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Canadian employers seek options

Pension plan sponsors exploring new designs

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TORONTO--Although some Canadian employers are opting to switch completely from defined benefit to defined contribution pension plans, the risks involved with managing defined contribution plans mean that the decision to make such conversions is far from automatic.

Instead, several Canadian employers are using other options rather than fully shifting their defined benefit plans to defined contribution formats, according to speakers at the Assn. of Canadian Pension Management's regional conference in Toronto on May 5. And those employers that have developed defined contribution plans say they have spent a great deal of time and effort minimizing the risks associated with the plans.

Benefits consulting firm Towers Perrin did a study of 232 employer clients, comparing their pension plan designs in 2000-before the current pension funding crisis emerged in Canada-to their 2004 plan designs. The study found that, of 119 companies with defined benefit pension plans in 2000, 12 had converted to defined contribution plans, according to Ian Genno, a principal of Towers Perrin based in Toronto.

"You do see some employers saying, 'I'm getting out of the defined benefit business and moving into a defined contribution design,"' Mr. Genno said. He noted, though, that a greater number of these employers—16—shifted from defined benefit pension plans to flex plans or combination plans.

A flex plan is either one in which members have a choice between defined benefits or defined contributions, a plan with multiple defined benefit options with varying levels of employee contributions or a plan with flexible ancillary accounts. A combination plan is one in which members accrue both defined benefit and defined contribution benefits.

These types of plans offer more choices to employees while maintaining the core elements of defined benefit plans, Mr. Genno said. "There are a lot of different directions plan sponsors are moving in, and each plan sponsor has to respond based on their own particular business objectives and the needs of their workforce," he said.

Of the 54 employers that had defined contribution plans in 2000, 50 still had defined contribution plans in 2004, while one switched to a defined benefit plan, two established flex plans and one company ceased to offer a pension plan.

"Generally speaking, a lot of employers that are with defined contribution are staying with defined contribution," Mr. Genno said.

"That's no surprise at all. But we have seen some employers re-examine the principles of defined contribution, and, in a few cases, we have seen employers shift away from defined contribution. They are moving to an environment where defined contribution is still a core element of the compensation package but maybe more flexibility is being offered. So defined contribution is not necessarily the perfect end state," he said.

Mr. Genno noted that the traditional model of plan sponsors bearing all the risks in defined benefit plans and plan members bearing the risks in defined contribution plans no longer applies because of the number of employer risks associated with managing defined contribution plans. "That traditional paradigm is totally combusting," he said. "It's really going out the window today."

Among the risks for defined contribution plan sponsors are those associated with the governance of the plan, the communication with and education of employees about the plan, the establishment of appropriate investment options, the monitoring of the performance of the plan, the regulatory oversight and the risk of litigation.

"Defined contribution plan sponsors themselves face some very significant challenges in managing their plans appropriately," Mr. Genno said.

Setting appropriate investment options was very important when Toronto-based Expedia Canada Corp. created its defined contribution plan last year, said Helene Bouffard, human resources manager for the Canadian unit of the online travel service. Company officials spent a lot of time researching all the fund options and plan managers, eliminating those that appeared to have financial problems or any other red flags, she said.

"We can't believe any more that a defined contribution plan has no risk involved for an employer," Ms. Bouffard said. "We have to do our homework, and we have to do it properly. We wanted to make sure what we were going to offer employees was as safe as humanly possible."

The education and communication aspect is an ongoing challenge for Toronto-based Hudson's Bay Co., which closed its defined benefit pension plans in 1988 and moved all its new employees into defined contribution plans, said Marc Poupart, the retailer's director of pension and retirement programs.

Mr. Poupart noted that many employees in Hudson's defined contribution plans either want the company to advise them or simply choose the default option. "Our board is very reluctant on that, but you almost have to protect members against themselves, which is a concern," he said. "We're trying to get members to become investor-proficient."