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Benefits and Pensions MonitorThe Future Of Benefit Plans In Canada Younger employees will also see a trend towards replacing traditional DB pension plans with Defined Contribution plans. CFOs donʼt like volatility, and the DC plan provides a much less volatile company expense than the traditional DB plan. While DC plans still experience volatility, itʼs the employee that has to deal with the effects of this volatility – not the employer. Older employees can expect that employers will try to limit their costs for existing post-retirement benefits. For example, employers may introduce lifetime maximums, annual caps on benefits, or some form of cost-sharing with employees for medical and dental plans. Post-retirement drug plans may be revised to limit the selection of drugs covered. Out-of-country coverage for retirees may be dropped. Assuming that post-retirement benefit plans arenʼt eliminated entirely, both older and younger employees can expect changes to the early retirement benefits. Itʼs likely that new retirees will have to retire at a later age than the current baby boomers in order to receive an unreduced pension and that Factor 80 retirements will become a thing of the past. Employees not covered by a collective agreement may be the first to lose their post-retirement benefits. Already, many companies with non-unionized employees have converted their DB pension plans to DC plans. While reducing or eliminating benefits for unionized employees is one way to lower costs, any reduction would have to be negotiated with the union during collective bargaining. Weʼve recently seen examples of unions agreeing to pay cuts in order to preserve jobs and it may only be a matter of time before unions accept cuts to their post-retirement benefits as well. In Canada, unions have traditionally supported DB pension plans. However, they may be forced to accept DC plans in order to preserve jobs. Multi-employer Plans Another possible outcome of future collective bargaining is an increase in multiemployer pension plans. There are several versions of these plans, from union-sponsored pension plans to plans jointly-sponsored by a union and the employers. Typically, the employersʼ contributions are collectively bargained and the planʼs trustees establish the benefit levels that can be sustained by these contributions. For employers, these plans provide predictable employer contributions similar to the contributions to a DC plan. Post-retirement benefit plans have always been expensive, but the true impact of these plans wasnʼt always obvious to investors. Over the next few years, there will be significant changes to how these plans are reported and expensed. Determining the funded position of post-retirement benefit plans requires an actuarial valuation of the liabilities, a valuation based on long-term corporate bond yields. Each year, the bond yields could change, introducing volatility to the balance sheet. Once smoothing is eliminated from the determination of the annual expense recorded in the income statement, companies may also see increased volatility in the income statement. The accounting standards boards are taking a cautious approach to reforming the income statement. Itʼs possible that a compromise may result, a compromise that will provide some stability to the income statement, but at the cost of increased volatility in the balance sheet. One option would be to recognize any gains and losses not as an element of current year expense, but as an adjustment to shareholder equity. Companies should pay attention to the ongoing debate on how post-retirement benefits should be expensed by publicly-traded companies. While investors and CFOs may accept volatility on the balance sheet, they are less likely to accept volatility on the income statement. And the provincial and federal governments have their own motives to follow the discussions. The current retirement plan structure in Canada depends upon a partnership between the individual, the government, and the employer. As employers decrease their post-retirement benefits, the individual and the government will have to compensate. Since any reductions to post-retirement benefits will probably coincide with a reduction in total overall compensation, individuals may not have much opportunity to make up the shortfalls. Voters will look to the government to fill the void. Taking Action If companies abandon the retiree benefit field, and if individuals must become more self-reliant, then the Income Tax Act should be revised to allow for a tax-efficient savings plan that can be used by retirees to pay for medical and dental coverage. To make the paying field level, the Income Tax Act could also allow companies to pre-fund these benefits in a tax-efficient manner. At the time of the last election, the CIA tried to push pensions onto the political agenda. With a new election on the horizon, now is the time for the political parties to consider an overhaul of the retirement benefit structure – whether by creating new saving plans to finance retiree medical and dental plans, or by expanding the Canada Pension Plan benefits to fill the void left by employers who eliminate or reduce their employee pension plan benefits. ■
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Dan Clark is an actuarial consultant at ACS/Buck.