Those are the questions Benefits Canada set out to answer over two days in February at the ninth annual DC Plan Summit. The event brought together more than 35 senior representatives from DC plans across Canada, as well as representatives from the recordkeeper, legal, consulting and money manager communities.
Predictions for 2018
To start the conference, we asked a lawyer, a consultant and a plan sponsor to paint a picture of the future and to hypothesize about what the DC plan landscape will look like in the year 2018. Paul Litner, a partner at Osler, Hoskin & Harcourt LLP in Toronto, predicted that the wave of big employee class actions that many expect to happen as a result of poor investment returns will never materialize, for a number of reasons.
First, DC plans simply aren’t conducive to class actions. “There’s never been a legal right recognized by the courts for an employee to retire at their desired or at a specified age,” said Litner. As well, he pointed out that Canadians simply aren’t as litigious as their neighbours to the south. The most important factor, however, will be the trend among Canadian plan sponsors toward paternalism. “Following the U.S., there will be a trend toward DC plans adopting target date funds, auto-enrollment and auto-escalation.”
Nonetheless, DC plan sponsors won’t be entirely off the legal hook. That’s because different problems will arise, envisions Litner. For instance, he foresees individual actions in cases where employee communications have led members to believe that their plan would provide a sufficient income at retirement, or that they would be able to retire at a particular age. He also sees DC plan members suing their employers (and their directors and officers) over the use of defined benefit (DB) surplus to fund DC contributions.
And he predicted that the CAP Guidelines will be enacted into law, and that a Joint Forum Commission will be appointed by the provinces to regulate DC plans. “Rather than employee class actions, where you have to spend money and hire a lawyer, it’s much easier to complain to the Joint Commission and have them chase your employer and make sure they are following the guidelines and regulations,” he said.
John Poos, director of global pensions at Nortel, predicted that, by 2018, many more plan sponsors will have shut down their DB pension plans in large part due to a reprise of 2002’s “perfect storm”—a combination of low interest rates and poor market performance—in 2007 and 2008. “They thought they had gotten through the worst of it, and now they find that it wasn’t a one-in-20 event; it happens twice in a decade,” said Poos. “So a lot of them will just decide that’s enough.”
As a result, DC assets will have grown to almost half of the retirement assets in Canada in 10 years’ time, said Poos. He predicted that there will be some lawsuits related to poor member performance caused by ineffective education, too many investment options and poor plan governance, but that DC plans that take a paternalistic approach will fare best. “The ones that have chosen to limit options and to provide a holistic and paternalistic type of view on retirement programs will succeed.” In this regard, he also predicted a rise in the use of target date funds and autoenrollment and predicted that plan sponsors may look to redesign their DC structure by combining their DB and DC assets to reduce fees and improve both member performance and plan governance.
Zaheed Jiwani, senior investment consultant with Hewitt Associates, agreed that plan sponsor paternalism will prevail over the next decade and that plan sponsors will begin to address plan members’ extremely low savings rates. “Plan sponsors in the future will start to monitor those levels a lot more proactively and will develop plan design that’s a lot more dynamic in nature.”
He also foresees plan sponsors taking steps to address plan member disengagement. On enrollment, members will sit down with a financial advisor to map out a customized savings plan and make appropriate decisions about the best investment and de-accumulation vehicles.
In terms of investment options, he sees the creation of more sophisticated investment vehicles tailored to Canadian investors, with currency hedging back and inflation protection. And on the regulatory side, he sees more flexibility being created around savings vehicles, allowing members to plan for other financial goals than just retirement, such as paying off student loans or saving for a house.
Like Poos, he also predicted substantial growth in the DC world by 2018, as plans established in the late 1990s and early 2000s will have 15 to 20 years under their belts. As more plans grow beyond $100 million in assets, they will have more flexibility in terms of what they can expect from their providers. “They will go directly to investment managers and negotiate fees. They won’t be limited by a bundled solution,” he predicted.
Real-world Challenges
In addition to some crystal-ball gazing, conference delegates also heard a real-world perspective of the future as three Canadian plan sponsors shared their thoughts about the biggest challenges they will face in the coming months and years.
Louise Koza, director of HR and total compensation for The University of Western Ontario, says one of the biggest challenges going forward for her 7,000 DC plan members will be phased retirement, particularly now that mandatory retirement is illegal in Ontario. She points out that phased retirement isn’t a concept exclusive to DB plans—a fact that was lost on the federal government last year when it introduced measures to allow phased retirement for DB plan members, says Koza. “For our members, they’re actually trying to decide, ‘When do I retire?’ or ‘What do I do for cash flow if I want a reduced and gradual retirement?’”
Another challenge is assisting members in their transition to retirement. “One of the members’ preferences was to keep their investments in place after retirement instead of having to learn about different investment structures and schemes in the retail RRIF market.” So the university introduced a group registered retirement income fund (RRIF) in 2000. Koza said that opens up a whole new set of challenges, including complying with securities law and dealing with tax regulations that lay out qualified investments for RRIF programs. She also pointed out that the CAP Guidelines lack any direction around RRIF programs, making the process even more difficult.
For Marc Poupart, director of pension and retirement programs at Hudson’s Bay Company, one of the biggest challenges is member engagement. With many of its 35,000 members dispersed across the country, it’s difficult to communicate with them all face-to-face. Making communications relevant to members—many of whom are the second-income earners in their households—adds to the challenge.
He also points out that many of his members have difficulty knowing and understanding what income to expect from their plan assets in retirement. “So we’re working on income projection, which will probably scare them.”
Poupart says Hudson’s Bay’s three active DC plans currently have limited investment choices, but that members “still don’t know what to do.” Many are in the diversified default option, but Poupart will be looking at offering lifecycle options in the future. He is also considering if advice can be offered. “Advice is needed. But how do you do it? One-on-one advice is very difficult in my environment.”
Heather Briant, senior vice-president of HR for Cineplex Entertainment LP, is dealing with an entirely different problem—too many investment options. Cineplex’s group registered retirement savings plan (RRSP) and DC plan currently offer 17 investment choices. “Over the next year, we need to look at fund choices that can be explained more easily to members,” said Briant, adding that they are considering target date funds for their plans.
Like Poupart, Briant is also dealing with a geographically dispersed member population, spread across six provinces. Adding to the challenge is that theatre managers have no access to an email account. And, because Cineplex recently introduced auto-enrollment, a big challenge will be getting their members up to speed on basic investment and retirement planning principles. “We’ve got some education and communication to do.”
The company’s workplace demographic is also quite young, averaging in the low 30s. As such, retirement is a “distant goal” for many employees, said Briant. For this reason, she’s keen on the federal government’s recent introduction of a Tax- Free Savings Account. “I can only imagine that employees are going to be asking for it and that, for some folks, it will make more sense than an RRSP,” she said. “I’m certain that plan providers will figure out with the government how to do that on a group basis…I think that it’s going to be huge.”
Finally, time will continue to be a major obstacle. Briant’s staff spends much of its time dealing with the conversion and windup of Cineplex’s two DB plans. “We spend more time on our closed DB plans…than we do on our DC plan. We don’t have a large team.”
The Future is Now
When it comes to DC plans, seeing the future doesn’t always require prognostication or prediction. In some cases, the future is right before our eyes, in other countries that have been in the DC game much longer than we have. At another session, the DC Plan Summit looked at what we can learn from the U.S., which was facing some challenges we’re facing now a decade ago. The conference also featured a speaker all the way from Australia, to speak about what they have done to address the advice dilemma.
Over the two-day conference, presenters also explored how the issues of retirement income, longevity risk, member inertia and plan design will be grappled with in the years ahead. We’re pleased to provide summaries of these presentations in the following pages. Full versions of these articles, as well as further coverage of the DC Plan Summit, can be found here, and for more information surrounding the event, visit www.hfconferences.ca/dcplan.
Don Bisch is editor of Benefits Canada. Jennifer Hughey is assistant conferences editor. don.bisch@rci.rogers.com; jennifer.hughey@rci.rogers.com
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