SESSION/SÉANCE : 34 DC Plans: Comparing the Canadian and the U.S. Experience SPEAKER(S)/CONFÉRENCIER(S) : Steven Mews, FSA, FCIA
Emergence of DC Plans in Canada Members covered by a Registered Pension Plan Source: Statistics Canada
Coverage Overall pension coverage declined by 9% between 1991 and 2006 Similar trends in both the private and public sectors These statistics do not mean that employers and employees have given up on retirement plans
Don t forget about CAPs CAP = Capital Accumulation Plan tax assisted investment or savings plan that permits the members of the CAP to make investment decisions among two or more options CAP Guidelines developed in 2004 Best practices, not legislative requirements Embraced by industry, leading to continued growth in CAP plans DC RPPs and Group RRSPs cover 50% of private-sector employees* 2011 CAP Benchmark Report illustrates that 1 in 4 employers offer Group RRSPs as their sole retirement savings benefit * Source: Baldwin, 2008
Retirement Savings Reform Still a gap in retirement savings in Canada Private sector employees (millions) Employer size (# of employees) * Includes pension plans and group RRSPs Sources: Industry Canada: Key Small Business Statistics - July 2011, Statistics Canada Workplace and Employee Survey Compendium 2005
Introduction of PRPPs What are PRPPs Pooled Registered Pension Plan New type of defined contribution retirement savings plan Designed to: Reach people who might not otherwise have access to a group retirement savings plan Be universally accessible Be easy for employer to administer (no fiduciary responsibility) Have low cost Federal and provincial governments each have to pass their own legislation and write regulations Other than Federal and Quebec, no other jurisdiction has published a draft position
Federal PRPP Highlights Timeline In 2010, the Federal minister of finance released a framework for the introduction of PRPPs November 2011: Bill C-25 was introduced to parliament for approval Bill C-25 recently received third reading in the House of Commons and is now proceeding to the Senate Comments Applies to federally regulated industries Voluntary participation for qualified employers Immediate vesting Allows for auto-enrolment and autoescalation Employer contributions are not mandatory Employer contributions are locked-in until age 55 Administrator determines plan default fund, default contribution rate, and increases Administrator must provide at a low cost Regulations expected in Spring 2012
Quebec VRSP Highlights Timeline March 2011 Quebec government releases framework for voluntary retirement savings plan (VRSP) March 2012 detailed proposals for the VRSP released, enabling legislation to be introduced Bill 80 introduced last week Comments VRSP will mirror many aspects of PRPP Mandatory for employers with 5+ employees Voluntary for employers with under 5 employees Immediate vesting Must start plan between Jan 1/13- Jan 1/15 Allows for auto-enrolment and autoescalation (Start: 2%, 2016: 3%, 2017: 4% ) Employer contributions are not mandatory Employer contributions are locked in until age 55 Default fund must be a target date fund with a maximum of 5 other investment options
Keys to a Successful Retirement Program Joining early Meaningful contributions Appropriate Investment options Lessening the impact of withdrawals Portability
PRPPs Other Considerations Low cost Impact to existing Capital Accumulation Plans Distribution Member engagement
Member Engagement Current hot topic in the DC industry Shift from DB to DC has put more onus on the members A successful outcome requires members to be engaged and make active (and good) decisions Join early Maximize contributions Make the right investment decisions Reasons why some members aren t engaged: General lack of interest Lack of understanding / poor financial literacy Procrastination People think they re too young Not a priority
Some Statistics According to the 2011 Benefits Canada Survey of CAP Members 61% report that their CAP is their primary retirement savings vehicle 36% are unengaged 23% report having no other savings program beyond their CAP 24% have a formal, written financial plan 59% aged 18-34 don t think about retirement since it s too far away 51% feel they are on track to save the funds they need for retirement
Recent Trends Personalized and customized tools available online Use of mobile devices to access plan information, member education, retirement planning tools, etc.
Recent Trends Retirement illustrations on member statements Monthly income illustrations at retirement under various probabilities Uses a member s unique profile Helps show the need for retirement planning and saving Helps members get and stay on track
Recent Trends Tailored Communication Different generations prefer different forms of communication Baby boomers tend to prefer paper / person-to-person Gen Y tend to prefer online / use of mobile technology Tailored Education Education needs to be customized based on stage of employment
Defending against low engagement Auto-enrollment and auto-escalation Barriers and legislative challenges to incorporating auto features into Canadian CAPs Over 60% of CAP Members support auto-features * Source: 2011 Benefits Canada Survey of CAP Members
Defending against low engagement Prudent default investment choices Shift towards target date funds in recent years (self-completing) Target date funds are still fairly new in Canada relative to the U.S. Source: CAP Benchmark Report (2008, 2011)
Questions?
Great-West Life and key design are trademarks of The Great-West Life Assurance Company (Great-West), used under licence by its subsidiaries, London Life Insurance Company (London Life) and The Canada Life Assurance Company (Canada Life). As described in this presentation, the group retirement and savings products are issued by London Life and the payout annuity products are issued by Canada Life.