How to handle the payout phase is one of the most important issues facing DC plan sponsors today. Benefits Canada’s 2015 DC Plan Summit delved into the decumulation dilemma.
Keynote presentation: revisioning retirement
Canada is seeing transformative change taking place in the way people think about retirement and how they should plan for it—both financially and in every other area of life, said Maddy Dychtwald, author and co-founder of Age Wave, and keynote speaker at the DC Plan Summit. “It’s really uncharted waters.”
She encouraged plan sponsors to help their plan participants think about retirement in a broader way. “Retirement is about a lot more than just the money,” Dychtwald explained. “However, based on [Age Wave’s] most recent studies, achieving financial independence is the key to unlocking retirement’s full potential.”
She said two dynamic new forces of change are increasing longevity and shifting demographics. Over the course of the 20th century, the average life expectancy has skyrocketed by more than 30 years, which Dychtwald describes as a “longevity bonus.”
Women need to pay particular attention to longevity: they tend to outlive men by four years, but, on average, women’s retirement accounts are just two-thirds those of men.
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From 2010 to 2020, most of the population growth has been taking place in the oldest segment of society (age 65 and older) in Canada and other countries coping with the same demographic dynamics.
“The baby boom has become an age wave,” Dychtwald said, noting baby boomers always do things differently from previous generations. “They are change agents, and now they are revisioning retirement.” She sees five key changes.
1. New work/life design. “The question becomes where to put our longevity bonus—that extra 30 years of life,” she said. For example, someone might decide to go back to school to prepare for a second, third or fourth career. “You get an opportunity to reinvent yourself.”
2. Flexible retirement. A flexible retirement is the new ideal. According to a Merrill Lynch/Age Wave survey, almost one-quarter (24%) want to cycle between leisure and work, and 39% want to work part-time. “Post-retirement careers are being considered by almost half of all workers,” Dychtwald said, noting many people believe working in retirement is an antidote to aging.
3. Multi-generational challenges. The fastest-growing family unit today is the multi-generational family, and intergenerational complexity has huge financial implications for employees. According to an Age Wave/SunAmerica study, the new retirement wild card is having to provide financial help to family members, such as adult children, grandchildren, siblings or parents.
4. Redefinition of retirement. The new definition of retirement is to stay engaged, to reinvent yourself “and, more than anything, to enjoy the freedom of doing what you want, when you want,” said Dychtwald.
5. Shift in planning and funding retirement. “We are seeing a pronounced mind shift toward financial self-reliance,” Dychtwald explained. “We all know that financial planning is not a do-ityourself project.”
With this in mind, plan sponsors have the opportunity to guide their employees through the planning process, helping them determine what they need to do to live their dreams in retirement and giving them choices, as well as a sense of security and peace of mind. “It’s an opportunity for plan sponsors to do well and do good.”
Canadian case study: George Weston/Loblaw’s guiding DC principles
George Weston/Loblaw has been growing through acquisition— including the recent addition of Shoppers Drug Mart—which has led to many different pension plans. To deal with this, the company simplified and consolidated all of its capital accumulation plans and streamlined the investment lineup, making communications easier and fees more competitive.
“In the program we established, simplicity and cost are important for a number of reasons,” said John Poos, vice-president, pension and benefits, with George Weston/Loblaw. “If you reduce the number of [investment] options that are available, it makes it easier for people to understand and know which choice is appropriate for them.” For that reason, most of the investment choices offered to members are target-date funds (TDFs) as well as a few asset-specific funds, such as equity-only, bond-only, real estate and GIC options. Most assets are in TDFs.
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When George Weston/Loblaw acquired more companies, “in almost every case, we reduced costs for those participants by more than 1%—and that 1% should add 10 years to their retirement,” Poos said. “One percent savings in fees means 10 more years of retirement earnings.
“We’re trying to find a solution that keeps costs for participants at a reasonable level. In my view, DC plans should not be disadvantaged from a cost perspective, as compared to institutional DB plans,” he added. “We try to manage our costs as if it were a DB plan.”
Decumulation is an important issue for the company, noted Poos. “We are now very focused on what happens to [plan members’] money when they reach retirement—how can we help them through their retirement years, as opposed to seeing them leave and having them deal with the financial industry without our help.”
Swedish case study: An update on the Swedish pension system and lessons for Canada
Sweden is living proof that it’s possible to design a financially stable, pay-as-you-go pension system. The downside is, benefits are not guaranteed and can vary depending on economic and demographic changes.
Newer employer-sponsored pension plans are DC plans with quasicompulsory participation, covering approximately 90% of the Swedish labour market. (Those employed at a company with an industry pension plan are required to participate.) Within Sweden’s premium pension plan, workers can choose up to five funds from among 850 different mutual funds.
“There can be too much choice in a pension system,” noted Ole Settergren, research and development director at the Swedish Pension Agency. “In this sort of financial product, it’s very difficult for anyone to understand the impact of your choice.” Those who don’t choose their own funds end up in the default fund, which has done better than the average.
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Since the market has been up, those who have chosen their own funds have done well, said Settergren, “but it’s a rather volatile journey. Right now, it has been good returns for most.”
The retirement age is “fairly flexible,” he explained. People can receive pension benefits starting at age 61, and the amount accumulated is converted into an annuity. At age 65, a guaranteed pension and housing allowance kick in.
Because longevity is increasing so rapidly, “perhaps the main issue in Sweden, as in many other countries, is what the retirement age should be,” said Settergren. “There is no escape from increasing the retirement age if we want to pay contributions that we can afford and get pensions that we can live on.”
However, raising the retirement age— which would successively be increased and pegged to life expectancy—is not yet on the table. “It will happen sooner or later, but right now, it looks like later rather than sooner.”
Canadian case study: McGill University’s decumulation strategy
For plan sponsors, offering a group life income fund is an easy solution to the decumulation challenge, yet very few are taking advantage of this strategy. “For those who want to offer a benefit without getting overly involved, it’s an excellent opportunity to do so,” said John D’Agata, director of pension and benefits with McGill University.
In terms of decumulation options, plan sponsors in B.C., Alberta, Saskatchewan and Manitoba can offer LIF-type payments directly from a DC plan. Another option, available across Canada, is to sponsor a group LIF/retirement income fund for retiring or departing employees.
When making payments directly from a pension plan, a plan sponsor takes on more of a fiduciary role. But with a group LIF, the trustee is a financial institution, while the plan sponsor acts as an agent for employees and can limit its involvement. Plus, “you are still offering a fantastic benefit to your members,” D’Agata said.
Quebec doesn’t allow direct payments from a DC plan. So McGill had to go outside of the plan to offer a decumulation option to its members. “That’s why we went the group LIF route,” D’Agata explained.
McGill is launching its group LIF this spring, offering all retiring and departing employees an opportunity to transfer their money into the McGill group LIF. “We have a limited number of investment options, and the management fees and overall costs to the employees would be fairly low,” he added.
U.K. case study: How Sainsbury’s took on the auto-enrolment experience
The U.K. government mandated auto-enrolment in DC plans starting in October 2012—and, as one of the largest grocery retailers in the U.K., Sainsbury’s was one of the first plans to implement it.
With its first auto-enrolment, Sainsbury’s put 50,000 employees into its DC pension plan. The initial opt-out rate of 7% has since fallen to under 5%.
“We knew it would work—that people would stay in—and they did,” said Wendy Davis, Sainsbury’s pensions manager.
Communication with Sainsbury’s 160,000-plus employees, spread across 1,200 sites, was key to a smooth rollout. “It was really an ongoing process of communication,” Davis explained.
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During the six months before it went live, Sainsbury’s delivered a steady drumbeat of information to employees using all of its available communication channels (an employee magazine, internal websites, posters and employee meetings/forums) to ensure everyone was familiar with the changes by the time auto-enrollment kicked in.
Sainsbury’s also closed its DB scheme to future accruals, moving another 15,000 employees into its DC plan in September 2013. There are now more than 100,000 employees enrolled in Sainsbury’s DC plan.
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