Increasing contributions not an option, decreasing benefits is
It has been a tough few years for multi-employer pension and benefit plans. While the situation looked relatively rosy before the new millennium, today’s reality is very different.
The bursting of the dot-com bubble, followed by the general market downturn and disturbingly low interest rates have converged with rapidly rising benefit costs to paint a pretty bleak picture.
It is probably not surprising then, that a recent survey by Eckler Partners Ltd. found the primary concern for multi-employer pension plans in Canada was the plan’s financial position.
In most cases, the solvency position of the plan has become much more important than the going-concern funded position and there are very few, if any, pension plans for which the solvency position has ever been worse than it is today.
Regulators in several provinces have been looking at ways to address solvency concerns. In Ontario, regulators have allowed solvency deficiencies to be amortized over periods in excess of five years. Similarly, New Brunswick recently relaxed the funding rules for solvency from five years to 15 years. The longer period to amortize deficiencies reduces some of the pressure on plan sponsors.
Options for trustees
Unlike single employer plans, multi-employer plans are funded through contributions negotiated between a union and an employer association, so there is little opportunity to make increases to contributions. Generally, the more feasible option is to decrease benefits.
Of course, if at all possible, trustees will want to avoid reducing pension benefits that have already been earned or are currently being paid. Often, the easiest place to start is eliminating ancillary benefits, such as early retirement subsidies for members not yet eligible to retire. Reducing future accrual rates may be more palatable than other changes because it has little immediate impact on active members. However, these changes may not significantly reduce liabilities.
When further action is required, trustees may wish to consider reversing recent plan improvements made when investment returns were better. This is often an easier “sell” than implementing new changes.
Another option is to modify the going-concern assumptions. At first glance, this may not seem to address solvency concerns. Remember, however, that contributions are fixed. If the going-concern service cost is reduced, the difference can be used to fund the solvency deficiency.
Assuming the solvency deficiency is a result of poor investment returns — as opposed to poor management of the plan — changes should be structured to be undone easily if and when markets rebound.
Solvency rules are good safety check
Many respondents to the Eckler survey were concerned about complying with solvency rules. It is sometimes argued that multi-employer plans are not subject to the same risk of plan termination as single employer plans and that they should not, therefore, be held to the same funding standard.
However, multi-employer pension plans can terminate. Solvency rules are a useful safety check to ensure that multi-employer plans remain healthy, not only in the long term, but also in case of a wind-up in the short term.
Multi-employer pension plans are also challenged by falling employment levels and aging members. The long-term viability of any multi-employer plan hinges on its ability to continue adding new members as current members age. Plans in declining economic sectors know only too well that aging membership and falling employment levels can have a devastating effect on finances.
Benefit issues the same but different
As with pensions, many multi-employer benefit plans are also in a poor financial health.
In addition to disappointing investment returns, these plans have also been hurt by rising benefit costs, in particular drug costs. This situation is further compounded by insurer consolidation. The flurry of mergers and acquisitions in recent years has resulted in reduced provider competition, leaving few insurers with the understanding and capabilities to service the multi-employer plan market.
Given their inability to increase contributions (at least, in the short term) trustees may look to specific cost control mechanisms, such as drug pre-authorization to manage the potential cost of expensive new drugs, audits to ensure provider benefit payment accuracy and preferred provider arrangements.
When employment is strong and members are less dependent on their disability coverage, it may also be a good time for trustees to consider tightening disability benefit plans.
By helping plan members understand that the money in the benefit fund is part of their compensation, and that they have some ability to lower benefits costs, HR will find itself with another effective cost control mechanism.
Shopping around for best prices to fill prescriptions, using vision care benefits only when new glasses are needed (not because the limitation period is up), requesting generic drugs, all help to control costs over the long term and ultimately allow members to get more mileage from their plan.
Coverage for retired members is another area of concern for benefit plan trustees. Survey respondents indicated that the disproportionately high cost of retiree coverage is adding pressure to the financial position of the plan.
This situation is particularly difficult to address because retirees tend to feel that they paid for retiree coverage while they were working and therefore have a right to keep it when they retire.
Tough times for trustees
For many trustees, this is the most challenging period they have ever had to face. Weakened plan finances coupled with an increased emphasis on governance is a large burden to bear.
Union trustees, in particular, may be confronted with tough decisions as they balance fiscal responsibility with accountability to their membership. Some union leaders may feel the political fallout come election time.
Employer and union relations may also begin to fray as they grapple with the need for increased contributions to deal with the rising costs of the pension and benefit plans.
This environment demands that trustees and their advisors use their creative juices to help address these difficult issues. They must be thorough and realistic in their cost projections and analysis, and every effort must be taken to ensure that the decision-makers have a full understanding of the plan’s current financial position and the impact of any proposed changes.
Cameron Hunter is partner in the Toronto office of Eckler Partners Ltd. He may be contacted at (416) 696-3020 or [email protected].
The bursting of the dot-com bubble, followed by the general market downturn and disturbingly low interest rates have converged with rapidly rising benefit costs to paint a pretty bleak picture.
It is probably not surprising then, that a recent survey by Eckler Partners Ltd. found the primary concern for multi-employer pension plans in Canada was the plan’s financial position.
In most cases, the solvency position of the plan has become much more important than the going-concern funded position and there are very few, if any, pension plans for which the solvency position has ever been worse than it is today.
Regulators in several provinces have been looking at ways to address solvency concerns. In Ontario, regulators have allowed solvency deficiencies to be amortized over periods in excess of five years. Similarly, New Brunswick recently relaxed the funding rules for solvency from five years to 15 years. The longer period to amortize deficiencies reduces some of the pressure on plan sponsors.
Options for trustees
Unlike single employer plans, multi-employer plans are funded through contributions negotiated between a union and an employer association, so there is little opportunity to make increases to contributions. Generally, the more feasible option is to decrease benefits.
Of course, if at all possible, trustees will want to avoid reducing pension benefits that have already been earned or are currently being paid. Often, the easiest place to start is eliminating ancillary benefits, such as early retirement subsidies for members not yet eligible to retire. Reducing future accrual rates may be more palatable than other changes because it has little immediate impact on active members. However, these changes may not significantly reduce liabilities.
When further action is required, trustees may wish to consider reversing recent plan improvements made when investment returns were better. This is often an easier “sell” than implementing new changes.
Another option is to modify the going-concern assumptions. At first glance, this may not seem to address solvency concerns. Remember, however, that contributions are fixed. If the going-concern service cost is reduced, the difference can be used to fund the solvency deficiency.
Assuming the solvency deficiency is a result of poor investment returns — as opposed to poor management of the plan — changes should be structured to be undone easily if and when markets rebound.
Solvency rules are good safety check
Many respondents to the Eckler survey were concerned about complying with solvency rules. It is sometimes argued that multi-employer plans are not subject to the same risk of plan termination as single employer plans and that they should not, therefore, be held to the same funding standard.
However, multi-employer pension plans can terminate. Solvency rules are a useful safety check to ensure that multi-employer plans remain healthy, not only in the long term, but also in case of a wind-up in the short term.
Multi-employer pension plans are also challenged by falling employment levels and aging members. The long-term viability of any multi-employer plan hinges on its ability to continue adding new members as current members age. Plans in declining economic sectors know only too well that aging membership and falling employment levels can have a devastating effect on finances.
Benefit issues the same but different
As with pensions, many multi-employer benefit plans are also in a poor financial health.
In addition to disappointing investment returns, these plans have also been hurt by rising benefit costs, in particular drug costs. This situation is further compounded by insurer consolidation. The flurry of mergers and acquisitions in recent years has resulted in reduced provider competition, leaving few insurers with the understanding and capabilities to service the multi-employer plan market.
Given their inability to increase contributions (at least, in the short term) trustees may look to specific cost control mechanisms, such as drug pre-authorization to manage the potential cost of expensive new drugs, audits to ensure provider benefit payment accuracy and preferred provider arrangements.
When employment is strong and members are less dependent on their disability coverage, it may also be a good time for trustees to consider tightening disability benefit plans.
By helping plan members understand that the money in the benefit fund is part of their compensation, and that they have some ability to lower benefits costs, HR will find itself with another effective cost control mechanism.
Shopping around for best prices to fill prescriptions, using vision care benefits only when new glasses are needed (not because the limitation period is up), requesting generic drugs, all help to control costs over the long term and ultimately allow members to get more mileage from their plan.
Coverage for retired members is another area of concern for benefit plan trustees. Survey respondents indicated that the disproportionately high cost of retiree coverage is adding pressure to the financial position of the plan.
This situation is particularly difficult to address because retirees tend to feel that they paid for retiree coverage while they were working and therefore have a right to keep it when they retire.
Tough times for trustees
For many trustees, this is the most challenging period they have ever had to face. Weakened plan finances coupled with an increased emphasis on governance is a large burden to bear.
Union trustees, in particular, may be confronted with tough decisions as they balance fiscal responsibility with accountability to their membership. Some union leaders may feel the political fallout come election time.
Employer and union relations may also begin to fray as they grapple with the need for increased contributions to deal with the rising costs of the pension and benefit plans.
This environment demands that trustees and their advisors use their creative juices to help address these difficult issues. They must be thorough and realistic in their cost projections and analysis, and every effort must be taken to ensure that the decision-makers have a full understanding of the plan’s current financial position and the impact of any proposed changes.
Cameron Hunter is partner in the Toronto office of Eckler Partners Ltd. He may be contacted at (416) 696-3020 or [email protected].
