Lessening the Pension Risk

Paul Litner

July/August 2013

Bev Cline, Lexpert Magazine

Paul Litner, partner and Chair of the Pensions & Benefits Department, discusses the various ways organizations can consider de-risking their pension plans.

He says a pension plan windup, “is the ultimate de-risking solution, but this is difficult to do, and requires DB deficits to be fully funded, at a sub-optimal time.”  So many sponsors “are not pursuing that option at this time, and instead are searching for other ways of managing DB plan and their attendant funding risks.”


“The well-established global trend for employers, in particular in the private sector, is to abandon the traditional defined-benefit pension-plan design in favour of a defined-contribution plan design, which shifts funding risks from the employer to plan members, or to having no employer-sponsored retirement plan at all.”

This trend also holds true in Canada, he says, “albeit the move away from DB has proceeded at a slower pace than seen in other jurisdictions such as the US and/or the UK.”

Over the past few years, says Litner, “we have seen companies in the US and the UK leading the charge on pension risk-transference options, with a number of US companies implementing lump-sum transfers and UK companies seeking annuity buy-outs.”  Canadian companies which have US and UK parents that have engaged in these pension de-risking initiatives may be asked to” duplicate such initiatives.

In this context, he says, “it is important for Canadian management to understand the legal limits on de-risking options that make US- or UK-style de-risking more difficult to implement in Canada.”  For example, “a lump-sum transfer – paying out a cash-settlement equivalent to the commuted lump-sum value of the member’s pension benefit – is likely not permitted for retirees in Canada.  While lump-sum transfers are generally permitted for active members, subject to certain limits, employers may have to pursue specific legislation permitting lump-sum payouts to retirees.”

As another example, says Litner, “an annuity buy-in is an insurance contract held as an investment of the pension plan.  As such, no top-up contribution is required for an underfunded plan and no accounting settlement is triggered.  While this solution may reduce contribution volatility, it does not necessarily remove the liabilities to fully fund the plan from the employer.”

The full article is available here.