Closing the Gap

The fact that the CAP industry is functional certainly speaks to its strength. “The recession has really highlighted the value of prudent business practices, both for sponsors and for providers,” says Bill Kyle, senior vice-president, group retirement services, with Great-West Life. “This is a key strength that may not have been appreciated before the economic shakeup.”

As a result of the government activity and market volatility, though, Nancy Campbell, assistant vice-president, marketing, group savings and retirement solutions, with Manulife Financial, says the CAP industry is looking closer at two key issues: coverage (including mandatory participation for members) and adequacy (sufficient retirement savings).

According to Watson Wyatt’s most recent DC survey, 83% of plan sponsors surveyed indicated that they are concerned or somewhat concerned that their employees will have insufficient retirement savings.

Saving for retirement has to be made easier for individuals, according to Bruce Moir, senior product manager with ScotiaMcLeod. “That may mean changing some of the income tax regulations and making it simpler for a plan sponsor to actually run a plan.”

And, members can’t rely solely on returns. “Rate of return cannot replace savings,” says Claude Leblanc, senior vice-president, group savings and retirement, with Standard Life. Members need a combination of the two—good returns and savings, he adds.

Taking Inventory
In the wake of the market decline, CAP providers will be looking at solutions that address long-term time horizons, the de-accumulation phase (especially with the baby boomers set to retire in the next five to 10 years) and long-term inflation risk.

“As we get into an environment like we are today, with very low interest rates and a lot of financial stimulus in the economy, if the economy does start to pick up again, potentially, all the stimulus could lead to inflation [in the] long run,” says Damon Williams, president of Phillips, Hager & North Investment Management Ltd. (part of RBC Global Asset Management). “That becomes a very real risk for plan members, whose objective is to live off their retirement savings for the next 20 or 30 years.”

The industry is also taking inventory of its products—particularly new products such as target date funds (TDFs), guaranteed minimum withdrawal benefit (GMWB) products and the tax-free savings account (TFSA). Plan sponsors may demand more of these—and more from them—to assist them in helping Canadians save for retirement. How best the CAP industry can deliver these products, however, remains to be seen.

Target Date Funds – Most providers agree that there will be an increase in the uptake of TDFs and some feel that TDFs likely will be more customizable and flexible to the needs of the members. But since TDFs don’t have the longevity that they’ve had in the U.S., it may be too early to tell if they’re living up to their expectations. “Time will tell somewhat with TDFs,” says Moir. “They don’t have a super long track record.”

Campbell says that many plan sponsors are making TDFs their default and that members are keen to select them. “Members are gravitating to [TDFs] because they appeal to the investor who acknowledges, ‘I don’t have the time, the knowledge, the interest’—and they’re prepared to turn over the reins to someone who does.”

While Williams agrees that TDFs are a big part of the market, he wonders how, as an investment manager, Phillips, Hager & North will participate. “Is it by having our own set of TDFs, participating in other TDFs that the recordkeeper is putting together or working with plan sponsors to design TDFs that are tailored for their plan?”

Guaranteed Minimum Withdrawal Benefit – The GMWB product (or, more generally, products that guarantee some portion of the funds invested in a CAP) is also on CAP providers’ radar. “Plan members definitely felt uncomfortable with the volatility they saw in their retirement savings and will want some form of protection,” says Campbell. As the population ages, she continues, this guaranteed aspect will be even more critical as more people will think about what market fluctuations could do to their savings just before or during retirement.

Currently, Manulife is the only group provider in Canada that offers a GMWB product. (Group Income Plus was launched in June 2008.) But the insurance giant will soon have company. Sun Life is launching My Money for Life, a new group GMWB product, some time in the first quarter of 2010. And, more than 70% of the funds available on Sun Life’s platform will be available for My Money for Life. “Members who insure their assets with it will be able to keep most, if not all, of their existing group plan investment options,” says Reid.

“We’ve had lots of questions from sponsors. We hear it in the call centre,” he continues. “Members call in saying, ‘I know about SunWise Elite Plus—can I get something like that for my group pension plan?’”

However, GMWBs may lose some of their appeal down the road. There have been some challenges with guaranteed products, either because the product is forced to shift into a long-term, low-return strategy to maintain the guarantee or because the guarantor suffers due to the guarantee being more expensive than expected. “If the true cost of the guarantee is reflected in the price of the product,” says Williams, “we may well see the interest in those guaranteed products waning once the memory of the market upheaval we’ve seen starts to dull over time.”

While there may be an appetite for the GMWB at the individual level, Leblanc is not sure there’s a similar hunger at the group level. He likens the GMWB to the traditional DB plan where the plan sponsor is on the hook for liabilities. “On the DC side, if you start having guaranteed products attached to the DC concept, the sponsor will again be hooked with those guarantees when they face their members,” says Leblanc. “It could be very inappropriate for a sponsor to be hooked with any guarantee-type products under a DC scheme during the accumulation phase.”

Tax-free Savings Account – With the first year of the TFSA almost at a close, providers have had a few requests for it throughout the year, but it has not been a widespread trend. “Sponsors are still trying to figure out how to integrate the product into their global HR compensation strategies,” says Éric Filion, senior director, product development and pricing, group retirement savings, with Desjardins Financial Security. “When you think about the TFSA, it could help your retirement, but it can aim at other objectives. How do you fit that into your compensation strategy?”

Sun Life launched its group TFSA last January, and though it has seen a large number of sponsors put it on their investment lineups, members aren’t necessarily choosing this option. “It’s just a question of getting member take-up,” says Reid. Reid admits that this is likely the experience across Canada, adding that bank colleagues he’s spoken with have had mixed success with the TFSA. “If you think about it, RRSPs didn’t really become a huge engine of retirement savings until the 1980s. It would be wrong to judge [the TFSA] in the first 12 months. This is a vehicle that is going to gain a lot of traction over time.”

And, the economic environment when the TFSA was first introduced was far from optimal. “The economy made the launch of group TFSAs the worst possible timing,” says Campbell. “In reality, I don’t think [most] people had excess money to set aside.”