The first wave of retirees from Canadian defined contribution plans is expected in the next five years. And many plan executives and service providers are worried that not only are plan participants not ready, but also the regulatory regime might be making things worse for them.
Issues that are in the spotlight as DC plans begin to mature in Canada include:
- federal and provincial rules that do not allow for lump-sum or variable withdrawals from defined contribution plans directly to participants;
- requirements, both national and provincial, that retirees make all their own investment and asset withdrawal decisions, without any advice provided through plan sponsors;
- few rollover options for retirees leaving DC plans, causing them to use the limited products offered by their plan's mostly single provider, predominantly insurance companies;
- high fees for post-retirement investments provided by insurers and financial services firms; and
- the lack of a holistic approach to retirement that incorporates DC assets with benefits received from the country's national pension plan, the C$298.1 billion ($223.6 billion) Canada Pension Plan, and from other sources like defined benefit plans, Old Age Security (Canada's income-tested version of Social Security) and public aid.
The cause of many of the problems, sources said, is that the defined contribution market in Canada is far less mature than those in the U.S., the U.K. and Australia.
“Defined contribution is a fairly new phenomenon,” said Martin Leclair, vice president with investment and benefits consultant Proteus Performance Management, Toronto. “I think we're in for some hardcore education in the coming year for both” DC plan participants and government regulators at the federal and provincial levels.
Added John D'Agata, director, pension administration, at McGill University in Montreal: “The big issue today is that a person who's retiring is going into an arrangement where, after someone provided the plan oversight and investment strategies, now suddenly that person leaves the plan and has to figure out what to do. This is one of the most important decisions they'll ever make.”
Katherine Strutt, general manager of the C$450 million Saskatchewan Pension Plan, Kindersley, said DC participants at or near retirement age “are looking to someone to help them get through all of this. All we can do is lead them to where they can make the best decisions for (themselves). But they own the decision. It's all up to them.”
Canadian DC plans generally “do a good job of accumulating (assets), but I don't think there's a lot of preparation for when people reach retirement,” Ms. Strutt said. “It's often just turned over to the insurance provider. There's also a lot of limits to decumulating DC plans from a legislative perspective.”