DC plan e-roundtable

ELAINE NOEL-BENTLEY: We have had minimal reaction from plan members to the Sept. 11 events. Our only issue was to ensure appropriate communication to the small number of members who had requested a transfer of their DC fund during the days when the Toronto Stock Exchange was closed.

PETER GORHAM: So far there has been no evidence of increased trading or fund switching. Either our members have understood the message that retirement savings is a long-term issue, or they have no idea of what to do with their savings other than leave them where they are.

DAVE CLAPPERTON: Most DC plan members are concerned but have not panicked. For the most part, our clients have not witnessed DC members transferring assets to money market funds or some form of guarantee fund.

EN: We would expect that quarterly DC statements reflecting the new state of the economy would create an understandably negative reaction by employees in the short term. But we do not expect that this will have any impact on the DC market in Canada. The move to DC was not triggered by the bull market and will not be stopped by the revised economic environment. The effect of the new economic reality will be a more realistic assessment by members of their expected long-term rate of return.

COLIN RIPSMAN: A large number of DC plans have been introduced in the last 10 years. This represents one of the strongest periods in recent history in the capital markets. This has created unrealistic expectations by members about the rate of return on their investments. The sobering events of [Sept. 11], together with the lackluster performance of world equity markets over the last year, should help plan sponsors to manage the long-term expectations of plan members.

PG: The economic condition is low on the list of drivers for new plans and expanding coverage. Unfortunately, the reality is likely that recent retirees and those planning on retiring in the coming year or two will be extremely worried, and will probably have trouble accepting that the downturn is more likely to be an inconvenience than complete doom and gloom.

PG: The unwritten details. The proposals are generally good and positive at a macro level. Interestingly, the DC providers are already delivering products that meet or exceed the proposed standards in almost all categories, and their development efforts are not slowing down. Unfortunately, these products have not been rolled out to many existing clients.

PATRICK LONGHURST: Our chief concern is the possible addition of securities legislation onto [DC] plans. This would cause unnecessary expense to plan sponsors, with no foreseeable benefit to plan members. Plan members want adequate investment information to make informed decisions. A plan sponsor's goal is to provide education--not comply with additional regulation.

EN: [These] plans are not designed and promoted like defined benefit plans, to provide a predefined retirement income level that ensures some retirement security. They are intended by employers to assist employees with their own personal retirement planning as part of a total compensation package. I am concerned with the general theme of the report, where all liability and responsibility is placed on the employer without an appropriate obligation placed on the employee. Employees are adults. If reasonable information programs and services are offered, employees should be expected to do their part in becoming educated and taking responsibility for their future.

BRIAN SMITH: The regulatory principles may result in no choice being provided to plan members.

EN: No, I am not optimistic. The history of pension plan regulation in Canada does not bode well for regulation in this new area.

BS: Yes. The regulators are approachable and do, in fact, listen to concerns.

PG: [Joint Forum chair] Sherallyn Miller has a good idea of what is needed to help the industry and, importantly, the plan members without messing up the parts that are generally working well now. Whether that extends to the rest of the Joint Forum and then through to the provincial regulators and politicians may be a big stretch.

DC: It is too soon to be able to determine whether optimism is called for. Most would likely agree that the pension industry is already overly burdened with regulations. Establishing and maintaining good governance practices would at least include: a benefit function; a financial and investment function; and an administrative and compliance function (daily administration, plan documentation and regulatory filings).

Do you believe that a safe harbour system is in the best interests of Canadian DC plan sponsors?

BS: No. It may lead to a false sense of security.

PL: The safe harbour system is not needed in Canada. Plan sponsors are willing to design and implement investment policies and programs that are in the best interests of their plan members.

DC: There is value in providing reasonable limitations of liability to plan sponsors who satisfy the minimum regulatory requirements. However, a single approach/requirement might not be sufficient for all plans. A more preferable approach might be to adopt a framework that would provide a clearer understanding of the responsibilities of sponsors, administrators, members and associated agents.

CR: A safe harbour system is an important element for DC plan legislation. While any legislation in this area will place burdens and responsibilities that will lie primarily in the hands of the plan sponsor, the legislation must also provide tools to the plan sponsor to meet those obligations and effectively discharge those responsibilities. This includes guidelines on proper delegation of responsibility, which should include guidelines on factors to be considered in delegating responsibilities to a third party, and a process that will assist plan sponsors in properly meeting those guidelines. It will also include safe harbour provisions, which will help to protect plan sponsors that take the appropriate measures to meet the intent and standards of the legislation.

PG: A safe harbour would protect plan sponsors from lawsuits. From that perspective, it would be in the sponsors' best interest. Assuaging employer concerns is the best way to ensure they continue to sponsor retirement plans. Employers are concerned over the possibility of future lawsuits, even those who are doing everything they believe is required of a good fiduciary. There is no way to predict what standards a future court will impose retroactively on a plan sponsor.

PG: A legislated safe harbour cannot possibly address all of the differing needs of different groups. That would lead to a plan relying on a safe harbour to the possible detriment of the members. But with the safe harbour, the members have no recourse. The only way a safe harbour can work is if there is a method of obtaining restitution for members who believe they have been harmed.

PL: A limited range of investment options, as is the minimum under the safe harbour system, is not adequate for many DC plans.

CR: If the legislation is properly drafted, then it should act to protect the interests of members. This would involve setting out clear expectations for plan sponsors and other parties involved in the pension management system, which will ensure that members are offered appropriate investment options, as well as the information that they need to make effective decisions. To the extent that there is ambiguity built into the legislation or that unrealistic expectations are placed on particular parties within this system, there is a greater likelihood that plan sponsors will opt out of this system.

EN: An appropriately developed safe harbour system will encourage responsible DC structures and information programs and will facilitate the continuation of DC plans in Canada. The alternative cash option, a flight from all registered retirement arrangements, could be the result of costly regulatory obligations without a safe harbour.

PL: Although the number of DC plan suppliers has reduced, the quality of the services has been improving.

PG: Choice is diminishing. With the loss of the trust company providers, there are fewer places where a sponsor can get unbundled services, and few places where access to any fund manager can be easily and effectively achieved. On the positive side, I believe that service levels and quality of service to members will improve as the remaining players fight for position. This is a time for investing in infrastructure and services by the providers. Competition is fierce.

DC: One concern is customer service. The remaining providers will have to work harder to satisfy stakeholders and may have to "bulk up" either internally, through education and training, or hire externally to have sufficient top quality service people available to meet the needs of stakeholders. Another area of concern for plan sponsors is in meeting their fiduciary responsibilities. For example, providers should flag, document and notify plan members that make investment choices that are not consistent with their investor/risk profile.

CR: As you would expect, consolidation has resulted in short-term upheaval for many plan sponsors that are using a recordkeeper that has been merged, as accounts are being transitioned to different systems and platforms. In some cases the trend towards market consolidation has resulted in price increases and a decrease in flexibility in the product offering. This is particularly true for small DC plans. Increasingly, large DC recordkeepers are looking to segment their market and target larger more profitable cases. Smaller plan sponsors are being encouraged to use a more standardized product with less investment flexibility or to search for a new recordkeeper.

EN: Smaller plans have a problem in finding an appropriate DC supplier. Larger plans have, to date, had fewer concerns.

EN: It is hard to make a profit in administration. Costs of running a good system are high, and capital expenditures are needed to develop a modern system. Large volumes are required to make money.

CR: Many mergers have been intended to help companies achieve these economies of scale. With the demutualization of many large insurance companies in the industry, there is more of a need to ensure short-term profitability. These mergers are helping to achieve profitability objectives. At the same time, they are introducing higher barriers to entry for potential new entrants in the marketplace.

PG: Where a system has not been upgraded for years, the investment required is huge if one hopes to serve the DC industry at the leading edge. Plan sponsors (and providers) will be forced to recognize that there actually is a cost to providing administration services. Too much of the actual cost has been buried in the investment management fees.

DC: I would expect that the DC marketplace will become even more competitive and that plan sponsors and members will reap the rewards as providers develop and introduce innovative tools and approaches. As the competition increases, we may even see the day that investment management fees will decrease and begin to approach those offered in the U.S. BC