By Mark Barnicutt on November 29, 2011
Private Companies & Defined Benefit Pension Plans:
The global financial challenges over the past several years have been a catalyst for the solvency issues facing so many defined benefit pension plans, not only in Canada but globally. Although lots of discussion has occurred in recent years about the public & large private pension plans, it seems that not as much ‘air time’ is given to the defined benefit pension plans that are sponsored by private companies connected to the entrepreneurial, owner-operator.
Although many private companies have established, or converted to, various forms of Capital Accumulation Plans (ie: Defined Contribution Pension Plans, Group RRSP/DPSPs) in recent years, the reality is that there continues to exist many Defined Benefit (DB) Pension Plans sponsored by private companies either as active programs or as legacy programs with frozen defined benefit promises.
Pension Risks For Private Companies:
As we know, all entrepreneurs assume considerable risks in successfully establishing and operating their businesses. The ongoing operation of a defined benefit pension plan creates an additional risk for all companies that sponsor such a plan, but can potentially be a greater risk for small & medium sized private companies as they:
• Do not have ready access to public capital markets to fund capital requirements.
• Lack the internal expertise to manage a defined benefit plan, and
• Incur disproportionate costs for retaining quality external expertise related to defined benefit plans.
The purpose of this article is to provide an overview of the pension plan solvency challenges that such entrepreneurial companies face by sponsoring DB pension plans, to review historical investment practices for these programs and present an investment solution, based upon proven strategies, for how the investments in these plans can be structured to not only meet their ongoing funding obligations but also mitigate the business & financial risks borne by the sponsors’ shareholders.
To read this article, please click here.