Rough Ride or Smooth Sailing?
Although plan members are watching their retirement savings sink, some providers say that, despite the market volatility, the CAP market is still relatively smooth sailing. “While market volatility has impacted them, DC plans are really robust and well designed to weather volatile markets,” says Claude Accum, vice-president, group retirement services, with Sun Life Financial. “[The credit crisis] has pretty much had a minimal impact on DC plans in Canada. DC plan sponsors that have obtained their plans from a Canadian insurer have largely sidestepped the issues that have challenged the U.S. market. For instance, there have been no material issues with money markets freezing up, there are no large plan sponsors with securities lending issues, there has been modest exposure to U.S. credit losses, and we are not aware of any material exposure to hedge funds.”
While the Canadian CAP market may not be in the same trouble as that of the U.S., it has still suffered a heavy blow. This year’s CAP report finds total assets for CAP providers down 0.9% from last year. That may not seem like a significant loss, but last year’s report saw a 13% increase. And in 2006, a 10.2% increase was reported. In fact, we’ve seen growth in the double digits since 2004. The last time single-digit growth was reported was 2003—and even then, we saw a 5.7% increase.
“[These figures] suggest that asset losses have not only reduced balances, but have [also] offset new cash flow,” says Mazen Shakeel, senior retirement consultant with Hewitt Associates. “The significance is that plan sponsors [and providers] need to communicate with plan members so they understand that their savings are going to be impacted by market cycles, but that they should focus on the long term.” And not only are assets down, industry experts say conversions from defined benefit (DB) plans to defined contribution (DC) plans were lower than expected this year.
Although market volatility may not be the main cause, it certainly should be considered as a factor. “The pace is lower than expected, but that main driver in the market will stay,” says Claude Leblanc, senior vice-president, group savings and retirement, with The Standard Life Assurance Company of Canada. “People are questioning when and how to do it. In the U.S., DC is the main pension vehicle. In Canada, we still have a lot of DB.”
Most experts agree that now isn’t the time to make drastic plan design changes, but those who were thinking of switching before the markets started to dip and dive haven’t forgotten their intentions. “I think it’s coming to the forefront again but, with the deficits that many of these plans have, it might not be an option at this time,” says Tony Ioanna, vice-president in Aon Consulting’s DC unit. “[Conversions] did slow down over the last few years, but…I don’t think we’ve seen the end of the switching. [Plan sponsors] aren’t in a rush.”
Shakeel agrees and says the credit crunch may renew interest in DB to DC conversions. “If plan sponsors weren’t already aware of the investment and other risks that they have with their DB plans, the economic crisis has really forced the door open and will more than likely continue to drive employers away from DB plans to DC—whether or not it’s better for employees.”
Navigating New Waters
To add a twist to the DB to DC debate, a new product is being introduced next year that providers and plan sponsors will need to accommodate. There has been little innovation in the CAP market over the past decade—but as of Jan.1, 2009, when the tax-free savings account (TFSA) rolls out, that will change.
Several industry experts have said that the TFSA is one of the most important personal savings vehicles since the introduction of the registered retirement savings plan (RRSP) more than 50 years ago and believe it will make a big splash in the industry. “The TFSA will generate similar interest as RRSPs did when they were first introduced,” says Sharon Seifried, assistant vice-president, marketing, group savings and retirement solutions, with Manulife Financial. “What’s still questionable is how they’ll be used over time—for short- or long-term savings, or for a good healthy mix of both.” Accum couldn’t agree more. “Many plan sponsors will want to adopt this program and include it in the array of offerings that they provide to their employees,” he says. “I think there is a strong group of plan sponsors that will be early adopters, [and] there will be some that will wait and see what the early adopters do.”
Most providers will be ready to offer group TFSAs to those plan sponsors that want them, and providers say that this new product has generated a significant amount of interest. However, some people are a little skeptical of its immediate uptake. Michael Campbell, vice-president, marketing, group retirement services, with Great-West Life, says that there is still some uncertainty with the new savings vehicle and that it will take some time before TFSAs become prominent. “The first months of the year will be plan sponsors deciding if they want to offer it or not,” he says. “You will always have your early adopters—and that’s great. But I think there will be a bit of lapsed time before we see a large number of sponsors implementing it.”
Leblanc feels that sooner or later, most plan sponsors will offer a group TFSA. “Most employers will offer it because there is no liability on their side,” he says. It’s really a matter of how employers will position it within their overall retirement savings programs and how providers will promote it. And, of course, everyone has his or her own opinion of how it will all come together.
“We may see traditional arrangements like the defined contribution pension plan or group registered retirement savings plan or deferred profit sharing plan evolve into multilayered product combination plans that include a TFSA component,” says Accum. Seifried adds, “The TFSA will be a logical companion for members in DB plans and other members who don’t have RRSP room to use.”
However, Peter Arnold, national practice leader, investment and CAP consulting, with Buck Consultants, says, “This could replace, or be first in line ahead of, the EPSP. [Also,] some plan sponsors may shy away from it and suggest to their members to set them up themselves.”
Regardless of how and when this new product is implemented, experts think there is a strong need for education before the TFSA will really take off. “Not many Canadians understand what it is and how it might be incorporated into their personal plans,” says Campbell. Accum adds, “Research shows that many Canadians think this is a substitute for the RRSP.”
And, educating sponsors and potential plan members about the product is just one challenge that providers will need to overcome. Providers, too, are headed into uncharted waters and will have some learning of their own to do. “One of the challenges that providers will face is that there is no history with this product that can be used to help anticipate member behaviour,” Accum points out. “Providers will [have to] closely monitor behaviour, such as whether or not there is a net increase in contributions, or if members are simply redirecting existing after-tax savings into their TFSAs.”
Shakeel expects that new savers may put their money in the TFSA because it will allow them more flexibility. High income earners will use it because they are running out of RRSP room; middle-income earners will use it for shorter-term savings (such as saving for a house) and low-income earners may not use it at all. “Whether it’s a TFSA or an RRSP, if they don’t have the net income to put something away, they won’t be using either vehicle,” he says. Although ideas vary on how the product will integrate into existing plans and how employers and employees will use it, the consensus is that the TFSA is a welcome addition to an industry on the brink of change.
Mayday, Mayday, Mayday
Now that their account balances have practically capsized, members are finally reaching out. Providers have the opportunity not only to throw them a lifeline, but also to teach them how to swim. Gil McGowan, national vice-president, business development, group retirement savings, with Desjardins Financial Security, says that is the positive side of what has been happening. “With the economic downturn, it’s easier to get an audience because it has hurt all of us. There is more of a tendency now for people to pay attention. It’s not just the same old, same old anymore…especially [for] people who are within 10 to 15 years of retirement.”
Providers have recognized this opportunity and have brought education and communication to the forefront once again. Several providers and consultants have confirmed that call centre and website activity have more than doubled since the markets have taken a turn for the worse—but only a small portion of those inquiries actually lead to members making transactions. “We are very busy serving clients to make sure they understand the current market and to make sure they don’t make wrong decisions about their investments or the plan itself,” says Leblanc. “People are paying more attention and looking for counseling and advice.”
Campbell says his company, like most, plans to reiterate the three key messages it’s been sending for years: long-term investing, asset allocation based on risk tolerance and rebalancing along the way. But just how are those messages going to be delivered?
Although it’s already started happening with large providers, segmented messaging will be an emerging trend in plan communication. No more will employees ages 23 to 65 be sitting through the same retirement planning presentations. Intranets, provider websites, booklets and statements are all starting to be geared toward three different market segments: individuals who are just starting their careers, those midway through and those who will soon enter retirement. Ioanna says he has seen this shift start to happen, adding that while some providers have started using call-out boxes and targeted messages on their member statements, other providers need a little more wind in their sails.
“Providers aren’t doing enough to make the statement personalized. It needs to speak to the member. I think a lot of providers are going to be looking at the behaviour of their members and [will realize] the statements are going to have to become more efficient.” Arnold concurs. “Providers are not proactive enough,” he says. “Instead of members reaching out to providers, providers need to be reaching out to members and finding out what makes them tick, and what they really know about the programs and their investment options.” Arnold says that understanding the financial literacy of members is going to become more of a necessity in the future. Without knowing how much plan members understand, communication and education initiatives are about as useful as putting a message in a bottle and tossing it into the ocean.
He adds that the fact that call centre inquiries are up substantially is a clue that members don’t know where to go for financial help. “This kind of member behaviour calls into question the extent [to which] members actually understand their plans and where they should go for answers. Members aren’t always clear where they can get advice. They are calling the call centres, which aren’t necessarily equipped or authorized to provide this kind of advice. The importance of the financial literacy of members will be an enormous factor for providers and sponsors going forward.”
The Shifting Tide
Earlier this year, Statistics Canada reported that the median age of the Canadian worker is 40, and 15.3% of today’s workforce is 55 or over. With the first wave of baby boomers just a few years out from retirement, providers have started to shift their focus from the accumulation phase to the de-accumulation phase. “We rarely talk about the de-accumulation phase,” says Ioanna. “That is going to be the next challenge [for providers]—to develop products, tools and education for those who are about to retire.” More and more financial seminars are being held for the 55 and older crowd, and more tools are being developed to meet the needs of this group. Innovative investment options have become available, such as target date funds and guaranteed minimum withdrawal benefits.
As new products enter the market and old ones are resurrected, providers are going to have the challenge of making sure their workforce group understands which products are best for them. “The industry is proposing old-fashioned products such as life annuities and RRIFs, and all those products need to be understood by the members to make sure they fit their [retirement] plans,” explains Leblanc. And that is just the beginning.
“As we move from the accumulation phase to the retirement income phase, I think we are on the cusp of a tremendous amount of innovation,” predicts Accum. “Plan sponsors are going to see the demand doubling for retirement income products, plan advice and retirement planning workshops. Over the next three years, we will see more product innovation than we have seen in the last 10.”
Shawn Cohen, a senior investment consultant with Hewitt, adds that he, too, expects that the number of products will increase. “There is an advantage for record keepers to retain these assets through the plan member’s retirement. The market is developing some new de-accumulation products, including guaranteed minimum withdrawal benefits, which provide some upside exposure with downside protection at a high cost.”
Industry Waves
While product innovation might be on the rise, the number of providers carrying these products isn’t. With the exit of Fidelity from the Canadian DC recordkeeping business, there is even less choice of available providers—a situation that could both help and hinder the industry. “Fidelity’s plan to exit the group retirement recordkeeping business in Canada is welcome news to the other service providers,” explains Arnold. “From a consulting perspective, we’re not so pleased because we had little competition in Canada with Fidelity in the game. We are going to keep an eye on what this means for sponsors and members—[more] importantly, on fees. Fidelity did have attractive pricing relative to other providers.”
However, there is an upside. Fidelity’s move may make the CAP market more competitive, which could lead to creative thinking, better products and lower delivery fees. “When you toss 100 or so plans in the marketplace, there is a scramble to see if there is any opportunity for the other providers to monopolize on that transition period,” McGowan says. “[The consolidation] has to stop somewhere.”
As the markets continue to rise and fall, many CAP providers are taking a wait and- see approach. But while they wait for the waters to calm, all hands are on deck to help educate members about the current market conditions and how, in the future, they might be able to recover some of their lost treasure.
April Scott-Clarke is assistant editor of Benefits Canada. april.scottclarke@rci.rogers.com
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