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30,000 Feet - Fourth quarter, 2012

The Biggest Stories of The Quarter With Significant Ongoing Impact

EXPANDED C/QPP

A change in government in Quebec and persistence from Ontario has given new life to the idea of expanding the C/QPP. The odds of the Finance Ministers coming to some agreement during 2013 have risen considerably.

WHY PLAN SPONSORS SHOULD CARE

If it happens, this will be much bigger than any pension reform actions taken so far by any province. Employers should start to look now at how their own pension arrangements – DB or DC – would have to be amended to accommodate
an expanded C/QPP.

COST-SHARING AND RISK-SHARING CATCHING ON

A growing number of public sector pension plans are adopting 50-50 sharing of pension costs with their members. In some cases, it applies only to current service costs while in others it applies to the funding of deficits as well. Cost‑sharing leads naturally to risk-sharing with the prime example being the innovative New Brunswick Shared Risk Plan. Also affected are some Ontario public sector pension plans, Crown corporations, the Federal public service pension plan (with its 450,000 members) and various municipalities in different provinces.

WHY PLAN SPONSORS SHOULD CARE

This trend is likely to spread to the private sector as well, with implications for defined benefit pension plans that are subject to collective bargaining. Employers may consider asking unions to share in the cost of the plans as this is likely more palatable than reducing benefits. In addition, ancillary benefits such as early retirement rights may be capped or even reduced during the current economic climate.

IMPROVING MORTALITY ADDING TO PENSION COSTS

Two recent Canadian mortality studies indicate that mortality rates continue to drop faster than expected. The results of these studies have been used to create a new mortality table and a new mortality improvement scale.

WHY PLAN SPONSORS SHOULD CARE

If the new mortality table and improvement scale are adopted as the new standard, pension liabilities and service costs in defined benefit pension plans will rise between 3% and 8%. Employers with DB plans need to prepare for the resulting increase in their contribution requirements in subsequent years. They may also want to consider reducing early retirement subsidies to discourage earlier retirement and offset the increase in costs due to mortality. Employers with DC plans will need to consider the mortality factor in any future review of their contribution rates.

MORE DISCOUNT RATE PAIN

Discount rates for solvency valuation purposes appear to be about 30 basis points lower at the end of 2012 than at the beginning of the year. Discount rates for accounting valuation purposes have dropped even more and may be 50 to 75 basis points lower than at the beginning of the year.

WHY PLAN SPONSORS SHOULD CARE

Employers with DB pension plans may need to brace for another jump in pension expense in 2013 and another increase in their solvency deficiency. Plans subject to IFRS accounting are especially vulnerable because of a change in the interest that is recognized on pension assets. Employees who are retiring from DC pension plans will not be able to generate as much retirement income as they could a year ago.

30,000 Feet - January 14, 2013