On the same day Keith Dixon began working at the University of Victoria, the campus gained another new addition: its combination pension plan.
Introduced in July 1968, the plan is fairly unique in the world of Canadian pensions. It operates on a defined contribution basis, with the university and plan members each contributing. But when employees retire, they have three main options: to leave the plan entirely; to convert their savings into a variable benefit account and pay themselves a monthly income; or to use their account balance to purchase what the university calls an internal variable annuity. Plan members can also choose to split their assets between the variable benefit and the annuity.
The annuity provides plan members with a guaranteed income for life, with the amount varying depending on fund performance each year and other factors such as the pool’s longevity experience. If it drops below a minimum payment calculated on a defined benefit basis, members are given supplemental payments to bring their total benefit up to the minimum.
Dixon, now chair of UVic’s pension board, says the university’s decision to take on the additional responsibility of in-plan retirement options reflects its attitude towards supporting employees. “Right from the beginning, the university had a very good employer attitude to providing the best possible pensions for its members. They see the benefit, in terms of attracting employees, of having a good plan.”
Then and now
Both of the combination plan’s options for members are unique in their own right. In 1997, the plan was one of the first in Canada to start offering a variable benefit account; essentially, a life income fund that operates within the plan. And the internal variable annuity is an option the vast majority of Canadian DC plans have never used — and currently don’t have access to.
On March 27, 1988, the federal government introduced legislation to prevent DC plans from offering fixed annuities, an option considered to put plan sponsors at risk of being on the hook for potential shortfalls. Variable annuities, which only offer members an estimate of the annuity they’ll receive each year and a warning that performance may vary, were swept up in the overhaul. Just a few DC plans offer the option, because they were in place before the government’s changes. These include the University of British Columbia’s faculty pension plan, Saskatchewan’s Public Employees Pension Plan and the University of Victoria’s combination plan.
The UVic plan is a particularly interesting case, because it may well be a preview of the future of DC arrangements. Since these pensions are relatively young in Canada, most DC plan sponsors are now experiencing their first wave of retirements, but they’ll soon be able to provide more decumulation options for their members.
In its 2019 budget, the Ontario government said it would move forward with amendments to the Pension Benefits Act to allow DC plans to provide variable benefits, making it the seventh province to do so, behind British Columbia, Alberta, Saskatchewan, Manitoba, Quebec and Nova Scotia. New Brunswick and Newfoundland and Labrador haven’t implemented legislation, and all three territories and Prince Edward Island follow federal legislation, which took effect in 2015.
In terms of decumulation options, major changes are afoot at the federal level as well, with the government’s 2019 budget proposing that variable payment life annuities be permitted for registered DC plans and pooled registered pension plans. The changes are expected to come into effect in 2020.
Industry and retirement groups have greeted the provincial and federal proposals with enthusiasm, calling the measures better options for DC retirees looking to turn their savings into income.
“The deal here that will give plan sponsors comfort is it changes the way we talk about what happens in DC plans with employees that will terminate or retire,” says Jillian Kennedy, leader of Canadian DC and financial wellness at Mercer. “Before [this], every plan sponsor was talking about how to get employees out of their DC plan.”
Rosalind Gilbert, an associate partner and senior pension actuary at Aon, calls the federal government’s VPLA proposal a welcome announcement. “But it’s always the kind of thing where [the] proof is in the pudding,” she adds. “Until we see how they roll it out and how they implement and help to support it, it’s hard to see if it’s going to be really effective or just a great idea that didn’t roll out the way that would have maximized it.”
Benefits for plan members
In the case of VPLAs, it will be up to the provinces to amend their respective pension legislation to allow for them after the federal government amends the Income Tax Act and the Pension Benefits Standards Act. But once that happens, both the variable annuity and variable benefit will expand the in-plan decumulation options available to DC plan sponsors and, subsequently, their employees.
“By having employees stay within the plan, [employers] can . . . solve a lot of challenges that they would have to deal with today,” says Kennedy. “There is definitely a case for stating that they can help employees improve their overall outcome at retirement and sustain that quality while they’re in retirement . . . as opposed to going into a retail space, or even these rollover group products that have a significant increase in cost.”
For employers that have both a DC plan and a legacy DB arrangement, the new options also go a long way towards creating equality among retiring plan members, notes Kennedy. “There’s definitely been a need in the marketplace to have some kind of common platform where every employee, . . . when they get to retirement, would have some type of a common approach.”
Plan members in arrangements that eventually offer VPLAs will benefit from reduced investment risk and longevity pooling with their fellow annuitants. But Fred Vettese, the former chief actuary at Morneau Shepell Ltd., says he doesn’t see either being the biggest draw for members. “If the underlying fees can come down substantially as a result of people being covered by these things, I think that would be a really good thing, and probably the most important thing as far as these plans are concerned.”
Ironing out wrinkles
However, experts note that both the federal and Ontario proposals are still in their early days with plenty of details still to be ironed out.
In Ontario, some are expressing concern with the so-called all-or-nothing requirement at the time of transfer for a member’s variable benefit account, which doesn’t allow them to keep part of their balance in the plan. “The flexibility to have a portion of your savings providing some kind of variable income and a portion doing something else, that’s the standard we were hoping for,” says Gilbert. “[Ontario plan members] have to say, ‘Yes, I want all of my savings to provide variable income for life,’ and some people might not want that.”
The Pension Investment Association of Canada, which praised Ontario’s proposals and said it was happy to see a 50 per cent unlocking allowance for members who transfer their assets out of a DC plan, recommended in a letter that the provincial government also consider including an option to allow for 50 per cent unlocking within the plan.
As for the federal proposals, industry experts say they’re a strong start but should go further. Todd Saulnier, chair of the national policy committee at the Association of Canadian Pension Management, notes while the federal provisions allow for VPLAs as long as there’s a pool of at least 10 members, this model would realistically need scale to be successful. For example, if a small group with VPLAs experienced one death, or an exceedingly long life, that would skew the overall longevity of the pool.
“I would expect that large plans would be the ones who may look at this,” he says. “Very large employers with thousands of retirees in a DC plan . . . would potentially say, ‘This could be good, we’ve got scale, we’ve got multibillion-dollar DC plans, we can do this.’”
A knock-on effect for PRPPs?
The flip side, however, is that VPLAs may be inaccessible to smaller plans. “I think [the VPLAs] are necessary tools, but they are not sufficient,” says Roman Kosarenko, senior director of pensions at George Weston Ltd. “[The federal government] limited VPLAs to registered pension plans and PRPPs — as such, for smaller employers, a PRPP is basically the only option, and we haven’t seen much traction on the PRPP front.”
These changes should prompt the federal government to revisit the existing framework for PRPPs and determine how to make them more appealing to smaller plan sponsors, he adds.
As well, based on the federal proposal, VPLAs won’t be open to group registered retirement savings plans or tax-free savings accounts, notes Saulnier, though the ACPM and other groups have recommended this should be the case. “We really think there should be a solution for just about anybody who wants to buy income like this to be able to buy it from some sort of provider. The percentage of employees covered by a pension plan is decreasing every year, especially in the private sector. If you have savings, it’s likely going to be in RRSPs or TFSAs. I do think that’s really where the next phase will be once we’ve got a framework. I think there’ll be a push to open it up.”
There’s also the question of whether employers will even be interested in the new options, since offering in-plan decumulation strategies for members means more administrative responsibilities and continued communication with retirees.
“It’s hard to say whether most employers would want to take on the extra responsibility to provide this,” says Gilbert, referring to VPLAs. “It’s fair to say most employers would like to see their employees able to manage their post-retirement savings more effectively, but they don’t necessarily want to be the ones that fund that or take responsibility for it.”
Specifically for variable benefits, there’s currently no inducement for plan sponsors “other than just good will,” she adds, particularly because they would retain fiduciary duty for more members. “With registered defined contribution plans . . . there is a liability for continuing to provide education, information, tools and resources to any member of the plan.
“If they have employees who have left them but they’re still holding money in the plan for those employees, whether for deferred pensions or one of these variable benefit options, they still have this liability and responsibility and oversight and, sometimes, cost.”
To make the option more appealing to plan sponsors, Gilbert suggests Ontario could consider adding a liability discharge into the legislation, similar to what happens when plan members transfer their funds into an insurance company’s post-retirement group plan.
“If the legislation provided that kind of release for transfer into a variable benefit option, that would help employers feel like it was a good idea to put those in.”
Plan member choice
More than 50 years after he joined the University of Victoria, Dixon is drawing down his retirement income. When he turned 71, he opted for a variable benefit rather than the plan’s internal variable annuity.
“I’m not going to not have anything for my heirs; that was a big consideration for me,” he says. “Also I’ve got quite a lot of investing experience, so I wanted to have the option that, if I didn’t like what the plan was doing, I could go elsewhere.”
Dixon and other plan members benefit from the plan’s considerably lower fees — his outside investments have a fee of 0.85 per cent compared to the plan’s 0.25 to 0.3 per cent — and the plan has performed well over time, he says.
“As a founding member of the plan . . . it has worked out superbly for me. I started my pension in 2011 with a very considerable sum of money, and in only one year since then has the amount of money I’ve taken out exceeded the amount the plan made in returns. Overall, the plan has been very successful for me, and I think I can speak for my colleagues that it has been fairly successful for them.”
Christa Taylor, director of pension services at the university, notes the plan’s options provide a level of choice for members that they wouldn’t have otherwise.
“As complicated as it can seem on paper, when we meet with our members . . . they really do appreciate the options that the plan provides,” she says. “It’s a wonderful option for our members in choosing the retirement path that works for them.”
Kelsey Rolfe is an associate editor at Benefits Canada.