Law Times

Law Times • February 27, 2012 FOCUS Retirement benefits Public sector joining pension cutback trend BY UYEN VU For Law Times sure on employers — including those in the private sector — to fi nd ways of containing the costs of their defi ned-benefi t pension plans. "For defi ned-benefi t plans, A the costs are diffi cult to con- tain on a status quo basis. And the costs are probably due to a so-called 'perfect storm' of low interest rates and high market volatility," says Ian McSweeney, a partner at Osler Hoskin & Harcourt LLP who practises in the areas of pensions and em- ployee benefi ts. Low interest rates mean high valuations for plan liability, and market volatil- ity means returns on assets are failing to cover for the shortfall. Facing these costs, employ- ers are looking at a range of measures. Some are looking at removing or reducing ancillary benefi ts, such as cost-of-living indexing and early retirement bridging provisions. Th e City of Saint John, N.B., for example, has asked the province to ap- prove changes to the city's de- fi ned-benefi t plan to help deal with a $190-million defi cit. Th e changes would include suspen- sion of the plan's cost-of-living adjustments for current retirees. Future retirees face a total re- moval of indexation altogether. Th e changes to indexing would reduce the defi cit by $75 million. "Indexation was one of the fi rst benefi ts to be attacked in the private sector over 10 or 15 years ago. Th ey've been maintained or partially main- tained in a lot of public sector plans. But some of those public sector plans have maintained partial indexation," says Simon Archer, an associate at Koskie Minsky LLP. Another ancillary provision that some plan sponsors are re- moving is bridging benefi ts for early retirement. "Th at's a com- bination of both the fact that costs have gone up and the fact that people are living longer. So employers are asking, 'What's the appropriate retirement age? Should we be subsidizing or en- couraging people to go early?'" says Scott Clausen of human re- sources consulting fi rm Mercer. Historically, plan sponsors didn't off er early retirement provisions on an automatic and guaranteed basis. But when plans were posting huge surplus- es in the 1990s, many employers brought them in on a permanent basis, according to Clausen, who notes "a lot of companies are now saying that probably wasn't a good idea. Let's go back to what we had and look at it more on an ad hoc basis when the funded status allows." Another common cost- containment measure is chang- ing the future-service formula so-called perfect storm of low interest rates and market vola- tility is putting pres- and their higher-earning staff into the defi ned-contribution scheme, says Clausen. "Th ere are diff erent approaches to it," he notes. Th ere's another type of hybrid option that people in the pension industry are on the lookout for: a jointly sponsored target-benefi t plan. Th is type of plan refl ects a model that has been around for decades in Reach one of the legal and business markets in 'For defined-benefit plans, the costs are difficult to contain on a status quo basis,' says Ian McSweeney. so that benefi ts refl ect ca- reer averages instead of earn- ings for the last fi ve years. One alternative to taking away benefi ts, however, is to increase contributions. Many employers that face defi cits ask employees to contribute more or to start paying if they aren't already. "Really, the intention there is a plan that may have had contri- butions 10 years ago may have been on a close to a cost-shared basis," says Clausen. "Th e com- pany contributions still moved up and down with funded sta- tus based on interest rates and based on expectations, but it was close to an equal cost-sharing approach. Whereas with today's interest rates and where things stand today, you may fi nd the employer contributing far more than employees." Asking employees to bring their contributions up, then, is part of restoring that balance, Clausen adds. Alongside these eff orts to reduce costs and increase con- tribution levels, employers are still contemplating mov- ing away from defi ned-benefi t plans and enrolling new hires into defi ned-contribution plans instead. Th at momentum hasn't abated, according to both Mc- Sweeney and Archer. But they're also hearing some employer interest in alternative plan types that allow for some risk sharing by employees. One type that's been around is the hybrid plan that off ers a reduced level of guaranteed benefi ts from the defi ned-benefi t portion. Payouts from the defi ned-con- tribution portion of the plan can act as a supplement. Th at's what new hires at Air Canada's service and sales divi- sions ended up with as a result of an arbitration ruling last Sep- tember. Air Canada had wanted new hires to participate in a fully defi ned-contribution plan, while the Canadian Auto Workers proposed the hybrid scheme in a fi nal-off er arbitration process. Th e arbitrator went with the union's proposal. 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