Defined contribution pensions are taking a bumpy ride in the coronavirus pandemic, with plan sponsors and their members facing volatile stock markets, financial uncertainty and interruptions to business as usual.
Whether related to plan design, investment options, decumulation or overall financial well-being and education, what issues are taking the spotlight this year and what changes are required to safeguard these plans for future crises?
In the weeks after the initial pandemic shock of mid-March, the call to help DC plan sponsors and members grew. In April, the Financial Services Regulatory Authority of Ontario confirmed it would permit a suspension of employer contributions to registered DC plans on a temporary basis. A week later, the Canada Revenue Agency said it would waive the one per cent minimum required employer contribution on these plans for the remainder of 2020.
Many plan sponsors opted to leave their contribution levels alone, but among those that did make changes, most were comfortable dropping their contribution requirements to the minimum one per cent rather than going down to the zero allowed by the legislation, says Rosalind Gilbert, senior actuary and associate partner of retirement and investment consulting at Aon. “Then there were plan sponsors that had employees in all provinces . . . so even though CRA said it was going to be possible to drop to zero, some of the provinces had different things you had to do, such as advance notice or different requirements.”
For DC plan members who opted to temporarily reduce or suspend their contributions, there was a knock-on effect to their plan sponsors’ matching contributions, notes Jean-Daniel Côté, vice-president of retirement at BFL Canada Consulting Services. “There was a reduction in cost for employers — not voluntary, for most of them — but because employees were cutting down on how much they were putting in.”
Todd Saulnier, chair of the Association of Canadian Pension Management’s national policy committee, says the CRA feels it’s important, once the crisis passes, that plan sponsors and members make up for any changes to contributions. “They’re actually in the midst of writing regulations that would allow for doubling up of contributions next year to make up for contributions that didn’t happen this year for employers that took advantage of that situation. I don’t know how many employers are going to take advantage of it, but at least they’ve thought through that situation going forward.”
The current climate offers DC plan sponsors an opportunity to rethink their contribution levels, he adds. If an employer can only afford to contribute three, four or five per cent, it could introduce a plan design that encourages members to contribute the rest. “Rather than a strict match, maybe it’s a 50 per cent match — the employee puts in 10 per cent and the company puts in five per cent, it’s a total of 15. Maybe there are some interesting ways to slice that pie and encourage behaviour toward better outcomes.”
These types of plan design discussions often come back to automatic features. Indeed, in a July letter, the ACPM suggested the Ontario government amend the Employment Standards Act and the Pension Benefits Act to allow for auto-enrolment and auto-escalation features in capital accumulation plans.
While the conversation predates the pandemic, the letter noted that, during challenging times, employees who are participating in a workplace pension plan may have to make difficult decisions to lower their contributions due to other financial needs.
“With the knowledge we have of employee behaviour, it could be very challenging to have these same employees increase their contribution to the pre-pandemic level voluntarily once the financial situation stabilizes,” it said. “Allowing employers to amend their pension plans to include auto-enrolment and auto-escalation features will assist employers in helping employees get back on target for a secure retirement.”
While countries like the U.S. are miles ahead of Canada on automatic features, different provinces also allow different options. Until recently, Saulnier was based in Nova Scotia, where many of his plan sponsor clients had these features in their plans.
“But in Ontario, I was surprised to see it’s really not common. It’s because the Employment Standards Act precludes that because you have to give explicit consent before employers can take deductions from wages.”
In periods of a loss or decline in income, it’s important for employees to be able to find money where they can. But in a program with auto-escalation, he notes, plan members could temporarily drop their contributions, for instance, from six per cent to one per cent of pay. When the crisis is over, auto-escalation could gradually increase the contributions to ensure people don’t stay at that temporary low rate through inertia.
“If [plan members] are going to reduce their contributions to make ends meet, when they get back to work and can afford it, they need to put money aside again,” says Saulnier.
“And to have it automatic, I think, would help reduce the number of cases of poor outcomes.”
In terms of investment lineups, Zaheed Jiwani, a principal at Eckler Ltd., says he’s seen an increase in trading in plans where members have fund choices. “Trading went up in line with the broader market volatility. . . . We ended up seeing people pull money out of equities and sought what they felt were safer investments in money market largely and, a little bit of a lesser extent, to fixed income.
“Unfortunately, we didn’t see people move that back, so they did miss out on that ultimate rebound that happened afterwards. Unfortunately, people that reacted, reacted too quickly and didn’t react again.”
In addition, Jiwani saw some money flow out of target-date funds, which he calls disconcerting since it’s a long-term, buy-and-hold strategy. “Quite honestly, the members who did move their money, in large part, got burned, which is consistent with what we’ve seen over 10, 20, 30 years in individual investments — people generally don’t make the right decisions; they generally sell low and buy high and they don’t move back fast enough. So that’s what we’ve seen in large part on the plan member side.”
On a positive note, record keepers’ call centres were overwhelmed by plan members in the early stages, says Gilbert. “We did see a lot of the record keepers . . . put out good information about staying the course, keeping a long-term focus, that kind of thing. Where we’re involved in helping employers with communication, we suggested something quite similar.”
For plan sponsors, many already considering investment changes held off during March and April for fear of members interpreting these negatively, says Jiwani. “Very rarely did we see plan sponsors make investment lineup changes during the peak of the market volatility earlier this year.”
But previously scheduled investment changes are now coming through, with some employers reflecting on their lineup in light of how members behaved during the worst of the market crash, he adds. “We’ve seen a lot more self-reflection from plan sponsors and looking at what’s available to their plan members and making sure that’s appropriate.”
The Co-operative Group Ltd.’s DC plan takes a long-term perspective, says Michael Dodd, the organization’s director of pensions, treasury and shareholder services. “From a pension committee point of view, we’re not necessarily trying to provide the top-tier returns every single quarter, it’s more of a long-term approach. So we’re trying to remind [plan members], while they’re seeing a shock in their balances at the end of Q1, it’s a long-term approach.”
Another opportunity, he notes, is reminding employees to look at their risk tolerance profile to gain some comfort that they’re currently in the
Michelle Loder, partner in DC solutions at Morneau Shepell Ltd., is talking to plan sponsor clients about ensuring members are educated on the importance of rebalancing to an asset mix that aligns with their risk tolerance.
She also suggests low levels of plan member changes aren’t necessarily a good sign. “Could it also be that the changes haven’t happened because [members] are, in fact, inert in managing their programs? . . . To me, unless individuals are in a target-date plan, which is managing risk over time, with a market correction that we saw, with that amount of volatility, one should have expected changes for the very fact that rebalancing should have been taking place.
“This is one of the critical pieces of investing in à la carte menus and creating a portfolio of different mixes of categories — they will have strayed off their targeted mix, which presumably they arrived at because they did a risk tolerance questionnaire,” she adds. “And they’ll have strayed off of that if the market moves as it’s been moving. If people were understanding the rebalancing activity that’s on their shoulders when they’re investing in à la carte menus, we should have seen activity. The fact that no one made any changes during a period of market volatility says we’ve missed something.”
The decumulation conversation is also getting louder, with Canada clearing many of the legislative hurdles over the past couple of years. As of Jan. 1, 2020, for instance, Ontario now allows variable benefit accounts, with New Brunswick and Newfoundland and Labrador the only provinces still lagging.
The next step is for record keepers to set up products to administer decumulation in the same way they administer accumulation, offering a convenient program that plan members can transfer into at retirement and shows plan sponsors there’s no material change or increase in fiduciary risk, says Saulnier. “If that sort of relationship exists, I think it would be helpful.”
The proposed advanced life deferred annuities and variable payment life annuities, which the federal government introduced in the 2019 budget, may have slipped off the radar during the pandemic, he says, but the industry is still advocating for these options. “If these arrangements are set up smartly and pool mortality and investment risk, you could see individuals using that as their base floor retirement income needs in a much more cost-effective manner than a straight-up annuity, which we know most people don’t buy upon retirement.”
The pandemic and its accompanying market volatility has increased the importance of decumulation strategies for plan sponsors, says Jiwani, along with the importance of overall financial wellness. “It may not happen in 2020, for obvious reasons, . . . but certainly, there’s a lot more work being done in all of those areas for a variety of plan sponsors.”
The Co-operators Group has been working toward introducing variable benefits, but was waiting for Ontario to pass its legislation. “COVID has delayed a few things, but we’re still moving forward,” says Dodd. “We’re planning to present to our board for approval later this year or early next.”
Personally, Dodd believes decumulation strategies offer a definite opportunity to improve Canadians’ retirement readiness, pointing in particular to the impact of fees in the retail environment. “The research that I’ve seen — and it obviously depends on the specific numbers — seems to indicate the savings can literally add years . . . to individuals’ retirement income and I think that is significant.”
With low interest rates, potential for lower returns and continuing volatile markets, Dodd says it’s more important than ever for plan sponsors to consider decumulation. “The fees savings can be that much more important during a low interest rate environment. To me, that’s all the more reason to put the push forward.”
Côté is working with many plan sponsors that are focused on implementing decumulation solutions for their members. “They’ve put that aside for now, wanting to make sure the business was doing better,” he says, referring to one plan sponsor in particular. “We’ve actually just started re-opening that discussion.”
But it’s important to remember the move to decumulation is about more than just specific products, says Loder, noting it also includes providing plan members with independent financial advice and support in making the right decisions when they reach retirement on topics like Canada Pension Plan and old-age benefits timing, understanding tax rates and setting up cash-flow budgets.
“There, we’re not offering a decumulation product or feature in the design, but we’re emphasizing education and support on making decumulation decisions as people exit the DC plan.”
Overall financial wellness
Plan member education and support is tied directly to their overall financial well-being, which is a growing focus for DC plan sponsors.
The Co-operators has seen past downturns as an opportunity to remind members they have ownership of their own retirement planning, says Dodd. “We encourage them to seek financial advisor input to their personal situation because it’s important to understand that financial planning is a very unique and personal process. On a regular basis, we try to remind them of that, but during a downturn, I think it becomes an easier message for people to realize.”
Indeed, the pandemic is demonstrating the importance of ensuring plan members have the proper support to navigate challenges that impair their financial security, says Loder, noting it’s about more than just saving for retirement. “Savings is certainly there and everyone’s worried that they’re not saving enough, but it’s not the first thing you hear out of employees these days about what’s concerning them the most.”
As a result, plan sponsors are revisiting their retirement programs and considering how they can be constructed for broader financial wellness goals, she adds. “COVID didn’t launch the conversations around financial wellness and total well-being, but it certainly has accelerated those conversations among pension committees to question whether or not their plans are designed the right way to promote that objective.”
In considering other options, such as emergency savings programs, Loder says plan sponsors are asking whether it’s right for the pension plan to be mandatory, for the employer to dictate the level of contributions and even how the plan is communicated.
“It’s not uncommon for plan sponsors to send out messages to employees around, ‘You’re leaving money on the table. You haven’t contributed enough to get the maximum company match.’ And while that’s a good message in terms of promoting a savings behaviour and culture, there’s some question about whether it’s — although well-intentioned — maybe misplaced.
“Perhaps we need to take a step back from that message as that’s not the only objective. Perhaps there’s a way to not leave money on the table, but to redirect it into another appropriate program that will meet another financial need. There’s some kind of debate and questioning about that.”
One example is plan sponsors offering a tax-free savings account as part of the retirement plan, says Saulnier. His employer, Mercer Canada, allows employees to choose to put their contributions into a DC plan, a registered retirement savings plan or a TFSA, with an employer match either way. “That allows me to build up my nest egg [and] my emergency fund. . . . So maybe that’s something folks will want to look at going forward, giving that flexibility to help get people back to where they were and give them the comfort where they’re prepared for the next emergency, whenever that may be.”
DC plan sponsors can also look to their plan members’ behaviour during the crisis to better understand their plan membership, says Jiwani. “From there, it will then inform them further in terms of what they need to do from a plan management perspective, whether it’s how they communicate to plan members and how they segment that communication, how they make changes to their investment lineups and how they implement other aspects of their programs with respect to financial wellness or decumulation or retirement readiness assessments.
“We’ve got a lot of information that we can look at. Plan sponsors should take advantage of this time and look at that information and really learn from it to see how their members behaved.”
We’re seen a lot of self-reflection from plan sponsors and looking at what’s available to their plan members and making sure that’s appropriate.
Jennifer Paterson is the editor of Benefits Canada.