Capital accumulation plan (CAP) members need to learn how to shift from building wealth to preserving wealth and lifestyle, and it’s up to plan sponsors and service providers to help bring about the change, according to an industry expert.
The design, communication, and investment strategies of most CAPs focus too much on accumulating assets, said Towers Perrin principal Ian Genno at the Association of Canadian Pension Management’s capital accumulation plan seminar at the Sheraton Centre Toronto Hotel on Wednesday. He added there is not enough emphasis on how the assets are used after retirement.
Genno said CAP members are confused and uncertain about their retirement savings plans and are asking for effective solutions. He pointed to a 2007 Benefits Canada survey in which 45% of plan members polled said they didn’t know what level of assets were required to generate adequate retirement income, and 85% said that simple solutions are important. “When we talk to plan members, the continuing message that comes through is that CAP members are confused about what to do with their money at retirement,” he said.
Genno identified the three main risks to income protection after retirement as investment risk, inflation risk, and longevity risk, and suggested tools to mitigate them, such as annuitization strategies, improved member communication and modeling tools, and greater plan flexibility.
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Annuitization strategies such as using a mix of high and low-risk assets and phased purchases can improve CAP members’ reluctance to buy annuities, he said. Improved communication and modeling tools would address a significant lack of comprehension of payout options, reducing the plan sponsor’s exposure to liability risk in the future and limiting the potential of employee risk being shared by the plan sponsor. And greater flexibility would allow retirees to bridge income gaps and respond to emergencies or sudden changes in lifestyle. Genno explained that while non-registered savings plans and tax-free savings accounts are a step in the right direction, CAP legislation needs to be reviewed in order to maximize the benefits for plan members.
“We all have an interest in trying to move the regulatory system towards an environment that offers greater flexibility to plan members,” he said. He suggested that legislation regarding DC registered pension plans such as the locking-in rules introduced in Ontario in the 1980s, while well intentioned, imposes too much rigidity and complication in how members can actually withdraw their money towards retirement. “The current rules for DC registered pension plans are too hard for people to understand and are too restrictive in terms of allowing people the latitude that they need.”
To read the 2007 Benefits Canada Survey of Capital Accumulation Plan Members, click here.
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