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Bucking a trend, pharmaceutical firm keeps DB pension plan


TORONTO--When Merck Frosst Canada Ltd. was looking at ways to reduce the cost and volatility associated with its defined benefit pension plan, the pharmaceutical maker considered following other employers footsteps by converting to a defined contribution plan.

"Frankly, we looked very hard at converting from a defined benefit to a defined contribution plan because, ultimately from an employer's perspective, that's a very easy way to immunize your risks going forward," said Danny Greene, director, HR shared services for the Kirkland, Quebec-based company

Merck Frosst, though, decided to buck the trend and chose to implement changes that the company believes will help stabilize its pension contributions, Mr. Greene said at the "2007 Pensions Summit: Striking the Right Balance," presented by the Conference Board of Canada May 10-11 in Toronto.

The impetus for the redesign of the Merck Frosst pension plan was the realization that benefits costs were increasing at significant rates, he said.

"It became an expense that needed attention," Mr. Greene said.

The drug maker also wanted to develop a pension plan to attract and retain skilled employees, particularly those in research, he said. The Canadian subsidiary of Whitehouse Station, N.J.-based pharmaceutical company Merck & Co. Inc. has 1,544 employees in Canada, about 25% in the research area.

"We were really interested in employees who want to stick around for the long-term, given the nature of our research and our product," Mr. Greene said.

The company considered a range of options: a traditional final pay defined benefit plan, a reduced defined benefit plan, a career pay plan, hybrid plans and defined contribution plans, he said. Ultimately, company officials rejected the idea of converting to a defined contribution arrangement, believing that a defined benefit plan would be more of an inducement for long-term service with the company, Mr. Greene said.

"There are no perfect solutions," he said. "In all fairness, defined contribution plans may be very appropriate to your business."

The company also felt that the value created by a sophisticated defined benefit plan was an important advantage, Mr. Greene said, pointing to Watson Wyatt Worldwide data that has shown defined benefit plans in the United States provide higher average investment returns than defined contribution plans.

"It wouldn't be an easy thing to do to keep our DB plan, but we knew it would be the right thing to do," he said.

Current employees' pension benefit is calculated by a formula that takes 2% of their final average earnings and multiples it by their years of service. Effective Jan. 1, 2008, the contribution rate will decrease from 2% to 1.8% for current employees for their future years of service as well as new hires.

The company will also eliminate early retirement subsidies for new hires after Jan. 1, 2008, while current employees will be grandfathered for the early retirement incentives for both past and future service, he said.

In addition, Merck Frosst's enhanced termination benefit will decrease for new hires to the minimum required by Quebec law, which tends to be the most progressive from a Canadian employee's perspective, Mr. Greene said. The company chose to abide by the Quebec statute to avoid dealing with the vast differences in provincial laws relating to pension benefits, he said. 'It ends up being a very favorable outcome for our employees," Mr. Greene said.

The company retained a feature of its pension plan known as the "Savings Plus" account, in which employees can make voluntary contributions to the pension plan. "This is their own money that would be invested by the money managers to purchase additional enhancements," he said.

After the redesign, the core costs of the pension benefit will decline for the company, Mr. Greene said. The need to control the company's pension costs was communicated to the employees, he said.

"We were very transparent," Mr. Greene said. "We needed to reduce the volatility and the costs of our pension plan."