The first DB to DC pension plan conversion I was involved in took place in 1986. Back then, a DC pension plan was called a money purchase pension plan, which nomenclature remains in the Income Tax Act relating to such plans.  In 1986, upon retirement under a money purchase pension plan retirement income was provided by way of a life annuity purchased from the value of the pension account balance, hence “money purchase.”

It is interesting to look in the rear view mirror at this DC pension plan established 27 years ago.  Administratively, it was very simple.  There was no investment choice; the pension plan remained invested just as it had been when it was a DB plan—in a pooled balanced fund.  Member account balances were credited with the gain of the pension fund each year, net of expenses, with interim interest credited at 6% per annum for in-year withdrawals.

Cost analysis
In fact, operating costs for the converted plan resulted in a net overall cost reduction. Here’s how:

  • no change in investment management fees post-DB conversion, as there was no change to how the funds were invested;
  • no change to custodial fees; and
  • administrative and actuarial fees decreased substantially due to the elimination of actuarial valuations and DB-related recordkeeping. The recordkeeping for employee required contributions was retained, with an additional employer contribution account added for each member.

From the plan sponsor’s perspective, pension costs became fixed rather than variable but plan governance requirements otherwise remained mostly unchanged. There was just the continuing need to monitor investment performance and service providers.

The only thing that would now trouble me about this 27-year-old design is the method of crediting investment gains and losses.

A real-time methodology is preferable, and this can be accomplished fairly simply by ascribing unit values to contributions (purchases) and withdrawals (redemptions).

Consider simplifying
This retrospective view of a DC plan design leads to a question—why don’t pension providers and experts now give serious consideration to this kind of plan design?

It seems to be the case that almost everyone blindly believes that DC plans must feature investment choice, but a few of the demonstrable results of this blindness are as follows:

  • chronically poor investment results for plan members generally;
  • the never-ending holy grail quest to educate and inform plan members to help them make appropriate investment choices;
  • plan members who exercise their right to choose only at the time of enrollment; and
  • evolution of rules/guidelines for plan sponsors on establishing an appropriate default funds.

It is possible that I have reached my saturation point for absorbing endless articles and presentations describing the investment related challenges faced by DC retirement and savings plans, almost none of which provide serious consideration to the idea of letting the plan sponsor take responsibility for the investment of the DC plan assets.

In the most recent such presentation I witnessed, the speaker very wisely (and accurately) pointed out that the governance work entailed in monitoring the 10 to 12 investment funds maintained by the average DC plan was 10 to 12 times greater than the governance work entailed in monitoring a single balanced pooled fund, to explain why most small and medium-sized enterprises generally fail to carry out such work.

Unfortunately, the speaker did not take the opportunity to extend his thesis to the idea of a single fund DC pension plan, which thus demonstrates that this is apparently an unimaginable concept.

If we were to simplify DC plan investment and re-deploy resources, there would remain significant opportunities for governance services and retirement planning systems and services, areas that are currently under-serviced.

Next time you sit in on a presentation or read an article describing the challenges of investment choice and plan member education and advice, try asking the question, “Is investment choice really necessary?”

Greg Hurst is a Vancouver-based pension consultant with Greg Hurst & Associates Ltd.

These are the views of the author and not necessarily those of Benefits Canada.

Copyright © 2018 Transcontinental Media G.P. Originally published on benefitscanada.com

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See all comments Recent Comments

Neil Craig:

Ah yes but as plan sponsor do you want to make that one and only call when you can off load that responsibility to the plan member and in some cases with provider guarantees as to sufficiency of the platform or even to a PRPP plus as a plan member closing in on retirement not sure I want to be exposed to the vagaries of the market if I have a choice to do otherwise. I think we are losing site of the fact that in most cases the employer has no interest in providing an adequate and sustainable retirement income for their members. They want to know what level of benefits and coverages and the cost of same they need to provide in order to secure quality labour and produce their good or service at a competitive price. They have no interest in being big brother and frankly I don’t want them to be. There are no quick fixes but we really need to start in the schools with mandatory credits and requirements for day to day financial literacy. It won’t help the boomers but nothing we can do now will.

Wednesday, March 13 at 11:41 am | Reply

Greg Hurst:

If plan sponsors don’t care, why are there so many articles and conference presentations focused on the challenges of providing investment choice and the need to educate members?

The payoff for plan sponsors for removing investment choice is that they wouldn’t have to worry about these questions anymore, while at the same time providing them with the “level of benefits and coverages and the cost of same they need to provide in order to secure quality labour and produce their good or service at a competitive price”.

As to the reticence around a plan member closing in on retirement being exposed to the vagaries of the market, it is likely demonstrable that, on average at least, most are similarly or more exposed in plans that have investment choice.

Finally, fiduciary responsibility relative to a DC registered pension plan, might actually mean plan sponsors should not offload responsibility for investments on to plan members who are generally lacking in investment knowledge and competence.

Wednesday, March 13 at 5:39 pm | Reply

Priscilla Healy:

I agree with Greg. Most people do not have the time or the inclination to monitor their investments. As a thought – if offering investment choices is seen to be a requirement, why not provide a sound, employer managed balanced fund fund as an option – and give comparative return figures with member communications. Members might see that they could be better served by leaving investments to the employer/administrator.

Friday, March 15 at 11:04 am | Reply

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