Putting the Member First

Good governance and transitioning to retirement.

Increasingly, plan sponsors are transitioning plan members into retirement. In fact, this is a growing responsibility. Statistics Canada states that 50 years ago, one in 14 Canadians was over 65, the usual retirement age. According to the Conference Board of Canada, in the next 50 years, this will move to one in five Canadians. Today, we are feeling the impact of this huge demographic shift. As Greg Malone of Eckler Ltd. indicates, “For sponsors, the fiduciary and cost implications of retirement transition has furthered the realization of the responsibility CAPs impose on sponsors and members alike.” And yet, there is no published guidance from our governance roadmap—the CAP Guidelines.

A Word of Caution
Is this an area where more guidance is necessary? Stephen Lewis of Towers Perrin cautions about adding burdens to plan sponsors by adding to the CAP Guidelines, stating, “How plan sponsors decide to meet that responsibility, including information on the transition to retirement, should be left to them.”

Who Ya Gonna Call?
Here, then, is a call for service providers to shoulder this burden—the first step being determining the needs of retirees. Consider: every one of us, with luck, will be a retiree one day, and our needs will likely have three main components:

1. Regular income for life, the traditional promise of an annuity.
2. A growth component to our investments to help maintain our standard of living. In some cases, this may mean covering added medical costs while in others, it might mean ready funds to help the kids.
3. The ability to leave something for the kids or a charity.

These three components must form the foundation for a healthy retirement income. And yet, only the first need is met with annuities, which remain the only legally blessed automatic retirement rollover vehicle.

Call to Action
How can this be? This is a call for action for our industry to lobby, potentially through the ACPM, for solutions more in keeping with the needs of seniors retiring from DC plans (group RRSPs have their own challenges also requiring lobbying). Consider, today’s retiree is likely to live for 20 to 30 years beyond retirement—a great change from when annuities first received this legal blessing. Today’s worst-case scenario could well be a former employee, automatically locked for life into an annuity generating income below inflation. Rather than court litigation surrounding the adequacy of communications, we should look to real-life solutions providing for growth and a change of mind.

Real-life Solutions
With the advent of target date funds as a default option, we could now build rollover retirement portfolios to generate regular income, include a growth factor and preserve capital for inheritance. This meets all three components of the retiree’s needs and allows for a change of mind, perhaps to purchase an annuity later. Further, we can twin communications with existing programs to indicate default processes during employment and at retirement, while adding retirement transition features such as seminars and increased help desk support. To further match real life, calculators should be rebuilt to include credit factors. After all, most seniors today carry credit cards, lines of credit and mortgages—unlike their parents’ generation.

Making it Happen
Again, the service industry needs to step up to these challenges. However, Bita Jenab of AON suggests looking to the States for further ideas to support plan sponsors. “[Instituting] ‘Safe Harbour’ measures,” she states, “would be a catalyst for a broader provision of member education and information regarding retirement income decisions while mitigating the litigation risk for plan sponsors.” We could, therefore, provide guidance within the CAP Guidelines, but do so with increased protection for plan sponsors through safe harbour provisions. This might well be the best of both worlds, and again, another call for action for our industry.

Joan Johannson is the president and managing director of Integra Group Retirement Services.

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