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Joe Hornyak
Former editor of Benefits and Pensions Monitor and founder of Joe Hornyak Communications
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Plan Consolidation Essential To DB Survival
In October 2018, the members of Torstar Corporation’s defined benefit pension plans overwhelmingly approved the merger of Torstar’s DB plans with the CAAT Pension Plan’s DBplus.
As one of the first organizations to join, it was in a challenging situation with its pension fund, said Lorenzo Demarchi, chief investment officer at Torstar. He told the CAAT Pension Plan ‘Pensions for Everyone’ conference it was dealing with several risks. One was a concern about whether it would be able to deliver on the pension promise to its employees. It was also increasingly concerned about the level of management distraction surrounding the management of the pension plan at a time when management really needed to focus all of its energy on the business. It was also seeing its business change as the use of digital media grew and became more important.
Just 20 years ago, it had 5,000 employees due to its acquisitions. These acquisitions included pension plans from newspapers it bought “which gave us a very complex DB plan. We had eight distinct DB plans, all slightly different and all with different funding,” he said. “The one thing they had in common was the contributions were heavily skewed to the employer, so it was a very heavy financial burden.”
These kinds of plans reflected a time when the newspaper business was extremely profitable and had the ability to pay these kinds of benefits even though from a governance perspective they were very complex, expensive to administer, and required attention from management.
As its business contracted, its pension business actually began to get larger and larger because its legacy employees were moving into retirement. “So we started to have a mismatch in the size of our pension business relative to the size of our former business,” said Demarchi.
At that point, it made the decision to close its DB plans and turned to CAAT.
For Rick Arseneau, chief financial and administrative officer at the George Hull Centre for Children & Families in Toronto, ON, the situation was different. The employee population at the children's mental health centre is mostly millennials and its special solvency payments were “killing” it. Of its total $12 million budget, $1 million was going to these payments.
It joined DBplus in July of 2021 and it saw an immediate impact on its employee retention, he said. Another benefit was during the process of switching to the new plan, “people became more aware of the pension that we were offering,” said Arseneau.
Katie McNulty, manager of pension solutions at CAAT, confirms that pension plans can attract and retain employees. She is hearing from organizations that attraction and retention is “so important in this competitive labour market.”
Plus, the environment is changing. Job candidates are now screening employers. “One of the first questions they're asking is, ‘do you offer a pension plan,” she said. In fact, one organization was “so bold that they actually put on their job posting that they already offered our pension plan because they needed that differentiator to compete.
“They get it. They know that employees value that lifetime retirement income,” said McNulty.
The CAAT plan itself was established in 1967 as a final average DB plan for the 24 Ontario community colleges. Enabling legislation in 2019 was passed which allowed it to create DBplus and offer it to employers coast to coast.
For Randy Bauslaugh, an independent barrister and solicitor and former co-chair of the pensions and employee benefits practice at McCarthy Tétrault, this is one of the most important solutions to one of the country’s biggest pension challenges ??the lack of coverage. “More than 60% of the workers in this country have no pension coverage. We probably don't need to cover everyone as the Canada Pension Plan (CPP) and Old Age Security (OAS) are probably going to be good enough for the 20% of the workforce that earns below $40,000. But close to 60% of the workforce has no pension coverage,” he said.
As well, the current system is not cost efficient. “We have a system in which we have more than 16,300 registered pension plans, but more than 50% of them have fewer than 10 employees. I don't think that's good for employers or their employees. It's not efficient,” he said.
What is need is more consolidation and economies of scale to provide better pensions for Canadians. Iceland is the number one pension system in the world as rated by the OECD and others. “It looks a lot like our system. It has something that looks like OAS and has something that looks like CPP,” said Bauslaugh. But it also has a private pension system of 21 pension plans that covers 95% of its workforce. They're all multi-employer, industry wide plans. They are cost efficient and they provide secure certain benefits,” he said.
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There are opportunities in Canada, in addition to DBplus. The Saskatchewan Pension Plan is actually a group registered retirement savings plan which anyone in Canada can join. Bauslaugh, based in Toronto, ON, belongs to it.
The creation of Ontario’s University Pension Plan was the result of the consolidation of several single employer university plans. There are even for-profit offerings like Blue Pier and Commonwealth.
“Maybe some of the financial institutions will look at this and see that's the way to go. There's hope,” he said.
Is BoC finished tightening?
If the US Fed is tightening at the 5% level, the key question then in Canada is whether the Bank of Canada (BoC) has finished tightening or if this is an extended pause, says Robin Marshall, director of fixed income research at?FTSE Russell.
He told its ‘Canadian fixed income ... after death by duration' session that the BoC's inflation targeting regime is being called a “flexible inflation target.” This gives it plenty of leeway to leave rates where they are for a while.
And because the BoC acted comparatively early, it's in a better position than other central banks. It paused for to meet some important policy objectives ? maximizing sustainable employment, stabilizing inflation expectations, and maintaining financial stability.
“And those factors have some bearing on why this inflation is falling quite quickly,” he said. “They're forecasting inflation at 3% and, by mid-year, it's already down to 4.3% and on target for the mid-2% range in 2024. So, the portends are pretty good for at least an extended pause, and quite possibly they have finished tightening.”
The risk is whether the labour market tightness causes wage growth to accelerate and, with growth pretty weak, that pushes up unit labour costs and inflation.
Evaluating or benchmarking Canadian yields in this environment shows that after the death by duration in the first half of 2022 when the long end took a terrible pounding after the Ukraine shock, yields have stabilized and fallen back from the highs. This partly reflects the early action by the Bank of Canada.
Overall yields are still high with longer government yields around 3% so the market is still comparatively cheap, even if the BoC doesn't move on quickly.
The other important factor is the correlation of Canadian yields with US and it's much more marked in long yields. “This tends to be exaggerated, but the fact is that the correlation between the longer Canadian yields and Treasury yields is much higher than with shorts. Three-year yields tend to go their own way in Canada, according to what the central banks are doing and what local inflation is doing. At the same time, the seven- to 10-year yields track more closely to the US and that's been the case for some for some time.
“This leads to the related question, which is whether the US curve suggests a recession there because there's been a lot of press speculation about that,” he said. The US yield curve going inverted is a “pretty good indicator,” but it's “often exaggerated” and tends to over-predict recessions. “What you need is confirmation in the longer curve. That generally does the confirmation and what has always led to a recession,” said Marshall.
What needs to be kept in mind is if the BoC moves towards easing and the policy pause extends the market, yields will drop faster. “Bold steepening is usually a feature where short yields drop faster than loans, but the duration effect in the longer yields will give you a sign of a stronger return. Overall, you can make a case for saying it is time to dip into the water again and to own a little more duration,” he said.
For details on these stories, visit www.bpmmagazine.com