Towers Watson has released its first DC Retirement Age Index—and the results don’t look good.
While falling equity markets and declining interest rates have presented a “double whammy” for DB plans, the index shows there’s also been an unexpected, significant impact on DC and RRSP plan members, says Michelle Loder, Canadian DC business leader at Towers Watson.
The index acts as a “pension freedom” tracker, showing how changes in capital market returns and annuity purchase prices affect the potential retirement age of a Canadian worker.
It tracks the investment portfolio of a plan member who has contributed from age 40 to 60. The plan’s performance determines the funds available at retirement to purchase a life annuity from an insurance provider. Depending on the markets, the plan member might choose to retire early—or be obliged to work longer in order to achieve the funding required to purchase the annuity.
For a benchmark, the index begins with a member who started contributing in 1988 and chose to retire at the end of 2007. That member’s annual annuity income, as a percentage of their final employment income, is the benchmark for later generations who start contributing at age 40 in a year after 1988.
“Pension freedom” comes when an individual who stops contributing at age 60 can first purchase the benchmark annuity.
The 2008-2009 recession hit the savings and annuity purchase prices of later generations hard and delayed their pension freedom well beyond age 60. For a plan member who reached age 60 at the end of 2009, poor market returns while they were in their late 50s pushed their pension freedom back further, to age 62, if they wanted to have the same level of income as the 60 year-old who retired just two years earlier.
Unfortunately, the trend didn’t improve. Later generations were also hit by higher annuity purchase pricing caused by declining interest rates. The result? Reaching age 60 at the end of 2010 would have meant pension freedom arrived closer to age 64.
This is bad news for plan members, but the impact on plan sponsors is proving equally unexpected.
“Given the continuing economic pressures, many employees who rely heavily on DC savings are delaying retirement, making it more difficult for organizations to determine if, when and how many older workers will retire, and how to manage their staffing needs,” says Ian Markham, Canadian retirement innovation leader at Towers Watson.
These concerns are not likely to fade any time soon. In the shadow of a recession, continuing market turmoil and declining interest rates, the pension freedom age for Canadians is now drawing close to 67 years, according to the index.
“A DC approach can provide some funding stability for plan sponsors, but there may be longer-term implications,” says Loder. “Especially in uncertain economic times, employers may be well advised to carefully consider how to provide better education and tools to help DC plan members manage their retirement savings and expectations—or be prepared for many more retirement-ready employees who may be working by necessity to achieve their pension freedom, rather than by choice.”