Defined contribution pension plan sponsors may face workforce planning challenges coming out of the coronavirus pandemic as older plan members whose account balances were hard hit by this year’s market volatility delay their retirements.
“We saw a lot of presenteeism coming out of the [global financial crisis] — are we going to see that again?” asks Janet Rabovsky, an independent investment consultant. “[We could] see older workers not retiring when they should and basically stop the advancement for people that should be progressing in their career. . . . Certainly, all you need to do is go back to the recession [in] the late ’80s and early ’90s, where it was very difficult to get jobs; people went back to school because there was nothing out there. We saw some of that in the [global financial crisis] as well.”
In Benefits Canada‘s 2020 CAP Member Survey, plan members expressed concern for the impact of the coronavirus crisis on their savings and planned retirement age. Two in five (43 per cent) said the recent market downturn has impacted their target retirement age, with 12 per cent saying they expect to work one or two more years, 11 per cent citing an additional three years at least, seven per cent planning for five and eight per cent saying they expect to work longer but aren’t sure how long. Five per cent said they expect they won’t be able to retire and plan to work as long as possible.
As well, the survey found fewer CAP plan members are on track to meet their target retirement savings, with just 59 per cent somewhat or definitely on track in 2020, down from 65 per cent in 2019 and 68 per cent in 2017. Of those who said they aren’t on track or aren’t sure, about a quarter (27 per cent) said they were on target before recent market declines.
Jill Wagman, managing principal at Eckler Ltd., says employers she’s spoken with have expressed concern about the potential for older employees delaying retirement after the pandemic. This highlights an existing challenge with DC plans, she adds.
“In my opinion, there [was] a problem with DC plans pre-COVID. Employees are just not saving enough and so [that impacts] their ability to retire. There are all kinds of studies out there that show account balances are just not enough for employees to retire. This is just going to make that situation worse for sure.”
In a recent webinar, Jillian Kennedy, leader of DC and financial wellness at Mercer Canada, acknowledged the stress some late-career plan members are likely feeling. “During a financial crisis, there is a lot of anxiety over, ‘Will I have enough [funds to retire]? Am I in a situation where I could potentially even outlive my assets?'”
According to Kennedy, these employees need financial advice, reminding them they’re still long-term investors, even as they prepare to leave the workforce. “Within defined contribution-type arrangements, we tend to see employees actually take their money and convert it into products that allow them to continue to be invested. It could even be invested over another 20-plus years. . . . Thinking about that long time horizon, even in retirement, is really important.”
In addition, these plan members shouldn’t be thinking of retirement as purely an amount of money, but rather considering what they want their day-to-day retirement lifestyle to look like.
“In order to do that, these employees will definitely benefit from taking a look at potential retirement income options . . . [and] what that could look like, as far as a monthly or annual payment for them, even if they’re a ways away from retirement,” said Kennedy. “This helps to provide control and confidence, so they can envision their retirement and know that, as they go through this tough and challenging time, they can still achieve the retirement goals that they’re looking for.”
Going forward, says Wagman, plan sponsors can help younger and mid-career plan members avoid this potential situation by encouraging them to undertake retirement readiness assessments that help them determine how much they’ll need to save. “When you’re looking to solve this problem, it really needs to be solved at the younger ages.”