How have Canada’s DB pensions changed over the last decade?
BY Martha Porado | August 20, 2020
Whether it’s battling the challenges of plan maturity, increasing longevity, the changing nature of work or difficult financial markets, these so-called golden handcuffs are looking pretty dented in some cases.
But the 10 years following the great financial crisis wasn’t all bad. Many public pension plans, as well as affiliated administrators and investment managers, have been busy making their organizations more efficient and effective, driven by the fundamental belief that providing the guarantee of a retirement income is worth the effort.
“I think it’s always important to come back to why are we doing this, what makes a DB plan so important to the people — in our case, in Ontario — and also to the economy?” says Annesley Wallace, chief pension officer at the Ontario Municipal Employees Retirement System.
While pension organizations are taking varied approaches to boost their long-term viability, growth through consolidation was a common theme throughout the 2010s.
For example, after years of discussion, Queen’s University, the University of Guelph and the University of Toronto formed the University Pension Plan in 2019.
In the same year, major Ontario players like the Colleges of Applied Arts and Technology pension plan and the OPSEU Pension Trust both kicked off new programs to offer DB arrangements to a wide array of employers, introducing DBplus and OPTrust Select, respectively.
While the OMERS isn’t actively searching for new sources of membership growth, it’s also making some consolidations. During the last decade, it folded in four closed City of Toronto plans that had been established before the OMERS existed. “That was a great example of an opportunity for us to do some consolidation where, in some cases, some of those members were even drawing pensions from two different plans because they had an OMERS pension for service [after] the creation of OMERS and then from this other plan,” says Wallace.
The ability to add new plans into the mix is a fundamental part of the design of Saskatchewan’s Public Employees Benefits Agency, says Dave Wild, its associate deputy minister. “We don’t actively go out and seek new business, but we have structured our organization and operated with an eye to being able to add new plans without much disruption, so scalability comes into our design quite a bit. We can add a new plan and it will have its own governance and its own unique benefits structure, investment policies, everything it wants to do by itself. We can add that without being loudly disruptive to our organization.”
Kids these days
The emphasis on consolidation also plays into solutions to the changing nature of work. In 2015, the millennial generation became the largest portion of the Canadian workforce and along with them came a different approach to building a career. “People no longer spend their entire career from graduation to retirement with a single or one or two employers,” says Weldon Cowan, a trustee on British Columbia’s College Pension Board of Trustees.
He suggests that strengthening the presence of multi-employer DB plans in the overall pension landscape could be part of the solution to this trend. “There is an opportunity here to rethink the way DB works in the private sector. It’s difficult for a single employer to support a DB pension plan for just their company. There is a lot of risk with that. There are all sorts of accounting rules that may make it difficult, so the plans within the private sector need to modernize, look at moving to multi-employer plans or sector-wide plans where different companies could work together, potentially move their plans to joint-trusteeship, because it really changes the nature of how the plan is administered.”
And as multi-employer plans grow, so does the likelihood that plan members will change employers and still end up covered by their previous plan, says Derek Dobson, the CAAT’s chief executive officer and plan manager. The CAAT, in particular, has made special efforts to help members stay put. “We have 76 employers in the plan and sometimes people move between contracts for six months, so they’re out of work for six months. Rather than force them [to choose], ‘Do I take a commuted value? Do I take a deferred pension?’ we leveraged the [Pension Benefits Act] rules; we have an extension of membership so members don’t have to do anything for two full years and if they find another job with any of those 76 employers, they have time to think about it. Because when you lose your job, it’s probably not the right time to be making a decision of, ‘Do I want to manage my money forever or do I want to leave it with CAAT?’”
Grandparents these days
But for plan members closer to retirement, pension plans have to take longer life expectancies into account and that’s caused some sponsors to make some design changes, says Cowan. “Over the last decade, the plans have modernized themselves, changed their plan design to address shifts that have occurred in life expectancy, in employment patterns, peoples’ choices about retirement age. Essentially, if you would have looked at the plan designs 10 years ago, they were effectively the plan designs created in the 1960s with the rise of the [Canada Pension Plan], with some public policy elements baked in, like supporting early retirement, with strong early retirement incentives integrating with the CPP.”
In 2016, the B.C. College Pension Plan was the first of the province’s public plans to de-integrate from the CPP, establishing a flat accrual rate and significantly reducing early retirement incentives to make the early retirement reduction factors more actuarially correct, he says. The B.C. Teachers’ Pension Plan and the B.C. Public Service Pension Plan followed soon after. While early retirement becomes the goal for fewer and fewer plan members, moving away from incentives to do so also makes the plan more affordable, adds Cowan.
Saw it on the ‘gram
At the beginning of the 2010s, social media was just beginning its meteoric rise in popularity. Instagram started the decade with 15 million active users and ended it with more than a billion, half of whom use the app daily. And while the average influencer isn’t raving to followers about their pension contribution rate, effective digital communication is all about getting a message in front of its intended audience.
“We’ve started to communicate more via social media channels,” says Wallace. “We’re on Facebook and LinkedIn and, in the last six months, we launched Instagram because we have almost 100,000 members between the ages of 19 and 36 and we want to be where they are. So our Instagram account really showcases the people of OMERS, including our members and our employees.”
The prevalence of digital communications also makes it easier for pension plans to contact members who may otherwise fall through the cracks and become unreachable, she notes. And, while the OMERS doesn’t have email addresses for all of its 500,000 members, it’s aiming to close the gap. “That’s a big effort for us, trying to fill in those missing pieces so all members are able to elect to receive electronic communications. We currently have about 135,000 members who’ve elected to go paperless, which is great and we would like to see that number go even higher if we could.”
The OMERS’ members can also be more autonomous in their retirement by using digital tools. “They can now go into the member portal and actually see updates through the transaction process as opposed to having to call in and say, ‘Can someone check on the status of my transaction?’” says Wallace.
Enabling and emphasizing this type of self-service for plan members has to go hand in hand with efforts to ensure they’re able to make informed decisions, says Wild. Whether it’s providing direct information, tools or access to financial counselling, the PEBA’s aim is to reach a higher level of engagement.
“We’ve had, for several years, certified financial planners as part of our service offering. We have them on staff to do that education and counselling for our plan members. So that’s been a real drive over the last decade to put members in a better position to understand their plan and to make good decisions.”
Continuity and coronavirus
The digitization of the communication process over the last 10 years has also helped pension plans continue their normal, daily operations in the wake of the coronavirus pandemic, says Cowan. “The [B.C. Pension Corp.] has roughly 400 employees. They’ve been able to get over 350 employees to work from home and continue doing their job in a secure fashion, which means much fewer employees are having to go to the worksite.”
That digitization also means employees who planned to retire in 2020 can still do so without interruption, he adds. “That would have been impossible if this event had occurred nine years ago. Everything would have ground to a halt. So it’s been a very smart move; this has been an excellent test of whether we can cope with a crisis.”
Wallace agrees, noting the implementation of tools like secure messaging just happened to coincide with a crisis where the tools became critical to business continuity. “The emphasis we’ve placed over the last two years on digital transformation and some of the things we’ve implemented like secure messaging, we never would have appreciated at the time, but we now realize how important all of those things actually are to our being able to continue to deliver service.
“We’ve seen some of the highest sign-up rates for our webinars over the last couple of days just around people interested in getting more information and likely having the time to do that. So I think we’re fortunate from an administration perspective that we are able to continue to operate and ensure that every pensioner is getting their pension cheque every month and that we are processing all of the other types of transactions that we would do on a regular basis.”
A crisis like the coronavirus pandemic emphasizes the need for pension committees and boards to always be looking around the corner for the next problem, says Joseph De Dominicis, senior vice-president for group retirement solutions at People Corp. He recalls one plan he worked with that periodically bought annuities to cover off the inactive portfolios of its member population whenever the opportunity arose.
“They were able to go back to the board every year and say, ‘Look, we know all of our competitors have gone [defined contribution]. We believe in DB and here are the steps we’ve taken to make sure it never becomes a driver of our business decisions.’ And they did that by removing liabilities from the balance sheet at opportune times; when they had the funding available and when the annuity market was primed for purchase. And I thought that was a very astute strategy.”
The temptation for DB plans to take advantage of achieving a funding surplus — by taking a contribution holiday, for instance — is very real, he says. “And then, invariably, you get a shock like we have now and all that goes away.”
Adapt or die
A decade ago, the last major financial crisis shook some pension plans into realizing they needed to regroup and revaluate whether their current systems could survive market shakeups.
New Brunswick took on this challenge by becoming the first province to allow a target-benefit or shared-risk approach, says John Sinclair, president and chief executive officer of Vestcor Corp. “I think it was helpful to be able to focus on the specific missions of these various target-benefit plans that we provide services for with unique opportunities as well. And when we find ourselves in an uncertain or volatile period, my expectation is these plans will hold up a lot better — first of all, from a more risk averse investment policy, but also having the ability, if needed in the future, to potentially have to defer indexing for short periods of time. Having that flexibility certainly is more helpful for the long-term sustainability of the pension plan.”
For some, the current crisis feels like an echo of the last historic market downturn, says Chris Brown, president and chief executive officer of Alberta’s Local Authorities Pension Plan Corp. But plans that shelter members from a number of sources are all the more significant in their ability to maintain their promises to pensioners in hard times, he adds.
“The pandemic and the resulting economic crisis really has the potential to be a tragedy that will almost undoubtedly bring on hard times for a great number of people. Plans like ours and others in the country, we have this Canadian model that is so well-respected around the world. And we have an opportunity, and perhaps even an obligation, to look at what we can do to help people who aren’t in our plans.”
This article originally appeared on CIR’s companion site, Benefitscanada.com. Read the full story here.