Pensions Change Only Thing Permanent!
By: Susan Thorpe
If someone were to ask the pension industry 'Can you spare some change?',they’d find that change is something it has plenty of, but unfortunately not the kind that can be given away.
Change is happening to the pension industry in Canada at unfathomable speed: takeovers, mergers, and acquisitions are forcing corporations to become more multi-jurisdictional than ever before.
Plan sponsors and administrators are faced with increasing demands with respect to their fiduciary roles; and plan members are required to make more decisions and constantly revisit their retirement plans. As a result of the changes being imposed, plan sponsors and administrators are looking for support and guidance to ensure that they are providing their plan members with the right products and decision-making tools. Plan sponsors, impacted greatly by the constant changes to their corporate structure, plan legislation, and demographics, are often confused. They are challenged by the differences in their plan members’ geographical, cultural, and socio-economical standards. These variances coupled with legislative diversity can lead plan sponsors down an onerous path when they are merely trying to provide the best that they can offer for their plan members. They must rely heavily upon the support of their providers, consultants, and agents to assist them with plan blending, plan wind-up, and new plan set-up
. The aforementioned can be confusing to say the least, but there are organizations in Canada that are working diligently to offer a resolve. The Canadian Association of Pension Supervisory Authorities (CAPSA), working in concert with all facets of the industry, has been developing guidelines and alternative solutions to the problems.
CAPSA has long been a strong proponent of Capital Accumulation Plan (CAP) guidelines and now is responsible for the initial suggestions that will formulate the new Model Law Principles.
Plan sponsors are being invited to actively participate and respond to the new CAP guidelines and to the suggested Model Law. In the past, these types of uniform guidelines have been almost non-existent. However, their purpose is to ensure that:
- Plan members will be adequately protected by their plan sponsors
- Administrators will understand the need to record due process
- Plan members will be provided with the tools and the knowledge to make informed choices
The new guidelines will provide consistency in the industry. They will offer gentle directional support to encourage a focus on constant improvement and development of good governance practices. Plan sponsors will be (or should now be) responsible for maintaining the good health of their plan. They will be urged to provide a diversified selection of investments, be prudent with respect to the fees charged to the members, and provide the tools to enable the members to make informed decisions. By combining these many good practices, the results will be:
- Plan sponsors who can be satisfied knowing they have met their fiduciary responsibilities
- Administrators who have ensured that good guidelines have been met and they have the records to prove it!
- Plan members who have taken advantage of the education provided and invested wisely – truly inline with their risk return profile – will now, hopefully, have a clear vision of what their retirement will look like!
The last point brings up an important question: While CAPSA’s guidelines resolve a number of issues, will they actually guarantee effective education for plan members? We are constantly reminded that the entire responsibility cannot fall upon the shoulders of a plan sponsor. After all, members do have to take some accountability for their future, correct?
Well, let’s consider that retirement is just the next phase in life. It should be something that plan members should look forward to – not just for the fact that they will no longer be ‘working.’ Realistically:
- We prepare our children for elementary school through preschool activities
- We provide children, through elementary education, with basic life skills
- We provide children with disciplines through high school and post secondary education to develop long-term trades or careers…
But, how do we really prepare plan members for the next stage of their lives?
We can demonstrate to plan members how to acquire sufficient funds to achieve a certain lifestyle at retirement. We can educate them and we can guide them into that lifestyle. However, where does the skill set suddenly come from to assist a prospective retiree to develop a long-term strategy for retirement?
The following information outlines the relationship of plan sponsors, administrators, and plan members since the 1980s. Change has been very apparent over the years. Are plan sponsors, administrators, and plan members ready for the new challenges?
It’s tempting to predict what changes are going to take place in the next 20 years. And, current geo-political insecurity allows the imagination to run wild. Rest assured we can only guarantee constant change … the pension industry will always have plenty to spare.
‘Cocooning’ was the theme of the ’80s along with straightforward acceptance of what was offered.
For the plan sponsor, administrator, and plan members, the ’80s were a simpler time.
- Primarily provided Defined Benefit plans to their members (if they provided any retirement benefits, at all)
- Managed their plans with a heavy paternalistic hand
- Dealt primarily with federal pension legislation
- Had no advisory guidelines to follow
- Relied upon the calculations prepared, and advice given, from actuaries and accountants
- Chose the investment direction for the pension plan
- Had only a few investments to choose from
- Usually chose a pool of investments
- Were required to ensure that the pension did not suffer from a shortfall
- Over time, bore the weight of all the day-to-day internal work relating to the plan
- Had to receive all questions from plan members, relating to the plan – remember – no call centres, no Internet
- Needed to explain the plan dynamics to retiring plan members – did they really understand themselves?
- Rarely understood the benefit of their plan
- Relied implicitly upon the plan sponsor to ensure that they would be looked after at retirement
- Made contributions to the plan
- Only received information when it was disseminated in the form of an annual statement
- Received no education about their plan
- Usually planned to retire at 65, but some began to choose 60, because it was assumed there was something better ahead
- Didn’t realize that a form of subsequent income was required and, therefore, many struggled with the actual amounts of their retirement income
- Realized that without additional savings, a simpler lifestyle at retirement was necessary
- Basically took what was given to them at retirement
1990s Awaking in the ’90s, it was a time of change, optimism, and enthusiasm.
- Witnessed changes in industry trends
- Saw the introduction of provincial pension legislation
- Experienced changes in the economy – inflation was high, markets were beginning to improve
- Introduced Defined Contribution pension plans
- Downsized, restructured, and re-engineered
- Some were packaging off their senior employees at a younger age
- Company incentives were offered for members to retire at 55 and even younger – given the right ‘years of employment/age factor’
- Were not necessarily preparing their members for this early retirement
- Began to take a less paternalistic approach to their plan members
- Offered too many investment choices for their plan members
- Offered ‘early stage’ investment education and retirement planning tools
- However, many were reluctant to allow members to be educated on company time
- Continued to bear most of the day-to-day responsibilities associated with the plan
- Had the support of provider 1-800 customer call centres, but continued to remain the prime communicator/‘adviser’ to plan members
- Began to give unqualified advice to plan members, with respect to investments
- Were receiving more frequent valuations of investments and, therefore, relied greatly upon monthly, quarterly, and annual reporting
- With little knowledge, were becoming more confused as more information was available
- Were beginning to take a serious interest in their savings
- Were realizing the importance of their decisions
- Were focused on getting double-digit returns
- Began forecasting their long-term goals based upon 12 per cent average rates of return
- In some instances, the investment selection was so large that it was beyond comprehension and, as a result, members often selected a ‘Savings’ option as their default investment
- Had the use of a 1-800 customer call centres for general account information
- Were beginning to get caught up in the media frenzy – retirement at age 55, golfing, travelling, etc. and they wanted it
- Were retiring, often without specific goals and ideals
2000 The new millennium and new found fear.
- Noticed more change in the industry
- Scrutinized their industry colleagues as corruption was being exposed; boards of directors and senior executive executives were doubted and questioned
- Faced the end of the overvalued investments and a market downturn
- Developed a fear of future litigation potential
- Recognized words such as ERISA and heard the repetition of corporations names faced with serious governance and fiduciary issues
- Heard members question the security of their retirement package
- Saw early retirement incentives become disincentives
- Witnessed companies extending their large paternalistic hand once more, not only for protection of members, but also for self-preservation
- Heard word of new capital accumulation plan guidelines and early suggestions of a model law in Canada
- Reviewed whether or not the range of investment options was too large
- Briefly considered reverting to a DB style of plan (some actually made the change)
- Realized that more education is required for their plan members, in order to support them and to alleviate their fears – and to protect themselves from future exposure
- At last have good educational resources
- Have a system of support through consultants, agents, and plan providers
- Are understanding the necessity of educating the plan members and are actively encouraging this ongoing process
- Have an option to refer a plan member to the plan provider’s resources – IVR, customer care centre, and Internet – thus lessening their burden somewhat
- Can access a wide range of reporting from the Internet and real-time information.
Plan members are...
- Struggling with market volatility
- Seeing unrealized paper losses in their pension plans
- Feeling pessimistic because of developments in the pension industry
- Having to adjust to single-digit returns at best
- Beginning to understand the need to plan for a long-term satisfactory results
- Appear willing to take control of their pension plans and investments
- Starting to be cognizant that they may not have enough to retire and lack a long-term skill set to manage their retirement effectively
- Need sound advice and direction to assist them with the decision-making process
As we progress in the realm of greater knowledge, greater accountability, and more complex educational programs, there are items key players (sponsors) of this industry could consider.
- Seriously consider the governance and guidance practices provided by the CAP Guidelines
- Establish a committee to take responsibility for overseeing the management of the plan
- Establish regularly scheduled plan and investment review meetings
- Provide plan members their required full disclosure of entire plan details
- Be fully educated with respect to the administrator role for a CAP
- Be able to communicate effectively with a plan member and direct them to the correct source for information
- Understand the timeliness of investing contributions
- Maintain clear and concise records
- Take full advantage of the services offered
- Be encouraged to attend educational meetings offered by plan providers
- Be encouraged to speak with external unbiased third-party advisors should they require further assistance and guidance
- Explore retirement opportunities
- Set new goals for the autumn years and endeavour to remain active, productive, and forward-thinking
Once again, it’s is very tempting to predict what changes are going to take place in the next 20 years and one thing is for sure…the pension industry in Canada will always have plenty of change to spare!
Susan Thorpe is a senior account executive, Alberta and British Columbia, for Great- West/LondonLife/Canada Life – Group Retirement Services.
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