Towers Watson: Canadian DC plans trail DBs in post-crisis recovery

Canadian defined contribution plan participants are only marginally seeing an increase in potential retirement income from rising capital markets, according to Towers Watson.

According to the investment consultant’s latest DC Retirement Index, which uses as a benchmark a 60-year-old participant who retired in December 2007 and had invested in a balanced fund, retirement income as of Sept. 1 was 15.2% of monthly pay, up from 13.4% in November 2012 but far below the index high of 22.3% in December 2007.

DC plans, by their nature, aren’t able to lock in the returns “and take risk off the table” as defined benefit plan managers can, said Dan Morrison, senior consultant at Towers Watson. “In DC plans, it’s often set-and-forget,” Mr. Morrison said. “Participants pay less attention to their asset allocation than DB plan managers. They don’t have the same hands-on ability to make adjustments to changing circumstances” as DB plans do. He said target-date funds mitigate that difference somewhat but added that they “slowly derisk over time” rather than in response to market conditions.

The relatively small change in payout has not been helped by overall increases in maximum employer contributions over the past five years, Towers Watson said, as 75% of Canadian DC plans in the firm’s database have not changed their maximums. Seventeen percent have increased their maximum employer contributions, to an average 7.3% of pay from 5.1%.