Despite the challenges in offering defined benefit pension plans, they can help achieve important employment objectives and should not be abandoned by Canadian employers, some plan sponsors say.

Other plan sponsors, though, say defined contribution plans provide certain advantages such as more flexibility for a mobile workforce and express little concern about certain risks associated with the plans.

Plan sponsors discussed their pension strategies at the Assn. of Canadian Pension Management's 30th national conference held Sept. 20-22 in Winnipeg, Manitoba.

One of the key frustrations for defined benefit plan sponsors is that the regulatory environment is uncertain and government officials are afraid to tackle some of the difficult issues involving defined benefit plans in Canada, said John Coyne, general counsel for Toronto-based Unilever Canada, a consumer products company with about 4,000 employees and retirees that offers both contributory and noncontributory defined benefit plans.

In Ontario, for example, there is a lack of clarity regarding surplus plan asset rules, Mr. Coyne said, adding that he speaks from the unusual perspective of a sponsor with a pension plan currently in a surplus position. "The policy environment in Ontario is almost rudderless right now," he said.

Another major obstacle for sponsors is the disparate provincial statutes and regulations that they must comply with, he said. "The patchwork of legislation right now is a complete hindrance to the way we manage our plan and the way we describe it and justify it," Mr. Coyne said.

"There's an extraordinary amount of confusion that a unitary system with some application of national standards would take care of."

Several changes need to be made to create a more favorable environment for defined benefit plans, including legislation that would allow employers to build bigger surpluses as a buffer against declines in funding positions and to sometimes use letters of credit, he said.

One potential change that Mr. Coyne said he does not want to see is the creation of a national pension guaranty fund similar to the U.S. Pension Benefit Guaranty Corp. Ontario is the only Canadian jurisdiction with such a fund. "I don't believe institutionalizing bailout funds is a good idea," he said. "It adds costs, it adds complexity, but worst of all it removes the discipline necessary for creating an excellent regulatory system."

Despite the challenges involved in maintaining defined benefit plans, they still can play a key role in offering a competitive compensation package that helps a company attract and retain the best workers, Mr. Coyne said. "The challenges that we have are quite daunting, but I don't think we can stop now," he said. "I don't think we can give up on defined benefit plans. I think if we did, we would find that the social and economic consequences would be far greater than that which we've contemplated up to this point."

Defined contribution plan sponsors, though, say their plans are effective in meeting their employment goals. The University of Western Ontario, for example, offers two defined contribution plans with employer contributions of between 7.5% to 8.5% of pay. The high--compared to other universities in Ontario--employer contribution rate demonstrates that the plan fits the university's employment objectives, according to Louise Koza, director, human resources-total compensation for the London, Ontario-based university.

"In our business, attracting the best faculty is key to our success," she said. "It's a fairly competitive environment for faculty and we like to differentiate ourselves from a compensation point of view."

Defined contribution plan sponsors say the flexibility provided by these plans is a key benefit for employees who do not remain with one company for their entire careers. For the Co-operative Superannuation Society Pension Plan, which provides pension and retirement services or income to more than 37,000 active and retired members, it was critical to have benefit mobility because a sizeable number of employees change jobs, said Bill Turnbull, general manager of the Saskatoon, Saskatchewan-based organization.

Agricore United also developed a defined contribution plan in 1999 after discussions with mid-level managers raised the possibility of having a portable, flexible plan that allows the members to control investments, said Richard Whitbread, pensions and benefits manager for the Winnipeg, Manitoba-based agri-business. Risk management also played a key role in the decision as company officials converged to assess the pension environment in the late 1990s and decided to investigate the movement in the direction of defined contribution plans, he said.

Sponsors of defined contribution plans are unfazed about potential lawsuits challenging their decisions, such as the level of investment education they provide, which pension experts say is a possible source of future litigation in Canada (BI, Oct. 2).

The sponsors say they have protections in place to neutralize the risk of litigation. Shell Canada Ltd., for example, requires new employees attend a pensions and benefits seminar. If the employees later sue the company alleging that they were not given enough information about their pension plan--a potential basis for future defined contribution plan claims--the company can refer to their attendance records to show whether these employees participated in the sessions, said Chris Ferrill, manager of compensation and benefits for the Calgary, Alberta-based energy company.

"Regardless of what you do, if you do nothing, you run the risk of litigation," he noted.

Despite warnings to plan sponsors about providing enough diversity of investment options--another potential basis for defined contribution plan suits--Mr. Turnbull said his organization's plan members consistently say they do not want more than the three investment options offered in their plan. Offering more investment options, he said, will not help sponsors avoid liability when class action lawsuits finally are filed in this area. "You're going to get sued anyway," he said.

Rather than focusing on implementing either a defined benefit or a defined contribution plan, some sponsors have incorporated both types of plans into their benefit structure. Shell Canada created a defined contribution plan that employees participate in during the first nine years of employment. When they reach 10 years of service, employees have the option of choosing to remain in the defined contribution plan or switching to a defined benefit plan, Mr. Ferrill said.

The impetus for the change from a pure defined benefit plan to this structure in 1994 was an analysis of employment data that showed that 80% of employees who left the company did so in the first 10 years, he said. In creating the current pension design, Shell Canada was trying to deliver more value during the first years of service for their employees while also emphasizing its belief in long-term employment, he said.

"If you plan to quit before you retire, a defined contribution plan may be better," he said. "If you plan to retire with the company, a defined benefit plan may be better."