One of the good things to come out of the current economic crisis is that pensions are suddenly a hot topic—not just among actuaries, but among the media, politicians, and the general public.
In the wake of the financial downturn, many plan members are apprehensive about the future of their pension. At the same time, they’re not only more interested in their pensions, they’re more easily engaged on the subject. This presents a unique opportunity to educate members about how their plan works and how valuable it is. It also presents an opportunity to debunk some of the common misconceptions—often perpetrated by the mainstream media—that plague plan members Here are a few of the more popular ones:
• Defined benefit plans always pay out less than they earn so that there’s money left to fund the pensions of other members.
• My pension plan won’t want me to take the commuted value of my pension if I leave my job, because the plan will lose money.
• All I have to do is maximize my RRSP contributions and choose an asset mix based on my years to retirement, and I’ll be fine.
• You can’t lose in a bond fund.
• If I can save $500,000, I’ll be set for life, and receive an annual income of about $50,000 without ever having to touch the capital.
• The Canada Pension Plan (CPP) likely won’t be around when I retire.
• I won’t qualify for CPP or Old Age Security (OAS) because I have a pension from my employer.
• My CPP pension will automatically start when I reach age 65.
While you’re on your myth-busting mission, you might want to take the opportunity to counter some of the other misinformation that’s floating out there.
For example, although plan sponsors often worry that they’ll create unnecessary anxiety if they tell plan members what could happen to their pensions if the company (or pension fund) went belly up, members are likely to conjure up an even worse scenario if left to their own devices.
Likewise, if you’re located in Ontario, you’ll be doing your members a service if you explain how the Pension Benefit Guarantee Fund (PBGF) really works—particularly in light of recent headlines about pensions at GM and Chrysler.
On the other hand, multi-employer plans that have buried the message that they’re not covered under the PBGF need to get that message out of the small print and into the open—and remind members that pensions may have to be reduced in the event of a funding shortfall.
If you sponsor a capital accumulation plan, members need to understand the implications of being invested in segregated funds. They also need to know which of their investments or accounts are protected by the Canadian Deposit and Insurance Corporation (CDIC), and the extent of that protection. If their savings exceed CDIC limits, this too is an important piece of information that needs to be disclosed.
Of course, amidst the unpleasant news, it doesn’t hurt to remind members that they’re part of a privileged minority—the ever-shrinking group of Canadians who have a private pension. All too often pension plan members are so inwardly focused on their own pension that they forget that less than 40% of Canadians have a private pension (in the private sector, the percentage drops to 28%). Likewise, public sector employees need to be reminded that indexed pensions are a rarity and that the economic crisis has had a direct—and, in many cases, devastating—impact on the pension savings of most Canadians who aren’t lucky enough to belong to a generous defined benefit plan.
Closing the knowledge gap will not only earn you brownie points with your plan members, it’s a cost-effective way to engage them in a conversation about their benefits, shape perceptions and behaviour, and build appreciation for a valuable benefit. It’s also the right thing to do.