Due to the dire financial situation of DB arrangements, more DB plan sponsors have started moving to DC over the last few years. For many, DC represents a minute portion of their pension arrangements, oftentimes limited to new hires, for instance. Many pension committees oversee these combined DB/DC schemes and aren’t sure how to manage the DC component.
DB plan management generally focuses on funding, investment performance and meeting tax and legal requirements. Communications to plan members are essentially limited to the annual statement, with the occasional memo from the sponsor regarding plan changes or, more recently, comforting notes explaining what “solvency ratio” means.
But DC is a totally different animal. Things need to be looked at not from an overall plan perspective, but rather from its members’ point of view if you want the plan to work well. DC is a lot like being responsible for a group of retail accounts—not one, large corporate account as is with DB.
Overseeing DC arrangements in a way that will optimize the plan’s effectiveness for members requires a very different set of skills and knowledge than DB plans do. Unfortunately, we routinely run into sponsors where the DB pension committee has simply taken on the new DC responsibilities, with limited changes to how the committee is composed and actually runs. Not exactly a recipe for success.
Different needs, different focus
Don’t get me wrong. People running DB plans are intelligent, competent and well-intentioned. Unless people around the table (whether they are a CA, a CFA, an actuary or a lawyer) have actual DC oversight experience or have had the opportunity to spend significant time handling a layperson’s finances (mom and dad don’t count, and neither does a spouse), they will likely not have the right reflexes or correct mindset to truly help plan members. And the same goes for pension or investment consultants.
To illustrate this point, the table below provides a partial list of retirement arrangement aspects with very different implications between DB and DC:
|Plan aspect||DB (corporate) perspective||DC (member) perspective|
|Decision-making||Almost exclusively sponsor / pension committee||Mostly plan member|
|Decision-maker support / advice||Professional (actuarial, investment consultants, etc.)||Generally limited to information from DC provider|
|Decision-maker behavior||Rational (“It’s the plan’s money”)||Largely reactive and subject to emotion (“It’s my money”)|
|Tolerance for investment manager underperformance||Fair||Limited (when the member notices!)|
|Definition of investment risk||Volatility||Negative returns|
|Member understanding of the plan||Virtually unnecessary (until retirement time)||Key to success|
|Funding contributions||Unlimited and mandated when in deficit||Capped at CRA limits with no obligation|
|Pension income||Determined by plan rules||Linked to member’s overall behavior and decisions|
There are several ways to fill the void. Here are some suggestions that have been successfully implemented by some clients.
- When a DC arrangement is still fairly small compared to an existing DB plan, it might a good idea to create a DC sub-committee that is better skilled to ensure proper governance and oversight. The DC sub-committee is often chaired by the HR representative of the main DB committee; external members with more DC experience are usually added to the sub-committee.
- Provide training to committee members to sensitize them to DC-specific issues. These efforts should be supported by a well-structured DC governance framework that will ensure committee members have a well-defined process to follow.
- Adding an experienced DC pension committee member (sometimes sitting on the committee of another DC plan) has proven very effective, bringing insights from the inside, rather than always having a consultant or the DC provider raise issues. Shared experience from other plan sponsors is always refreshing and helps make things more concrete to the rest of the committee.
Many DB sponsors moving into DC come to realize the transition is not as straightforward as expected. Getting help from people with true DC experience will help make the best of your new arrangements, both for the plan sponsor and its participants.
Your DC provider is a good (virtually free) start, but has its limitations due to potential conflicts of interest. For example, you may be restricted to work within only the programs that provider offers.
Pension actuaries and investment consultants are also a good source of support—as long as they have actual DC experience. With the decline of DB, we have met many who appear to have become instant DC experts, when in fact they are not.
DC plans shouldn’t be treated like the poor cousin of DB plans. These plans need to be given attention so that they too can flourish into a richer offering for plan members.
These are the views of the author and not necessarily that of Benefits Canada.