“Experts at Mercer highlight the many ways the pandemic is affecting defined benefits in Canada.”
By Rick Baert
COVID-19’s impact on business is also being felt in the administration of corporate defined benefit plans in Canada, as sponsors’ uncertainties following the sudden shutdown of the global economy extend to the future of their retirement plan operations.
“We’re always trying to emphasize with our (DB) clients about tail events, black swan events,” said Bill Watson, partner and retirement plan business leader at Mercer (Canada). “We never stopped having those discussions when we’re looking at long-term risk management.”
However, as a result of the coronavirus pandemic, “There’ll be a new lens on risk management and maybe a broader net,” Watson explained. “There’ll be financial elements, but also elements of resources and governance, the ability to do administration. We’ll see a little more attention from executives when we raise these negative scenarios.”
One of the chief uncertainties sponsors face is how to categorize employees who have been furloughed, he said. Are these employees still active participants in their employer DB plans? How are their employment statuses classified legally?
“There’s something that we haven’t seen before,” Watson said. “Companies are coming to us with different statuses or scenarios with their employees, some are wondering what happens to their work force if this continues, and now with government actions taking place, there are new categories of employees.”
He added, “They’re not exactly being terminated. They want to put them in some sort of leave program so when (business) does pick up, they have access to their skilled workforce. That creates some unique scenarios.”
“Should pension coverage continue during this time? Can coverage continue?” Watson asked. “That’s where our administration team will work with our actual team and legal team to go through the specifics of each case and say here are the options for people.”
The constant in these questions, he points out, is that “everyone wants to make this the least disruptive as possible. Everyone’s trying to keep things going. So no one’s looking for ways to disrupt.”
One potential disruption, however, is dealing with the complexity of Canadian pension regulation — usually the responsibility of each individual province rather than the federal government — which makes providing solutions to employee classification under extraordinary conditions like a pandemic more complicated because regulations can differ by jurisdiction.
“There’s no clear one-size-fits-all,” Watson said. “Every case is different.”
Client questions have also focused on a potential rush for lump sum pension payouts as more employees are laid off, according to Joseph Tang, Mercer principal and pension consultant. When employees retire under normal conditions, pension plans can either make lump sum benefit payouts or annuitize those payments.
“The concern is if we may see more terminated members in a short while, if they choose to take a lump sum option, that could have a negative impact on the funded status of the plan,” Tang said.
“Some may have to make additional contributions to their plans to offset the negative impact. For others, they may want to just pay out a portion of the lump sum and defer a portion to later mitigate the impact on the pension plan,” he explained.
Mercer’s actuarial, legal and administration teams work with clients to develop solutions to fit their specific needs and help them submit their proposals to the respective governments for approval, Tang states.
Differences among plan jurisdictions “is the other wrinkle,” said Peter Robillard, operations lead for Central Canada at Mercer. For example, in klakte March, the federal government changed rules for the transnational pension plans it regulates to now ban lump sum payments.
The changing nature of rules “does complicate matters,” Robillard said. “It requires a lot of organization with consultants, clients and our people.”
Mercer has not seen a large increase in the number of employees retiring as a result of COVID-19-related furloughs or layoffs, he adds, but there have been more requests from retirees with deferred pensions to access those assets early.
“People are asking to access funds that they might not have accessed in the past,” Robillard said. “But it’s a short sample right now. We’ll have a better idea of how many are doing this about a month down the road.”
In terms of a surge in request volume, “everyone’s already anticipating that,” according to Tang. “In terms of financial hardships, it’s very plan-specific and jurisdiction-specific, and internally we look at different scenarios. In those situations, they are handled on a case-by-case basis. But in terms of a surge of requests, everyone is anticipating that, and we’re mobilized to meet that demand.”
Such administration concerns are dovetailing with problems of declining investment returns hurting cash flow and liquidity, says Watson, but those concerns also were prevalent during the financial crisis of 2008-2009. And while the cause of the current crisis differs from the one 11 years ago, the previous crisis provided somewhat of a blueprint for sponsors and administrators to build their response today and not react hastily.
“If we’ve got sponsors who lived through (the financial crisis) volatility and they’ve seen the decline and slow restoration of assets, they’re more prepared to keep an eye on the long term … and less likely to have a reaction,” Watson said.
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.