The dramatic sell-off in stock markets around the globe has been very bad news for participants in capital accumulation plans (CAPs). This is a critically important time for CAP sponsors to communicate with plan participants and to mitigate plan risks where possible.
Member statements for the third quarter of 2008 will be hitting plan members’ mailboxes in the coming weeks. These statements will reflect losses for the quarter of more than 18% in the S&P/TSX Composite Total Return Index, year-to-date losses of more than 31% and year-over-year losses of 33% (both as of Nov. 5).
The doom and gloom that was already pervasive in September worsened considerably in October. Steep losses in global financial markets have continued and some Canadian economists are now predicting that Canada will join the spreading global recession.
Although CAP participants have weathered other market downturns in recent years, no one has ever been faced with a financial meltdown of the current magnitude, which the media describes as “the worst in 50 years” and “matches or exceeds 1929”. We expect that CAP plan members may well look to their employer plan sponsor for comfort and maybe some guidance. In anticipation of such possibility, CAP sponsors may wish to formulate a “CAP Crisis Management Plan.”
A CAP Crisis Management Plan
1. Communicate with CAP participants – It has been said that the 3 most important elements of a crisis management plan are communication, communication, and communication. Although some might believe establishing a CAP crisis management plan might be an overreaction, we believe CAP sponsors who fail to provide employees with timely communications concerning the impact of the global financial crisis on their CAPs may end up with some risk exposure.
Most CAP services providers have prepared communication pieces specific to these current events. A common theme is that CAP members should refrain from panicking and “stay the course” on their CAP investments and contributions; and portfolio changes should only be made within the context of their personal investor risk profile. We believe this is good advice. However, the communications response may well entail a level of advice-giving, which has been a problematic issue for many CAP sponsors.
2. Review the statement of investment policies and procedures (SIPP) for your CAP – If you don’t have a SIPP, you should immediately address the need for one. If you do have one, this is a good time to dust if off and see if it is effective in its current form. For example, does the SIPP appropriately address investment risk exposures of employees nearing retirement?
3. Anticipate employee demand for guaranteed investments – The traditional form of guaranteed investments utilized by CAPs are guaranteed investment accounts (or GIAs under insured plans), guaranteed investment certificates (or GICs under trusteed plans) or pooled guaranteed funds (a pooled fund consisting of GIAs or GICs). The use of guaranteed instruments has waned in the past few years because of low interest rates, but we expect employees’ demand for such funds will grow as a result of the market conditions.
New guaranteed investment products are also now being introduced to CAPs by some insurers. One insurer offers market-based target-date funds with a financial guarantee that the unit value on maturity will never be less than the highest unit value achieved by the fund while it has been held by the plan member.
Guaranteed minimum lifetime withdrawal benefit products (GMLWB) provide guarantees on retirement annuity values in respect of deposits invested. We note that plan sponsors should be cautious of financial guarantees, as the market for GMLWB products is very thin so pricing may not reflect a competitive marketplace. Utilizing products featuring guarantees may also impair the ability of plan sponsors to make provider changes, should other factors suggest that to be appropriate.
4. Stay the course – Don’t let the current market events drive changes to the SIPP and fund offerings in your CAP. Instead take these events into account as part of a regular review process in respect of your SIPP, but continue to focus on long term goals and objectives.
Once the financial markets re-stabilize, CAP sponsors will have an excellent opportunity to carry out analysis to determine how their plan members have coped in weathering the storm. A review of statistics on inter-fund transfers and personal rate of return studies can provide important indicators of whether the CAP’s investment offerings continue to be appropriate and on whether education efforts have been effective.
5. Remember employees who are covered by DB plans – many media commentators are not well-informed on pension matters in general, and DB plan members are often no more knowledgeable. Media coverage on pensions may be frightening them, even though their pension entitlements are not directly linked to the current financial crisis.
6. Take into account the special concerns faced by CAP participants who are nearing retirement – There is no escaping the fact that those who may have been planning to retire in the near future utilizing their CAP assets will be forced to re-assess their readiness for retirement. Some may have to postpone their retirement plans as a result of a drop in their account balances. This may prove to be a challenge for employers as much as for employees.
As in all difficult times, there are lessons to be learned from this global financial crisis. In the weeks and months to come, there will be time for CAP sponsors to review those lessons and make adjustments to ensure that CAP members are better prepared to weather future crises, which will inevitably occur.
Greg Hurst is a principal and national DC practice leader at Morneau Sobeco in Vancouver. Fred Vettese is executive vice-president and chief actuary at Morneau Sobeco in Toronto.