Picking investments for money earmarked for retirement isn’t a priority for most people, nor do most have a sufficient knowledge base to do this efficiently or effectively. Investing in a meaningful way can be a mind-bending exercise for the majority of Canadians.
But what if you could just dump your retirement savings into a trusted return-generating fund and walk away with confidence? Too simple? Not for OMERS members in its additional voluntary contribution (AVC) program.
How it works
Members can contribute to the pension fund’s voluntary program in two ways—through lump sum payments or through regular automatic bank withdrawals. So far, now in its third year, the AVC program has attracted 7,200 members—while this is only a small portion the pension fund’s overall membership, it does account for $170 million.
“In my view, that’s a success,” says Jennifer Brown, chief pension officer with OMERS. “The challenge is, our contribution rates have gone up over the last three years. It’s a bit of a challenge for some members to consider even more contributions, but this is something that many members are very interested in.”
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“If there is a steady increase, I think OMERS would be happy with that,” added John Pierce, vice-president, public affairs, with OMERS.
And with minor tweaks, such as eliminating the window in which members can make transfers from their RRSPs—a change that was made this year—and setting up payroll deductions with employers that want to participate (coming in 2014), the team behind the AVCs should see the steady membership growth it is looking for.
Of course, returns are never guaranteed, but those who decide to put their extra retirement savings money into the AVC program get it directly invested in the OMERS Pension Fund. Today, OMERS released its 2012 financial results, and the fund saw returns of 10%. Over the last eight years, the OMERS fund earned close to a 7.5% gross annual average return.
Winning formula
Katie Clarke, manager of the program delivery, community and family services department with the City of Kingston, says that for her, this makes more sense than contributing to RRSPs.
“I don’t have time to research my investment options and monitor my returns,” said Clarke, who is also a certified accountant. “I like that with the AVCs you know [the money] is safe, and you don’t have a lot of fees.”
OMERS doesn’t make money from the AVCs; the program is a cost-recovery model. Plan members pay investment management fees of $0.59 and only a $35 annual administration fee.
But putting all your nest eggs into one retirement basket is risky, isn’t it? This is a common question Mike Robinson, manager, client services, with OMERS, hears a lot from members and explains that it’s not all in one basket. “You’re actually quite diversified,” he says. The AVC program is completely separate from the pension part of the plan. The pension is based on earnings and years of service, while the AVCs rely on investment returns.
For Clarke, moving retirement savings that she had outside of her OMERS pension to the AVC program was more of a relief than a concern. “I feel safe with it. It’s through OMERS, [and] they obviously know how to manage money.”
Also, both Brown and Robinson have AVCs, and yes, they both have a bias toward the fund, but there’s some security in knowing that those behind the plan believe in it as much as they want all the members to.
The AVC program is a win-win for the pension fund as much as it is for plan members. It’s a way for the pension fund to grow and build its capital pool. The fund has made a shift toward private market investments—which costs money.
The fine print
For many people, the AVC program makes solid financial sense, but the AVC team confirms that this program isn’t suitable for all OMERS members.
Potential investors need to have a mid-to long-term investment horizon (five to 15 years), adequate cash flow and moderate risk tolerance.
Once the money is in the AVC program, it’s not easily accessible for active pension plan members. AVC members can only make withdrawals from March 1 until April 30 and can take out only 20%. (Exceptions apply to retirees. They can withdraw money at any time during the first six months of retirement, and there are no limits on amounts, at any time.) So, for those who plan to use this extra cushion to purchase a home, for example, or for emergency purposes, they’re better off leaving it in an RRSP or another savings vehicle.
“It makes sense for a person who is looking for a long-term stable investment for their retirement,” Robinson explains. “We are very clear on that; we don’t want people getting into something they don’t understand.”
This program is one of kind in Ontario, and only the Saskatchewan Pension Plan has anything similar in the country. Most of the members in the AVC program right now are retirees, but in an age where Canadians are being warned to maximize their retirement savings, this type of program is sure to draw even more attention in the coming years from younger generations.