto members; it’s about managing the risk and making sure that the sponsor is discharged from the liability of its pension plan which is transferred off to a third-party issuer like an insurance company. The key consideration for sponsors looking to better manage their pension risks is to examine this entire spectrum of possible options and from among those options choose a strategy that best suits the sponsor’s particular circumstances and the circumstances of its workforce.


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