While defined contribution plans can currently pay variable benefits to members at retirement in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec and Nova Scotia, the Ontario government is moving forward with legislation to allow the option. But are DC plan sponsors actually interested?
Michael Dodd, director of pensions, treasury and shareholder services at the Co-operators Group Ltd.:
Defined contribution pension plans continue to grow and mature in Canada. At the same time, discussions are increasing around how these plans can help members prepare for retirement once they receive their pension income, commonly referred to as the decumulation phase.
More provincial governments have been adapting legislation to allow DC plans the option of providing payments to retirees directly from their plan, referred to as variable benefits. The Co-operators Group’s pension management department has been watching these developments closely and researching the feasibility of adding variable benefits. We are pleased the Ontario government has recently announced it too will allow variable benefits.
There are many positive aspects of adding variable benefits:
- Significantly reduced fees, as DC plans that provide variable payments could charge lower fees to their members because of the large assets under management — which could literally translate to several years of additional income in an individual’s retirement;
- An opportunity to prepare and educate employees around their financial readiness for retirement, an issue employees are increasingly looking to their employer to provide;
- Provide an end-to-end retirement solution for members, which would improve the ease of dealing with one point of contact for both the accumulation and decumulation phase;
- The ability to offer retirees simple investment choices with appropriate default options.
In addition to these benefits, it shouldn’t be overlooked that defined benefit plans can successfully offer variable payments to their retirees as part of their structures. So why shouldn’t DC plans have the option as well?
Further, variable benefits are already a successful part of some Canadian DC plans. Some plan sponsors may be riskaverse to adding retirees to their governance requirements, but we feel these risks are overstated. DB plans’ experience in dealing with retirees can be leveraged in this regard.
We urge DC plan sponsors to be open-minded about variable payments. It’s a potential feature that can greatly benefit plan members.
Ronald Sanderson, director of policyholder taxation and pensions at the Canadian Life and Health Insurance Association:
Pension plans are intended to provide guaranteed lifetime incomes to plan members. Defined contribution plans use life annuities to achieve this goal.
While plan members invariably want pension plans to provide guaranteed income throughout retirement, they often also want flexible access to accumulated funds — what they view as ‘their money’ — to address irregular expenses. But employers often worry that providing greater flexibility undermines pension plans’ raison d’être. DC plan service providers are frequently caught in the middle of these competing employee and employer preferences.
Balancing an appropriate mix of guaranteed income options (such as the Canada Pension Plan, old-age security and private pensions) with flexible income sources (such as registered retirement savings plans, registered retirement income funds, tax-free savings accounts and non-registered savings) is reasonable and appropriate. The trick is choosing the right vehicles to meet those goals.
Cost-effective flexible income instruments, like group RRIFs/life income funds, already exist to address the need for variable income, while retaining investment options and low costs comparable to those offered by DC plans.
Where consumers want to take on significant longevity and investment risk through more flexible instruments, employers generally want those individuals to have personalized, expert advice rather than expecting the employer to provide it — with the employer, perhaps, assuming the risk related to that advice.
Limited demand from members means employers see little advantage, and considerable cost and risk, in offering variable benefits within DC pensions when comparable flexibility can be obtained through other means.
Variable benefits within DC plans seem to duplicate existing options without adding significant value. They seem to be a solution in search of a problem. If consumers want to manage assets to provide flexible post-retirement income, there are readily available ways to do that without jeopardizing guaranteed lifetime income. Employers tell us that pension plans are the wrong vehicles for individuals wanting to take on those risks.