Consulting Retirement Global Pension Risk Survey Highlights Canada Findings 2013
2013 Global Pension Risk Survey Highlights Canada Survey Findings About this Material The 2013 Aon Hewitt Global Pension Risk Survey Canada was conducted in March and April of 2013 and is a part of a global series of surveys aimed at understanding the thoughts and risk management philosophy of plan sponsors in selected countries and/or geographic locations. Similar surveys were conducted in 2008, 2009 and 2011. This report highlights key trends and interesting differences where appropriate. For more information on the Global Pension Risk Survey Canada Findings 2013, please contact your nearest Aon Hewitt office or send an email to thomas.ault@aonhewitt.com. Notes: Percentages in this report are rounded to the nearest whole number. Therefore, totals may not equal exactly 100%. The terms, organization, company and employer are used interchangeably. Defined Benefit and Defined Contribution pension plans may be referred to as DB and DC pension plans throughout. 2 Aon Hewitt 2013 Aon Hewitt Inc. All Rights Reserved.
Global Pension Risk Survey Highlights Canada Survey Findings 2013 Survey Highlights Aon Hewitt conducted its first Canadian pension risk survey just as the financial crisis was unfolding. We are now five years into the crisis era. While there are reasons for optimism, it is expected that many more years will pass before we can comfortably say the crisis is over. The Conference Board of Canada s most recent Canadian Outlook report notes the nation s economic recovery is still uncertain, and that growth in one sector does not necessarily indicate other sectors are out of the woods. Though Canada s recovery has been strong relative to other regions, continued fiscal restraint hampers recovery locally and globally. The financial crisis has led to significant drops in long-term interest rates across the globe as governments try to enhance credit options, stimulate growth and reduce unemployment levels. Quantitative easing, particularly in the United States, has supported the US housing recovery and boosted equity prices. So far, many would say these actions have led to economic rewards that outweigh the associated risks. For pension plans, the downside to a period of declining long-term interest rates is typically an increase in pension liabilities. As such, many plans find themselves with notable funding deficits. Plan sponsors living through this period of poorly funded plans and increased contribution requirements are constantly reminded of the risks associated with managing their plan. Ultimately, plan management becomes an exercise in weighing up and balancing the options available to them. For some, this may ultimately mean a re-think of the pension promise and the way the pension plan is managed overall. Adding to the mix, companies reporting under International Accounting Standards (IAS) have been feeling the volatility in assets and liabilities directly on their balance sheet for several years (since the transition from Canadian GAAP to International GAAP). More recent changes to the accounting standards mean that companies are no longer able to recognize assets outperforming the corporate bond discount rate in their income statement - a further point of pain for affected plan sponsors. Aon Hewitt s global pension risk survey series continues to track and analyse the ways in which plan sponsor attitudes and practices toward pension risk have changed over time. A sea change in pension risk practice is emerging gradually, and appears to be evolving from a passive exercise to one of increasing priority. Driven by the experiences of the last few years, this new focus has led many sponsors to realize that risk levels in their pension plans are simply too high. The result is that de-risking strategies in some form are quickly becoming a standard for all organizations, regardless of a sponsor s long-term commitment to a DB plan. October 2013 3
2013 Global Pension Risk Survey Highlights Canada Survey Findings This year 139 Canadian organizations representing two million pension plan members participated in our survey. This group includes a broad cross-section of organizations, both in the public and private sector, from across the country in various industries. It includes those sponsoring open and closed pension plans. A few key trends emerged from the results: 1. Finding ways to manage risk in their DB plans with strategies increasingly grounded in thoughtful long-term planning is a clear focus. 2. Establishing clear long-term goals that are monitored and measured is now standard practice. The notion that there are no quick fixes to existing DB funding dilemma appears to have taken hold. 3. Paying closer attention than ever to plan funding and performance levels is viewed as a critical behaviour. 4. Actively managing investment strategy that is clearly focused on liabilities has experienced notable uptake with increased attention to diversification and alternatives. Managing Benefits and Liabilities There are two broad paths plan sponsors can follow to change DB plan benefits: 1. drastic changes that fundamentally alter member benefits, or 2. adjustments to benefits or cost structures that maintain the form of the benefit but at a level that is more palatable for plan sponsors. It is here that we observe the main difference between plan sponsors in the public sector (or similar) and those in the private sector. There is a strong commitment to DB plans in the public sector. However, many sponsors are looking at ways to make the underlying benefit less costly, and the vast majority contemplate further cost sharing with members. The private sector is a different story. Similar to corporate plans in other parts of the world, many Canadian sponsors have already closed or intend to close plans to new members, freeze accruals for existing members, and/or switch to a pension structure where more of the risks are borne by plan members. Although the target benefit concept is a relatively new way to manage many risks inherent in traditional DB and DC plans and legislation is still outstanding in most jurisdictions, there is considerable interest in finding out more. 75% of plans where the sponsor is publicly traded have already closed at least one plan to new members, and 15% are looking to freeze their plan in the near future. 71% of public sector plans are considering additional member contributions, while about a third are looking to reducing ancillary/discretionary benefits or reduce/eliminate indexing. 43% are curious about target benefits. 4 Aon Hewitt 2013 Aon Hewitt Inc. All Rights Reserved.
Global Pension Risk Survey Highlights Canada Survey Findings 2013 Solvency and Funding Most DB plan sponsors are employing a cautious combination of passive and active measures to meet funding obligations. There is an encouraging trend toward investment diversification and de-risking practice, though many continue to rely on passive measures like interest rate increases to boost their funding position. Letters of credit continue to be underutilized, despite being useful in some cases for managing short-term contribution volatility. 77% is the median solvency rate measured by Aon Hewitt Canada data at June 2013. 6% of the 116 survey respondents in situations where solvency is applicable, had an aggregate solvency position at 100% or above. 46% have taken advantage of available funding relief measures; 30% will seek relief in the next year. 19% have already posted a Letter of Credit and 22% intend to do so in the future. Annuities and Longevity Along with options for managing benefits, plan sponsors have at their disposal an increasing array of tools that can be used to manage plan liabilities. Annuity options are increasingly marketed by insurance providers and are popular in other geographies. We expect to see the popularity of annuities in Canada grow, given the private sector trend toward plan closures and freezes. Similarly, insuring a plan s longevity risk is becoming of interest to sponsors in Canada. This market is already well developed in the UK. 16% are very or somewhat likely to consider a buy-in and another 11% considering a buy-out. 65% are now concerned with longevity risk (the risk of people living longer) in their plans. 28% are open to exploring ways to hedge longevity risk. De-risking Survey results revealed a growing awareness of the risk pension plans face and the steps that are required by plan sponsors to mitigate that risk. 37% say low-risk targets are part of their long-term strategy. 40% are interested in hedging risk related to interest rates. 22% are planning to increase allocation to long bonds to better match their plan s liabilities. Alternative Investments Investment strategy continues to be targeted towards greater diversification of return-seeking portfolios. Emphasis on diversifying out of Canadian equities into alternative asset categories and foreign equities is a trend that has continued for several years now. 33% reduced Canadian equity holdings last year and 30% will continue this trend into next year. Alternative assets and real estate demonstrate the largest increases within all asset classes. More than 30% of plans already increasing or planning to increase allocations to alternatives. October 2013 5
2013 Global Pension Risk Survey Highlights Canada Survey Findings Monitoring Risk and Thinking Long-term The growing focus on risk may well be the catalyst for the dramatic growth witnessed in monitoring practice as we see years of discussion finally gel into actionable strategy. Pension plan sustainability, supported by long-term goals and strategic planning to support robust, reduced risk plans is gaining momentum. For the overwhelming majority of plan sponsors, the pace at which their objectives can be met, and their ultimate success, is driven by the plan funding position - a fully funded plan seems to be everybody s objective. It is apparent that sponsors are not only mindful of the need to plan, but also that plans are focused on achieving established goals. 78% of DB sponsors are monitoring pension plan assets and liabilities on a regular basis. 50% measure progress against long term objectives. 84% of plan sponsors say they have a long-term plan in place Conclusion: A Future Focus on Risk-based Planning It is fair to say that organizations around the globe were unsettled by the financial crisis. For DB sponsors, the protracted economic recovery provides a constant reminder of the risks and potential pain associated with pension plan management. Though not forgotten in Canada and still acute in many sectors, the financial crisis is becoming a historical reference that is helping to influence improved financial management for pension plans. This year s survey suggests that plan sponsors are considering management and funding practices that will make their defined benefit plans less burdensome and help to control the volatility of contributions. The latest crisis appears to have changed the map to the point where it is no longer sufficient to believe economic storms can or should simply be ridden out. Thoughtful and far-reaching future planning is critical and is an increasingly typical starting point for sound plan management. Establishing clear long-term goals, paying close attention to funding and performance levels, and actively managing investment strategy with a clear focus on liabilities, are the new normal. The array of defined benefit plan management options is increasing and risk strategies are likely to be highly individualized going forward. The clear message from Canadian organizations is that, regardless of how (or how many) pension de-risking options are applied, the way forward is simply to be strategic, be thoughtful, and take action. 6 Aon Hewitt 2013 Aon Hewitt Inc. All Rights Reserved.
Global Pension Risk Survey Highlights Canada Survey Findings 2013 Aon Hewitt Contact Calgary, AB +1.403.261.6056 Montreal, QC +1.514.982.4806 Saskatoon, SK +1.306.934.8680 Edmonton, AB +1.780.423.1010 Ottawa, ON +1.613.728.5000 Toronto, ON +1.416.225.5001 Halifax, NS +1.902.463.6213 Quebec, QC +1.418.650.1119 Vancouver, BC +1.604.683.7311 London, ON +1.519.434.2114 Regina, SK +1.306.569.6749 Winnipeg, MB +1.204.954.5500 Aon Hewitt provides commentary on key industry issues through various surveys and research reports. To read more visit www.aon.com/canada. About Aon Hewitt Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide. For more information on Aon Hewitt, please visit www.aonhewitt.com. October 2013 7
2013 Aon Hewitt Inc. All Rights Reserved.