Replacement income levels generated by capital accumulation plans (CAPs) declined to 63% in the first quarter of 2014, according to Eckler’s Capital Accumulation Plan Income Tracker (CAPit).
While investment returns were strong in the quarter, the drop (from 64% in the last quarter of 2013) was driven by a combination of lower interest rates, which raised annuity prices and wage increases.
A variety of factors influence replacement income levels generated by CAPs, including interest rates, contribution levels, fees, investment returns and changes to members’ pay.
“While plan members have little control over many of these factors, it is essential that they understand what drives their CAP income projections up or down in order to take a more active role in preparing for the financial realities of retirement,” says Janice Holman, a principal in Eckler’s Toronto office.
The March 2014 release of CAPSA Guideline No. 8 for DC pension plans attempts to address this need by recommending that plan sponsors provide members with information on how the DC plan works and its role in helping members build adequate retirement savings together with government benefits and personal savings; tools designed to illustrate an account’s accumulated value at retirement; and an estimate of how much retirement income could be generated from the accumulated savings.
“Focusing on what the plan will provide, which ultimately answers the ‘What’s in it for me?’ question, will help drive engagement in the plan and change the member focus
from accumulating a savings pot to accumulating a retirement income,” she explains.
“Individual members need help to understand whether they are currently on track to build an adequate retirement income and what factors can affect the amount of income their plan will provide, so they can adjust their savings behaviours accordingly.”
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