Buck Exchangeccccccc

 Year in Review

From the editor

In this issue of Exchange, each of our consulting practice leaders offers up what they saw happening in 2010, where we’re heading in 2011, and how the 2011 agenda is shaping up for employers, benefit and pension plan sponsors, and their employees.

Employees are taking more responsibility for their careers, health and wealth accumulation for retirement, as both their employers and they themselves realize that the old way of providing benefits and managing careers is no longer workable. Mobility, technology, health, a balance between work and family, opportunities for personal growth, and building connections with their peers are driving new products and innovative programs in wellness, pensions, communications and HR technology.

For employers and plan sponsors, it’s clear that the battle for talent and the war on program costs will heat up as economies rebound. Competing in the global marketplace, managing or smart-outsourcing program administration, finding the best strategies for fund investments and ensuring adequate return on program investments are all on the new agenda. Those with a strong employer brand—built around a compelling employee value proposition that offers opportunity, education, and the right mix of compensation, benefits and rewards—will be able to attract and retain the talent they’ll need to achieve those goals.

Many organizations find they’re no longer playing in the local sandbox. Neither are we. You can learn more about how Buck’s wealth of global resources, insights and solutions can work for you by visiting our website for past articles, webcasts and downloads, or contacting any of the consultants named in this issue of Exchange.

Communications

• Keeping talent on board in 2011 will take strong HR communications

Health and Productivity

• Trusts, generics, fertility, taxes and cosmetics

Retirement

• E-filing, plan design, and new legislation
  

Investment and CAP

• Inflation, liquidity and volatility shaping 2011

Research and Compliance

• Pension reform chugs along

Communication

Keeping talent on board in 2011 will take strong HR communications

Deloitte’s 2010 Ethics and Workplace Survey found that a third of employees plan to find a new job when the economy improves. Of those who plan to leave, 46% say the problem is a lack of clear communication from company leadership. And according to a recent Gallup poll, only 29% of Canadian workers were completely satisfied with their opportunities for promotion. It’s clear that, as real recovery takes hold and companies head down the growth path again, talented but disheartened employees may easily be courted away.

Traditional compensation isn’t going to be the reason for employees changing companies. In 2011 people are looking for opportunities for growth, opportunities to learn, creative options to accumulate wealth, challenging projects and real-time recognition. Internal communication will play an integral role in keeping employees aligned and focused on the organization’s goals while emphasizing staff’s role in the journey.

Here are five of the trends and opportunities we see for HR communications in 2011:

1. Using internal talent for internal communication: Co-creation of content and publishing will improve how internal communication is perceived and conducted. The more you involve your employees in communication content creation and delivery, the greater the chances of acceptance.
   




2. Social activism and transparency: We must be able to acknowledge that any communication shared internally may find its way out. Social activism is on the rise. Unless employers understand and listen intently to their staff, and make sure their communications are open, responsive, and truthful, they will continue to be surprised when internal literature leaks out or specific company policies are discussed or appear on social networking sites. Internal communicators are responsible for monitoring staff’s participation in social media—without encroaching on their privacy—to gain insights and feedback on what isn’t probably getting shared in-house.
   




3. Internal communication consulting for department and unit levels: Employee engagement continues to be an issue as we emerge from the recession. Managing engagement at the organization level will lose traction as employees continue to demonstrate closer connection and commitment to their immediate circle of peers and supervisors. Each manager will hold immense clout over how aligned the employee in his team is vis-à-vis the firm. Internal communicators will be sought after as consultants to draw out strategies at the micro level, working with specific lines of business to communicate change relevant to their business.
   




4. Internal communication and employer branding: Building an employer brand will see greater involvement by internal communicators in crafting suitable messages and implementing relevant practices for making the organization an employer of choice. Employer branding will extend into recruitment marketing, induction programs, corporate branding and alumni connection to provide a holistic employee experience.
   




5. Managing personal brands and personalities within the organizational context: As organizations become more open to social media, employees will look to coordinate their “personal brands” in the real world and online with their personalities at work. They build their own personal equity—trust and recognition among peers in the wider world—and employers who get the engagement factors right will see a huge opportunity for brand building.
   

Internal communications needs to be seen as a strategic partnership among HR, corporate executives, and talented communicators—each combining their perspectives to deliver and make good on the corporate message that “this is a great place to work.”

For more information, contact David McCullagh, National Practice Leader, Communications Consulting (david.mccullagh@buckconsultants.com)

Health and Productivity

Trusts, generics, fertility, taxes and cosmetics

Employer Life and Health Trust (ELHT)

The Federal Department of Finance announced its intention to amend the Income Tax Act to provide flexibility in the way in which health and insurance benefits are funded.

A new type of trust, called an Employer Life and Health Trust (ELHT) has been created to allow employers to pre-fund life and health benefits. Before 2010, funding contributions to a trust were limited to the expected cost of benefits within the contribution year. Under the ELHT, employers can pre-fund future benefits.

The tax deduction, however, is still limited. Employers can only deduct for contributions that can reasonably be attributed to benefits paid within the year. Employer contributions made to fund future liabilities are not deductible in the year that the contributions are made.

There is an exception to this rule for multi-employer trusts. Contributions to a multi-employer trust are deductible as long as they are based on the terms of a collective agreement or other specific measure—i.e. hours worked.

Employers who self-insure their LTD should consider funding it through an ELHT, since this would provide greater security for future benefits should the company face bankruptcy. Any companies facing the threat of bankruptcy may want to consider settling their OPEB (post-employment benefits) liability through a trust.

The generic drug landscape has changed significantly in Ontario for private plan sponsors. The Ontario government has introduced legislation to reduce generic drug costs significantly in coming years.

Some examples of changes that have been put in place include:

• A reduction of generic drug prices to 25% of brand name drug prices by 2012 (an average of about 40% savings over current costs)
  




• The elimination of professional allowances paid by generic manufacturers to pharmacies)
  




• An increase in allowable dispensing fees under the public plan to offset loss of revenue from elimination of professional allowances)
  

Similar changes are also in process in British Columbia and Quebec.

Plan sponsors will see savings to their drug costs—the amount of savings dependent on what type of drug formulary is in place (i.e. mandatory generic substitution), however, we expect that the savings will be offset by increases in other drug plan areas such as introduction of and increase in utilization of high cost biologics.

Plan sponsors are still encouraged to closely manage their drug plans.

Fertility drugs in Quebec

Effective August 5, 2010, the Quebec government expanded provincial health coverage to include the costs associated with “assisted procreation” for couples who need this treatment. Qualifying Quebec residents are now covered for both the treatment and drug costs associated with in-vitro fertilization (up to 3 stimulated cycles) and other fertility treatment (up to 6 natural or modified natural cycles). As a result of this legislation, a number of fertility drugs have been added to the RAMQ drug formulary, with all but one of these drugs classified as “exception”. Drugs with “exception” status are not approved immediately for payment, but require special authorization in order to be paid.

Since legislation in Quebec requires that private drug plans provide coverage at least equal to that provided under RAMQ, private plan formularies are being amended to include these fertility drugs for residents of Quebec. In order for plan sponsors to pay only what is required by legislation, it is important to ensure that in adding these drugs to private plans, insurance carriers are also classifying them as “exception”. Carriers should ensure that claims for these drugs are held to the same approval standards as those processed under RAMQ.

Employers that do not currently cover fertility treatment should also be aware that this legislation may generate complaints of inequality from employees outside of Quebec who do not receive the same coverage.

While the cost of fertility treatments can be substantial ($2,000 to $5,000 per cycle), the number of treatments within a given population is generally quite low. This change could have a signficant effect on health costs for smaller companies with employees resident in Quebec. For the majority of companies, however, the cost impact is expected to be minimal.

Introduction of Harmonized Sales Tax (HST) in Ontario and British Columbia

The Harmonized Sales Tax is the combining of the Goods and Services Tax (GST) and the Provincial Sales Tax (PST). In most cases, if an item or product attracted GST, the item or product now attracts HST, noting that there are some exceptions to this rule.

For benefit plan sponsors, the HST does not apply to regular insurance premiums but does apply to administration, service and consulting fees and Administrative Services Only (ASO) claims costs if the contract is without stop loss insurance. This change was effective July 1, 2010. The HST rate is 13% in Ontario and 12% in British Columbia.

Most medical expenses are exempt from HST, with the exception of massage therapy. Where in the past only the GST was reimbursed under health plans, now HST will be reimbursed. Employers need to be aware that they will see an increase in their paid claims for massage therapy, since the plans will now be covering the cost of HST for those services.

Exclusion of cosmetic coverage under private plans

As announced in the 2010 Federal Budget, after March 4, 2010 cosmetic surgical and non-surgical procedures for purely esthetic reasons are ineligible for the Medical Expenses Tax Credit. Since the tax status if healthcare spending accounts (HSAs) is linked to eligibility under the Medical Expenses Tax Credit, cosmetic procedures for medical or reconstructive purposes will continue to qualify under HSAs. But purely esthetic types of cosmetic procedures will be ineligible.

We recommend discussing this change with your claims adjudicator and also reviewing any documents outlining plan coverage (i.e. contracts; employee booklets) to ensure that they reflect this change.

For more information, contact Michele Bossi, National Practice Leader, Health and Productivity Consulting (michele.bossi@buckconsultants.com)

Retirement

E-filing, plan design, and new legislation

Ontario allows e-filing for Annual Information Returns (AIRs)

The Financial Services Commission of Ontario (FSCO) launched their new electronic filing procedure through their online portal. With e-filing offered as an option for now, we suspect that its only a matter of time before e-filing becomes mandatory.

In order to take advantage of the AIR e-filing option, a specially formatted XML file has to be prepared and uploaded to the FSCO portal. All information that is required in the existing AIR in paper format must continue to be provided when e-filing.

Buck was the first consulting firm to offer an e-filing solution to its clients. (If you are interested in taking advantage of Buck’s environmentally-friendly, specialized AIR e-file software, please contact Darren Klorfine (darren.klorfine@buckconsultants.com).

Defined Benefit (DB) plans continue their slow decline

Just two or three decades ago, employer-provided DB pension plans were the primary means of saving for retirement in Canada. But since that time, defined contribution (DC) plans and group RRSPs have become the principal form of retirement saving in the private sector. In 2010 that trend continued unabated.

“The movement toward defined contribution (DC) plans appears to be maintaining a steady path away from the liabilities and headaches of DB plans,” said Kevin Sorhaitz, Principal and Consulting Actuary at Buck. He adds “providing adequate retirement savings for workers remains a priority for private-sector employers, but just not with DB plans.”

“As the economic climate improves in 2011, we fully expect to see the trend away from DB plans to continue in the foreseeable future. Employers will be better positioned to take advantage of recent legislative and regulatory changes that make cash balance plans more appealing to them and to their employees” he said.

Defined benefit plans remain an important form of retirement saving for public sector employees, although even for these employees personal retirement accounts are becoming increasingly important.

Target Benefit Plans emerging as strong alternative to private sector DB plans

Several proposals surfaced in 2010 that propose new forms of pension plans. As most are aware, the third pillar of the Ontario pension system, covering employer-sponsored pension plans, needs strengthening. DB plans are not working for most employers in the private sector due to escalating costs, unaffordable benefits and increasing administrative complexity. On the other hand, DC plans are not working for most employees as many will be surprised to find insufficient funds at retirement primarily due to the investment and longevity risks burdened on them.

One proposed solution supported by Buck is Target Benefit Plans (TBPs), as they offer the best of both the DB and DC worlds and can be a very real solution to the ever-growing problem of decreasing pension plan coverage for Ontario workers.

In November 2010, Buck made a written submission to the Ontario Ministry of Finance Standing Committee on Finance and Economic affairs advocating the adoption of TBPs.

Changes to Ontario Pension Legislation

Two Ontario bills—Bill 236 (Pension Benefits Amendments Act, 2010) and Bill 120 (Securing Pension Benefits Now and for the Future Act, 2010)—received Royal Assent. Both bills amend the Ontario Pension Benefits Act (PBA). Most of the amendments will not take effect until sometime in 2011, as many require new regulations to implement.

The most significant changes resulting from the passage of Bill 120 include:

• Expanded provisions for target benefit plans
  




• Changes to the funding rules for DB plans
  




• Changes to the Pension Benefits Guarantee Fund (PBGF)
  




• New provisions relating to surplus withdrawals
  

Among the most noteworthy changes that will be brought about by Bill 236 are:

• Immediate vesting for all service
  




• Entitlement to grow-in benefits for all involuntary “without cause” terminations of plan members who have 55 age plus service points
  




• The elimination of partial wind-ups
  

Bill 236 also creates new Pension Advisory Committee rules, relaxes the threshold for the commutation of small benefits and makes some changes to member notice requirements.

Buck will keep you updated as new developments in pension products, reforms and regulations become known.

For more information, contact H. Clare Pitcher, B.Math, F.S.A., F.C.I.A., Principal and Consulting Actuary, National Retirement Practice Leader (clare.pitcher@buckconsultants.com)

Investment and CAP

Inflation, liquidity and volatility shaping 2011

Highlights of 2010

• Canadian equity performance across broad- and small-capitalization was strong, fuelled by continuing demand for commodities.
  




• Canadian fixed income also posted strong results as yields continued to fall and bond prices rose (see more below).
  




• U.S. and EAFE results were also strong in local currency terms.
  




• Unhedged investors were stung as the Canadian dollar strengthened by about 5% versus U.S. greenback and 11% versus the euro.
  




• GDP growth in Canada, other developed markets and emerging markets, exceeded expectations with diminishing signs of a double-dip recession.
  




• Money pumping into the system was a cause for concern over possible inflation—a concern that wasn’t realized in 2010.
  




• The threats of the global banking and debt crises were also not fully realized, although debt crises in the smaller European countries (Greece, Ireland) posed continuing threats.
  

The return environment was generally good for Canadian investors. An equally important consideration for defined benefit (DB) pension plans was the impact from interest rate changes:

• Yields continued to fall with the 30-year AA bond yield dropping from 6.5% at December 31, 2009, to 5.5% at December 31, 2010.
  




• A 1% decrease in AA yield rates increased the accounting liabilities of a single employer DB plan with a duration of 15 years by around 15%.
  

Notable developments: Pooled Registered Pension Plans (PRPP’s)

The Department of Finance proposed a new type of retirement vehicle, the ‘PRPP’, in an effort to increase pension coverage. While it is speculative to look at the advantages and disadvantages of a proposed retirement arrangement, we see a number of pro’s and con’s to the PRPP.

The good

• Increased pension coverage: Employers would be required to offer this if no other ‘savings or pension’ arrangement is offered. Members would have to specifically ‘opt out’ in order to not participate.
  




• Lower cost to employer: Under the arrangement, the employer is not the plan administrator, does not have to contribute to the plan, and except for choosing a financial institution to administer the PRPP, enrolling members, remitting the member contributions, and informing the “administrator” of terminations, employers effectively have no other responsibilities.
  




• Lower cost to member: The pooled fund nature of the plan is meant to enable more people to benefit from the lower investment management costs that result from membership in a large pension plan.
  




• Plain language disclosure is promised, including an annuity quote based on each member’s plan assets.
  

The challenges

• May not increase pension coverage if large numbers of members opt out. Employees not currently using RRSP room may have more pressing needs for their cash (financial hardship or basics such as food, clothing, lodging etc.).
  




• The cost to member may not be significantly decreased. Providers eligible to offer this product are limited to financial institutions (in Canada this gives market control to a few large institutions with already high fees versus other developed CAP markets). Requiring the financial institution to take on a fiduciary role may actually increase member costs, and there are the clear additional costs of provincial regulation.
  




• Limited member flexibility: This may be the only way to achieve reasonable expense levels.
  




• Lack of benefit certainty: Since this is a money purchase arrangement, each member’s entitlement will rise and fall with market conditions.
  

In general, based on the information provided so far, it is not clear what the advantages of the PRPP are over an omnibus group RRSP that everyone is allowed to join.

This is a draft document meant for discussion and agreement among the provincial and territorial jurisdictions by the summer of 2011. Accordingly, there will be time for interested parties to make submissions.

Looking Ahead to 2011

Printing money eventually will have to come to a stop. Inflation risks are becoming more pronounced, and many countries including Canada have yet to address fiscal imbalances: stagflation (high inflation and unemployment) are reasonable long-term risks.

Large-scale public sector retrenchments could trigger another liquidity crisis. The banking crisis is far from over and the workout has only begun—bank capital remains vulnerable to asset volatility and potential impairment, highlighted by the continuing trend of some foreign governments still underwriting banks.

Investment management perspectives

The markets appear to be flying blind—many managers say stocks are at ‘fair value.’

Asset allocation will be a critical investment management decision, and the focus will be on volatility and currency trends. With the Canadian dollar at a high versus long-term trends, investors might consider investing outside of Canada to take advantage of increased purchasing power.

Bonds are vulnerable to interest rate shocks, suggesting that equities could reasonably be expected to out-perform bonds in 2011.

For more information, contact Peter C. Arnold, CFA, National Practice Leader, Investments and CAP Consulting (peter.arnold@buckconsultants.com)

Research and Compliance

Pension reform chugs along

In our 2009 Exchange review, we expressed our view that 2010 was going to be a year in which “change is all around us”. The year didn’t disappoint, as most provincial governments took steps to address coverage and retirement income protection issues.

The Manitoba government finally brought into force its revised minimum pension standards legislation, effective May 18, 2010.

The Ontario and Federal governments passed legislation to strengthen minimum pension standards legislation. A small number of changes are in force now. However, the most significant changes still need to be implemented.

Prince Edward Island has publically said it wants to implement minimum pension standards legislation in 2011. A draft bill was tabled in the Legislative Assembly in late 2010, but won’t proceed until public consultation sessions are concluded in 2011.

The Federal government was busy during 2010 on non-pension issues and introduced a new tax vehicle (Employee Life and Health Trust) to permit the funding of group life and health insurance benefits. This should attract attention from companies who self-insure long term disability benefits.

New Brunswick appointed a task force that will move forward with public consultations, to examine the sustainability/protection of private pensions. This will inevitably lead to changes to minimum pension standards legislation.

Quebec continues to modernize its minimum pension standards legislation in order to protect and secure retirement income for its residents. The latest measures allow employees of an employer that is in financial distress or that is under bankruptcy protection to elect to have the value of their benefits administered by an arm of the Quebec government.

Last but not least, the Saskatchewan Pension Plan has been modified to permit increased contributions up to $2,500 per year and add more transfer option flexibility. While marketed solely in the Province of Saskatchewan, membership in the Saskatchewan Pension Plan is in fact open to all Canadians. (While other jurisdictions have found it hard to make up their minds on how and what to use to increase coverage (or even if they want to), Saskatchewan has been quietly going about addressing the problems for the last quarter century.)

Meanwhile, Alberta, British Columbia and Nova Scotia are still all contemplating how to implement the recommendations of their “expert” committee reports, and we expect the industry will see action on this front in 2011. Nova Scotia completed its second series of consultations in early summer; we should expect to see announcements from them in 2011.

Pooled Registered Pension Plan

This has all happened against the backdrop of a national debate on whether the Canada Pension Plan (CPP) should be expanded and, if so, how and when. While it appears that the CPP debate has been quelled for the time being, in December the Federal government proposed an alternative solution. The proposal is to support a new type of “low cost” defined contribution pension plan (Pooled Registered Pension Plan) which would, on the surface, expand pension coverage on a national basis for unrelated employers and employees who do not have pension coverage, as well as the self-employed. Rather than the Pooled Registered Pension Plan being administered by the federal and provincial governments, it was proposed that the financial services industry would assume administrative and fiduciary responsibility for any plans established under this initiative.

(For a further description of the PRPP, see the Investments and CAP section of this issue of Exchange.)

Outlook

The one disappointment in 2010 was that the cycle of change has not been fully completed. Nevertheless, the legislative groundwork for change has been laid. Over the course of this year and into 2012, we anticipate that both Ontario and the Federal government will put the finishing touches to their pension reform solutions. A number of the smaller provinces will move to introduce and finalize pension reform. And the new defined contribution pension program (Pooled Registered Pension Plan) will be launched, which will be the first step in expanding coverage.

Another busy and exciting year!

The courts: The Importance of Pension Plan Communications

Claims of negligent communications (or negligence due to the lack of communication) is a recurring theme in pension litigation. In 2010, this issue arose in the context of a conversion from a defined benefit (DB) plan to a defined contribution (DC) plan in a B.C. lawsuit (Dawson v. Tolko Industries Ltd.). The lawsuit is still pending and a decision has not yet been rendered by the courts.

Members of a DB pension plan were given a one-time option to choose to convert their accrued benefits to DC and participate in a DC pension plan going forward.

The primary basis of the lawsuit (instituted by the members who chose to convert) is that their benefit under the DC plan is much less than it would have been under the DB plan.

The allegations made by the members relate to the communications (written materials and information seminars) provided by the employer and its advisors which formed the basis for their decision as to whether or not to convert.

Among other things, the members allege that written materials provided to them were negligently misrepresented, and that the employer and its advisors failed to advise them of the personal considerations which they ought to have in mind when deciding whether or not to accept the offer to convert accrued DB benefits to DC, and failed to advise them of the risks associated with the transfer of the value of those benefits to a DC plan.

This lawsuit serves as a reminder to plan sponsors and administrators of the importance of communications to pension plan members—that is, the importance of both ensuring that information which may be relevant to member decisions is communicated to them (as opposed to omitting to provide such information) and in preparing those communications, ensuring that they are accurate, consistent, sufficient, and not misleading or capable of misinterpretation.

Once a court decision is rendered, we will advise you of its possible impact.

For more information, contact David Blundell, Director, Research and Compliance (david.blundell@buckconsultants.com)

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Communications, Global Perspective, Health & Productivity, Investments & DC, Legislative Update, Retirement, Technology, Uncategorized