Pension risks need to be shared: Watson Wyatt

Today’s pension rules unfairly bind the hands of employers, forcing sponsors of defined pension plans to take on excessive risk while offering little compensation, according to a top benefits consultant.

In its submission to Ontario’s recently established Expert Commission on Pensions, Watson Wyatt points out that employers face conflicting requirements — they must mitigate the risk to plan members while maximizing returns.

“It is not easy to achieve the feat of reducing risk while improving expected returns,” Watson Wyatt says in its submission. “Success depends upon the ability of pension fund managers to invest large pools of assets for long-term gain, without regard to liquidity or short-term fluctuations in market values.

“The current funding rules do not merely require prudence in the long-term funding regimes adopted by employers. They impose solvency minimums that ostensibly protect plan members from the loss of benefits in the event the plan sponsor becomes insolvent,” the submission continues.

Requiring employers — many of which voluntarily implemented their DB plans in the first place — to assume all of the risks associated with the pension would make such plans simply unaffordable, according to Watson Wyatt.

Defined benefit pension plans are too important to risk, the company says, because they form the cornerstone of its members’ retirement plans. As DB plans have disappeared from the Canadian benefit landscape, those that remain have become an important tool for employers to attract and retain talent.

Employers are responsible for any deficits in the plan but are not allowed access to any surpluses, skewing the risk–return balance too far in favour of employees and threatening the very existence of the pension.

To correct this imbalance, Watson Wyatt recommends that the current provincial pension governance structure allow risk-sharing so that joint governance is only required when members share in the risk. Pension plans with true risk-sharing arrangements should be administered by a pension committee, although such committees may not be suitable for all DB plans.

The firm also recommends that plan members and beneficiaries receive “adequate disclosure of financial information on their plan, with adequacy determined based on the extent of the funding obligation.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com