Plan sponsors should consider group decumulation options: ACPM

More employers should be considering offering group decumulation options to employees, the Association of Canadian Pension Management argues in a new report.

While individual options such as annuities, life income funds and registered retirement income funds allow members to maximize their investment choice and enjoy a good amount of flexibility in retirement, they often come with higher fees and may be difficult to navigate for retirees who don’t have a good grasp of investments, notes the report.

“Right now, there is a concern by employers: ‘What’s in it for me to do this?'” says Kathy Bush, chair of the ACPM’s national policy committee and a partner at Blake, Cassels & Graydon LLP in Toronto. “. . . Maybe they’ll attract and retain employees better. Maybe the employees will be more productive if they know their pensions are looked after. Maybe they’ll be more willing to retire because they will have good pensions and it won’t just be people staying on when they’re not as able as they once were.”

Read: PIAC proposes regulatory changes to address decumulation concerns

Plan sponsors might be wary of moving into the group decumulation space because of the increased fiduciary risk, says Mazen Shakeel, vice-president of market development for group retirement services at Sun Life Financial. “The role that the employer plays and their interest in these options could expand if they felt more comfortable that they weren’t taking on additional risks. But right now, as things stand, I think there would be a lot of hesitation from these employers to do something more. . . . I think when they do the risk/reward trade off, what they see is ongoing risk and they want to put a limit to that.”

Bush suggests the introduction of safe harbour legislation to ease employers’ fears. So if a retiree’s money runs out earlier than expected or if a target-date fund underperforms, the employer wouldn’t be liable. “To encourage them, you want to make sure there’s no legal negatives to them continuing the arrangement,” she says.

Read: Pension sector challenged as number of workers retiring hits 5,000 per week

Shakeel notes group decumulation options are more common in the higher education sector, where a retiree may maintain his or her link to the university as a professor emeritus or in a less formal research role. In other organizations, where the relationship is more or less severed upon retirement, plan sponsors worry retirees ”may be taking inappropriate risks in managing the funds. They’re withdrawing too much or they’re not withdrawing enough, and [plan sponsors] have no way of playing an intermediary role like they do when the employee’s working with them,” he says.

One way employers can try to maintain their connection to retirees is through electronic communications, Bush suggests. Whether that’s including them on email campaigns or live streaming workshops, it often doesn’t cost more to keep retirees in the loop.

According to the Association of Canadian Pension Management’s report, decumulation options should include managed withdrawals, limiting access to lump sums and allowing longevity pooling through deferred annuities.

Read: Pension industry urged to look international for decumulation solutions

Another option could be variable benefits, which provide retirees with the same rate of return the fund gets with fund managers continuing to decide on asset mix and specific investments, says Bush, noting this option is only permitted in British Columbia, Alberta, Saskatchewan, Manitoba, Nova Scotia, Quebec and federal jurisdictions. 

Another argument for group decumulation options is the high retail fees retirees may pay once they leave the group plan. “Ontario Teachers’ plan only made [around] 4.5 per cent last year,” says Bush. “They’re really good at what they do. And that’s not their average. But there will be lots of people who did make 4.5 per cent last year. And if you have to pay 2.5 per cent in fees, now it’s two per cent — you’re barely beating inflation.”

Developing group buying power for retirees, either through their employer or through insurance companies, could be a win-win-win, she adds. Members get lower fees, plan sponsors get more engaged and secure employees, and insurers have more educated clients who require less attention than those in individual plans.

“The idea of pooling risk is in a sense the broader topic here,” says Shakeel. “And I think financial institutions play potentially a big role there. We’re in the business of risk and risk pooling.”

Read: Drug prices, decumulation among top issues for 2017

Bush also points out that any additional administration expenses from the plan sponsor perspective could be charged against the plan. “On the discussion of fees, if I can negotiate a 0.5 per cent fee for my employees, even if there’s a 0.2 per cent fee that pays for all the administration that the employer additionally incurs, if I charge the employee 0.7 per cent they’re still way ahead of the 2.5 per cent.”

And Bush doesn’t anticipate that active members would grumble about a slight bump in fees. “Every active employee expects to be a retiring employee, so you’re going to be pretty happy if you think, ‘Jeez, I’m going to be looked after in the long haul,'” she says.