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.

Read: Ontario budget touts variable benefits from DC pension plans

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?

Read: The shifting landscape for variable benefits from DC plans

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.

Read: Employers encouraged to focus on the entry, exit points of DC plans

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.

Read: How plan sponsors can blend DB features into their DC pension plans

Copyright © 2019 Transcontinental Media G.P. This article first appeared in Benefits Canada.

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See all comments Recent Comments

Joe Nunes:

I was surprised that someone from CLHIA would argue against the idea of keeping more funds with recordkeepers that are predominantly insurers.

I disagree. DC members don’t generally terminate or retire and buy a fixed annuity. Rather, they transfer the funds to a bank, mutual fund advisor or insurance broker, and rarely to a new pension plan.

To me, creating an easy way for the funds to remain in a well run group plan with some clear guidance on withdrawal rates will benefit members long-term.

We just need the rules in place to protect employers that provide this in good faith. We are not far off from a PRPP/delegated model that will relieve employers of risks and responsibilities of former employees while providing a benefit that is tangible and helps get us to the end result the entire industry desires – cost effective retirement savings

Wednesday, March 13 at 11:27 am | Reply

Jean-Daniel Côté:

I’m in agreement with Joe’s comments above.

I would add that I disagree with Mr. Sanderson’s comments to the effect that group RRIFs/LIFs already exist with low costs comparable to those of DC plans. To my knowledge, only very large DC sponsors have been able to negotiate such arrangements, and some providers are simply closed to the idea.

The majority of retiring members’ assets staying at insurance companies goes to their retiree orphan plans, where fees, albeit lower than retail, are still significantly higher than what they would be in a large DC plan. A situation the industry should continue working on to improve.

At the very least, DC and other CAP sponsors should ensure they understand the fee structure applied to their retiring members – and negotiate them if possible. They should also review the information materials provided to members at decision time to make sure it is completely transparent regarding the fee increase they are looking at.

Wednesday, March 20 at 1:58 pm | Reply

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