Buck Blog

The Ontario government has announced additional funding and increased assessments for the Pension Benefits Guarantee Fund (PBGF). To the disappointment of some, the government is not increasing the minimum guaranteed pension, which now stands at $1,000 per month.

The government acted following the release of a report on the future of the PBGF: Looking Ahead PROJECTING ONTARIO’S PENSION BENEFITS GUARANTEE FUND.

The report’s solution for preserving the PBGF or even expanding the minimum pension to $2,500 is to substantially increase assessments and to provide additional funding.

The government announced it will do both, but not to the levels recommended by the report. For example the report calculates that if the PBGF is treated as an insurance fund then it should have $1 billion in reserve. Prior to the government latest announcements of additional funding the PBGF was in deficit.

The report was commissioned to review the sustainability of the PBGF. It was obvious that prior to the current increase in funding and assessment the fund was not sustainable. The bad news is that even with the announced funding and increased assessment the PBGF is still not sustainable over the long term.

Over the short term, increased assessments can help pay claims for a few years, but the report demonstrates that the greatest risk to the PBGF is the financial health of 31 companies covered by the PBGF. The failure of even one of these companies will have a significant impact on the PBGF.

The PBGF guarantees pensions for about 1 million Ontario workers whose employers have promised a defined benefit pension. It does not guarantee a pension for members of multi-employer plans or for members of defined contribution plans. Relying upon assessments as the sole source of funding will not work because the pool of employers sponsoring defined benefit plans is decreasing. Increasing the assessment only provides another reason for these employers to convert to defined contribution.

So far the government has reacted to large plan defaults on a case-by-case basis. The latest announcement does not change this strategy. What the increase in funding and assessments does do is buy the government some time to look for alternatives.

Perhaps an alternative is to devise a risk management strategy. Such a strategy might:

• Limit coverage under the PBGF to service prior to a certain date
• Create a superfund to continue paying pensions (currently pensions must be purchased from an insurance company; if/when one of the big 31 companies goes bankrupt, the Canadian insurance industry will be hard pressed to absorb such a huge number of pensions)
• Limit the PBGF to smaller plans since the larger or more mature plans pose the greatest financial risk to the coverage

The PBGF was created to protect defined benefit pensions of members and beneficiaries of privately sponsored single-employer pension plans in the event of sponsor insolvency. The PBGF has been a success in protecting pensions for many workers of small plan sponsors. It cannot succeed in protecting the pensions of workers of large plan sponsors without massive amounts of plan sponsor and taxpayer money. So the question is, how much confidence is the government willing to instill in the PBGF system so that workers can sleep well at night knowing their pensions will be protected, come what may? From my perspective, not a lot at this point.

The University of Calgary School of Public Policy has recently (July 2010) published a Research Paper “Should Government Facilitate Voluntary Pension Plans?” It concludes there are only two compelling reasons to establish large, economically efficient pension plans. The first is that they could be managed professionally and efficiently. Second, they would reduce the distraction from employers’ primary goals. The paper provides a good summary of the current debate within Canada about expanding pension coverage. Its focus is on the role of government in creating “superfunds”.

The study gives scant attention to the defined benefit (DB) plan, perhaps due to the liability attached to the traditional DB plan. While the paper does discuss longevity risk in detail, it fails to include the DB plan as a way to address that risk. I would suggest that the third compelling reason for creating large pension plans is the pooling of the longevity risk.

In Ontario it is possible to create a DB multi-employer pension plan where benefits can be reduced. That would eliminate the requirement for employers to fund future deficits. In these plans the employer’s liability ends when they make the required contribution. MEPPs already meet the two compelling reasons described in the research paper. In addition, these plans pool the longevity risk.

But current legislation limits who can create a MEPP. The research paper identifies the current prohibition against co-mingling assets, and the current definition of a plan sponsor, as the two key features that prevent establishing a non-government “superfund”. This private sector solution to increasing pension coverage only needs the regulators to eliminate these restrictions and to adopt a governance structure based on MEPPs.

More detail on MEPPS as a private sector solution can be found in the article MEPPS: The Best of Both Worlds. The Research Paper can be found on the website of the University of Calgary’s School of Public Policy.

Background
SPP Research Paper, http://policyschool.ucalgary.ca/files/publicpolicy/researchnielson.pdf.

Consider The Unheard Third™ struck a chord, but not with the executives I hoped would read it and expand their search for leaders beyond the "usual suspects." Instead, responses came from the (previously!) Unheard Third. They admit they are poor self-promoters. They hate blaring their own trumpets. They believe their work should stand on its own.

One frustrated reader said, "I spend my time doing a good job instead of telling people how great I am. Why should the braggers and schmoozers rise to the top?"

That's a little harsh, but many organizations do rely heavily on the "who you know" approach to select candidates for important positions. Why don't they use a logical and thoughtful process?

One reader said, "Business is more political than politics," but that isn't the only reason. At least part of the problem is that many organizations don't have the right information to make good talent decisions. Their talent management programs and systems are either absent or broken or disconnected from each other.

Surveys tell us that most companies don't do workforce planning, so they don't know who or what they need. They don't train managers to evaluate performance or provide effective feedback. Their performance management approaches are time-consuming and cumbersome. They don't link ratings — flawed as they are — to rewards or to high potential and mentoring programs, which aren't based on a robust succession plan and succession management process. And their "supporting technology" neither supports nor enables.

These gaps have special significance for The Unheard Third: When formal systems don't work, organizations fall back on informal systems, which often are based on personal relationships. People who don't learn to navigate the underground system of make-dos and workarounds will be invisible forever — or at least until organizations fix what's broken.

It's another riff on shared responsibility between employer and employee, a theme we've applied to Career, Health, and Wealth through Consumerism 360°. In short, when it comes to your career, don't wait to be found or asked what you want.

• Make sure your manager really knows your strengths and personal goals. Don't expect him or her to read your mind.
• Let others help promote you. Forward a note of praise from a satisfied customer to your manager so he or she gets another view of how you contribute to the company.
• If a job that you want opens up, ask for it and make the case for why you should get it. The worst that can happen is they say no.
• Network internally and on sites like LinkedIn. Post updates to your profile, add comments, or link to a blog to get your name out there.

To find more advice, Google "the art of self-promotion" and you'll get seven million hits. A good start is The Art of Self-Promotion in the Workplace by Caroline Dowd-Higgins.

And be sure to tell us what works for you!

A central focus in the debate about health care reform is whether organizations will choose to "pay or play." Recently a survey by the Society for Human Resource Management (SHRM) reported that nearly half of organizations (46 percent) have decided they will not drop health-care coverage for employees because of the effect on employee morale and job satisfaction and because they value employee health. Less than 2 percent of organizations surveyed said they have decided to drop coverage.

Of the organizations that are not dropping coverage, 34 percent made the decision without analyzing the effect that reform would have on their health-care plans. That's a mistake.

While employers must be competitive in their total rewards package, it's a very real possibility — some would even say certainty — that health care costs will continue to rise. That means responsible benefits and compensation professionals must think beyond "pay or play."

Buck Health and Productivity consultant Steve Ferruggia proposes that the new subsidized Exchanges will actually be a good deal for some workers. Further, he suggests that employers take advantage of the opportunity to reevaluate their premium contribution strategies and rebalance compensation and benefits. In other words, while the economics favor continuing to offer coverage, the rules about subsidizing it have clearly changed.

For example, a large employer that has salary-based premium contributions might switch to a level contribution approach where all workers contribute the same amount for the same coverage. The effect could easily be that lower-paid workers will opt out of the company's coverage and purchase their insurance less expensively from Exchanges.

Every employer will need to determine what portion of their workforce will be eligible for the new federal subsidies and whether some employees would be better off dropping the employer plan and moving to the Exchanges. That requires a comprehensive analysis that includes actuarial modeling and testing different scenarios, but the results can be well worth the effort: Some employers may find that they can simultaneously improve total compensation and reduce their organization’s total labor costs.

Like AT&T, Verizon, Caterpillar, and other companies reported to be testing pay vs. play scenarios, employers are facing the question of how to be competitive, survive, and thrive. In a climate where they must consider any reasonable solution, the good news is that there could be a way for both employers and employees to win.

So when your management asks, "Should we pay or should we play?" the best answer may be "both."

You can read more about Steve's ideas in the August 3, 2010 edition of Health Care Reform Magazine.

We’d like to know what you think.

Sometimes employees need to be ‘nudged’ to make the right decisions

Individuals tend to change jobs more frequently and work longer than in the past. As a result, pensions have become less relevant – and less appreciated as a benefit.

However, this reduced engagement comes at a time when members need to be more involved. Buck research published in March 2010 showed 100 per cent of the employers interviewed had either already closed their DB scheme to new employees or plan to do so in the next three years. As we move into a defined contribution (DC) world, member engagement matters.

How can we improve engagement?

Buck Consultants established the Financial Frontier Trust, a group of industry experts and academics, in January 2010. One of the discussions focused on the idea of an ‘ideal financial diet’. Just like the food we eat, our savings need to be in the right proportions – pension savings could be viewed as the ‘protein’ in that diet – a long-term, tax-exempt approach. However, there are also short and medium-term needs, analogous to carbohydrates – such as ISAs.

Unfortunately, not everyone has the same appetite for savings as they do for food! People need to be 'nudged' towards making financial decisions - just like they sometimes have to be 'nudged' towards making the right diet choices.

Nevertheless, not everyone will react positively to being ‘nudged’ – and different demographics will respond to different methods of nudging. The products on offer for savings will be one part of that process. Another is how members receive information – older members may respond better to printed information, whereas younger employees may be more influenced by social networks, or peer group behaviour.

How can this be applied in practice?

Technology has a big role to play in the process. One option might be benefit portals that provide a single centre where an employee can see their benefits to date, but also think about their retirement requirements – and even their next career steps.

Buck’s solution in the UK is its Compass system, a rewards portal that breaks down employees’ needs into three sections:

See – provides an employee with an overview of all of their company benefits. This could include former DB pensions, the value of current DC pensions, any additional voluntary contributions (AVCs), and any other benefits provided by the company.

Learn – this section uses stochastic modeling to provide best estimates on what employees can expect in their retirement, based on when they expect to retire, how much they are contributing to their savings, their appetite for risk, and what their retirement needs will be. It can also give employees information about the next steps in their careers.

Do – this section provides features for members to take practical action – from updating their details, to opening an ISA, or increasing their pension contributions.

Do you think there's an appetite now for this type of approach to benefits from employers, trustees, and scheme members? We'd like to hear what YOU think.

Sustainability-based human capital management looks holistically at moving beyond a "culture of health" to a "culture of sustainability" based on three fundamental pillars: environmental sustainability, organizational sustainability, and individual sustainability.

Environmental sustainability is what is normally considered the "green" movement...reducing an organization's carbon footprint; adopting environmentally-friendly operating and manufacturing practices; and on a micro level, working locally in the community to promote environmentally- and community-friendly programs and practices.

Organizational sustainability is about focusing first and foremost on the ability of the business to drive sustainable growth and profitability. This includes processes to continually assess strategy (vision, mission, values, markets, and competitive advantage); operations (structure, processes and practices); innovation (the "fuel" of organizational sustainability); analytics (the lifeblood of any effective enterprise) and talent (people execute and operationalize business strategy. When people execute well, it's almost impossible to replicate).

Individual sustainability is about helping people rise to their greatest level of achievement. Individual sustainability is driven by critical talent management practices that holistically engage people in their career, health, and wealth — and inspire them to achieve their greatest potential in work and life.People have an innate desire to be part of something greater than themselves.

Sustainability-based human capital management will take the individual, the organization, and the environment to the next level. Sustainability is about understanding the best of the current environment...externally, organizationally, and internally...and creating the path that will lead to perpetually improved environmental, organizational, and individual health.

How sustainable are you? Your organization?

It all comes down to clearly defining the pension fund’s investment objectives, the risk tolerance of the plan sponsor, and the sensitivity of the liabilities to movements in key economic variables.

Take the case of a plan sponsor who, like so many, wants to get out of the investment risk business, but can’t, at the present time, continue to deliver the promised pension without bearing considerable market risk.  An interest rate goal could then be established saying essentially, “If interest rates ever get to 10 percent  we want to lock in, immunize the portfolio,and eliminate our exposure to market risk.”

Of course, interest rates are currently nowhere near 10 percent and the pension fund asset mix policy is currently 60 percent stocks/40 percent bonds.  But we use a dynamic or adaptive asset allocation algorithm (see William Sharpe FAJ June 2010), that says, when the key interest rate rises, rebalance more into bonds; when the key interest rate declines, rebalance more into stocks.  And if interest rates ever do get back up to 10 percent, we’ve achieved the ultimate objective — risk free delivery of the pension promise (at least for a fixed chunk of accrued benefits).

A more sophisticated algorithm could be devised that would incorporate other factors such as inflation, longevity risk, or changes in market values of the fund assets, but the general approach remains the same. What we are looking to do is take risk off the table when it is affordable to do so. Paradoxically, what this means is that the pension fund will have a less aggressive asset mix when it could afford to take on more risk, and a more aggressive asset mix when it can least afford it. Some limits would have to be placed on the downside risk.

And ultimately this only makes sense if the pension liabilities are truly fixed. As we said up front, it all comes down to the objectives. If the hope is to grow the assets to improve benefits, a different approach is

But regardless of the investment objective, the important principle is that asset mix targets should not remain static, because the economic environment and funding levels of the plan are constantly changing.

If you are interested in “dynamic risk management for defined benefit plans” take a look at Chad Hueffmeier’s article by this name on page six of Buck Consultants’ Global View®, 3rd quarter, 2009.

As organizations emerge from the recession, one of their top concerns – in the US and abroad – is leadership and succession. According to a blog post on the Harvard Business Review website, nearly 60 percent of companies say leadership talent shortages are impeding their performance. Another 31 percent expect a lack of leadership talent to impede their performance in the next several years.

Where do you find leaders? And where especially do you find leaders who know your business? Human potential consultant Nancy D. Solomon makes a provocative suggestion: Consider The Unheard Third™.

Inside your organization is a group of people Solomon defines as "the people in the middle who, for one reason or another, fall through the leadership cracks when they're passed through or passed over." They are enormously talented and they are waiting for you to tap into their expertise and enthusiasm.

If they're so talented, you're thinking, why do they need to be discovered? They may simply lack the talent for self-promotion – or they may have given up when they got the message that they don't fit your model for leadership.

In many organizations, people can predict who will rise to the top and who won't. It's not a stated policy, but time and again, leaders seem to come from the same mold. If that sounds like your workplace, why not challenge your leadership profile and get to know the Unheard Third?

Without much effort, your leaders and managers probably can name your Unheard Third. Their backgrounds may be unconventional or their skills nontraditional. They may be the team members who consistently voice a different opinion…quietly, of course, in a small group…and who, more often than not, turn out to be right. They add value where they are, but how much more could they add if you lifted them up, gave them some coaching, and broadened their influence? The very qualities that keep them mute and invisible might make them better leaders than some of the obvious candidates, particularly those for whom leadership means power and privilege.

Not only will you find a new pool for your succession plan, but you just might energize your organization from a source of creativity and diversity that will drive innovation and competitive advantage. Give it a try – stop looking in the same place for the same kind of leaders and take a chance on the Unheard Third.

Does your organization have an Unheard Third? Tell us about it.

Do you offer an insured short-term disability benefit for your employees? An in-house salary continuance program in place, perhaps?

If you answered yes to either of these questions, please keep reading…. Reading this might save your company some money!

What I have found interesting in my travels is that some employers are not aware of the Employment Insurance premium reduction program offered by the government. The EI premium reduction program provides a reduced EI rate for having a salary continuance / short term disability program that would be first payor in the event of a short term disability, instead of solely relying on the EI program for disability benefits. Your plan has to provide, at a minimum, the same level of coverage as the EI plan (or better, as is most often the case).

The program requires you to submit details of your plan along with the applicable forms to be approved for the program. For further information, please visit: http://www.servicecanada.gc.ca/eng/cs/prp/documents/in12199.pdf.

Last week the New York Times ran an article called “Hooked on Gadgets and Paying a Mental Price.” Research shows that juggling email, phone calls, and all the other information that bombards us, keeps us from concentrating and focusing — even after we stop multitasking.

That's a problem, since multitasking also blocks creativity, the single most important leadership competency, according to 1,500 CEOs in a recent IBM report, “Capitalizing on Complexity.” A professional services CEO defined creativity as the basis for “disruptive innovation and continuous re-invention," and leaders are applying that principle to their business models, channels, customer relationships, and their leadership and communications style.

Business is growing more conscious of the importance of creativity and innovation. Two years ago the Conference Board, Americans for the Arts, and the American Association of School Administrators ran a survey called “Ready to Innovate.” It concluded that, "innovation is crucial to competition, and creativity is integral to innovation."

The skills that contributed most to creativity were the ability to spot problems or patterns others cannot see and the ability to identify new patterns of behavior or new combinations of actions. How do you develop those skills? Both educators and employers listed arts training — and, to a lesser degree, communications studies.

In that study, employers who focused on creative ability in the hiring process were given two choices:

• Hiring a creative thinker who is willing to take creative risks, and teaching him or her technical skills.
• Hiring a technically qualified employee and helping him or her develop creative abilities.

An impressive 63 percent of respondents preferred the creative employee to the technically skilled one.

This evidence should be good news for our educational system, where the arts are often "electives" and are the first to go when there are budget cuts. However, until our schools catch up, here's a short-term solution:

Before we had our gadgets, before we could text on our phones or check email, or the World Cup scores for that matter on our PDAs, we doodled when we were bored. And, guess what? Last year the journal Applied Cognitive Psychology confirmed that doodling was good for us. It actually helps us remember things because it forces our brains to expend just enough energy to stop us from daydreaming but not so much that we don't pay attention.

Even more encouraging, the website Enchanted Mind says, "When you are stuck for an answer to a problem, or looking for creative innovation, the technique of doodling will unleash the hidden symbolic powers of the unconscious mind."

So if you're like the man in the New York Times article and you're glued to three monitors and fall asleep with a laptop and a smart phone on your chest, try stimulating your brain the old-fashioned way: pick up a pencil and doodle.

Are you a doodler? Let us know how it's helped you.