Sometimes, the best way to explore the unknown is by following in the footsteps of someone who’s been there first.
When it comes to in-plan decumulation options from a defined contribution pension, whether the plan was grandfathered into existing legislation or is registered in a province that allows the option, many employers — and their retirees — have already been down the path.
With both the federal and Ontario governments looking to allow DC plan sponsors to offer more flexible drawdown options from their plans, Benefits Canada asked five recent DC plan retirees to share their experiences choosing how to take their retirement savings.
Anne Robb joined the Saskatchewan Pension Plan in 1988, two years after it was founded. She learned about the new plan through local media and ended up taking on a role promoting it in the community.
“It was a very good way of introducing the plan and making people a little bit more conscious of money growth . . . and also conscious of the fact that, if you saved, through interest you would have a retirement in the end.”
Robb and her husband Bill run a farm and own a fertilizer business in Melfort, Sask. Since they’re self-employed entrepreneurs, the flexibility of the SPP was ideal. “I was very sold on it because, unless you paid through a pension plan with an employer, you didn’t have an opportunity to have a pension plan. Whereas, the Saskatchewan Pension Plan opened that niche for those people who didn’t have what is considered ‘earned income.’”
Between 1986 and 2010, the SPP’s annual contribution limit for members was $600, regardless of whether they had room in a registered retirement savings plan. “Available RRSP room didn’t come into the equation until 2010, when the limit was increased to $2,500,” says Katherine Strutt, the plan’s general manager. “Since 2010, members must have available RRSP room in order to contribute.”
As of Jan. 1, 2020, the annual contribution limit is $6,300 and is indexed to the change in the year’s maximum pensionable earnings.
The plan also allows members to retire at any age between 55 and 71, but they must have their account converted to an annuity or a prescribed registered retirement income fund by the end of the year in which they turn 71.
Robb turns 71 in April, so after saving into the plan for more than 30 years, she applied for retirement last year. She says she contributed to the plan most years. “At the time of applying for retirement, my balance was at $84,240.66, of which I had contributed $39,752.01.”
Robb isn’t taking full retirement since she’ll continue to run the business while beginning to draw down her savings. “I’m keeping it in the plan,” she says. “They’ve done very well in their investments over the years — there has been ups and downs, like everyone else, but I decided to keep it in.”
Currently, the plan’s decumulation options include a guaranteed life annuity from the plan, a life annuity from an insurance company, a transfer to a prescribed RRIF or locked-in retirement account or a combination of the plan annuity and transfer. “We are working on a variable benefit (RRIF-like option) and we expect to roll this out to members in 2020,” says Strutt.
Robb is choosing the RRIF option because she will receive a monthly cheque and anything left in her account will be paid out to her beneficiary.
The University of British Columbia’s faculty pension plan was established in 1967, just four years before Paul Marantz joined the university as an associate professor in political science.
“Back in 1971, it was a simpler world with fewer choices and I was automatically enrolled,” he says. “At that time, they had only one option: the balanced fund. There was nothing to be decided on my part so I could continue in blissful ignorance until I approached retirement.”
Throughout his 35-year career, Marantz contributed five per cent of his gross salary and UBC contributed 10 per cent. “I am very cognizant, given the state of pensions, especially in the private sector, that this is a superb pension and one reason is the high level of contributions.”
The plan’s original investment option is a well-diversified custom balanced fund that contains exposure to a number of investment managers and strategies, including real estate, at a very low fee. While it’s still available today, plan members can also design their own asset mix using the five other investment options available.
“I did realize, by the time I turned 60 . . . I would have to make some decisions,” says Marantz. “Up until that point, I had been on auto-pilot, just let my money go into the balance fund, even when they established the other funds, because I didn’t have the knowledge to make a decision on equities or fixed income and so on. But at age 60, I realized that, when I retired, I would have to make some major decisions, given the nature of the plan.”
At retirement, if members choose to leave their funds in the plan, the decumulation options include a variable payment life annuity, an RRIF-type payment account from non-locked funds or a life income fund-type payment account from locked-in funds. The plan also allows members to transfer other registered monies into the plan. And, if they transfer out and then change their minds, they can transfer the funds back in. Most members choose a combination of these options, and Marantz was no different.
“Initially, I just left the money there and continued to educate myself,” he says, noting he learned of a good high-yield bond fund and absolute-return fund outside of the UBC plan. “I decided to transfer some of my money . . . to take advantage of those funds, and left some of my money at UBC, to get different investment vehicles and to get further diversification.
“In order to get access to the absolute-return fund, you had to have an investment of at least $1 million, so I took that out of my plan and $400,000 remained at UBC.”
When Marantz retired in 2006, he decided the VPLA wasn’t the right option for his circumstances. “For one, I wanted to be able to leave my estate to my children when I passed away. And secondly, as I thought about it, because I had enough funds to fund my retirement on an ongoing basis. In other words, I aimed to take out, let’s say, four to five per cent a year, and I thought I could sustain that with market yield. So I didn’t see any advantage for myself to go into the variable annuity.
“I was also cognizant — because I think we got good materials from the plan — that it might be more advantageous to wait.
And, if I was concerned about outliving my money, then at age 75 or 80, I could still go into the variable annuity plan at that point. So that was a backup option if I needed a higher cash flow.”
François Beaudry spent the majority of his career in a defined benefit plan. But when his employer, Astral Media, was acquired by Bell Media Inc. in 2014, he was enrolled in a DC plan.
For five years, he contributed two per cent of his gross salary, with Bell contributing six per cent. When he retired at the end of February 2019, as director of industrial relations and training, he had saved $95,000 into his DC plan.
Beaudry, who’s based in Montreal, opted to draw down his DB plan and take the Quebec Pension Plan at retirement, pushing out his DC plan and group RRSP until he turns 71 in a few years. However, Bell introduced a variable benefit option on April 1, 2019, so he’s able to leave his DC savings with the organization until he’s ready.
“One of the elements that influenced my decision to leave my DC plan with Bell was flexibility — I can withdraw it at any time and I didn’t have to commit to a decision at the time,” says Beaudry. “My reasons also included much lower fees, disbursements — these can start at any time and I can decide the amount — and the lifecycle tool. It’s worry-fee for anyone who’s not familiar with investing in the stock market.”
While Beaudry moved over to Bell with the Astral Media acquisition, the organization’s acquisitive history has meant some employees have been saving into DC plans since 1993. “That was one of the reasons why we wanted to launch [the variable benefit option] now, because when we were discussing this as a company and with our board back in 2018, that was 25 years that some of our people had been accumulating in DC,” says Eleanor Marshall, Bell’s vice-president of pension and benefits and assistant treasurer.
“And we’ve had people leave and retire out of DC and transfer their money out over the years, but we can see it coming that it will be an increasing number of people reaching that retirement milestone. So we wanted to have this available as we start to see that demographic push through the plan.”
The variable benefit, or Bell retirement income option, is permitted under federal legislation with the minimum and maximum amounts based on RIF and LIF levels. “Essentially, you stay in the pension plan, but you move your account from an accumulation account to one that you will draw income out of,” says Marshall. “And the income starts at age 55. If you leave before 55, you’re not considered a retiree at Bell, in any of our arrangements. Of course, we are allowing people to leave their funds there and come back to it if they want, and start income as soon as age 55 and later.”
One of the important parts of keeping DC savings with the plan is the low fees, she says, noting Bell has $25 billion in DB plan assets. “We have incredible scale to invest in, and our DC offerings are built using the same managers and the same funds that our DB plan invests in.
“So the level of fees that we’re able to have in the DC plan is really low — 25 to 35 basis points for lifecycle funds. And you can’t get anywhere near that when you port your money out to a retail option after retirement; you’re looking at two per cent. That 150 basis point plus difference between staying in the plan and moving your money out in retirement can mean about five years more of your money lasting. So it’s a huge advantage.”
Another important element is that Bell employees have become comfortable with the DC plan’s platform and investment options, so it’s in their best interest to stay in a familiar environment.
“People aren’t really comfortable, nor are they really good at, making their own investment decisions, and so the more we can build intelligence into the plan design and get as many people into the default options, the better,” says Marshall. “As they become comfortable with that as an employee during their working career in accumulation, we want them to stay in that same environment through retirement.”
By the time Patti McDonald retired in February 2020, she had spent her whole career in British Columbia’s public sector.
Following a number of years in the provincial government, she had moved to the college sector, where she worked for Camosun College in Victoria. In both roles, she was in a defined benefit plan.
“The pension plan had portability,” she says, noting she was able to transfer her public service pension into the college plan. “At that time, it made a lot of sense for me to do that; it was a slightly better plan. The other reason I did that is my husband has continued to work for the government of B.C., so he’s contributed to the public service pension plan. It made sense for us to have a bit of diversity in our pension plans. When we got to that stage, we had some options, so we could maximize what we had.”
For the last 13 years of her career, McDonald was a human resources consultant at the University of Victoria, where she was enrolled in the combination pension plan. Technically a hybrid between a DB and a DC arrangement, it operates on a DC basis, with contributions from the university and plan members.
For instance, as of Jan. 1, 2020, employees below the YMPE contribute four per cent and the university contributes 6.37 per cent. Employees above the YMPE contribute six per cent and the university contributes eight per cent.
At retirement, plan members have three main options: leave the plan entirely; convert their savings into a variable benefit account and pay themselves a monthly income; or use their account balance to purchase what the university calls an internal variable annuity. They can also choose to split their assets between the variable benefit and the annuity.
“We have the added complexity over a straight DC plan of calculating our annuity reflecting a minimum DB calculation,” says Christa Taylor, the university’s director of pension services, noting that whichever amount is higher is the amount of pension the member will receive.
“So if their DC account balance gives them an annual pension of $50,000 and their DB calculation is $70,000 per year, the $50,000 would be paid for . . . out of the DC account and the extra $20,000 would come from a separate fund for our defined benefit account.”
McDonald is opting for the variable benefit, though she admits pension planning can be a bit overwhelming. “The information that I’ve gotten from the pension services here has been great and very helpful, but I’m probably not what you’d call a real risk-taker in terms of the money and also, I don’t feel like I’m terribly savvy.”
Also, she has her deferred DB plan, as well as RRSPs and tax-free savings accounts. “What makes the most sense for me is to take it this way,” she notes. “But I think it’s a great option to have. At a time in your life where you’re wanting to simplify a bit, to have to deal with something that’s really complex is a bit daunting. But I can certainly see that, for someone who may have worked and contributed to the plan for many, many years, has quite a balance and is far more savvy, it creates a lot more options.”
A member of the Co-operative Superannuation Society pension plan for about 38 years, Glenda Gartner retired in January 2015 from Affinity Credit Union.
While she moved around a lot during her career, Gartner had always worked at credit unions and co-operatives. “I was probably 19 when I got my first job in the system. And of course, at 19, I thought I could go forever without having to contribute because it would be ages before I’d need the money.”
Founded in 1939 in Saskatoon, the CSS pension plan is one of the country’s oldest and largest DC plans. Today, it’s offered by 330 co-operative and credit union employers across Canada and has 48,000 members. Each participating employer chooses its mandatory employee contribution levels, as well as the percentage at which it matches those contributions. “If I remember correctly, I often took on four [per cent] because if you contributed — at Affinity Credit Union for my last job — up to a certain percentage, they matched it,” says Gartner. “So I certainly did that. I contributed as much as they would match, for sure.”
For investment options, the CSS plan historically offered a single balanced fund, but it added a money-market fund in 2005 and a bond and equity fund in 2011. “I was extremely happy when the CSS opened up our options for investing,” she says.
At one point, while managing the branch of a credit union, Gartner was licensed as a mutual fund sales representative. “For me, it was a natural fit to look at retirement options, look at what you’re doing for income, because I was always dealing with people, saying, ‘OK, how are you going to manage when you retire?’”
When CSS plan members reach retirement, the decumulation options include taking the money out of the plan, purchasing an annuity from the plan or an insurance provider, taking a variable benefit or a combination of the last two options.
Jennifer Paterson is the editor of Benefits Canada.