In Benefits Canada’s 2012 Top 50 DC Plans Report, 46 plans had an increase in assets; this year was not as strong, with only 32 plans with an increase. But despite the drop, the DC space is preparing for an even bigger change as Canada’s retirement landscape moves through a period of reforms. As the population lives longer and the baby boomers begin to retire, Ottawa is reacting to these demographic realities with initiatives for Canadians to work longer and save more for retirement.
On June 28, the Pooled Registered Pension Plans Act (Canada) received royal assent, following passage by Parliament. Also in June, Quebec became the first province to adopt a version of the pooled registered pension plan (PRPP) when its National Assembly passed Bill 80, An Act respecting voluntary retirement savings plans. But it’s still unclear whether other provinces will follow Quebec’s example.
In March, the federal government announced two major changes to old age security (OAS). First, eligibility for benefits was increased to age 67 from 65. This won’t take effect until 2023 and is being phased in over six years. Second, as of July 2013, new OAS recipients would have the option to defer their benefits for up to five years. For each year of deferral, the annual benefit payout will be increased by 7.2% over the base benefits.
In January, changes to the Canada Pension Plan (CPP) made it possible to collect CPP prior to age 65 while continuing to work; reduced the benefit by 0.6% for every month an individual collected CPP prior to age 65; and enhanced the benefit by 0.7% for every month an individual waited to collect CPP after age 65 (up to age 70). Meanwhile, pressure has been building from labour unions and Ontario’s Liberal government to expand the CPP.
How these changes might affect DC plans remains a key question. But it’s a question only a handful of DC plan sponsors have begun to explore.
“There is a lot of talk about these things in the industry, but when you talk to the clients, I think they must have bigger fish to fry at the moment, because we essentially do not hear anything from them on the topic,” says Jean-Daniel Côté, vice-president, retirement, with ACT conseillers inc. “Either they don’t care or they’re waiting until something actually happens. Even in Quebec, where they’ve introduced the Quebec version of the PRPP, we literally have to bring the topic up with our clients, because either they’ve not heard of it, or, if they have, realize they only have to comply by Jan. 1, 2015, and that’s so far [away] they don’t really care.”
Tony Ioanna, vice-president, DC pensions practice, with Aon Hewitt, reports a similar response from his clients. “The larger employers are curious about what [the changes] are all about. The smaller and medium-size clients don’t have time and energy to explore. We’ve been proactive, with both smaller and larger clients, to go out there and tell them. We did not get much feedback. They have so many other priorities that it’s, ‘Oh, thank you very much, but when it will affect me one day, I’m sure you’ll tell me.’”
Federally and provincially regulated companies
While there are some small federally regulated companies that the federal PRPP legislation could apply to, the majority of the opportunity is within the provinces, says Sue Reibel, senior vice-president and general manager, group retirement solutions, with Manulife Financial.
Most of the major federally regulated companies already have pension plans, but some may wish to convert their
DC plan to a PRPP. “It would need to be assessed by each company against the purpose of the current plan, the current structure and the current pricing.”
But the PRPP is designed for small- and mid-size businesses, so it may not meet the needs of a larger company. “The investment platform is very small,” says Reibel. “There is no flexibility in the design of the plan. [The larger company] may have a more sophisticated employee base. It may want a lot of flexibility in the design. It may want a TFSA [tax-free savings account] and a group RRSP attached with a DC pension plan. You can’t get that in a PRPP.”
Provincially regulated companies, however, are a different story. Serge Charbonneau, a partner with Morneau Shepell Ltd., is confident that the English-speaking provinces will eventually adopt PRPP rules, though not as rapidly as Quebec. “The big differentiator is whether or not it’s going to be mandatory [for employers],” he says. If employer participation is optional, the take-up rate in other provinces will be much lower than in Quebec, where employers with five or more workers are required to create a voluntary retirement savings plan by 2015.
If the other provinces emulate Quebec and make employer participation mandatory, Reibel says this would mean a huge take-up rate, with the possibility of driving down costs and making it more appealing for DC plan sponsors to convert to PRPPs. “It is dependent upon how low the cost goes and whether the structure of the PRPP will meet the needs of those larger businesses.”
But at this point, consultants don’t have any idea of pricing around PRPPs. “Cost is driven by scale,” says Reibel. “If there’s no scale—limited take-up—the cost is higher than if you get higher take-up with broad contributions and asset levels.”
Charbonneau sees lower fees and a shift of fiduciary responsibility as two major incentives for some existing
DC plan sponsors to contemplate a shift to a PRPP. “In theory, the new plans may be more attractive due to lower fees.” Charbonneau says that while it’s a misnomer that DC plan fees are high, those fees might be lowered even further if DC providers are faced with plan sponsors potentially switching to PRPPs.
If that were to happen, he says, some plan sponsors might then decide to stay with the status quo, because their DC plans provide extra service and more tailor-made plan features, such as the investment options. “There’s going to be [only] a standard selection of investment options [in a PRPP offering]. That may suit many sponsors, but some who have, say, eight options right now—where they spent years fine-tuning the options to something they really like and years trying to educate plan members to choose among those eight options—may not be interested in revamping them to the new five standard options that the provider may offer.”
Côté, for his part, doesn’t think the main motive in converting to a PRPP would be to lower costs. The biggest reason, in his view, would be the transfer of fiduciary responsibility from the employer to the provider. Currently, the CAP Guidelines impose some of the regulatory exposure for DC plans on the sponsors.
“The large employers know there are no ‘safe harbour’ rules in Canada,” says Côté. “You can never do enough to be entirely protected. Therefore, a number of them would see this as a great opportunity to unload all the responsibilities related to their plan: ‘Let’s focus on our core business and limit our [pension] role to determining a contribution formula that we can afford.’”
The downside of PRPP conversion
While it’s already difficult to engage employees in their pension plan, if an employer decides to go the PRPP route, it may feel its duty to engage employees wane. “My concern with having DC plans morph into PRPPs is that, as the employer outsources [governance responsibilities] to the provider, the interest from the employer in engaging the employee will go down as well,” says Côté. “The [employer] may say, ‘Whatever I add in communication may create responsibilities for me.’ But if you, the employee, get
ABC Life’s communications, it’s not as personalized as your president or boss writing to you.” Providers, he suspects, would likely offer a “low-touch” product (e.g., online sessions) to keep costs low.
Another concern is that, as more pension money flows from DC plans to PRPPs, the providers will use in-house investment managers more than third-party investment managers, forcing some of the latter to go out of business. With an in-house-managed fund, says Côté, “there’s a potential of lack of independence in determining whether the manager is doing a good job or not.” Eventually, if pension contributions were concentrated in PRPPs, there would be fewer DC assets available for third parties to manage, thereby reducing their numbers and giving plan sponsors less and less choice.
The impact of OAS and CPP
According to Reibel, the two-year delay in OAS eligibility will, to some extent, influence the timing of retirement decisions, “especially for individuals at lower income levels for whom OAS makes up a greater proportion of their retirement income. You can see a trend coming. There’ll be increased awareness of the need to save on your own.”
She says more flexibility in DC plan design will be needed in order to allow people to contribute to, and withdraw from, their pension plans at the same time, as became possible this year with the CPP. “Workplace pension plans haven’t been designed for that flexibility. So I see some changes there as people change from full-time to part-time work to full retirement. Now that you see one of the retirement pillars [CPP] moving in this direction, I think the workplace pension structure will adapt to that over time.”
But with Canada’s DC landscape still in its infancy, the proportion of employees set to retire with DC plans in the coming years is currently very limited. As a result, says Riebel, any changes will be slow. “I suspect that five years from now you’ll see a much bigger push for this kind of flexibility, because that’s when you’ll see more people with DC plans [as] their primary source of retirement income coming to retirement.”
An expansion of CPP benefits looks rather remote at this time. But even if there were a modest improvement in CPP benefits, says Charbonneau,
“there would still be a need to contribute to a DC plan because a modest expansion of CPP would not be sufficient for retirement savings, except for the very
low paid.”
As for the two-year delay in OAS eligibility, Charbonneau says it may look as though the retiree lost $12,000, but the fact that people live longer means that their pension over their retirement period is much more than they will have lost by the two-year delay. So $12,000 is a big cash sum, but if you look at the overall value of your retirement pension, it’s a small percentage. What has a lot more impact is when people lose a large chunk of their savings in a DC plan due to a market downturn.
But the CPP and OAS changes could bring pressure on plan sponsors to educate their employees about the impact of these cutbacks on their retirement incomes. “Not many members today—unless they’re very close to retirement—under-stand these changes,” says Ioanna. “So an education focus will be key. But will employers want to do that? Some of them are going to say, ‘It’s not my job to educate employees about changes in government plans and how that affects them.’”
Sheldon Gordon is a freelance writer based in Toronto. netmon@rogers.com