With the provision of defined benefit pensions on the decline and the subsequent growth in defined contribution plans, Canada’s retirement savings landscape is in a significant state of flux.
But one of the underlying implications of the move to defined contribution pensions is the consequent shift of responsibility. While the defined benefit plan member traditionally took a backseat in regards to their retirement savings, the defined contribution plan member must now take the wheel. That doesn’t mean the plan sponsor is completely off the hook, however.
Governance, then, is a growing concern for plan sponsors. With all of the changes in mind, here are six key governance trends for employers to be aware of.
Since decumulation made its way into the Canadian Association of Pension Supervisory Authorities’ guidelines in 2014, it has become a major buzzword, says Jana Steele, a partner in Osler Hoskin & Harcourt LLP’s pensions and benefits practice.
“It indicates that it’s expected the plan administrator will provide information regarding all the retirement products available to members with respect to the payout phase and that the information should allow members to make informed decisions that strike a balance between protection from the risks inherent in the various products and achieving target replacement rates,” she says. “That elevates its importance.”
According to Oma Sharma, defined contribution consulting leader at Mercer, there has been a big gaping hole when plan members get to retirement. “When they have to make the choice around decumulation, they’re faced with very expensive products, they often don’t understand the choices that are in front of them and they’re very vulnerable at that stage to poor advice, to buying expensive products, to having their fees go up,” she says.
“Even if [plan sponsors] don’t want to spend a ton of money to maintain a relationship with those members, what can they do to improve the choices that members face at retirement? I would like to see more attention being paid in that area, as we have a large number of people who are going to be retiring in the next five or 10 years, and I think they need to be looked after before disaster strikes.”
Given the concerns, Mark Dowdell, senior vice-president at Accompass, says he’s seeing more clients focusing on communications around decumulation by, for example, leaning on record keepers to do pre-retirement sessions or targeting issues such as payout products in written materials.
2. Reviewing member outcomes
But before employees reach the decumulation phase, they have to accumulate their funds, and employers have a role to play there as well. Janice Holman, a principal at Eckler Ltd., has seen more and more plan sponsors undertaking a regular review of member outcomes.
“Plan sponsors are spending time to understand, in this current economic environment, what the optimal use of their plan could provide and then looking at how members are actually using the plan to see what it is providing and understanding where gaps are arising.”
Is it down to certain decisions employees are making? Is it the investments in the plan? Is it the contribution formula? Holman is seeing employers trying to answer those questions to determine what’s driving members’ outcomes and then looking at what they can do to improve them.
3. More guidance from the regulators
Employers aren’t the only ones concerned about member outcomes. Governments and regulators at all levels have woken up to the potential ramifications of inadequate retirement savings and what that means, says Sharma.
“It’s fair to say there’s increasing regulatory expectation that DC plans be regularly overseen,” she says, noting CAPSA reissued its pension plan governance guidelines for consultation in March.
“There’s more meat to the guidance that’s being provided on what you should be doing, in terms of selection of providers, monitoring of providers, basic procedures for ensuring audit checks are taking place, your plan is properly administered, those kinds of things.”
Both Alberta and British Columbia require governance policies for both defined benefit and defined contribution pension plans, says Steele. “They’re fairly detailed in the legislations as to what has to be included in the governance policy. It can’t be a policy that’s an off-the-shelf kind of document. . . . It really has to be tailored to the governance practices of the organization.”
Within a governance policy, the documentation will be very important in the long term, Steele notes, because if a court were to look at something in the future, it would focus on the process rather than the results. “Let’s say, for example, you make a bad investment decision. If the process you have in place is prudent and you did all the right things, you’re probably not going to be held liable for it because it’s a process-driven question.”
The current CAPSA guidelines include a self-assessment tool, but Dowdell says there’s an onus on employers to complete their own questionnaires as well. “It’s been an ongoing challenge to get clients to do that piece of the homework,” he says.
4. Monitoring and reviewing third parties
It’s also important to monitor and review third parties, such as the investment manager and the funds, as well as the pension provider or administrator.
The issue appears in legislation across Canada, says Steele. “In virtually every jurisdiction, the wording is essentially along the lines of: ‘You can delegate to third parties, as long as those third parties are personally selected by the administrator and they are prudently monitored.’”
Since regulations are continually evolving, a regular review of the investment options is imperative, says Matthew Williams, head of defined contribution and retirement at Franklin Templeton Investments. “Are plan sponsors remaining abreast of the pension reform issues as they relate to investment selection and are they ensuring they are acting in the best interests of their plan members by making sure the investment options are timely and there is adequate choice?”
To review a provider, Holman suggests employers should take a closer look at how it’s engaging with plan members. “There was a lot of trust in the past and, really, a hands-off approach,” she says. “You hired an administrator and you just assume they’re going to do a good job, and people weren’t necessarily digging into the weeds as much as they are today.”
Where there has been more oversight of providers or administrators, it has generally been around fees, she adds, noting employers will look elsewhere if they find them to be too high. “Problems have arisen that are making plan sponsors pay closer attention. As they are doing their governance, they are spending more time looking at the details of the plan. That starts to highlight some of the data issues that might be there. A lot of our clients are spending time working with providers to make sure the records are up to date and correct.”
5. Better and more targeted communications
Plan sponsors are also becoming more active in overseeing communications about the pension.
One reason is to ensure the employer’s voice and perspective is separate from that of the plan provider or administrator, says Holman. “Plan sponsors are looking a little bit more closely that what they’re sending to their plan members is in the plan members’ best interest and represents the plan sponsor’s objective to the plan.”
Another reason is evolving demographics that are translating into more targeted and personalized communications. “A lot of plan sponsors, now that they’ve had DC plans for a number of years, are saying, ‘Certain ways we communicate are not effective at all.’ So they’re looking at ways that are effective and are willing to adjust the approach, the media, how they go about messages,” says Holman.
It’s also important to communicate investment options in a clear and effective manner, says Dowdell. “From a governance perspective, just because someone is in a target-date fund by default, the communications effort is really not over. Plan sponsors should be communicating with anybody that has not provided investment instructions, regardless of what that option is.”
6. The evolution of the governance committee
Ultimately, good plan governance is the responsibility of a pension governance committee, a body that has evolved significantly over the years.
“[Plan sponsors] thought the oversight of a DC plan was just going to be: ‘Set up the plan and let it run. We don’t need to do too much oversight; we just need to look at the investment options and make sure they’re operating well,’” says Holman. “Now, the mindset is expanding quite a bit to include member behaviour, outcomes and managing the communications risk.”
In Manitoba, if an employer provides a defined contribution pension to 250 or more employees, it’s mandatory to have a pension committee. There’s no such rule for federally regulated defined contribution pensions, says Scott Anderson, a vice-president of retirement at HUB International STRATA Benefits Consulting in Winnipeg.
“There is a guideline for who should be on a committee and how it should be formulated,” he says, noting the federal guideline includes committee elections, having representation from unions or employees in different lines of the business and how often the group meets.
Dowdell says the makeup of a committee depends on the amount of oversight the plan sponsor is looking for. “Some of our clients require quarterly committee meetings, including investment performance and an annual review; others are semi-annual. It depends on what their needs are.”
The best practice is to meet at least twice a year, says Williams, noting it’s “a doctrine of no surprises. You don’t want the regulator turning up at your door saying, ‘Have you done this? Are you following the CAPSA guidelines?’”
The formality of a committee will often come down to the size of the plan, says Sharma, who works with smaller plans that spend a lot of time on good governance. “But I would say, for the most part, when you get to $30 million and up, it starts to become more meaningful in the plan sponsor’s eyes and more attention starts being paid to how the investments are doing, the committee wants to meet more often and things like that,” she says.
Ultimately, the landscape for good governance in Canada is still a work in progress. Sharma, however, says more people are treating the CAPSA guidelines as set rules. “Now, everyone recognizes there are legal risks if you’re challenged and you’re not following those guidelines,” she says.
The regulators don’t want to push plan sponsors too heavily, she adds, noting there’s a latent tension in that fact.
“They are afraid that if they overregulate, they will push plan sponsors away from coverage. That’s the dance that the regulators in Canada are doing, because if they are too heavy-handed, plan sponsors just won’t set up arrangements at all. That’s the balancing act they’re trying to get right.”
Jennifer Paterson is the managing editor of Benefits Canada.
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