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Pension Funds

Pooling liabilities could help corporate plans, execs told

Canadian corporate defined benefit pension plans could survive and even thrive with a little relief from provincial regulators and by taking a page from the public plan playbook and pooling their liabilities with other corporate sponsors.

That's the view of Peter Edwards, retired vice president, human resources and investor relations, at Canadian Pacific Railway Ltd., Calgary, speaking at the Association of Canadian Pension Management national conference Sept. 13-14 in Banff, Alberta. Mr. Edwards spoke at a Sept. 13 workshop on lessons that public and corporate pension plan executives can learn from each other.

Corporate plans "would be a lot more successful than they are today" if more federal and provincial solvency funding requirements were relaxed, Mr. Edwards said. CP Rail's C$11.6 billion ($9.36 billion) DB plan was 130% funded on an ongoing basis vs. just over 100% in a solvency, or immediate termination, basis.

Because of solvency rules still in effect in most provinces and the federal government, Mr. Edwards said, CP had to sell stock at its lowest value in 2009 to make a required C$1 billion-plus contribution to the plan.

"Things that never happened at the same time happened" in 2009, Mr. Edwards said. "The company's earnings dropped while interest rates and equities fell through the floor. If you had a cool head, you would ride it through, but instead (the sponsor) wrote checks, at an amount far greater than before. That became a downward spiral that was tough to get out of. With no solvency issue, it would have been a lot different picture."

Mr. Edwards acknowledged some provinces have eliminated solvency requirements, as in Quebec; reduced those requirements, as in British Columbia; or are discussing reducing them, as is under way in Ontario and Nova Scotia. However, he said federal funding requirements also need to be addressed. CP Rail, as a federally regulated business, falls under Ottawa's jurisdiction for pension rules.

But, "even with all that pain, I still believe in DB," Mr. Edwards said. "And I'm coming here not with a lot of answers but with a lot of support."

Rachel Arbour, assistant vice president of plan services at the C$70 billion Healthcare of Ontario Pension Plan, Toronto, said HOOPP can remain in good funding stead because, as a jointly sponsored pension plan of provincial hospitals under the Ontario Hospital Association and the four unions representing hospital workers, the failure of one hospital won't affect the plan.

"Public-sector plans should emulate us by making their plans longevity-proof," Ms. Arbour said.

While HOOPP is able to transfer risk, single-employer plans like CP Rail can't, Mr. Edwards said. "Where does the risk transfer to?" he asked. "That works in a younger workforce. If you look at CP, a company that once had 100,000 employees has 22,000 today. Those changes are going to continue. Technology can improve productivity, but it costs jobs. And who is going to contribute to the pension plan if they don't have jobs?"

Ms. Arbour said private-sector plans need to find a large enough "swath of industries" with which to share risk. "It would require a rethink of governance of private plans if they're going to keep their DB plans."

However, Mr. Edwards said such pooling would only work if the corporate pension risk were shared among numerous companies. "If we could only pool five or six companies, if one went out, we'd have a bigger issue than in HOOPP's case."

In a separate discussion Sept. 12, Bonnie-Jeanne MacDonald, fellow of the Society of Actuaries and an academic researcher at Dalhousie University in Halifax, Nova Scotia, warned conference participants of the danger of depending on "rules of thumb" in retirement planning, including the assumption that 70% of employment income must be replaced in retirement or that Canadian retirees must draw down 4% of their retirement assets each year.

"Those rules of thumb have been prevalent in the financial world, government, and the world of academia," Ms. MacDonald said. "My concern is that these rules of thumb are what people will base their retirement on. People think they'll help them, but research is showing instead that those rules of thumb could be harmful, because they're based on made-up people, not true evidence."

As an example, Ms. MacDonald said, the rules of thumb do not take into account changes in demographics like baby boomers who are having fewer children or millennials moving away from their parents. "In the retirement planning system we have, the rules of thumb don't take these things into account."

Ms. MacDonald said plan sponsors are "instrumental" in changing that paradigm, "and moving people away from them. You should advise your (plan) members to get as much clarity as they can on their own financial planning, get them more engaged in that."