Session 5 – Global DC Strategies
Lessons for Canada from other DC programs around the world.
By Azita Bassiji, Principal, Hewitt Associates
When the global financial bubble burst in 2008, capital accumulation plans (CAPs) were hit hard. Plummeting member account balances, combined with a suspension or reduction in employer contributions, resulted in a number of consequences for CAP members—including postponed retirement as jobs or savings disappeared and/or the prospect of a reduced post-retirement standard of living.
For CAP members, the value of retirement benefits depends on the level and timing of contributions, as well as the compound rate of return during working life. Variations in any of these factors can have a significant impact on the amount of retirement savings and thus on the member’s standard of living. However, a review of the savings rate, investment strategy and time horizon aspects of public and private systems around the world that deliver retirement income on a DC basis will highlight features that could have made a difference to the Canadian CAP member experience in 2008/09.
Savings rate – In Chile, an automatic 10% of salary is deducted as retirement savings contributions, and an additional 2% to 3% is deducted to cover administrative costs. Additional voluntary contributions are also allowed. In Australia, employer contributions of 9% are mandatory, and voluntary employee contributions are also permitted. CAPs in the U.K. feature automatic enrollment, and employer and employee contributions of 8% are required. Employer contribution rates of 8.3% are required in Korea, and voluntary employee contributions are also permitted.
Investment strategy – In Chile, five pension fund administrators each offer four types of funds, as approved by the regulators. Employees can choose to invest in no more than two of the four funds. In Australia, there are four major types of investment funds. High fees are a concern. In the U.K., there are large aggregate investment funds, and fees and charges are low—administration fees are in the 0.3% to 0.5% range. In Korea, as far as investment strategy goes, there is a general discomfort with the risks associated with the DC concept, so no direct investment in risky assets is allowed. Investment vehicles may not have more than 40% equity exposure.
Minimum guarantees and financial advice – The Chilean system was revamped to provide minimum pension guarantees, mandated participation of the self-employed and the establishment of a fund for financial education in order to create a network of advisors for account holders. In Australia, a minimum means-tested pension is available, and initiatives are under way to enhance the population’s financial acumen.
Looking at the various systems, certain trends are evident: high savings rates, limited investment options, minimum pension guarantees and a focus on financial education and/or accessibility to investment advisors. All of these measures are in place to save employees from contributing too little, not making wise investment decisions and, more generally, not saving adequately for retirement.
What can Canadian plan sponsors take from these global trends to improve the effectiveness of CAPs in this country, within the confines of our legislative and regulatory system? A good place to start is to help plan members determine what an adequate retirement income would be. With an end goal in mind, plan sponsors can help members work back to determine what their retirement savings strategy should be, as far as contributions and investments are concerned. BC
Continued on the next page…
Session 6 – Autopiloting Your CAP
What Canada can learn from other countries that have implemented auto features.
