Either way, Cohen says there won’t be one “Holy Grail” type of solution. He agrees with Reid that having a solution that puts aside a portion of accumulating pension funds toward an annuity-like product, so the employee can have some certainty in terms of regular income once he or she retires, is a good start. “But again, we need a variety of products and solutions to be available,” Cohen adds. “I can’t stress this enough.”
Whose Job Is It, Anyway?
Movement toward product innovation in the decumulation realm of DC plans has been extremely slow, agrees Nigel Branker, a partner with Morneau Shepell. But he cautions that everyone needs to remember that the Canadian DC industry is still in its infancy compared to other DC markets around the world.
“Canada’s workforce has more unionized and public sector employees, and we haven’t yet experienced waves of people retiring from DC plans,” Branker explains. “In fact, depending on what study you look at, only about 10% of assets invested across all pension plans come from DC plans. Comparatively, the United States has closer to a 50/50 split between DB and DC plans.”
In addition to Canada’s small DC market, Branker believes another reason for the lack of innovation is that only four major insurance carriers own the lion’s share of our DC market. “It’s a good market for recordkeepers, and I would imagine they are happy to hang on to it,” says Branker. “And, since they also offer annuity products, it’s hard to see why they would want innovation in this space. It’ll be up to plan sponsors to put pressure on the industry to evolve decumulation products.”
Branker says fee transparency is one area that really needs work, noting that there is a huge difference between institutional and retail investment management fees. In fact, he notes, after retirement, it’s been estimated that about 20% of a retiree’s accumulated DC pension funds can go toward additional investment manager and third-party advisor fees over time. And, with most employees having no idea what kind of fees they pay, you can bet they also don’t know how much money they are losing to cover those fees.
“So an employee works hard for a good part of his adult life toward setting up his retirement and then loses up to 20% of his and the company’s contributions,” states Branker. “How fair is that? Employers need to ask themselves if they care. They should. Certainly, we can come up with a better way to support members.” Branker says he’d like to see legislative changes to allow plan sponsors to develop innovative solutions to help their employees post-retirement. But, he stresses again, it’ll be up to sponsors to demand and drive those changes.
Future Directions
Janice Holman, a principal with Eckler Ltd., says it’s interesting to note that the U.K. is moving away from the requirement to annuitize DC plan balances at retirement, while the U.S. and Canada are trying to find more ways to increase the use of annuities and provide DC retirees with guaranteed income for life. She says politicians are working toward allowing more flexibility in how retirees spend their retirement income, but she questions whether this is really a good thing.
“Unfortunately, people significantly underestimate how long they will live and the impact of inflation over their retirement tenure and their spending, and overestimate the investment returns they will earn,” explains Holman. “This leads to a very dangerous retirement situation where a lot of people will find themselves living a much lower standard of living than they had hoped or expected—or, even worse, running out of money entirely.”
As of July 2, 2014, she continues, regulations by the U.S. Treasury were implemented to allow members to purchase longevity insurance from a qualified DC plan. Longevity insurance is essentially a deferred annuity that pays the policyholder a benefit if he or she survives to a pre-established future age, typically 85 years old. This is a significant development, notes Holman, as it provides members with an additional more price-effective tool they can use to ensure that they don’t run out of money later in life.
She says there is also a move in the U.S. to allow members to draw retirement income directly from their DC plan. Holman says this will allow them to keep the same investments—and, more importantly, it will lower institutional fees and oversight of their investments by their employer’s pension governance committee.
Here in Canada, Holman anticipates that we’ll eventually see similar product offerings that provide income security for life at a reasonable price, are portable and incorporate some flexibility. Still, it will be up to pension plan sponsors to decide just how much support they want to provide to their members through the decumulation stage of retirement—and then push for product innovation.
Tony Palermo is a freelance writer based in Smiths Falls, Ont.
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