For defined contribution plan members who were intending to retire in the first half of 2020, the market crash caused by the coronavirus may have upended those plans.
Markets reached a trough in March, followed by some recovery, but with little clarity on what investments will do next, it’s a challenging time for plan members to make major decisions about starting the decumulation phase of their retirement journey.
Compared to the retail environment, in-plan decumulation options provide retirees with access to higher-quality investment options and lower fees, says Hugh O’Reilly, executive in resident at the Global Risk Institute. And in a situation where markets are in turmoil, keeping members in the plan can be more helpful than ever.
However, Canadian employers have been slow to introduce in-plan options, says Todd Saulnier, chair of the Association of Canadian Pension Management’s national policy committee. He suspects this is because the legislation is quite recent and, in some provinces, nonexistent.
Indeed, Ontario’s slow move to legislation — which, in the case of variable benefits, was finally fast-tracked to take effect on Jan 1. 2020 — prevented many major DC plan sponsors from implementing in-plan decumulation, says Michelle Loder, vice-president of DC solutions at Morneau Shepell Ltd. “Having large groups of their workforce in their multi-provincial plan, having much of their workforce in Ontario, it was problematic to make this feature available when you couldn’t have it for the majority of your workforce, so many multi-provincial companies would delay for that reason.”
Beyond legislation, another stumbling block is the lack of hard guidance from regulators, adds Saulnier. For example, while the Canadian Association of Pension Supervisory Authorities established guidelines for capital accumulation plans in 2004, there’s no equivalent for decumulation. “It’s something the plan sponsor industry has been pushing for or looking for so that the same level of guidance would be there for a plan sponsor that wants to do it [and] they don’t feel like they’re sticking their neck out by doing this.”
The guidance has to address issues around the type of information plan sponsors have to communicate, particularly around helping members make well-informed decisions, as well as fee and return expectations, he says.
The CAPSA is currently reviewing its 2004 guidance, notes Saulnier, but the pandemic is delaying that type of necessary work. Ultimately, the economic shock accompanying the virus may encourage plan sponsors to take action to better protect their pension members’ retirement viability.
On the other hand
As a counterpoint, plan sponsors may not be too keen to add features that increase their workload in terms of governance, says Jean-Daniel Côté, vice-president for retirement at BFL Canada, noting he’s seen plan sponsors consider in-plan options only to ultimately take them off the table. “It becomes a little more complicated simply because you become responsible for a lot of stuff.”
And, generally, there’s limited appetite for making changes during the pandemic, he adds. “My largest client . . . [is] so busy dealing with the business. It has plans to implement a couple of things specifically for retirees this year and next year, [but] it’s all on hold, no one has time for it.”
However, a handful of plan sponsors have already put in-plan decumulation options in place. For Saskatchewan’s Public Employees Pension Plan, its structure allows for significant flexibility. “[Employees] have the option of choosing to leave their money at PEPP or moving it out to a financial institution,” says Dara Sewell Zumstien, manager for member and stakeholder relations at the province’s Public Employees Benefits Agency. “If they leave their money at PEPP, they can open a variable benefit account or they can purchase the Saskatchewan pension annuity fund for a life annuity or they can choose a combination.”
The PEPP’s members can also customize their income streams. Within the variable benefit account, they can choose monthly, yearly or ad hoc, lump-sum payments. They can also choose to delay drawdown from the plan until they reach age 72.
Given the hit taken by DC plan portfolios at the beginning of 2020, it’s a comfort for the PEPP’s employees to know they don’t have to change where they’re invested or sell assets at depressed prices, notes Sewell Zumstien. And if they do want to make changes, they can discuss it with an expert.
“Because we have the financial planning team on staff, it definitely gives our members an advantage to contact them, talk about how to structure their portfolios, thinking in the big picture of their other sources of income — really helping them recognize that market volatility is going to happen and how to structure their portfolio to meet their cash-flow needs in retirement because of that.”
Martha Porado is an associate editor at Benefits Canada.