Canada’s workplace DC pension plans continue to struggle. Higher employer contributions can offset that trend, but they’re generally not taking place, leaving the onus on employees to increase their retirement contributions amid a slow economic recovery.
The latest DC Retirement Index from Towers Watson—a benchmark that indicates the effect of changes in capital market returns and annuity purchase prices on the potential retirement income of a Canadian worker in a DC plan—shows only a slight increase in monthly pension assets. The index moved from 13.4% of monthly wage in November 2012 to just 15.2% as of Sept. 1, 2013. Before the crisis, in December 2007, the figure was 22.3%.
One reason for the continuing struggle of DC plans is their funding design, which differs from that of DB plans. The latter are enjoying improved solvency due to higher deficit funding by plan sponsors, market gains and rising long bond yields.
“DB plan sponsors have been able to use improving financials to consider de-risking strategies to lock in a portion of the recent market gains,” explains Ian Markham, Canadian retirement innovation leader at Towers Watson. “However, DC plans do not have access to the same opportunities and will not benefit as readily from the same market gains.”
Another reason why DC plans are in bad shape is that most employers are not increasing their contributions, says Michelle Loder, Canadian DC business leader at Towers Watson. “Unlike with DB plans, DC plan sponsors don’t make extra contributions to make up for poor performance in past years, which can result in significant deficits relative to the plan members’ expectations,” she says.
As a result, the onus is on DC plan members to make higher contributions in times of poor investment performance, Loder explains. Alternatively, employees have to accept a lower level of accumulated savings from which to draw an income retirement, she adds.
While 78% of DC plan sponsors say retirement security has become more important for mid-career employees over the last three years, only 23% of sponsors expect their pension plans to play a bigger role in their firm’s total compensation strategy over the next five years, according to Towers Watson’s 2013 Pension Risk Survey. Eighteen percent of sponsors anticipate that retirement plans will play a lesser role.
The employer contribution rates for almost 75% of the DC plans in Towers Watson’s Benefits Data Bank have remained unchanged. (Employee contribution levels have generally not changed either.) But some organizations are re-considering the ability of their DC plans to provide a target retirement income in the new economic reality.
Seventeen percent of plan sponsors in the Benefits Data Bank have increased their maximum employer contributions, from an average of 5.1% to 7.3% of pay.
The insufficient retirement savings of workers ultimately affects employers’ bottom lines because if people don’t have enough money to retire, they may choose to continue working—and an aging workforce is a drag on productivity for most industries, Loder explains.
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