A new white paper released today by consulting firm Towers Perrin addresses critical issues for defined benefit pension plan sponsors arising from the poor performance in global equity markets, along with the lowest interest rates in 40 years.

Entitled “Surviving a Bear Attack: A Model for Managing Pension Financial Risk”, the white paper states that these two conditions, by reducing the assets of DB plans, will cause significant increases in both cash contributions and pension accounting expense for many Canadian companies.

“Many organizations are grappling with managing long-term obligations in a short-term world”, said Ashley Witts, a principal with Towers Perrin in Vancouver, who co-authored the paper with Jean-Rémi Mayrand, a principal in the firm’s Montreal office. “Some organizations are facing significant retirement financial issues. However, we feel the situation is manageable.”

The spotlight of public attention is increasingly focusing on corporate retirement obligations. Plan members, regulators, ratings agencies, analysts and shareholders are looking more closely at pension plan financials. Companies’ retirement financial management practices are being assessed; in some cases generating headline news.

The authors say that the fallout from current bear markets will be felt over the next several years, with most plan sponsors having to address one or more of the following issues

  • Significant increases in cash contributions as solvency funding requirements kick in;
  • Steadily increasing pension accounting expense;
  • Increases in Pension Benefits Guarantee Fund risk premiums; and
  • Potential charges to shareholder equity.

Aside from these financial issues, the authors noted that agencies and analysts who have looked at DB pension issues have uniformly criticized the level of disclosure of pension plan financials in corporate financial statements.

“Canadian plan sponsors should anticipate more onerous pension plan disclosures in corporate financial statements,” predicted Witts. “In many cases, retirement plan assets and obligations are material in comparison to the size of a company’s operations, and can have a significant impact on corporate financial results.”

The paper outlines a detailed strategy for managing the financial impact of employer-sponsored pension plans. The authors suggest a company’s goal should be to manage the financial commitments related to these programs within its tolerances for risk. This means minimizing the financial impact of retirement plans while ensuring the security of the underlying pension promise and overarching fiduciary responsibilities.