“Employers with DB plans attract employees, and those employees are more engaged,” said Derek Dobson.
By Rick Baert
Colleges of Applied Arts and Technology Pension Plan’s DBplus program has benefitted from a derisking trend among Canadian pension plans, making mergers with the Toronto-based pension plan more attractive, said Derek Dobson, chief executive officer and manager.
CAAT, which had C$10.8 billion in assets as of Dec. 31, 2018, should almost certainly see those assets increase exponentially when 2019 assets are reported later this year. That’s because 13 employers either merged or planned to merge with CAAT through its DBplus program in the past year, the latest being the C$25 million pension plan of the United Way of Greater Toronto.
Derisking has been “one of two main drivers” for the 15 employers who merged with CAAT since the C$10.8 billion plan began offering to acquire pension plans through its DBplus program in 2018, Dobson said. CAAT can assume assets and liabilities of merged plans “on a more cost-effective basis” vs. employers transferring defined benefit assets to the annuity market, he explained.
“Any shortfall [in assets] can be smoothed over a long time horizon” through CAAT’s DBplus program, according to Dobson. “Annuities can’t do that.”
Removing pension liabilities from corporate employers’ balance sheets by merging with CAAT is also a derisking benefit, he explained: “For chief financial officers, it’s defined contribution accounting with DB benefits. A frozen DB plan still has up to a 70-year runway before the last participant passes away. We take that all off their books, both past and future liabilities.”
The other driver of merger interest has been the attraction to prospective employees of companies that continue to offer a defined benefit plan, Dobson said. “Employers with DB plans attract employees, and those employees are more engaged,” he noted. “There’s lower stress for employers” with DB plans “vs. other retirement vehicles. Their people retire when they’re ready and when employers are ready.”
Offering DB plans keeps employers — both corporate and public — from suffering “envy risk,” where employees with target benefit plans, defined contribution plans or annuitized benefits are envious of those with traditional and sustainable pension plans, Dobson said. He cited industry estimates that only up to 9% of corporate employers offer DB plans, and that number is expected to drop a percentage point each year, while 80% of public employers offer DB plans.
For CAAT, whose original pension plan targets Ontario college teachers and other university-related employees, broadening their overall employer list to include non-education industries both inside and outside Ontario is beneficial, as is expanding its asset pool for investments: “Added scale comes with its advantages,” he explained. “CAAT as well as member employers can invest in any asset class because of scale.”
CAAT’s asset allocation, including its 17% real asset, 9% private equity and 5% real return bond allocations, is more accessible as assets increase, making investing in those expensive asset classes more cost-effective.
Plus, mergers make those investments accessible to smaller plans that would not be able to afford the high costs of those investments if they tried to invest on their own, Dobson said.
“From the investment perspective, nothing changes with the addition of DBplus as it’s still just one plan but with two designs,” said Julie Cays, CAAT’s chief investment officer. “So [it’s] just one fund with one investment policy — with more assets to manage.”
DBplus’ continued attraction to Canadian employers has raised CAAT’s expectations of future growth, Dobson said. In CAAT’s 2018 budget estimate, it was assumed that DBplus would increase CAAT’s overall participant total from 50,000 to 100,000 by 2027. In its 2019 budget estimate, he said, “that expectation is 300,000 just based on the interest we’ve seen.”
Rick Baert is a freelance journalist who specializes in covering institutional money management, trading and asset servicing. He is a retired editor and reporter with 42 years of experience with financial, business and daily news services. Rick has covered the Canadian pension fund industry for the past six years.