Saint John Energy, an electrical distribution utility servicing the City of Saint John, New Brunswick, had a mature defined benefit (DB) pension plan that had existed for 80 years.

Challenge

However, the 2008 recession and ensuing low interest rates forced the organization to consider whether it could meet its increased solvency funding requirements. As employer minimum contributions jumped from 0% of payroll in 2008 to 22.3% in 2009 and 54% in 2013 until at least 2018, the organization and its employees faced the real likelihood that the existing DB plan design was no longer sustainable.

Solution

In light of this situation, Saint John Energy’s finance team urged management to recommend a review of viable DB plan alternatives to the company’s board and asked Morneau Shepell, its long-time actuary, to take part in the discussion. Morneau Shepell had worked closely with the Government of New Brunswick’s expert task force and collaborating unions to evaluate pension plan options, which resulted in the development of the shared risk pension (SRP) model. This experience, along with its familiarity with Saint John Energy’s existing plan, enabled Morneau Shepell to bring perspective and expertise to the organization’s pension challenges.

Saint John Energy’s board was keen to review the current DB plan and alternatives. Maintaining the status quo was a choice that the board discarded once it understood how wide the range of variability in future contribution requirements was. Marta Kelly, Vice President, Finance and Administration at Saint John’s Energy, sums up the situation: “We would have had to consider layoffs if we’d kept the existing plan. We weren’t prepared to do that.”

Other possibilities were to keep the DB plan but reduce benefits—rejected because of the problems inherent in traditional DB plans—convert to a defined contribution (DC) plan, or implement an SRP plan. “A DC plan would have transferred too much risk to employees,” says Kelly. “However, other employers in New Brunswick had successfully introduced an SRP plan and we knew it was our most viable option.”

Saint John Energy, assisted by Morneau Shepell, held two education sessions for its approximately 200 active employees and retirees, first informing them about the pension plan situation and then explaining the alternatives and the decision to implement an SRP plan. “Our approach was to be frank and transparent—not pull any punches,” explains President and CEO Ray Robinson.

This collaborative approach continued. Morneau Shepell worked with the board to establish the employer contribution
commitment. Saint John Energy then called for volunteers to form a working group that would recommend an SRP design, working within these employer contributions. “The group represented our plan member population: all ages, career stages — including retirees — and levels within the organization, as well as union members,” states Kelly.

Andrew Dowling volunteered to be on the working group. “I was the youngest member, but I really wanted to learn first-hand about our pension plan.” The working group, guided by Morneau Shepell, developed a recommended plan design including, among other issues, the employee contribution rate, the benefit accrual rate, retirement age, disability benefits, and bridge benefits.

Results

Not only was the working group able to reach a consensus on all key points, it did so in record time—something Saint John Energy greatly appreciated. “The group was formed in April and we initially gave them a July 1 deadline,” explains Kelly. “However, it was able to make its recommendations by June 1, saving the organization $200,000 in solvency payments.”

All of the working group’s recommendations were adopted. “It says a lot that the organization trusted its employees to be involved and help design the pension plan,” says Dowling. Robinson is also very positive about member participation: “The working group really enhanced the credibility of the process.”

“Our organization faced a crisis with respect to our pension plan. Thanks to Morneau Shepell, our team, and our plan members, I’ve never seen a crisis managed so well.”
Ray Robinson, President and CEO, Saint John Energy

Now that the SRP plan is in place, Robinson reflects on what it took to get Saint John Energy to this point: “Our plan members may be mourning the death of our DB plan, but they’re not hanging on to the past. I’m thankful that a shared risk pension plan was an option for us and that Morneau Shepell was there to provide its knowledgeable, objective, and helpful advice.”

Employer’s permanent contribution now 9% of payroll with 8.5% temporary contribution for 15 years.

Total contribution of 17.5% versus 22.3%—which would have increased to 54% if DB plan had remained.


Case Study: Saint John Energy (PDF)