Often at board meetings, we hear variations of these three questions: 1) What is best practice for executive pensions? 2) Do any companies still provide defined benefit plans? and 3) How should we factor our pension plan into pay decisions?
This memo provides an overview of retirement plans provided to newly hired executives and looks at how designs are evolving in response to the views of various stakeholders. Our focus is the Canadian market, but the findings are directionally consistent for North America as a whole.
A continued (and prolonged) shift toward DC and savings plans
The market shift from DB plans to DC and savings plans began in the 1990s fueled by a strong stock market and a move by employers to reduce the cost and volatility of their retirement programs (thereby shifting investment risk to employees).
At present, 62% of the S&P/TSX 60 (Canada’s 60 largest companies) provide a DC or savings plan as the primary retirement vehicle to newly hired executives. The once-ubiquitous DB plan now maintains a 28% share of the market, most commonly in the energy and financial industries. Finally, 10% of companies provide no retirement plan to its executives — typically among the technology constituents of the S&P/TSX 60.
A focus on governance
Amid the continued rise in executive pay levels and the need for pay to align with performance, the exact role of the executive retirement plan remains a topic of discussion and debate. The current state of plan design is a product of balancing the following stakeholder perspectives:
Employees/executives: A retirement program is typically considered a “table-stakes” offering, a highly visible element of pay that is valued for the security it provides.
Employers: Seek consistency in program design such that all employees have a retirement program that covers their annual pay. The program should be retentive with a preference for simplicity as it relates to design and communication.
Shareholders: Expanded disclosure requirements over time have generated scrutiny from shareholders, particularly for plans with seemingly generous benefits and large — and often unfunded — financial obligations.
Shareholder advisors: While not a primary focus area of shareholder advisors, pension values are included in the pay-for-performance analyses by both Institutional Shareholder Services (ISS) and Glass Lewis. Additionally, the Canadian Coalition for Good Governance and ISS advocate for limitations on annual pension amounts.
Combined, these perspectives have produced the current state where executive retirement plans remain a majority practice but with updated designs to limit benefit accruals to address cost/volatility concerns and to meet expectations related to governance.
In 2024, 81% of S&P/TSX 60 companies imposed some type of limitation on executive retirement plan benefits. These limits are more common among DB plans than DC and savings plans (94% prevalence versus 72%) given their greater value (compares with 72% of DC and savings plans with limits). The most common limitation to benefit accruals is to exclude or restrict bonus from pensionable earnings, which also reduces plan volatility given annual variations in bonus outcomes.
The continued evolution in retirement program design
The most successful retirement programs are created with a shared understanding of their role in a company’s total rewards offering and their influence on competitive positioning. We expect a continued evolution in executive retirement program designs as outlined below, along with key considerations for boards and management:
Continued decline in DB plans: Despite the current higher interest rate environment being more conducive to DB plans, we expect the 28% prevalence to fall as companies identify further opportunities to streamline programs and reduce costs/complexity. Furthermore, nuances related to disclosure requirements suggest that companies have not yet fully disclosed transitions from DB to DC plans if their current named executive officers are long-tenured and remain in legacy DB plans closed to new hires.
Vesting to play a larger role in plan design: Most companies rely on their executive retirement plans to support retention but employ minimal to no vesting provisions. If the retirement program is intended to be retentive, it makes sense to link program entitlement to a minimum service requirement to boost its retentive features.
Link to long-term incentive (LTI) plan design: For companies with a DB plan or a relatively generous DC plan, the long-term nature and relative certainty in value may support a greater risk profile in your LTI plan (lower weighting on restricted share units, more on performance share units and/or stock options).
For expert assistance in addressing the implications of this study for your organization, please connect with your local WTW consultant or contact the author below.
