Going by the numbers, 2010 was good to Canada’s capital accumulation plan (CAP) industry. With double-digit growth in both defined contribution (DC) and group RRSP assets, the Top 10 CAP providers managed to pull off a hefty 15.6% jump after a 5.6% loss in 2009.
But while the numbers are looking good, the industry faces some challenges ahead, according to this year’s CAP providers. Dig beneath the numbers and you’ll find an industry that’s deeply concerned about how CAP members reacted—or, more accurately, did not react—to the financial crisis. According to some providers, inertia prevailed as members grappled with a mix of fear and a lack of financial knowledge, despite years spent providing them with sophisticated tools and resources to help them make decisions. In the wake of the worst market crisis since the Great Depression, CAP providers are now left with a clearer sense than ever that the future of their industry lies not in education and information but in sound plan design—and improved financial literacy skills for all Canadians.
While panicked investors around the world sold their stocks during the 2008 crisis, the Canadian CAP space was eerily quiet, according to some providers. Tom Reid, senior vice-president, group retirement services, with Sun Life Financial in Toronto, notes that during the crisis his firm saw less than one-tenth of 1% of the $35 billion in assets under management shift from active investment to safer options such as cash or money market funds. Reid feels that the inertia “worked in the members’ favour” as markets bounced back in 2009. Michael Campbell, vice-president, group retirement services, marketing, with Great-West Life in London, Ont., also saw a lot of inertia among members post-crisis. “They did not engage much when the market went down or up,” he says. “Many members didn’t open their statements during the crisis. Transaction activity levels show most didn’t do anything.”
While it’s been noted that the failure to act probably benefited most members post-crash, their lack of engagement with or interest in what was going on in their group retirement savings plans during the turmoil underlines an ongoing challenge with CAPs—how to engage plan members to take an active role in staying on top of their savings.
“The major impact of the financial crisis on DC investors was a loss of confidence in their investment decisions,” says Colin Ripsman, vice-president, Phillips, Hager & North in Toronto. To him, the crisis merely exacerbated an already persistent lack of confidence among many members around managing their CAPs. “Even more members wound up lacking confidence to make investment decisions. We now face a situation where more members are failing to make active investment decisions and are falling into the default investment offered under the plan,” he says.
Moreover, after years of providing information and education in every conceivable form—print, face-to-face, online, etc.—Ripsman believes that this can only go so far and that it hasn’t made much of an impact in terms of engaging members to take the reins and make decisions. “You have seen over the last 10 to 15 years an increased focus on member education, and the tools and processes have become a lot more sophisticated,” he explains. “However, the conclusion of the industry is that you can spend an awful lot and you are just moving the needle a little.”
Claude Leblanc, senior vice-president, group savings and retirement, with Standard Life in Montreal, believes members not only lack confidence but also lack the knowledge to set realistic targets and goals for investment performance. “A lot of members think they can expect a return on their investment of 12%,” he says. “The reality right now is about 6% and, as a result, people will have to save more money to reach the same outcome. The problem is that people who retired five years ago enjoyed double-digit returns—when returns are halved, people need to change their assumptions and behaviours.”
Peter Arnold, head, investment and CAP consulting practice, with Buck Consultants in Toronto, agrees that, post-crisis, the industry needs to do a better job of setting people’s expectations about investment returns. “We think there is a mismatch between industry expectations of returns and what plan members will likely get,” he explains. “We think 5% is realistic given investment fees that members usually pay, but we are still seeing 6% and 7% in some financial modelling. The industry needs to spend time helping members expect more conservative returns going forward.”
The employer’s role
The mix of inertia and a lack of understanding about how saving and investing work comes across loud and clear in the recent Benefits Canada CAP Member Survey. According to the survey, 65% of CAP members are confident that their employer-sponsored retirement plan will meet their needs—yet compared with some other key numbers in the report, the results are puzzling. For example, just under one-fifth (18%) of members surveyed say that they are satisfied with the plan because they know it will be enough to live off of and that it increases with the cost of living. At the same time, a further 42% say their plans decreased during the crisis and they do not know why.
Such numbers point to a basic lack of understanding about how markets work and what the potential impact of market volatility can be on CAP savings. The big question is, Can employers alone change these misperceptions and behaviours? And, is it ultimately their job to do so?
Michael Dodd, director of pension and shareholder services with The Co-operators in Guelph, Ont., believes that the financial crisis was a wake-up call for CAP members around what their role is. “It’s been a reminder to members that they have to be responsible for paying attention to the benefit,” he says. “We’ve been educating members that there is a risk in CAPs that they have to manage. I think many plan sponsors would suggest that they have been providing a lot of information to members, and it’s sometimes been difficult to obtain confirmation that they’ve read and are engaged with the information.”
Susan de Vries, relationship manager and director of CAP services with SEI Investments in Toronto, agrees that plan sponsors and suppliers have come up with tools and products that “are as simple as they could be—they are easy to understand, and they offer easy enrollment.” The problem is that they can only go so far.
The Numbers At a Glance
• Our Top 10 CAP providers pulled off a double-digit gain in a tough year. Total assets stand at $89.6 billion, a jump of $12.1 billion from 2009.
• At the top of the list, Sun Life Financial and Great-West Life retain the first and second spots, while Standard Life and Manulife Financial have switched third and fourth positions over last year. And two new entrants have earned their way onto the 2010 list—BMO Group Retirement Services (GRS) and Co-operators Life Insurance Company.
• Total assets of the top defined contribution (DC) providers stand at $41.4 billion—a whopping 11.9% increase and a major gain Compared with last year’s overall loss of 3.8% on the DC side. New to the DC list is BMO GRS.
• One of the biggest gains has been in the group RRSP space, with a 17.9% jump in assets up to $40.5 billion. Two group RRSP providers have made it into the Top 10—BMO GRS and Morneau Sobeco.
Financial literacy
Getting people to take responsibility for their financial future isn’t just something that concerns the pension industry. The federally appointed Task Force on Financial Literacy is getting ready to release its findings and recommendations in December. The group is tasked with creating a national strategy to support initiatives across Canada aimed at improving financial education. It defines financial literacy as “having the knowledge, skills and confidence to make responsible financial decisions”—a goal the CAP industry knows well after years of working to support and educate members around their group retirement plans.
While employers have long been tasked with ensuring their CAP members are equipped to make financial decisions within the plan, the Task Force recognizes that financial skills are now crucial to a healthy social fabric, where individuals are able to make informed decisions that will impact their financial health and that of their families (and Canada as a whole).
Given its historic role in trying to engage Canadians to understand their retirement savings options, the CAP industry is watching to see what recommendations the Task Force will come up with. “It’s a huge issue,” says Ripsman, who notes that a lack of financial literacy and a resulting fear of making investment decisions is a problem plan sponsors have to deal with among members. “In the future, Canadians will increasingly need to manage their own retirement savings through either DC plans or personal savings,” he explains. “It’s unrealistic to expect an employer to educate employees to the point where they are comfortable making informed investment decisions—it is an unfair burden to place on employers.”
The industry would like to see solutions to equip Canadians to make financial decisions—and understand and appreciate the importance of financial planning and pensions in general. Dodd looks forward to the Task Force findings and would like to see financial literacy in the school system, with pensions as part of the curriculum. “A lot of people think that pension plans are something that just happens. They don’t truly understand pensions or retirement planning. So there needs to be a higher degree of responsibility in the education system to educate people about what pensions are about and what the different types are.”
Leblanc hopes that a national strategy for financial literacy can help instill in Canadians the value of saving. “Today, people prefer to consume than save money—the basic understanding of the value of saving has vanished,” he says. “We need to get back to basics where people have a savings budget built into their plans. I think we have to come up with a clear vision about what we need from the country—do we want Canadians to be consumers or savers, and how do we balance this?”
Innovation for protection
But changing behaviour will take years. In the meantime, providers are focused on better plan design—simplifying and streamlining CAPs for members, with fewer choices and better default options for those members who choose not to choose. Going forward, new products will help in meeting the growing demand for capital protection in volatile times. Andrew Kitchen, managing director, strategies and solutions, with SEI Investments in Toronto, is also seeing changes in the product lineups that focus on “prepackaged solutions” such as TDFs and lifecycle funds, which reduce the amount of choice members have to make. However, he warns, not all are created equal, and “plan sponsors will need to spend time understanding the construction of these products because they are choosing a glide path for members when they select them. We will see more target date funds, but we have to make sure plan sponsors know they are not the whole solution.”
Kitchen has seen a growing demand for customized target date funds (TDFs), where the asset mix is designed to meet an organization’s specifications for a glide path. “This is then wrapped into a fund for their use only—but right now this is something for larger plans,” he notes. Dodds says it’s important to be aware that TDFs are like any investment—they need to be monitored. “If you are in a lot of equities and they crash when you want to retire, you’re still exposed,” he says. “Target date funds are not all the same—it’s important to know what you’re in.”
Leblanc also points to transparency as a potential problem with TDFs. He believes that a portfolio approach offers members a clearer sense of where their money is invested. Leblanc would prefer to see a focus on promoting asset allocation. “There’s more flexibility and transparency, and it really helps members understand what they are buying. They can see whether they like the asset mix or not.”
Perhaps the biggest opportunity to ensure members take advantage of their CAPs is automatic enrollment. The option is widely available in the U.S. and the U.K. but faces potential legal barriers in Canada. Suppliers believe that auto-enrollment could go a long way toward getting employees to opt into their retirement benefits and start saving. “What we really need to see are plan design changes that facilitate automatic enrollment,” says Campbell. “We know from the U.S. experience that this can have a very positive effect on the retirement readiness of plan members.” Ripsman also notes that the U.S. Pension Protection Act, which enshrines mechanisms such as automatic enrollment and automatic contribution increases and offers safe harbours for prudent default investment choices such as TDFs, would be a good model for Canada to follow.
The future
While suppliers wrestle with fundamental issues such as financial literacy and plan design, they are also staying on top of technology—and the future seems to lie in wireless devices that can tap into members’ desire to make a quick decision when and where they feel inspired.
As the baby boomer generation gets set to retire, options that extend beyond age 65 are becoming more popular. Says Ripsman, “The focus of most DC members does not end at retirement—they are looking for a lifetime investment solution.” Providers will need to help focus members on their income needs at retirement and help meet these longer-term objectives through longer glide paths that go beyond the last day of work. “Most members are not looking for a lump sum from their plan at 65—they would like a target date fund or investment strategy that continues to manage their asset mix after their retirement date, while offering better inflation linkages and more flexible, tailored payout options.”
With so many important developments on the horizon, the CAP space is likely to undergo some big changes in the years ahead as products become better suited to members’ needs and as members ultimately take more responsibility for their own retirement needs. Whether it’s through new products, technology or good old-fashioned learning, the future is looking bright.
Caroline Cakebread is editor of Canadian Investment Review. carolinecakebread@rogers.com