Pensions, Benefits Trends 2015

By: Nienke Hinton

As we progress into 2015, Benefits and Pensions Monitor spoke with industry leaders and asked them what plan sponsors are talking about. Here is what they said:

Mental Health

The effect of mental health in the workplace continues to be a hot topic going into 2015. It is the biggest cause of disability claims, absenteeism, and presenteeism in the workplace. Mental health problems and illnesses are the cause of approximately 30 per cent of short- and long-term disability claims in Canada. The Mental Health Commission of Canada (MHCC) says it costs employers roughly $20 billion so it has developed a psychological safety standard for the workplace and the response has been overwhelming.

Employers are starting to look at the increasing burden of disability due to mental health,” says Beth Dunton, senior market access manager, private payers, at Lundbeck Canada Inc. “Employers recognize that if they address mental health and support employees, they will benefit because there will be a reduction in claims, absenteeism, and presenteeism. They are looking at their benefits plans to make sure they are aligned to support their employees. Are they including enough support as far as counseling and services? Are they doing health risk assessments? Are they tackling stress in the workplace? Do they have EAP support? Is there benefit design support; access to new treatments?”

Dunton says she thinks this trend will continue. “We will see more employers taking part in manager training programs as to how to foster a healthy workplace and what to do when an employee is ill. To assist with improving the lives of people living with mental illness, Lundbeck says Canada has recently developed a partnership with organizations such as the Mental Health Commission of Canada and Excellence Canada to create a challenge for employers to adopt the ‘National Standard of Canada for Psychological Health and Safety in the Workplace,’ the voluntary standard put out through the MHCC.

“Employers are also starting to learn more about what the face of depression looks like,” says Dunton. “The face of depression is not necessarily somebody who just has sadness. A lot of the time they have symptoms such as difficulty remembering things, concentrating, and paying attention. Those are the symptoms that may have a bigger impact in the workplace. Those are the ones that drive presenteeism. You may have employees that work, but they may not be all that productive because of symptoms like those.”

Dunton says that more resources are becoming available. She recommends the ‘Mental Health in the Workplace Resource Booklet)’ put out by the Mood Disorders Society of Canada.

Conor Quinn, vice-president, group benefits insurance, the Cooperators Life Insurance Company says Cooperators has adopted some of the standards (the ‘National Standard on Psychological Health and Safety in the Workplace’ by the Canadian Mental Health Association) and continues to work with and support the association by sponsoring events.

He would encourage large plan sponsors to continue to look at a co-ordinated approach to their employee engagement and wellness programs. He mentions this because he knows that often it becomes a theoretical conversation that loses focus because more urgent items come up that have a more direct impact on the bottom line.

For smaller plan sponsors, he would encourage them to seek support and insight from their carriers and advisors for solutions that put forward a sustainable benefit program. “Both of those camps should have expectations from their carrier and advisor. However, I think the larger carriers have more internal support so they can push the conversation internally.”

Defined Contribution Pension Plans

One of the big issues being discussed regarding defined contribution plans is the continued shift from the accumulation phase to the payout phase. “This is not a new dialogue, but the emerging trend here is the awareness of building a strong bridge into retirement for plan members including providing an overall service and product offering and help so that pre-retirees can make smart choices,” says Matt Miles, vice-president, product & marketing, group benefit and retirement solutions, Manulife Financial. “I think this trend will continue to become louder in the industry as people realize that it is not just a product problem that we are trying to solve. You hear a lot of talk about products and decumulation. I believe the trend will shift more towards understanding that the retirement challenge facing the DC industry is probably less about products and more about how we service our customers and build a bridge for them into retirement.”

Miles says a part of that is an increased demand for financial advice solutions. “Sponsors are increasingly evaluating what their true fiduciary responsibility and risk is and what will happen if members are not supported or helped as they walk that bridge into retirement,” he says. “Access to quality, objective advice – which may look different for different plans – will be a key part of the relationship.”

Another area of increased focus will be on overall financial wellness. “Financial literacy has been a hot topic in the industry for a long time, but the real challenge is turning literacy from head knowledge into action for members, which is always been difficult for our industry,” says Miles. “In the next two or three years, we will see a continued shift towards member-focused tools and plan design that really influence member behaviour more intentionally.

“I believe that a broader definition of retirement preparedness and successful retirement outcomes will begin to prevail that goes beyond registered retirement savings and actually helps members understand how savings fit into their overall financial profile.”

Connection Between Health And Wealth

Miles believes there is a connection between people’s health and wealth. He thinks it will be an increasing trend that leading edge sponsors will capitalize on. “There will be an increasing appreciation of the impact of financial wellness on people’s overall health and engagement and productivity in the workplace,” he says. “We have done some research that highlights the connection between people’s health and wealth and the impact it has on their engagement in the workplace. It’s likely sponsors will keep looking for ways to connect those dots to improve their employee well-being. That is the piece that connects the benefit and the DC world.”

Finally, Miles says in 2015 there will be continued activity on the legislative front as regulators continue to discuss new ways to improve Canadian’s retirement income matters and efficacy. “Governments are increasingly going to need to weigh political objectives with retirement outcome they want to achieve for their constituents as they consider making the right policy decisions. You could reference the Ontario Retirement Pension Plan (debate) in Ontario. You could reference the federal government talking about target benefit plans. You could reference pooled registered pension plans (PRPP). There are a number of hot legislative conversations happening that are going to continue this year.”

Miles says plan sponsors need to be engaged on this issue, ensure that they understand the decisions being made by the federal and provincial governments, and they make their views known. “Sponsors need to understand the implications to their plan and talk to their advisors and carriers so that they are not surprised when a potential legislative activity has a considerable impact on their retirement plans.”

Defined Benefit Pension Plans

 

Derisking has been a hot topic in the defined benefit world since the financial crisis of 2007-2008. It is a natural time to discuss what would happen if another financial crisis hits, says Brent Simmons, senior managing director of defined benefit solutions at Sun Life Financial. “Do plans want to go through the same thing that just happened or should they take a smaller risk stance so they would not be in such bad shape?”

Derisking means different things to different people, but, “broadly, it is trying to make defined benefit pension plans less risky, meaning less volatile, either from a cash contribution point of view or a financial statement point of view,” says Simmons. He says solutions are about reducing or mitigating the volatility that comes along with a defined benefit pension plan. “If you are an employer and you have one of these plans where your contributions one year are $10 million, the next year $50 million, and then the year after that are back down to $25 million, it is really hard to do your financial planning. So getting contributions less volatile makes a lot of sense as well as it impacts financial statements.”

Simmons says there are three main trends he sees in derisking: transferring risk out of the DB plan to insurance companies through annuities; reducing the equity content in pension plans; and using alternative asset classes to make assets work harder.

Buying Annuities

Historically, the Canadian annuity market was approximately $1 billion a year. It has increased to $2.5 billion, says Simmons. He compares that to the UK market where the annuity market jumped from roughly £1 billion to £10 billion, “or even £30 billion if you include all the risk transfer deals that are happening.

“We are starting to see that trend Canada. In the past, it was just pension plans being wound up and buying annuities. Now, ongoing pension plans are purchasing annuities as a risk management tool to reduce their volatility.”

Reducing Equity Content

“The second trend, reducing equities and better managing assets to liabilities, is really interesting given the way Canadian actuarial goals work. Basically, equity does not really move in the same way that liabilities move in a pension plan. If you wanted to have a pension plan where your assets and your liabilities moved in the same direction at the same rate, you would want to have an asset mix that was 100 per cent bonds or 100 per cent fixed income. We are seeing more plan sponsors in Canada recognize that.

“It is all well and good to have equity in your pension plan, but if it is not going to match your liabilities, by definition, it is going to cause noise. It is going to cause extra contributions or extra earnings per share volatility. So, we are seeing a trend of employers reducing their equity content and moving into assets that better match their liabilities.

Using Alternative Asset Classes

The third trend is about alternative asset classes and getting assets to work harder. “One thing that Canadian pension plans have not made a big use of over time is alternative asset classes,” says Simmons. “They have stuck to pretty plain vanilla asset classes like equities and bonds, but alternative asset classes, especially private asset classes, can deliver a lot more bang for the buck than the typical assets that a pension plan might invest in. We are seeing more pension plans recognizing this and making a bigger allocation towards alternatives and getting a nice return for making that allocation.”

Simmons’ advice to plan sponsors of DB plans is to look at the amount of risk they are willing to take in their pension plan. “A pension plan is like a mini-insurance company. Whether they know it or not, there is a lot of risk around that. My advice to plan sponsors is just recognize what risk you are taking and then try to figure out what risk is right for you.

“Every company will have a different answer. Understand your own circumstance and figure out how much risk is right for you. Then put a plan in place or start talking about how you might get from where you are to where you want to be. The three trends I mentioned are great ways to start making that transition and cutting back on risk.”

Group Benefits

High cost drug claims is a hot topic for clients at Eckler Ltd. “One of the big issues is managing high cost drug claims and everything involved with that including pooling arrangements,” says Andrew Tsoi-A-Sue, principal and group benefits practice leader. Tsoi-A-Sue notes that pool charges with the carriers have been increasing quite significantly and this often leads to discussions on the impact of taking on more or less risk for plan sponsors.

“It is about managing drug plans,” he says. “Do you do it with formularies? It’s not a new topic, but we are seeing a little more movement in terms of establishing preferred provider organizations (PPOs). It will be interesting to see what happens in the pharmaceutical industry.”

Tsoi-A-Sue says another topic of interest that will potentially have an impact on plan sponsors is the recent legislation in New Brunswick. “They are making changes to the New Brunswick drug plan, but also preventing plan sponsors from making significant changes for the period of time until implementation of those changes.” The changes included eliminating minimum requirements for private plans so they would not have annual or lifetime maximums and eliminating the requirement that all provincial residents without private prescription drug plans must join the New Brunswick plan. The moratorium on making changes will not allow sponsors to make significant changes to reduce their liability, for example.

Tsoi-A-Sue says it’s too soon to know whether these changes in New Brunswick are an indicator that other provinces will follow suit. However, he says Eckler is keeping an eye on things that happen around the country and whether, at some point, they may find their way to Ontario or indeed to other provinces. He says plan sponsors should anticipate what may come from reviewing changes that have been made to other provincial plans and, if they can, take steps to minimize risk.

Another trending topic is the consultation paper that came out in January 2015 from the Ontario government regarding regulations to support the new requirement to insure long-term disability benefits.

Group Insurance

Learning how to best accommodate a multi-generational workforce is still trending in group insurance circles. “You have four generations in the workforce now – millenniums, boomers, X-ers, and Ys – and each of those segments have a different view of themselves and their relationship with their employer and different engagement levels with their benefit programs,” says Conor Quinn, vice-president, group benefits insurance, the Cooperators Life Insurance Company. He says, although it is not a new trend, there is continued thought being put into how benefits can be tuned in to accommodate all of those segments.

Communications

Communications is one area that needs to be addressed, for example. Boomers will choose to receive their information differently than 20-somethings who are connected to social media and tend to appreciate smaller sound bites. “Companies that offer benefits need to make sure their organizational communications strategy has enough breadth to cover how all stakeholders choose to receive information,” says Quinn. He compares the concept to omni-channel retailing where people make interdependent choices between going into a store or buying online and sometimes something in between. “The concept is applicable in our industry too. People will choose to source access to their group benefits by calling, on the web, on an app, or talking with their HR department. Those preferences seem to vary a little bit by generation, so you have to have all your bases covered.”

 

Lifestyle Accounts

Another area of relevance is interest and demand in lifestyle accounts. “You have your healthcare spending account and your taxable spending accounts. Younger generations are more interested in having a benefit that allows them to get to the gym that they want,” says Quinn. “Sponsors are looking to add some supplemental benefit components that can meet that need. We also see an uptake in optional products which I would suggest is there for the same reason.

“A sponsor can broaden the reach of their benefit program without necessarily increasing their cost by adding some optional benefits. Sometimes the interest in optional products comes with some interest in portability of those products as well.

Benefit Costs

Another trend, and also nothing new, says Quinn, is around benefit costs in general and a focus on drug costs and catastrophic drug costs. “We see some significant claims coming through now on medications for chronic conditions. It is really a change in how drug programs evolved from when the average cost of a medication was $22. We have the Canadian Drug Insurance Pooling Corporation (CDIPC) which is the insurance industry’s pooling mechanism for catastrophic drug costs. That is helping but does not take away all the risk and some plan sponsors are not eligible.

“To me, more dialogue is required on it to understand what we can do. I would say that the issue is driving continued interest in wellness and wellness programs, being proactive, and taking a look at the entire cost of somebody’s chronic health condition. For example, their medication might be very expensive, but if it is allowing them to be a healthy and productive employee without a disability claim, you cannot ignore that savings.”

Pharmaceutical

 

One of the top trends on the pharmaceutical side of group benefits is the development of sustainable drug plans, says Danny Peak, senior manager, private payer strategy, Sanofi. Forward looking payers will look at solutions to decrease rising costs attributed to lost productivity from non-managed chronic disease and non-adherence to medication by plan members. He says, “With the arrival of some highly effective, but higher cost specialty medicines and biologics, sustainability of drug plans is certainly the topic that continues to make headlines.”

Peak notes that statements are often made that costs are rising due to increased use of expensive biologics, but a close look at utilization reveals that the top three of these medicines are used, in total, by fewer than 40 people of the more than 35 million living in Canada today.

“Total costs of private benefit plans are comprised of numerous components, not simply the cost of medications. Employers/plan sponsors need to work with advisors and consultants who bring a holistic understanding to the different drivers of benefit plan sustainability. The latest research shows that plan members are asking more of plan sponsor around supporting better health and productivity in the workplace,” says Peak.

Canada’s Research-Based Pharmaceutical Companies (Rx&D) commissioned IMS Brogan, the Canadian business unit of IMS Health, to conduct a forecast of private drug plan drug costs for 2013-2017. This analysis is one of the most rigorous and detailed forecasts ever conducted for the Canadian private drug plan market, with the methodology validated by a leading actuarial firm, says Peak. The ‘IMS Brogan Private Drug Plan Drug Forecast’ shows that the Compounded Annual Growth Rate (CAGR) of private market drug costs, at an overall market level, will be in the low single digits – a range of 1.6 per cent to 2.8 per cent over the five years. Other research demonstrates that paramedical, dental, and vision care portions of benefit plans are growing at two to three times the rate of medications.

“The single digit growth of private drug plan systems is important news for Canadian employers who offer medication coverage to their employees as the results show that the growth is sustainable. However, most new ‘solutions’ being offered by the group benefits market focus on cost containment, limiting access, or delaying access to needed effective medications,” says Peak.

Improving Co-operation

“There is a realization that all stakeholders (plan sponsors, plan providers, medication manufacturers) need to come together and look at reimbursement of medication as an investment – good health is good business – and can mean improved engagement, productivity, decreased absenteeism, and decreased disability costs. We all have an interest in a productive working population. It makes good economic sense.”

Peak says the appropriate use of medicines to manage chronic disease is one of the most cost-effective strategies to keep employees productive in the workplace and overall healthcare costs down. He notes:

• Productivity losses among workers with chronic diseases are nearly 400 per cent higher than the costs of managing the disease itself.
• There needs to be improved education around adherence as one-fifth of prescriptions for chronic diseases are never being filled by patients and 50 per cent of patients are not taking chronic disease medication appropriately after six months.
• To illustrate, living with diabetes does not lead to increased sick days, disability claims, MI, stroke, amputations, etc.; rather, it is poor management of the disease that leads to such complications.
• Workplace wellness culture and strategies can greatly impact population health and overall workforce productivity.

Group health benefits continues to be a competitive market where economics and market share retention play a large role in business strategy for health benefit plan providers, says Peak. “Although cost containment continues to be at the forefront of proposed strategies by many plan providers, it is not cutting it anymore.

“Results from the ‘Sanofi Canada Healthcare Survey’ show that plan sponsors are seeking to better understand their health benefit plan and are asking for more solutions that can increase the health of their employees (organizational productivity). They do not need to accept recurrent unsustainable cost containment strategies by their providers. In fact, employers can ask their providers for more insurance ‘cooling’ solutions to make sure innovative drug options are available for the plan members who need them. As well, plan sponsors should be asking for more analytics tools and measures to track the outcomes and ROI of their benefits offering on productivity measures, such as absenteeism and disability rates.

“With improved analytics support, plan sponsors can introduce and support targeted wellness interventions tailored to their organizational health goals. Group benefits providers who can meet these needs of employers will have a competitive advantage in the marketplace.”

Investments

The trend of finding solutions to help mitigate volatility for investments and plan structures will continue as 2015 unfolds, says Wayne Wilson, vice-president of Lincluden. “The rules set in place by actuaries are fairly volatile to interest rates and if interest rates go down, that has extremely negative consequences for funding a pension plan,” says Wilson. With new IFRS (International Financial Reporting Standards) accounting guidelines, “that can have implications for getting financing for the company.”

Pension plan sponsors need investments that better insulate them from moves in interest rates on the bond side, he says. “They need to mitigate that with strategies that will actually, in this environment, have enough return to fund the pension plan long-term so they do not need to [fund] it all out of their own treasury. That is a difficult thing so it is going to continue to be things like real estate, lower volatility, and higher yielding equities. It is going to include bond strategies that think a little bit outside the box and can enhance the yield while still keeping their duration matched and their cash flows matched.

More Of The Same

“Unfortunately at this point, it is more of the same that has been happening for the last five or six years, says Wilson. “At the end of 2013, it looked like they may be able to turn a corner and think about some other strategies. However, with what interest rates did in 2014 with the sharp decline in yields, it has put them back in the defensive position. In the low bond yield environment, it is very difficult finding products that have the ability to fund a pension plan long-term and have stability attached to them. Real estate is well used. Low volatility equity strategies that have higher income are certainly getting a lot of attention.

“Low volatility is a bit of a change of thinking, but when you start to look at the evidence, people will continue to move down that path.”

Nienke Hinton is Benefits and Pensions Monitor’s staff writer (email Nienke).