December 2009
Communications consultant Steven Laird is the editor for Buck Exchange. He works with an advisory board with representatives from each of Buck’s consulting practices: Health & Productivity, Retirement, Investments & DC Plans, Communications, Global HR Technology, and Research & Compliance.
Feel free to comment on any of these stories; comments will be posted after a brief review. Or you can contact the editor directly at steven.laird@buckconsultants.com. Steven will direct your questions and comments to the appropriate consulting practice for response.
Health and Productivity
Retirement
Investments and DC Plans
Communications
Global Perspective
Technology
Legislative Update
Health and Productivity
by Michele Bossi, Health & Productivity practice leader
In a recent Benefits Canada article (”Zero inflation for employee drug plans: it’s possible!“) author Tim Hadlow wrote that with “potential savings on the horizon from new generics, new legislation and employer negotiations, employer drug plans could see little to no price inflation over the next two to three years, but only if employers prepare themselves to adapt to the new market realities.”
The article correctly points out that the deals negotiated by the public plans sponsored by governments have created a double standard. Revenue lost through the public deals is being recouped from the pockets of the private payer. But the suggestion that employers can do what the provincial governments have done – negotiate drug prices with pharmacists or drug manufacturers – is misleading. While it’s true that GM and Chrysler (through Green Shield) were successful in negotiating their own deals, very few employers have the buying power to do what they did.
The article suggests that savings can be obtained through pharmacy benefit managers (PBM’s). To my knowledge, only two of Canada’s PBM’s truly manage costs through agreements with the pharmacists that limit the price that they can charge. The others simply limit the reimbursement to the pharmacist from the employer’s plan. This may protect the employer’s cost, but there is nothing to stop them from charging the patient for the difference.
Even if employers could work with PBM’s to control drug prices through pharmacy agreements, they would likely need to band together to create enough bargaining power to get buy-in from the pharmacies and frankly, I don’t think there is enough pressure on the PBM’s to make the investment of time and effort.
And if they did? How would the pharmacies recoup the lost revenue? The answer is simple. Hike up the prices for the uninsured consumer.
I don’t believe the solution lies with the PBM’s. I think the time has come to look to government to set drug pricing controls. We need to eliminate the double standard. I applaud the government for negotiating lower generic prices, but it didn’t go far enough. It should establish price controls, not just to protect its own interests, for the benefit of all Canadian citizens.
Retirement
by Cindy Rynne, Retirement practice co-leader
There is a lot of discussion surrounding the current state of affairs of the pension world right now, and most of it is downright depressing. But there is one shining star in the sky that most of that world has not really noticed yet.
The critical commentary is by now familiar. Defined Benefit (DB) plans face surplus/deficit ownership issues; pressures to fund deficits and temporary relief to avoid funding deficits; increasing complexity and the increasing cost of ever more administration, governance and legislation; accounting policies with underlying inconsistencies and unforeseen financial impacts….and the list goes on.
Capital Accumulation Plans (CAPs), which include Defined Contribution (DC) and Registered Retirement Savings Plans (RRSPs), raise fears of inadequate savings either through lack of a disciplined savings approach or tax-limited ability to rebuild lost savings; of inexperienced investing and understanding of age-appropriate risk; of increased ability of cashing out ineptly; of both variability in, and a lack of understanding of, how much pension can be purchased with a cash balance; of running out of money before death….and the list goes on.
To date, pension reform proposals surrounding DB plans have not adequately addressed the real need – increased coverage and viability. The reforms only attempt to plug holes in an already leaky boat which is sure to sink sooner or later. There are cracks in the structure that need overhaul, not just plugs (see Cameron McNeill, “Solvency Relief: A Loaded Gun” and Dan Clark, “IFRIC: Another Nail in DB’s Coffin”). More regulation leads to more complexity, more cost, the possibility of more plan closures, and more people without pension coverage – the very opposite of the intent of pension reform. There is a feeling at top levels in the industry that this round of reforms tries to fix the current system with glue. The fact is, common sense tells us we should start looking at a truly new system – glue will not hold for long. The pension system in Canada needs a fresh start which will require innovation, creativity and new ways of thinking, all of which will lead to an end result well worth the investment.
Best of both worlds – plus
The Ontario Expert Commission on Pensions (OECP) referred to an alternative design called the Jointly Governed Target Benefit Plan (JGTBP), commonly known as the Target Benefit Plan (TBP). It is also known as a Multi-Employer Pension Plan (MEPP). Whatever the title, the concept is based on a combination of DB and DC principles, plus a few new ones.
The TBP design is based on participation by a number of employers with a common workforce tied together by either a union or professional association, or some other governing body. The larger the group, the more it gains in economies of scale. However, this arrangement can work for any group whose common aim is to provide a pension to employees. The plan is jointly governed by a board or committee composed of both employee and employer representatives. The objective is to provide a defined benefit to members, complete with preferred DB features; however, the promise is actually DC in nature.
The following chart summarizes how a TBP works relative to the traditional DB and DC arrangements.
Barriers removed
Fundamental features of a TBP include an appropriate contribution/benefit relationship established right from the start, the ability to convert past-service benefits accrued under a DB plan to the TBP formula, the ability to increase or reduce accrued benefits for all members, treatment as a DC plan by accounting and tax authorities, no solvency funding requirements, and a limit on the employer’s obligation to fixed contributions.
A target benefit plan design solves or eliminates many of the cracks in the traditional DB designs. Surplus and deficits are fully owned by employees since they take the risk. No solvency funding is required. Accounting complexities are eliminated and fixed contribution rates solve unpredictable funding requirements. Taxation issues are addressed, and administration is eased when the burden is transferred to a third-party agency.
The TBP comes with its own unique advantages compared to DC. Benefits are more predictable since the benefit is defined. All members share the risks, specifically investment and mortality risks. The plan is jointly governed so that the responsibility for the outcome doesn’t rest solely on the employee’s shoulders. Economies of scale are seen in expense costs. DB-type ancillaries such as subsidized early retirement can be part of the plan design, and better investment returns lead to better ultimate pension benefits.
Getting our heads around something different
The primary challenge of the TBP design is getting sponsors and members to understand how it works – it will require education, disclosure, a workable governance structure, and a knowledgeable board or committee. But this challenge is not insurmountable, particularly as compared to the challenges that would otherwise lie ahead for the traditional arrangements.
That education must start with the pension community. Policymakers and regulators need to understand this relatively new breed of plan and its potential to solve the primary concern of retiree pension coverage, and actuarial experts must help iron out the wrinkles of initiation.
While this type of plan, in its current MEPP form, is not available to employers with non-unionized employees, it should be. The OECP recommendations recognized that expanding employee coverage under the TBP should be considered. Employers need to know there will be an alternative available and how it can benefit them and their employees.
Our challenge is to get our heads around something different – a whole new world – there is an alternative that makes sense and should rightly be explored further. We are currently working alongside government to make this a reality for all plan sponsors. So don’t be afraid to explore that shining star further.
Theory is great, the solution is just another workaround. It addresses the surplus issue as all money belongs to the members but it also puts the members at risk and many are not happy about that. It addresses the corporate view to get the pensions off the books. It adds joint governance so there is no one to blame for failures.
The missing piece in all this is that it does not mention the cost or who is to pay. If we return to the ealry 60’s, often we had 5% by employees and 5% by the employer. Today many see this as a minimum and some suggest closer to 14% is needed.
So will this expand coverage, not likely. It may provide a vehicle for the young, just starting out but they do not have the money or desire to pay at this level.
Finally, one has not addressed the legacy that currently exists that cannot be easily converted to the new world.
The only solution is to return pension accrual to where they began eliminating some of the major issues such as surplus ownership, grow in (only in Ontario you say) and put responsibility and reasonableness back into the equation.
Cindy Rynne replied:
Thank you for your comments and thoughts on the TBP. You make a number of good points that we would like to address.
We don’t think you’ll find this to be another “workaround” when you dig a bit further under the surface. It’s all relative – to employers, the TBP will be better than DB and to employees, it will be better than DC. Regarding the surplus/risk relationship, these things are naturally tied together. There are very few things in life where you can achieve the reward without the risk; however, the key is managing the risk at a level that is acceptable to the members which is why joint governance is key to this type of arrangement. When managed properly there should be no failures to blame, but instead a plan that works according to well established policies determined from the start.
In terms of cost, again, the cost will reflect the benefit level established at the plan start which would be aligned with the expectations of the plan sponsors. It can be as rich or as basic as the parties want and set at levels that match the needs of the covered group. Ideally, the group will be large to achieve economies of scale, and will be made up of groups of a similar nature. An advantage to this is that when the young move between jobs, they would still be covered by the same plan and will therefore benefit from having all service count towards the same defined benefit at retirement. The TBP is actually more advantageous to the older members where the benefit accrual is worth more than the set average contribution level.
Concerning addressing legacy benefits and converting them to the new TBP world, you are correct in that this will be one of the biggest challenges to getting the TBP off the ground. In order to do so, policy makers, regulators, plan sponsors, members and advisors need to think outside the box. It may involve a reduction in benefits and a slight reduction in the security on plan windup, including amended legislation, as the trade off for a better future, but it will be worth it! Regarding your comment that responsibility and reasonableness need to be put back into the equation – we couldn’t agree more!
Thanks for your comments.
Investments and DC Plans
by Peter Arnold, Investments practice leader (excerpt from a longer article in Benefits Canada)
It’s understandable for the lay person to question the integrity of the Canadian pension system, when so many capable people from accounting, actuarial, investment, legal and other professions are not able to help plans meet their pension obligations. The pension system in Canada, as elsewhere, is a complex system, and all systems are subject to systemic risk. The systemic risk of the pension system is also highly dependent on the systemic risk of the capital markets and the direction and sustainability of interest rate levels. Capital market risk is a very complex system to accurately model. The purpose is to see not only how the components of capital markets operate independently, but also how they combine in aggregate.
This is very similar to what pension plans have been doing all along: how does everything add up at the total plan level? We clearly have more work to do here but we’re seeing two camps of institutional investors emerging from the traditional three camps:
- You are an aggressive investor: you are prepared to take the risk that your return profile will be higher in the long-run at the risk of severe losses at points in time; or
- You are a conservative investor: you remove risk and lower return expectations at every opportunity.
The concept of a ‘moderate’ institutional investor seems to be a thing of the past in today’s investment lexicon of LDI, low volatility and absolute return solutions. The disappearance of the moderate investor may also be due to the rate of change related to volatility in the markets. In other words, the ‘volatility of volatility’ appears to be increasing. During the last 40 years, financial crises have grown in magnitude and complexity. This is not surprising, given that the growth of some corporations through M&A mania has led to massive and complex ‘global’ companies deemed ‘too big to fail’. Global companies are connected like never before in terms of technology, and it’s the global banks that finance these companies. Governments are willing to act as a ‘lender of last resort’, where and when they can (think Iceland) in the event that a global bank or corporation fails. And of course governments have been/are willing to subject themselves to considerable financial strain.
Just as Canadians should be encouraged to manage their own healthcare needs, Canadians need to manage their own finances and retirement planning. It’s much more than whether or not your plan converts from DB to DC. It’s about knowing how to manage the pieces that form an individual’s retirement planning process. A company or industry pension plan is probably going to be a smaller part of this equation going forward. The next generation of DC participants may be the best placed for successful retirement planning, as these participants will be subjected to much stronger education resulting in higher levels of financial literacy.
Communications
by Steven Laird, Communications Consultant
Studies have shown that, while the company benefits program ranks high in importance when workers either select a job or are deciding whether to stay in their current job, a well-executed strategy for communicating the real value of those benefits in dollars and cents can positively influence employee attitudes towards the package and, overall, towards the employer. That makes the benefits communications strategy a cost-effective way to improve engagement and increase the efficiency of the benefits program.
What’s interesting to keep in mind when developing that strategy is that the life stage of the employee can be critical in choosing how to communicate those benefits.
The Prudential Insurance Company of America’s Study of Employee Benefits: 2009 & Beyond found that, for instance, the majority of single employees with dependents preferred group meetings and seminars conducted during the work day, while those who were married with no dependents showed a higher preference than other groups for e-mail received at home. Single employees with no dependents responded with a marked preference for one-on-one meetings with financial professionals during the workday.
The study also showed that married employees with no dependents were more likely than other groups to make benefits decisions using web-based assessment tools, although all groups declared a preference for reading benefits enrollment materials in making their choices.
“Interestingly,” the study states, “communications can have as much impact on worker satisfaction with benefits as the range of benefits offered or the perceived dollar value of employer contributions.”
The full study (conducted in the United States) is available on Prudential’s website. The study is enhanced by companion reports, including “Show Them The Value” which highlights the communications aspect of employee benefits.
Global Perspective
by Steven Laird, Communications Consultant
Age discrimination in the workplace is predicted to be the hot topic next year according to two items in the UK’s HR Magazine. And it’s not just older workers who complain they’re not treated fairly – younger workers have to compete for career development as their older counterparts become reluctant to retire.
Recent cases in the British High Court highlight the problems facing aging employees. Although the High Court rejected a recent challenge to the UK’s mandatory retirement age in the UK, the government plans to review the subject in 2010. Meanwhile, employers may be caught out by a recent award of damages to a professional with 38 years’ experience who was denied a top position because she was three years away from retirement.
“Some organisations still set seemingly arbitrary age limits for jobs,” writes Lorraine Head, partner in employment law firm Dickinson Dees. “At one end of the spectrum, an ‘age bar’ that excluded anyone aged 36 or over from training as an air traffic controller was found to be unjustifiable. At the other end, with much talent available for hire, organisations must be careful not to ‘over-specify’ roles, potentially leading graduates and new entrants to the market to feel discriminated against for a job they could do. Those responsible for recruitment need to ensure that candidates are recruited on merit, and job specification criteria are drafted in relation to skills.”
On the other hand, writes UK solicitor Chris Cooper, “young people in the UK risk being outgunned in the employment stakes by an active, articulate and well organized ‘grey haired’ lobby, which is effective in promoting the rights and interests of older workers.”
Recent graduates in the UK are finding jobs harder to get as employers put training and recruitment on hold. Younger workers already on the job are growing increasingly disengaged as their opportunities for career development, and for promotion, are stymied by older workers taking advantage of those same programs to stay in the workforce during downsizing periods, and by those whose plans for retirement have been put on hold by the recession.
[The latest figures from Statistics Canada show that between 2002 and 2008, the largest increase in participation in job-related education or training occurred among middle-aged people, followed by older Canadians. The trend seems to apply to us as well.]
“As a result, older workers may have driven the agenda to their advantage, particularly in relation to age discrimination, where the focus has been on the right to remain in work after the age of 65,” says Cooper. “Employers who neglect career development risk making their fears of ‘job hopping’ a self-fulfilling prophecy.”
Technology
by Karim Kurji, Director Technology Solutions
The challenges for HR keep coming. Having gone through an unusual downsizing and restructuring experience over the past year or so, HR may soon be called on to start picking up the pieces and help put the corporate house in order again.
It has been a very tough year for workers too. The fallout from job uncertainty, long hours, and diminishing pay, and a looming talent shortage, are the issues that HR will face as the economy grinds ahead to recovery.
Stuart Hyland of The Hay Group in the U.K. notes that employers “urgently need to take action to re-engage their workforce, or they risk losing the very people who would lift their organisation out of recession. Those who succeed will capitalize on the coming talent merry-go-round. Those who fail will be giving competitive advantage away.”
But for HR to succeed in its role of attracting, hiring, engaging, and maintaining a productive workforce it needs the right tools. And the process of putting those tools in place will have to be smarter, faster, cheaper, and enabled as much as possible by a new way of delivering technology.
The technology that supports that talent merry-go-round – from recruiting websites, to on-boarding tools and from benefits portals to pension modelers – too often exist in various pieces, provided by different systems and different suppliers. Little is harmonized across the board to present a consistent, seamless point of entry and look about it.
In the past that harmony was obtainable, but was an expensive proposition. It involved a significant cash outlay, long timelines, and very rigid parameters – a proposition that typically got shot down before the business plan landed in the boardroom.
What is called for is a new model for providing technological solutions to HR that makes the corporate vision more effective – including more cost effective. HR must feel confident that they’re properly equipped to deal with its strategic issues, but approaching the CFO with a plan to spend a million dollars on technology just isn’t going to cut it.
Rather, what you need to look for are service providers who can create ‘apps’ that bring your current systems online through one access point, and then build additional components to solve specific problems as you need them and can sensibly budget for them – in bite-sized pieces that grow with you, at your pace, and at a manageable cost.
Legislative Update
by David Blundell, Director Research & Compliance
Canada Revenue Agency: Errors in PAs, PARs and PSPAs
One of the biggest and most consistent non-compliance items being discovered by Canada Revenue Agency (CRA) is the reporting of PAs, PARs and PSPAs. Current CRA practice has been not to assess penalties for incorrect reporting but instead to educate the plan administrator on the need for accurate and timely reporting.
Commencing January 1, 2010 this approach will be modified. When CRA uncovers errors in PAs, PARs or PSPAs as a result of conducting an audit they will assess penalties without prior notice. Relief may be provided if you can prove to CRA that reasonable efforts were made to comply with the reporting requirements.
Penalties
The penalties for failure to file a PA, or for a misreported PA on a T4, are $100 per failure.
The penalties for a misreported PAR or PSPA are $100 per failure.
If a plan administrator fails to file a PAR Form T10 or a PSPA Form 215 then the penalty could be up to $2,500 per failure (the greater of $100 and $25 per day from the date that the PAR or PSPA was required to be filed, to a maximum of 100 days).
Also, if a plan administrator fails to file a Connected Person Information Return when required the penalty could be up to $2,500 per failure.
Voluntary disclosure of errors
Plan administrators should consider making a voluntary disclosure to CRA where they know errors or non-reporting has occurred. The main advantage of voluntary disclosure means that no penalties will be applied by CRA as long as an audit is not being conducted at that time. CRA will then work with the plan administrator to rectify any errors or non-reporting.
Canada Revenue Agency: Retroactive pension payments
The annual listing that reports lump-sum retroactive payments made during the 2009 calendar year is required to be filed with Canada Revenue Agency (CRA) by December 31, 2009.
Earlier this year, CRA implemented a new policy in respect of retroactive defined benefit pension payments which cross a tax year-end. The new policy states that where the retroactive payment is in accordance with the terms of the Plan as registered at the time of the payment, the advance approval of CRA will not be required.
The types of defined benefit payments that can be made under this new process are:
- lump sums that represent missed payments that otherwise should have been paid as of the eligible date of retirement stated in the plan as registered at that time;
- catch-up payments following the approval by a provincial authority to restore benefits previously reduced;
- benefit underpayments caused by involuntary administrative error(s) or systemic problem(s) in the calculation of the original benefit; and
- lump-sum payments to the member’s surviving spouse or beneficiaries that meet these criteria.
Written approval of prior year retroactive payments can continue to be requested from the CRA on a case-by-case basis.
Also, if retroactive payment situations arise which are deemed “risk” situations, then written approval should be requested from CRA – this could include situations that cross multiple tax year-ends or situations that involve a death, remarriage or separation.
Ontario: Specified Ontario Multi-Employer Pension Plans
The temporary solvency funding relief provisions introduced in 2007 and applicable to SOMEPPs have been extended until August 31, 2012. The temporary measures do not require SOMEPPs to make solvency payments during the exemption period. While this extension is good news for SOMEPPs, it is disappointing that the Ontario government has decided to defer the decision to make these measures permanent until late in 2012.
Ontario: Surplus on plan wind-up
The provisions which restrict an employer’s ability to receive a payment of surplus under a pension plan that is terminated in whole or in part have been extended until December 31, 2011.
These measures have been in effect since late December 1991 and the Ontario government does not appear close to resolving this contentious issue. One might be forgiven for concluding that the year 2012 appears to have some sort of special significance – besides being the end of the Mayan Long Count calendar, could it be the year in which the current government or some future government will actually deal with many of the controversial issues facing the pension industry?
Communications, Global Perspective, Health & Productivity, Investments & DC, Legislative Update, Retirement, Uncategorized
