Canadian HR Reporter - February 13, 2012

DEPARTMENTS 17

■ PENSIONS

■ TRAINING & DEVELOPMENT

Modified DB plan preferred option
Video less expensive

Continued from Page 15

risk. Unlike typical DC plans, members do not have investment options so the investment risk is pooled among all members. The longevity risk (the risk of outliving your retirement assets) is also pooled.

Another key difference is younger members essentially subsidize older members the same as they would in a DB plan. That’s because a dollar of benefit under the plan’s target formula is worth more for an older member than for a younger one. This is one of the biggest strengths — and biggest failings — of DB plans.

Target benefit plans exist only in multi-employer situations and generally involve industry-wide bargaining. As the provincial pension reform panels concluded, there is no reason they can’t exist in sin-gle-employer situations as well — but expect special conditions to be imposed on them, such as joint governance.

Employers should prefer target benefit plans to DB plans because contributions are fixed. They may also prefer them to DC plans because there are no investment options, so employers avoid the onerous task of educating employees on making their own investment decisions. The biggest challenge for employers is in managing expectations, since pensions can be reduced and this is not always clear to plan members.

Employees should prefer target benefit plans to DC plans since the investment risk and longevity risk are both shared among all members rather than borne individually.

Continued from Previous Page
a feedback session.

“We talk about what we could have done differently, what was easy and what was hard and how we can apply what we learned,” says Kalau.

Training often fails because
people aren’t open to failure,
says Zimmerman, while the vid-
eo game is fair and consistent.
“Most people don’t like
role-playing. If you have a few
rough edges in your skills, you
don’t want to be found out,”
she says. “Nobody wants to be
embarrassed, even if it’s for the
right reason — to learn.”
thing,” she says. “You’re also
doing a little bit of unlearning
bad habits too.”
Depending on the size of
the company, the series can
cost anywhere from $1,200 to
$1,500, with a single level cost-
ing roughly $400 to $500 per
person, says Zimmerman.

Photo: Melissa King/ Shutterstock.com

sible because of the choice of discount rate. Rather than trying to minimize volatility by matching assets to an immutable DB promise, this plan design changes the pension promise to match the assets.

From an employer’s perspec-
tive, the appeal is clear enough.
Providing a DB pension elimi-
Photo: E=mz2
An avatar in the video game Momentium from E=mz2 is helping sales
reps at Davis Controls in Oakville, Ont., refine their approach.
There is no way of knowing whether a modified
DB plan will be acceptable under new legislation
to accommodate hybrid plans.

Cash balance plans

The concept of cash balance plans surfaced in the United States in the mid-1980s. As with any DC plan, each member has an individual account and receives periodic statements showing an account balance. Each year, the account is credited with a fixed percentage of earnings, such as five per cent of base pay. Interest is then added to the account balance but, unlike regular DC plans, the interest credited is based on some external index — such as the consumer price index (CPI) or T-bills — rather than actual investment performance.

Hence, the employer still bears some investment risk. This is the DB element in cash balance plans. At retirement, the member’s account balance is payable in a lump sum or converted into a lifetime pension or annuity.

A cash balance plan differs from a target benefit plan in that an account balance is communicated rather than a DB pension amount. It differs from a DC plan in that members do not have investment options and less investment risk.

Employers will tend to pre-
But they are not acceptable
under Canadian pension legis-
lation or tax law, so it will be
interesting to see if eventual
legislation will accommodate
them.

Modified DB plan

The final example of a hybrid plan is something we will call a “modified DB plan.” This type of plan behaves exactly like a conventional DB plan except it would pay a lump sum rather than an annuity in the event of plan windup. Furthermore, that lump sum would be determined using a discount rate derived from the yields on prevailing corporate bonds (AA or possibly single A) rather than from government bonds, as is currently the case.

While this lump sum can be worth less than the benefit promise under a traditional DB plan, the difference is not that great in reality. Remember, DB plans can also have a deficit on windup that, in the case of insolvency, would usually cause pensions to be reduced.

Even in the midst of the re-
cent financial crisis, the funded
ratio under a modified DB plan
would have remained close
to 100 per cent. This is pos-
nates the problem of educat-
ing plan members to make
investment choices and the
modified DB plan significantly
reduces the problem of funding
shocks, especially those that
occur when workers are least
able to make additional contri-
butions, as in the midst of the
last financial crisis. Finally, it
dampens the volatility in pen-
sion expense, which has been
the primary driver behind the
decline in DB plans.

Much of the game’s appeal comes from the fact that it’s just that — a game. With the next generation of workers being raised on video games, it’s helpful to find a training tool that appeals to them, says Kalau.

However, he admits it was a
challenge for him to get used
to the avatar interface in the
beginning.

“My concern was about
how dynamic it would be com-
pared to a real-life individual,”
he says. “I thought it would be
very one-dimensional.”
He’s discovered it to be
quite the opposite.

“Depending on the question
you ask or the response you
give, it could be a very differ-
ent outcome,” says Kalau.

The game has allowed Davis Controls to move beyond its short-term issues and affect long-term change, says Zimmerman.

“It takes 10,000 hours of per-
fect practice to master some-
troduced the training, he says.
More notable, however, is what
he’s seeing in his sales staff’s
call notes.