The imminent departure of the first wave of baby boomers from the workforce will offer clues about the adequacy of that generation’s saving habits, and plan sponsors will likely base their future decisions on the events of the next few years, says a pension expert.
“The boomers are coming off a legacy of spending, and it’s come at the expense of saving,” said Peter Gorham, a partner with Morneau Sobeco, at the firm’s Compensation – Trends and Projections for 2009 seminar at the Fairmont Royal York in Toronto on Thursday. “The real question for my cohort is, Can we afford to retire?”
Gorham outlined the current trends in both defined benefit (DB) plans and capital accumulation plans (CAPs), explaining that conversions from DB plans to CAPs appear to be on hiatus. According to Morneau’s data, fewer than 5% of DB plan sponsors are thinking of converting to CAPs over the coming year—a significant drop from the past two years, when 20% of DB plans were converted to CAPs. Gorham explained that this could be a function of improved funding levels for DB plans, or evidence that the organizations inclined to make such a change have already done so.
On the issue of supplemental plans, Gorham said the jury is still out but the experience of the boomers would validate or debunk the need for such plans.
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“One of the lessons I expect we’re going to learn over the next 10 to 15 years is the abject failure of my generation to adequately save, and possibly realize that you cannot trust many of your employees to look after themselves in terms of their future,” he said. “This raises the question of: Should we be paying these supplements as part of compensation and leaving it up to individuals to look after themselves? Or should we be playing parents by putting in a formal program to make sure there are adequate savings for all?”
Gorham identified the key issues for 2009 at a glance, which essentially mirrored those of 2008. Respondents to Morneau Sobeco’s poll of 280 Canadian organizations rated investment performance as the most important issue (33%), followed by cost (24%), retirement planning (23%) and plan design (12%). The results include both DB plans and CAPs.
According to Gorham, the most important issues on the horizon for DB plans are the adoption of international accounting standards in 2011, phased retirement, the review of actuarial standards and dealing with frozen DB plans.
Closed and frozen DB plans are becoming a major issue, said Gorham, as they take up a considerable amount of time and resources. “These legacy plans are lingering and will not go away, which is not surprising when you consider that you’re looking after people who’ve got a long life expectancy.” He discussed the increased interest in what is referred to as total outsourcing: outsourcing of the complete operation of the plan, including the administration, governance and investment aspects. “We see this as a growing trend in the industry,” he added.
On the CAP side, the tax-free savings account (TFSA), target date funds, guaranteed funds and auto-enrollment are the issues most likely to drive change, according to Gorham. He predicted that the TFSA will be an “instant success,” after a poll last spring found that 65% of employers were interested in offering these accounts as part of their benefits programs. “We think that number can only grow with time.”
To comment on this story, email jody.white@rci.rogers.com.