DB plan sponsors are engaged, not complacent, says Eckler

Each month at BPM, we offer a slate of articles and content pieces that go deep on a particular topic. This month, we're focusing on defined benefit (DB) plans.

As Canadian defined benefit pension plans continue to sit in surplus territory, the question on plan sponsors’ minds isn’t whether to act on it but how, noted Natasha Gajdemski, director of pension at Eckler.

Funded positions have held and even climbed over the past couple of years all while the initial caution sponsors felt has given way to steady engagement, explained Gajdemski. Nearly all of her plans now involve some form of regular monitoring, but the depth of the conversation differs from one sponsor to the next, she said.

DB sponsors are engaged, not complacent

Moreover, unlike other recent arguments that have been made by pension experts, Gajdemski doesn’t think that well-funded plans are breeding complacency.

“Sponsors are generally engaged. They really want to be having this discussion,” she said. “It's not that they're complacent, it's that they need to understand the technical parts and the tools that they need to make decisions.”

"It's quite a common conversation, but how each company approaches it is very different. For most of them, it involves constantly monitoring how the plan is doing but then for some, it's actually guiding them through implementing the changes they're making to either de-risk or use that surplus," Gajdemski explained.

What an effective DB surplus strategy looks like

To that end, Gajdemski emphasized an effective surplus strategy comes down to knowing what levers are available and under what conditions to pull them. In practice, that starts with monitoring, she said, understanding the plan's current funded position and then projecting how liabilities are likely to develop over the coming years.

That forward-looking modelling is where the real value lies, she said, because it shifts the focus from a static snapshot to a range of possible outcomes, exposing both risks and opportunities that weren't visible before.

"When you start modeling into the future, that's when you start to see what opportunities or risks we’re looking at. You're no longer just focusing on a past point in time. You're now projecting uncertainty, which comes with risk and opportunity," said Gajdemski, adding from there, sponsors can start evaluating the specific actions open to them and how each one would alter the plan's trajectory.

When surplus monitoring becomes effective

Yet, the purpose of monitoring has fundamentally changed, said Gajdemski, noting how it used to be a defensive exercise, where plan sponsors would watch for sudden downturns and track solvency on a short-term basis.

Now, with surplus rather than special payments defining the landscape, it has become a proactive planning tool. Sponsors are using it to track going concern positions and map out what they want the next five to ten years to look like in terms of plan costs and funded status.

Contribution holidays - a temporary period when regular payments into a DB pension plan are paused or reduced - have also moved to the centre of the conversation, with sponsors projecting how long a holiday could last and when a mandated one might be triggered, she noted.

"Anytime you're trying to communicate big changes, it's better for everyone to get ahead of that,” she said. "Sponsors need to consider how they’re going to come up with a strategy of letting members know what this means, why it's happening and the steps they’re taking now that this could be a reality for them," she said.

Why the consultant relationship shapes DB surplus outcomes

To that end, an effective surplus strategy also comes down to the consultant relationship, said Gajdemski. She emphasized how sponsors should feel confident that they're getting clear, accessible guidance on what their options are and how to act on them.

Right now, she considers that especially important, particularly as the technical complexity of surplus management can be a barrier. On the reactive side, she points to contribution holidays as a concrete example as the Canada Revenue Agency (CRA) rules force sponsors to stop contributing once surplus crosses a certain threshold, which removes the decision from the sponsor entirely, she noted.

Should DB sponsors use surplus or de-risk?

The most common questions sponsors are working through, Gajdemski noted, fall into two broad categories: whether to use the surplus - through contribution holidays or benefit improvements - and whether to de-risk to protect it over the longer term.  

According to Gajdemski, de-risking most often takes the form of annuity purchases or changes to the plan's asset mix. Helping sponsors navigate those decisions also ties closely to governance, said Gajdemski, pointing to recent guidelines from Financial Services Regulatory Authority (FSRA), Ontario’s pension regulator.

"They recently put out more guidance saying that sponsors and administrators should have a governance framework and a risk framework related to their pension plan, and they should be documenting it," she noted. "It's creating a process for how decisions are made related to the plan and how they’re thought through. It’s all written for a company to follow."

When it comes to timing, Gajdemski suggests there’s no wrong moment to start putting monitoring in place and working through how decisions around the plan should be made. After all, market downturns are unpredictable, which is precisely the point.

Additionally, with FSRA's recent push for documented governance and risk frameworks, the current environment gives sponsors a chance to tackle surplus strategy and governance requirements in tandem, making the timing particularly practical for plans that don't yet have those structures in place, she said.

Ultimately, the real surplus gap, if it exists, is on the information side, Gajdemski underscored, particularly for sponsors who aren't engaging their consultants or aren't getting the clarity they need to evaluate their options. While there was more hesitancy in the surplus cycle, she believes that has since shifted, as most sponsors are now asking whether this is a conversation they should be having at all.

Moving forward, Gajdemski emphasized how sponsors "need to lay the groundwork before making any dramatic changes to take advantage of an opportunity for the company," adding that often means monitoring the plan's current funded position, understanding the level of risk exposure, and mapping how the plan is likely to evolve under the status quo based on broader corporate strategy.