March 13, 2014

Will 2014 Be the Pension World’s “Year of the Great Rotation?”

While traditional defined benefit plans are a very cost-efficient means of attracting and retaining talent, their inherent financial risks have become an increasing concern for plan sponsors. For nearly a decade, we have been consulting on the importance of “de-risking.” It is very encouraging that a pension risk transfer “mega-deal” has been completed in Canada. This may be a sign that the rotation to strategies designed to manage the inherent financial volatility of defined benefit pension plans has now begun in earnest. In other words, we are moving from “asset-only” pension risk management to “balance-sheet” risk management in recognition of the inherent financial volatility of defined benefit pension plans.

Currently only 20 percent of private sector employees in Canada have access to a workplace vehicle for the pooling of investment, interest rate, and longevity risk. We believe that other employers should take notice and embrace this opportunity to attract and retain the necessary human capital to drive their business success.

A de-risked defined benefit plan, alone or in combination with a “Target Benefit” pension plan that de-couples risk pooling from guarantees, can be a cost effective, low risk, and efficient means of delivering a key element of compensation not otherwise available to Canadian workers. The single employer Target Benefit pension plan, based on the multi-employer model pioneered by The Segal Group, has successfully enabled the financial security of tens of millions of North Americans for more than six decades.

With more than 10 million private sector Canadian workers now in need of a basic mechanism for achieving future financial security, we should all welcome more pension plan risk transfer mega-deals in 2014, “Year of the Great Rotation.”

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