While the Canadian retirement industry has spent a lot of time focusing on the accumulation stage, the decumulation conversation is much further behind.
For defined contribution pension plans, almost all jurisdictions across the country have now passed variable benefits legislation, including Ontario, which began allowing the option on Jan. 1, 2020.
However, despite receiving legal clearance, few plan sponsors have introduced variable benefits.
Among Sun Life’s plan sponsor clients, only one large pension plan is offering variable benefits and another one is adding the option, says Tom Reid, senior vice-president of group retirement services at Sun Life Financial.
Similarly, Neil Duffy, vice-president of group retirement solutions, products and pension risk transfer in wealth management at Canada Life Assurance Co., says he hasn’t seen interest from plan sponsors for variable benefits. “We do get enquiries from some of our advisors or consultants saying, ‘Are we going to offer this?’ But we, at this point in time, haven’t seen a specific client come forward and say that they would like to offer it.”
Zaheed Jiwani, principal at Eckler Ltd., hasn’t seen DC plans in Ontario offering variable benefits, but he notes it’s still early days. “Certainly, some of the more sophisticated plan sponsors that were already thinking about decumulation are looking a lot more seriously at variable benefits versus a group [registered retirement income fund or life income fund] program.”
And although the coronavirus pandemic is causing more immediate concerns for pension plan sponsors, Jiwani thinks those that were already considering variable benefits are keeping it on their radars.
“The recent market volatility is a reminder to all plan sponsors that we need to take very good care of our members’ account balances . . . not only in accumulation but also in decumulation,” he says. And while some plan sponsors are continuing make progress towards offering a decumulation vehicle, the launch dates are being pushed out due to the coronavirus crisis.
Investment product gap
Even for DC plan sponsors that are interested in offering variable benefits, not a lot of robust options are currently available from an investment fund perspective in Canada.
It’s important that plan sponsors proceeding with variable benefits consider the available investment options, adds Jiwani. “They need to think about — should the investments look a little bit different? They should. They should probably offer a few more vehicles that would be more appropriate just for decumulation that they wouldn’t have offered for the accumulation members.”
Solutions do exist for post-retirement plans, says Jiwani. For example, target-date funds include retirement funds, but there hasn’t been as much attention focused on the decumulation side of the glide path to date.
However, Jiwani believes more attention will be paid to this part of the glide path going forward.
Plan sponsors that are looking at offering variable benefits should consider the differences between target-date funds that offer a flat decumulation glide path versus those that offer a de-risking glide path in decumulation, he adds.
On the fixed income side, most DC plans are simplistic in what they offer during the accumulation stage, notes Jiwani. “I think you’re going to start to get a little bit more attention paid for variable benefits and other decumulation vehicles. So you might get more income-oriented funds that aren’t just purely fixed income; they could be dividends, equity funds, but something a little bit more sophisticated.”
With the U.S. further along the decumulation journey, Canadian plan sponsors can look at trends south of the border.
In the U.S., T. Rowe Price is engaging in more conversations with DC plan sponsors about keeping retirees in the plan post-retirement, alongside discussions about the benefits of choice when it comes to retirement income, says Michael Oler, a U.S.-based retirement income product manager at the investment manager. “It’s not necessarily going to be a one-size-fits-all proposition where a singular retirement income solution is going to work for everyone. Understanding the importance of choice and having potentially multiple retirement income offerings in a plan is also part of that conversation as well.”
In the U.S., the industry is working on investment strategies that connect the accumulation and decumulation stages, notes Oler. For example, T.Rowe Price has a managed payout product connecting to a target-date fund series. “Individuals are getting continued access to that same investment that they’ve had during accumulation. But now, when they’re in retirement, they’re actually able to start receiving monthly income from that strategy as well.”
He’s also starting to see plan sponsors offer more flexibility around distribution options at retirement. “It doesn’t have to be an all-or-nothing proposition where they either have to leave their money in the plan or take all of it out at once. I think we’re starting to see more plans adopting instalment options, which allow for periodic withdrawals or systematic withdrawals out of the plan.”
Insurance platforms complexity
In addition to investment considerations, questions remain in Canada around how record keepers are going to administer variable benefits.
“We’ve had conversations with all the record keepers and there’s a difference of opinion in terms of how they’re going to do it,” says Jiwani, noting some aren’t yet ready to introduce the option.
From the record-keeper perspective, they will be required to set variable benefits up within the DC plan. “There’s going to be some additional technology build or programming that’s going to need to be done at all of [the] record keepers,” Jiwani says.
Reid also acknowledges that variable benefits come with administrative complexities. For example, the legislation is different in each jurisdiction. “We think we can deal with it. We’re a large provider in the Canadian market. But the legislative requirements in the provincial jurisdictions are not consistent.”
For example, the rules around disclosure and communication with plan members vary. Some provinces require annual communications reminding plan members they must provide instructions about how much money they want from their variable benefit account. And, if members don’t provide instructions, their payments will default to the minimum amount.
Ontario, on the other hand, has a variation on this rule. If members don’t provide updated instructions, they default to their most recent choice. Other jurisdictions are silent on this, Reid adds. “Building a platform that can address all of the nuances of the seven provinces that currently allow for variable benefits, it’s hard to get to scale, especially if you only have two clients doing it.”
In Jiwani’s opinion, larger plan sponsors will help move the needle forward, “. . . because the record keepers will be more willing to build that out if they see some of their largest clients showing interest in it.”
The current pandemic highlights the importance of options such as variable benefits, says Jiwani, noting whenever there’s a downturn people are reminded about risk mitigation, which may push plan sponsors to act.
In times of market correction, employers want to protect their plan members and ensure there’s as much money in their pockets as possible. “That really means low fees all the way through, not just in accumulation, and really good investment products that are appropriate for them at every life stage, not just in accumulation.”