Rescuing a Canadian Private DB Plan (2017)
MIPC 2017 Case
LumberCo Inc. (“LBC” or “the Company”) is a Canadian corporation specialized in producing wood products and selling them across North America. When the company was founded in 1956, it established a pension fund (the “DB Pension Fund”) offering defined benefits to some of its employees after retirement. In 2000, the company decided to close the DB Pension Fund to new employees and instead created a defined contribution pension fund for them (the “DC Pension Fund”).
Suzie Cartier has been working for the DB Pension Fund since the beginning of her career. After 40 years of hard work, she is now the president and chairman of its investment committee. Suzie recently received an updated actuarial report ringing the alarm bell. The DB Pension Fund, which currently manages C$857M of assets, is facing a shortfall of C$264M. While the shortfall itself is not news, the fund’s solvency ratio just reached a new low point of 76.45%, which is below the 80% threshold commonly viewed as the minimum funding threshold.
Upon hearing the news, Jane Larsson, CFO of LumberCo, decided to consult Suzie to find a long-term solution. Jane is in a difficult situation. As the Company’s CFO, she must make sure that the Company will not have to inject too much cash into its DB pension fund, otherwise she will face pressure from shareholders and risk losing her job. However, Jane must also respect the Canadian pension laws that require any corporate pension fund to meet a solvency ratio of 100% over a period of 5 years.
Jane and Suzie came to a common agreement. LumberCo. will inject $50M into the DB Pension Fund in 2018 to help with the underfunding problem. In the meantime, Suzie must completely review the asset allocation of the fund in order to minimize the future cash inflows that the Company will have to inject into its DB Pension Fund, and still be able to pay the promised pensions. To facilitate the process, Jane told Suzie that the Company would cover all the trading costs associated with the overall portfolio restructuring.
As a result, Suzie is looking for innovative ways to invest the DB Pension Fund’s assets while satisfying all the parties involved, and keeping the risk level in check. On September 1st, she decided to review the Statement of Investment Policies and Procedures of the DB Pension Fund and launch a call for consultants to design a new asset allocation strategy.