From Talk to Action: Towers Watson Pension Predictions for 2014

Despite some obstacles, plan sponsors and policy-makers are likely to take action on pension challenges in 2014

TORONTO, Dec. 17, 2013 /CNW/ - The sufficiency and sustainability of Canadian retirement plans will continue to be a hot topic for pension pundits in 2014, according to global professional services firm Towers Watson (NYSE, NASDAQ: TW). However, the firm predicts the new year will mark the start of meaningful change as employers and policy-makers alike move from talk about mitigating risks for plan sponsors and members - to taking action on pension issues. While this may seem like a bold claim following the status quo outcome of Monday's federal, provincial and territorial finance ministers meeting, economic and social pressures may push the course of events faster than political consensus.

Taking Action on Financial Risk Management

For corporate defined benefit (DB) plan sponsors, a compelling desire for lower and less volatile employer costs will continue to drive plan design change in 2014. Towers Watson's 2013 Pension Risk Survey shows that this will first and foremost include change to investment strategy, with a shift away from equities into fixed income, cash or alternative asset classes. However, with many pension plans having benefitted from recent increases in long bond yields coupled with rising capital markets, some plan sponsors will begin to change their management approach, moving away from a prior focus on adjusting plan risk to the right level, to taking material steps to remove some risk entirely through liability settlements with plan members via lump sum payments and annuity purchases. This trend will see Canada move closer to the U.S. experience of private sector pension plan de-risking.

For DB sponsors that remain committed to keeping their plans operational - and there can be good reasons for this, including employee retention and labour relations - more dynamic approaches to investment governance and portfolio management will likely develop. As plan governance, and in particular, investment strategies and implementation become more complex, greater use of full and partial delegation of the investment process will occur - replicating another trend from European and American experience. This development will especially benefit smaller and mid-size plans, for whom high fees and access to better managers, strategies and funds have been barriers.

Pressure for Employer-Friendly Pension Laws Will Continue

In the year ahead, government policy-makers will be increasingly pressured to create employer-friendly pension laws to support plan designs that mitigate pension funding risk - especially in the public sector. Canadians can expect to see more provinces proposing and implementing new regimes involving negotiated deals on pension solutions, such as the New Brunswick Target Benefit Plan initiative. Regulatory developments may also emerge that enable plan member representatives and employers to agree on pension deficit funding strategies not currently available under existing legislation. For example, the use of solvency reserve accounts — a separate account where plan sponsors could direct solvency payments that permit employer refunds once the plan is fully funded. The political catalyst for regulatory flexibility will be the desire to increase pension coverage and benefit levels in lieu of relying exclusively on enhancements to the Canada/Quebec Pension Plan.

Retirement Education for Plan Members will Emerge as a Key Area of Focus 

The risk of running out of savings too early in retirement is dawning on Canadians as awareness of longer life expectancy grows. Given that employers are in the best position to counsel their employees to save - and have a vested interest in ensuring orderly workforce transitions into retirement - more employers will provide and actively promote retirement planning tools that help their employees project their retirement age and future standard of living, and options to meet their financial objectives. Increased focus on retirement education may also act as a change driver by highlighting potential inadequacies of pension plan design, member contribution rates, investment choices and communications.

About Our Predictions

We do not have a proverbial crystal ball, but are confident that debate will continue in 2014 about how to address the woeful levels of retirement savings in Canada. There will be increased discussion about the role that employers should play in ensuring the retirement preparedness of their employees. While action will be slow, it will begin as both employers and employees accept the need to be part of a solution to broader pension coverage and retirement income sufficiency.

About Towers Watson

Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers solutions in the areas of benefits, talent management, rewards, and risk and capital management. Towers Watson has 14,000 associates around the world and is located on the web at


SOURCE: Towers Watson

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Allison McLeod

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