Aon Hewitt Survey Finds Canadian Sponsors Taking Action to Meet the Defined Benefit Pension Challenge

TORONTO, Nov. 6, 2013 /CNW/ - Aon Hewitt, the global human resource solutions business of Aon plc (NYSE:AON), today released new analysis of the Canadian findings of its 2013 Global Pension Risk Survey, which confirms that many pension plan sponsors are taking a wide range of actions to manage the risk of their defined benefit (DB) plans.

The survey found that a majority of Canadian plan sponsors:

• Are managing risk in their DB plans with strategies increasingly grounded in long-term planning;
• Are establishing clear long-term goals that are monitored and measured as standard practice;
• Are paying closer attention to plan funding and viewing performance as critical; and,
• Are actively managing investment strategies with a focus on liabilities and are paying increased attention to diversification and alternative investments such as real estate.

"A shift in defined benefit pension risk practice is taking place. For most plan sponsors, the pain of the last few years has led to a greater awareness of the risks faced by their DB pension plans. There is heightened interest in how these risks should be managed and possibly de-risked regardless of an organization's long term commitment to a DB plan," said Will da Silva, Senior Partner, Canadian Retirement Consulting at Aon Hewitt. "Simply following the herd in setting investment and funding policy is no longer the standard. To survive, pension plans must be affordable for their sponsors, and appropriate risk management is one way to manage this goal."

Managing Benefits and Liabilities
Plans in different sectors are using varying approaches when they see a need to make changes to DB plan benefits.

The private sector plans are more likely to make fundamental changes to member benefits. Like corporate plans in other parts of the world, many Canadian sponsors have already closed or intend to close plans to new members, freeze accruals for existing members, and/or switch to a pension structure where more of the risks are borne by plan members.

On the other hand, there is a strong commitment to DB plans in the public sector. Sponsors are more likely to look for adjustments to benefits or cost structures that maintain the form of the benefit but at a level that is more manageable for plan sponsors. Many sponsors are looking at ways to make the underlying benefit less costly, and the vast majority are contemplating further cost sharing with members.

There is considerable interest in finding out more about the "target benefit plan" concept, although it is a relatively new way to manage many of the risks inherent in traditional DB plans and defined contribution plans and legislation is still outstanding in most jurisdictions.

• 75% of plans where the sponsor is publicly traded have already closed at least one plan to new members, and 15% are looking to freeze their plan in the near future.
• 71% of public sector plans are considering additional member contributions, while about a third are looking to reducing ancillary/discretionary benefits or reduce/eliminate indexing.
• 43% are curious about target benefit plans.

Solvency and Funding
Most DB plan sponsors are employing a cautious combination of passive and active measures to meet funding obligations. There is an encouraging trend toward investment diversification and de-risking practice, though many continue to rely on passive measures such as interest rate increases to boost their funding position. Letters of credit continue to be underutilized, despite being useful in some cases for managing short-term contribution volatility. Letters of credit can be used to satisfy solvency funding requirements by securing funding obligations rather than making cash contributions.

• 88% is the median solvency rate measured by Aon Hewitt Canada data as September 2013.
• 6% of the 116 survey respondents in situations where solvency is applicable had an aggregate solvency position of 100% or above.
• 46% have taken advantage of available funding relief measures; 30% will seek relief in the next year.
• 19% have already posted a Letter of Credit and 22% intend to do so in the future.

Annuities and Longevity
As well as having choices in managing benefits, plan sponsors also have an increasing array of tools that can be used to manage plan liabilities. Annuity options are increasingly marketed by insurance providers and are popular in other parts of the world. The popularity of annuities in Canada can be expected to grow given the private sector trend toward plan closures and freezes. Annuity purchases can reduce pension liability by transferring some or all of a plan's benefit obligations to an insurance carrier. They can be used by plan sponsors wanting to exit the DB business, and also by those wanting to de-leverage an ongoing plan.

Similarly, insuring the "longevity risk" of a plan is becoming of interest to sponsors in Canada.

• 16% very or somewhat likely to consider a buy-in and another 11% considering a buy-out.
• 65% of organizations are now concerned with longevity risk in their plans.
• 28% are open to exploring ways to hedge longevity risk.

De-Risking
The Aon Hewitt survey results revealed a growing awareness of the risk pension plans face and the steps that are required by plan sponsors to mitigate that risk.

• 37% say low-risk targets are part of their long-term strategy.
• 40% are interested in hedging risk related to interest rates.
• 22% are planning to increase allocation to long bonds to better match their plan's liabilities.

Alternative Investments
Investment strategy continues to be targeted towards greater diversification of portfolios. Diversifying out of Canadian equities and into alternative asset categories and foreign equities has been a trend for several years now.

• 33% of sponsors reduced Canadian equity holdings last year and 30% will continue this trend into next year.
• Alternative assets and real estate continue to show the largest increases within all asset classes.
• More than 30% of plans are already increasing or planning to increase allocations to alternatives.

Monitoring Risk and Thinking Long-Term
The growing focus on risk may well be the catalyst for the dramatic growth in monitoring practices as years of discussion are finally transformed into actionable strategy. Recognition of the need for pension plan sustainability, supported by long-term goals and strategic planning to support robust, reduced-risk plans, is gaining momentum. It is apparent that sponsors are not only mindful of the need for long-term planning, but that plans are also focused on achieving established and measureable goals.

• 78% of DB sponsors are monitoring pension plan assets and liabilities on a regular basis
• 84% of plan sponsors say they have a long-term plan in place

"Successful plan management can no longer be considered a passive exercise. It requires careful attention to long-term funding and investment strategy and a disciplined focus on adapting the strategy to take advantage of opportunities that may arise," da Silva said. "Active pension plan management, with a focus on how the assets and liabilities interact, is key with individualized strategies, including de risking practices, becoming 'the new normal' for Canadian plan sponsors."

Copies of the report on the Pension Risk Survey are available at http://www.aon.com/canada/attachments/thought-leadership/report_Global_Pension_Risk_Survey_2013_EN_highlights.pdf

About the 2013 Canadian Pension Risk Survey
The 2013 Aon Hewitt Global Pension Risk Survey - Canada is part of a global series of surveys aimed at understanding the thoughts and risk management philosophy of plan sponsors in selected countries and/or geographic locations. A record number of 139 Canadian pension plans participated in this survey, representing more than $250 billion of assets and 2 million pension plan members, from a broad cross-section of organizations, both in the public and the private sector, publicly traded and privately held companies coming from across the country in various industries.

About Aon Hewitt
Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide. For more information on Aon Hewitt, please visit www.aonhewitt.com.

About Aon
Aon plc NYSE:AON is the leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 65,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative and effective risk and people solutions and through industry-leading global resources and technical expertise. Aon has been named repeatedly as the world's best broker, best insurance intermediary, reinsurance intermediary, captives manager and best employee benefits consulting firm by multiple industry sources. Visit www.aon.com for more information on Aon and www.aon.com/manchesterunited to learn about Aon's global partnership and shirt sponsorship with Manchester United.

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SOURCE: AON Hewitt

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