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Companies see 'pension crisis' on horizon

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Companies with pension plans want governments to give them short-term or permanent extensions to help cope with growing shortfalls in the plans.

A new survey of 115 organizations that offer employee pension plans found concerns that Canada is facing a long-lasting "pension crisis" and a desire by plan sponsors to find ways to reduce risk in their investment portfolios, even if it means accepting lower returns.

The survey by pension consulting firm Towers Watson found 65 per cent of plan sponsors believe they are facing a long-term pension crisis that is likely to worsen in the next 12 months, up from 56 per cent a year ago, and far higher than 34 per cent in 2008 before financial markets headed into a steep downturn.

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Given a list of possible pension reform options that could be introduced by the federal and provincial governments, pension plan sponsors strongly preferred being permanently granted longer time periods to make up funding shortfalls in their pension plans, followed closely by the option of further temporary time extensions for shortfalls.

Pension plans have been grappling with soaring deficits since financial markets turned lower in 2008. The bleeding has continued as interest rates have dropped steadily since then, increasing the funding obligation facing plans. A January study found pension plans saw their shortfalls grow by 15 per cent in 2011 alone because of falling yields on long-term bonds.

Towers Watson's ninth annual survey of pension plan sponsors found a growing interest in strategies to "de-risk" investments held by traditional defined benefit (DB) pension plans, typically by investing in long-term bonds that match a company's pension liabilities for payouts to retirees.

In contrast to prior years when plan sponsors were more focused on seeking higher returns from their investments, 56 per cent of respondents this year said they would be willing to accept lower returns to reduce risk.

"Until a few years ago, plan sponsors were caught in the mindset that de-risking meant giving up more return than they felt was worthwhile," said David Service, director of Towers Watson Investment Services.

"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 fund status, sponsors now seem more inclined to focus on de-risking their DB plan -- even if at the price of lower returns."

The survey, however, suggested there may be a slowing of the trend toward converting traditional DB pension plans into defined contribution (DC) plans, which do not pay out a guaranteed income in retirement and instead provide income based on whatever returns are earned by the investments.

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Just 8 per cent of survey respondents said they are considering or planning to convert their DB plans into DC plans in the future, down from 11 per cent last year.

However, Towers Watson retirement innovation leader Ian Markham said many of the plan changes in the private sector have now already occurred, with only 36 per cent of private-sector companies still offering DB pension plans to their new hires.

Including all private-sector and public-sector survey respondents, 57 per cent of pension plans remain open to current and new employees, 31 per cent are closed to new hires, 7 per cent are frozen for everyone and five per cent have another status.

Also Thursday, a new report by two university of Toronto researchers has concluded larger pension plans earn better returns than smaller plans on average. Alexander Dyck and Lukasz Pomorski looked at 800 global pension plans and concluded bigger plans have better returns on average, but the gains are increased if plans have stronger corporate governance practices.

The better performance at larger plans is attributed to cost savings when pension plans use in-house investment experts, and to superior returns by investing in alternatives beyond stocks and bonds, such as real estate or infrastructure assets.

Larger plans outperform smaller plans by about 0.5 per cent per year, which the researchers said could equal about 13 per cent greater savings for plan participants by the time they reach retirement age.

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About the Author
Real Estate Reporter

Janet McFarland is the real estate reporter for The Globe and Mail’s Report on Business, with a focus on residential real estate trends. She joined Report on Business in 1995, and has specialized in reporting on corporate governance, executive compensation, pension policy, business law, securities regulation and enforcement of white-collar crime. More

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