Public and private sector defined benefit (DB) pension plans in Canada are facing a crisis. Most are woefully underfunded. The crisis has been created primarily by demographics – the inverted demographic pyramid and increased longevity risk as a result of longer life expectancies. It has been exacerbated by many factors including increased entitlements, the global financial crisis, the Federal Reserve Board’s prolonged low or zero interest rate policy (ZIRP), volatile investment returns & anaemic growth, and a high level of subsidized early retirement pensions.
The resulting pressure to reduce benefit entitlements, and implement pension reform has led some firms to close their DB plans to new employees, move to defined contribution (DC) plans, or explore various new risk sharing regimes, a.k.a. “pension reform”.
Beyond these solutions, a few plan sponsors are looking at more surgical options such as pension de-risking, whereby the corporation attempts to lay-off all or part of its pension funding risk using annuity buy-ins, buyouts and longevity swaps with an insurance carrier or other counterparty. These solutions are at best incomplete, messy and expensive.
More comprehensive and elegant funding solutions that are accretive to shareholder value are on the horizon.