Oops, there goes my pension

The decisions we ask employees to make at retirement are both complex and consequential. In many cases, there’s no going back. Whether you’re a DC member choosing an annuity or a DB member choosing a pension payment option, the decision is significant and irreversible.

So, what role should plan sponsors play in equipping members to make these critical decisions? Legal and fiduciary considerations notwithstanding, business, ethical and societal issues loom large. After all, when boomers bungle their retirement decisions, not only do they and their families pay a high personal price, there can be consequences for society at large. In addition, plan sponsors run the risk of brand and reputational damage.

On the DC front, Canadian plan sponsors have made great strides on the savings side of the retirement income equation. Thanks largely to the CAP Guidelines, we’ve introduced layers of supervision to help members balance risk and reward—and take advantage of group pricing.

However, the moment members hit retirement (the payout phase), we cut them loose. When did we decide that, left to their own devices, employees will suddenly become savvy and rational financial consumers? What makes us think they have the skills needed to navigate a daunting (and some might say predatory) retail market in order to choose the right products at the right price to protect their long-term financial interests?

On the DB side, the decisions are more limited and, with the issue of outliving one’s retirement savings off the table, the consequences less dire. That said, we still overestimate the decision-making abilities of most members. Having provided them with a DB plan that makes decisions for them and shields them from the pitfalls of adverse savings and investment choices, we suddenly turn around and expect them to make complex decisions about payment options and survivor benefits—decisions that are beyond the financial literacy and numeracy skills of many Canadians.

The good news is that with the boomers starting to retire in waves, industry focus is shifting from building a pension to receiving a pension. This shift is reflected in CAPSA’s new Guideline No. 8 for DC plans, which instructs plan sponsors to provide members with a realistic retirement income projection and balanced information on payout options. The appointment earlier this month of Canada’s first-ever financial literacy leader is another indication we’re moving in the right direction—paving the way for a new generation of retirees with the knowledge, skill and confidence needed to make responsible financial decisions.

But for older boomers, it may be too little too late. For them, plan sponsors might want to minimize the “oops” factor by adopting a strategy along the lines of the guarantee recently introduced in the U.K., which will give everyone in a DC plan or private sector DB plan the right to “impartial face-to-face guidance” at retirement.