(September 12, 2013) – Improved market returns have led to a sigh of relief from defined benefit (DB) plans, but defined contribution (DC) plans are continuing to struggle, according to Towers Watson.
The consultancy polled Canadian pension funds for its latest Retirement Index survey and found that while DB funds now show improved solvency after several years of increased deficit-funding by plan sponsors, things are less rosy for their DC counterparts.
Changes in capital market returns and annuity purchase prices only resulted in a slight increase in the monthly pension of a Canadian worker in a DC plan—from a low of 13.4% of monthly wage in Nov 2012 to just 15.2% as of September 1, 2013.
This is significantly lower than the 22.3% high, reached in December 2007.
Ian Markham, Canadian retirement innovation leader at Towers Watson, said differences in funding design had contributed to the difference in relative performance.
“One important distinction is the opportunity for de-risking,” he continued. “DB plan sponsors have been able to use improving financials to consider de-risking strategies to lock in a portion of the recent market gains. However, DC plans do not have access to the same opportunities and will not benefit as readily from the same market gains.”
The fact employers don’t top up DC pension funds during periods of poor performance is also hindering DC members’ retirement pots, Michelle Loder, Canadian DC business leader at the firm, added.
“Given these fundamental design differences, the onus remains on DC plan members to increase their contributions in times of poor investment performance or accept a lower level of accumulated savings from which to draw retirement funding.”
DC members are becoming increasingly aware of the danger of retiring without enough money, the survey found. Around 78% of DC plan sponsors told Towers Watson that retirement security has become a more important issue for mid-career employees over the last three years.
But the bad news is just 23% of DC plan sponsors expect their pension plans to play a bigger role in their company’s total compensation strategy over the next five years, and three-quarters haven’t changed their employer contributions in the past five years.
Only 17% of plan sponsors have increased their maximum employer contributions, from an average of 5.1% to 7.3% of pay.
This, if matched by the employee, almost accounts for the 15% now recommended by several sources, including fund managers Schroders today, as the minimum amount needed to retire comfortably from a DC pension fund.
“For DC plan sponsors, the notion that market improvements may not be ‘good enough’ news for DC plans has been a bit slow in coming, but now is the time to take notice,” Michelle Loder concluded.
“A DC plan that may have been designed for a different economic environment can have a negative impact on workforce planning and operational efficiencies if plan participants cannot accumulate enough savings to retire.”
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