Earlier this month, the Pension Investment Association of Canada came out in support of Ontario’s proposed regulations for variable benefits from defined contribution pension plans. The support came with a caveat, however.
“PIAC supports the proposal that the provision of variable benefits from DC plans is voluntary for employers,” Brenda King, chair of the association, wrote in a letter to Ontario’s Ministry of Finance on May 2.
“Some employers want to sever the relationship with members at retirement for strategic reasons, so this decision needs to be in the control of the plan sponsor.”
In outlining the association’s support for variable benefits, King noted it can be cumbersome for non-financial institutions to offer life income fund products. Remaining in the defined contribution plan, she added, would lower management expense ratios for members without access to a group product. In addition, plan sponsors would be able to achieve economies of scale by keeping assets in the plan, according to King.
Have your say: Will employers embrace variable benefits?
On the other hand, King noted the association doesn’t support a requirement to transfer the entire balance to a variable benefits account because members may want to allocate their funds to different providers or products or delay using their savings. It would also like more clarity on issues such as the treatment of additional voluntary contributions and the ability to draw benefits while still contributing.
“PIAC would point out that under some [defined benefit] plans, there are ‘phased retirement’ provisions that allow the simultaneous payment and accrual of benefits,” wrote King.
“As employees and employers look towards meeting the needs of more flexible work arrangements, this would be a valuable provision and help ‘even the playing field’ between DB and DC.”
In British Columbia, which began allowing for variable benefits in 2004, the uptake among plan sponsors has been minimal, according to Michael Peters, acting superintendent of pensions for the province. He estimates less than one per cent of the roughly 490 pure defined contribution plans registered with his office are offering variable benefits.
The reasons, he says, include the size of the plans. About 65 per cent of plans have less than 50 members, with about a quarter having less than $1 million in assets, according to Peters.
“And oddly enough, the larger plans have fewer members, and I think it would likely be the larger plans that already have these in place. So I think it’s probably a maturity issue. As plans become more mature and either expand or grow their asset base . . . I think, at least in my view, it would become more attractive to offer these,” he says.
In addition, there’s the question of continuing to hold some of the investment responsibility for retired members. “I think a lot of sponsors, rightly or wrongly — and again, in my opinion wrongly — think that the burden would be too cumbersome, the responsibilities of setting up such a drawdown vehicle would be too demanding and possibly expose them to some sense of liability,” says Peters.
And, of course, there can be administrative issues. “For example, in B.C. and Alberta, if you offer the LITBs [life income-type benefits], which is our legislative phraseology for these types of vehicles, then there is a responsibility on the administrator to provide statements similar to those provided to LIF [life income fund] holders. There would be a layered-on admin cost, but I think again, simply asking for institutional-level pricing, rather than relying on the provider and possibly paying retail pricing, might lead to some ease of the concern there,” says Peters.
Peters expects a similar slow uptake in Ontario in the short term.
“Based on my experience — and I can speak confidently on the experience of our Alberta colleagues, because we’re transparent with each other and talk to each other quite regularly — I would really expect again minimal uptake in the near turn,” he says.
“I think that this is an issue that as baby boomers progress through retirement and [are] looking for income streams, I think you might see a demand start to rise.”
Allowing variable benefits in Ontario will eliminate a really important barrier, according to Ofelia Isabel, Canadian defined contribution business leader at Willis Towers Watson.
“It’s too easy for employers to not even think about doing that, because the legislation doesn’t allow it. If it just takes that off the table and now gives you a good reason to be thinking about does this make sense for our organization, for our members and for our plan,” she says.
That said, Isabel doesn’t expect a lot of employers to begin offering variable benefits right away.
“Do I think that a whole bunch of employers are going to be providing variable benefits from their plan 12 months from now? Probably not, because inertia is pretty important, and it’s going to take some time for us to get comfortable with this new world and to analyze it and figure out the benefits that we’d get from this and the risks we’d be taking on,” she says. “I think it’ll take some time, but it definitely puts us on a better path than we’ve been on.”
Given the range of issues and perspectives, will plan sponsors will embrace the concept of variable benefits? Have your say in Benefits Canada’s weekly online poll.
Last week’s question, following on the Human Resources Professionals Association’s list of proposals for the Ontario election campaign, asked who respondents would be voting for. The Progressive Conservatives led the way, with the support of 32 per cent of respondents, followed by the NDP at 29 per cent and the Liberals at 22 per cent. Ten per cent of respondents were unsure, five per cent didn’t live in Ontario and two per cent picked none of three main parties.