PBI’s Apples & Oranges Multi-Employer Pension Plans Benchmarking Study is the only Canadian specific to collectively bargained multi-employer pension plans. It examines 70 plans with 1.3 million members and over $88B in assets under management from construction, healthcare, telecommunications, and numerous other sectors. Apples & Oranges examines plan design, investment strategy and risk management and offers a glimpse into the perspectives of plans following the pandemic.
The plan provisions from the various participating pension plans come in all shapes and forms, so in order to benchmark them against one another, plan provisions were converted to a consistent basis to ensure a fair comparison. What began as apples and oranges transformed into apples-to-apples.
|Figure 1||Figure 2|
|Figure 3||Figure 4|
Contribution rates (Figure 1) – Money going into the plan, expressed as the average contribution rate per hour worked.
At the end of the day, contribution rates are what they are, and fixed as per collective bargaining agreements. Contribution rates ranged from $1 to $20 per hour, with an average of $5 per hour.
Basic benefit rates (Figure 2) – Annual pension benefit earned expressed as a percentage of the contribution rate.
Benefit formulas can be expressed in many ways, including final average earnings, career average earnings, or flat dollar benefit. To compare the participating plans, basic benefit rates were converted to a uniform basis based on a percentage of contributions. Basic benefit rates ranged from 6% to 19%, with an average of 12% of contributions.
Adjusted benefit rates (Figure 3) – In addition to basic benefits, plans use various ancillary benefits to sweeten the pot for members.
It is interesting to see that since the first Apples & Oranges study in 2016, the number of plans offering early retirement subsidies has been decreasing. Additionally, the most common form of ancillary benefit continues to be a normal form other than life only, with guaranteed payments and/or survivor benefits.
To reflect the value of these ancillary benefits, the basic benefit rate was adjusted accordingly. On average, ancillary benefits improved the basic benefit value by 25%. Adjusted benefit rates ranged from 6% to 26%, with an average of 15% of contributions.
Risk Efficiency Index (REI) (Figure 4) – When a plan decides to undertake some level of risk, through either the underlying investment strategy or some other aspect of the plan, they do so with the expectation of gaining some reward or additional benefit. Otherwise, why do it? PBI has developed a unique concept to give plan sponsors an indication of the reward vs. risk trade-off within a pension plan. The REI is a valuable tool for making important decisions regarding risk management.
The REI is defined as the adjusted benefit rate per unit of risk. It’s an index that determines the “bang for the risk buck”, or how well members are being rewarded for the level of risk being undertaken by the plan. The higher the REI, the more effectively the plan is putting its underlying investment risk to use. The REI for plans in the study ranged from 0.5 to 2.7, with an average of 1.5.
COVID-19 and Pension Plans
The pandemic affected everyone and everything. Generally, the perception from surveyed pension plans was that the worst was over, and they were not expecting much additional impact.
How did plans react to the pandemic?
- No plans reduced accrued benefits
- 8% of plans increased their contribution rate
- 17% of plans reduced their future service accrual rate in some way
- 27% of plans made a change to their investment mix
- Approximately half filed early valuations because of the uncertain environment
- And approximately half upped their communication efforts to members
Where does your plan fit?
Using tools like Apples & Oranges will provide valuable insight into your plan and where you fit in the universe of similar plans, or better yet, among your peers. It can help to identify areas of strength and opportunities for development, and hopefully spark a conversation about how to improve your results. As time evolves and we are hit with unprecedented events, what may have worked well 10 years ago for your plan may not be the best way forward. Staying current and thinking ahead will help your plan be better prepared for the future. And while there is no one-size-fits-all solution when setting funding and benefit objectives, all plans should be aiming to optimize risk for the benefit of their members.
This is the third iteration of the Apples & Oranges Benchmarking Study, and as with all studies, the underlying data grows richer as participation increases. If you would like to participate in the next study to increase your pension-related knowledge, you can learn more and sign up here: pbibenchmarking.ca