Up to now, the CAP industry has largely focused on the accumulation phase of retirement planning. Understandably so, as defined contribution (DC) type arrangements in Canada have by and large not reached maturity. But as DC plans gain in size, the average CAP account gets larger and baby-boomer cohorts near retirement, an increasing number of clients are turning their attention to how/if they should help plan members turn their savings into retirement income. Sponsor views on the issue vary widely.

Coming to a radar screen near you
The current regulatory, governance and marketing context in Canada is simply not focused around the spend-down phase. The CAP guidelines essentially make no mention of post-accumulation life; pension regulations, almost exclusively designed for defined benefit plans, make it difficult if not impossible in most jurisdictions for plan sponsors to get involved, and retirement income products still look very much the same as they did twenty years ago–aside from the new guaranteed minimum withdrawal benefit products (GMWB), which are limited to two providers under group arrangements for now.

Still, retiring plan members are likely faced with the most important financial decisions of their lives in how to use their savings, and trying to manage a large number of risks including:
• longevity;
• inflation;
• financial markets volatility;
• health issues and increasing care costs; and
• potential changes in public policy, including taxation and government program benefits.

How DC plan members will do in meeting their retirement income goals and managing their retirement income has industry stakeholders watching.

Some plan sponsors, for instance, are taking interest from a workforce management perspective. Studies show that employees worried about their financial situation are less productive and more prone to absenteeism. Those nearing retirement may feel they cannot afford to retire and stick to their jobs, impacting productivity or limiting opportunities for younger employees. 2008 was an eye-opener for many, as some sponsors saw a number of ready-to-go employees suddenly decide to postpone retirement.

Governments are also interested from a public policy perspective, and are wary of the consequences if DC plans do not deliver the expected income in retirement. How do governments adequately support a society in which an ever-expanding number of retirees rely mostly on government programs to live? What would be the long-term implications of a melting taxation revenue base from the retired population, particularly

when its ratio to the working population is skyrocketing? How would government spending be covered?

The financial industry is also keeping an eye on spend-down, considering the inflection point that retirement represents as a fantastic opportunity to consolidate client assets and significantly grow market share.

What to expect
Globally, governments now view retirement spend-down as a national priority. For instance, in Australia (the most mature DC market globally), a recent proposal for a national DC retirement scheme called “MySuper” makes it compulsory to include an option to convert account balances into a stream of retirement income. In the United States, the Obama administration has indicated that the retirement phase of 401(k) plans was becoming a concern. Canada has lagged on this issue, mostly because pension reform discussions have been centered on finding a fix to the DB plan deficit situation. Still, a number of ideas aimed at improving DC solutions have been tabled. We are expecting that as the Canadian DC market matures, government interest will grow.

Providers will continue developing new retirement income products. Variable annuities such as GMWBs will become more widely available. New products combining accumulation and spend-down features are currently being developed for the U.S. market, and will no doubt eventually come to Canada. These new products are crucial to providers’ marketing strategies and growth prospects.

In this new context, plan sponsors will need more than ever to ask themselves if they want to get involved. They may actually have little choice, since their providers, and possibly their members, will be asking whether retirement-oriented products should be made available in the accumulation phase. In addition, sponsors will also need to consider expanding their offerings in the face of pressure from employees and competing employers, as well as the possibility of new regulations or governance standards that will require greater choice.

Stay tuned
What should DC sponsors do? In the short term, it would be advisable to learn what products become available, and understand them and their implications for members and your organization before offering them in your plan. Stay informed of spend-down developments. And as a client of mine said recently: “hope for spend-down safe harbour provisions in Canada!”