Retirement income adequacy still a problem for pension plan members

Alyssa Hodder | November 25, 2011

Educating members and encouraging them to save for retirement has long been a challenge for pension plan sponsors…but the consequences of not doing so could be damaging for employees and employers alike.

That was the grim message delivered by Ian Markham, Canadian retirement innovation leader with Towers Watson, at the ACPM ImpACT session in Toronto on Nov. 24, 2011. He outlined research that Towers Watson has conducted on DC/DB plan members’ retirement planning knowledge (or lack thereof) as well as the employer’s perspective.

In June 2011, Towers Watson surveyed more than 1,500 employees working full-time for larger private sector employers in Canada, including nearly 1,300 DC/Group RRSP and DB plan members, on their attitudes toward retirement. The results highlighted some glaring gaps in understanding—starting with the fact that 10% of those surveyed weren’t even sure if their plan is a DB or a DC plan.

Looking at the specific actions that Canadian plan members have taken in the past three years, they are generally more focused on paying off debt (51%), reviewing their personal finances (41%) and cutting back on daily spending (41%) than on considering how much to save for retirement (24%) or changing their investment strategy.

Perhaps not surprisingly, older plan members tend to be more involved in retirement planning. But what’s alarming is that DB plan members are more likely than DC plan members to say that they have reviewed their retirement plans in detail over the last year, have tried to calculate how much money to save for retirement and are comfortable making their own retirement/investment decisions—while of course, it’s DC plan members who are responsible for investment decision-making and bear the majority of the risk.

“When you think about employers who are socially minded and want to help employees in this world, there’s a heck of a lot that employers are having to grapple with, because the employees just aren’t getting it,” said Markham. “They’re not reading the literature, they’re not going onto the websites; they don’t care very much until later on. There’s this blissful thinking that something will work out for them in the distant future, at least for the younger folks.”          

Members may not be getting the help they need from employers, either. When asked to rate the effectiveness of the tools (such as educational materials, company website, blogs, online modeling tools, independent financial advisors and face-to-face/webcast meetings) provided by their employer, less than one-third believe they are very effective in helping them to prepare for retirement. 

“Employers really need to focus on these messages, on ways of getting the messages out,” stressed Markham. “Because otherwise, the pension plan was a complete waste of money. If there’s no intent to try to help people understand what you’re putting your money in for, then there is no point in having such a thing.”

With the ongoing trend of converting from DB to DC arrangements, helping members to accumulate sufficient retirement income will become increasingly important—yet it may not be an employer’s main priority. According to Towers Watson’s 2011 Pension Risk Survey, when considering the impact of plan design changes (for example, shifting from DB to DC), employers just aren’t that worried about the retirement income adequacy of their plan members.

While more than half of the employers surveyed said they were concerned or very concerned about the impact of plan design changes on attraction/retention, only 23% said the same about inadequate retirement savings. Even more concerning, 42% said inadequate retirement savings was of no or limited concern to them.

Markham concluded by drawing attention to some “warning signs” of dangers to come: demotivated workforces, lack of prioritization of retirement income adequacy by employers, failings in financial literacy among the general public and, potentially, future lawsuits in the DC space.

“This is not just a message for employers; this is a message for government, saying, ‘You need to watch what’s going on here,’” he advised. “Because we have a changing pension picture in a major way.”