As defined contribution plans mature and members retire, the pension industry may want to look abroad for solutions to the decumulation dilemma, participants at an Association of Canadian Pension Management event in Toronto heard yesterday.
“The theme that’s coming to the fore is, ‘What are plan members going to do?'” said Hugh Kerr, vice-president and associate general counsel at Sun Life Financial, during the event. “[Decumulation] is not one size fits all.”
Common vehicles, such as life income funds and registered retirement income funds, provide investment choice and advice and allow retirees to manage their withdrawals. “But are they optimal?” Kerr asked. “Not everyone is looking for that level of independence, maybe.” Some retirees, he added, may prefer investment vehicles that are closer to their workplace savings plans.
When it comes to possible solutions, Kerr pointed to international options to consider, such as Australia’s superannuation plans or qualified longevity annuity contracts in the United States, where employees can choose to defer up to 25 per cent of their required minimum distributions to age 85.
During the discussion, participants brought up other possible vehicles, such as buying annuities while still an active member to take advantage of a variety of interest rates, creating more portable defined contribution plans so an employee’s final employer isn’t responsible for a lifetime of savings and implementing more rigorous financial education for employees.
Also speaking at the event was Susan Nickerson, a partner in the pensions and employment practice at Torys LLP. Nickerson spoke about target benefit plans, which New Brunswick pioneered in 2012 and Ottawa is now considering for federally regulated plans.
Plan members must individually agree to converting their defined benefit plan to a target benefit arrangement, although unions can consent on behalf of their members, Nickerson noted. She also pointed out that if a target benefit plan terminates within five years of its inception, members will receive the benefits, if they’re greater, that they would have gotten under the former defined benefit plan.
Many federally regulated employers are expressing interest in target benefit plans, according to Nickerson. “I always thought . . . once you go to DC, you never go back, but I’m not seeing that. I’m seeing a lot of interest in target benefits,” she said, adding it would have been useful if target benefit plans had been available 10 years ago when many plans switched from defined benefit to defined contribution.