No cost certainty with CAPs

Plan sponsors that think moving from DB to DC would provide them with cost certainty may be mistaken.

Capital accumulation plans (CAPs) aren’t designed to provide enough retirement income and could lead to some workers living in poverty during their golden years, explained Hugh O’Reilly, head of the pension, benefits and insolvency practice group at Cavalluzzo Shilton McIntyre Cornish.

“I think as people end up in these circumstances, we will see litigation,” he said during a session at Workplace Pensions: Next Generation or Final Frontier in Toronto on Friday.

O’Reilly expects retirees will try to hold plan sponsors accountable for the way these plans have operated and the fact that plan sponsors ought to have known that the contributions were insufficient to support people in their retirement.

He also noted that employers might think they’re off the hook from a legal perspective as long as they follow the CAP Guidelines.

“Whether it’s a DB plan or DC plan, it’s a fiduciary relationship,” O’Reilly said.

He suggested CAPs could be improved by doing the following:

  • increasing contribution levels;
  • lobbying for a list of safe harbour investments;
  • lobbying for plan sponsors to make investment advice available and mandatory for plan members;
  • putting pressure on plan sponsors and service providers to charge less; and
  • giving members the ability to stay in the plan after retirement.

“At a certain level, at least as they’re presently constructed, they’re designed to fail,” explained O’Reilly. “I think we need to work together to take some steps to try and make these plans better.”

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