Part I of this series, we considered ways in which the
"traditional" accumulation driven defined contribution
(DC) plan design fails to maximize value. In this post, we discuss
variable pensions as well as the role of governance considerations
in decumulation strategies.
The interesting opportunity for plan sponsors to consider is how
they might significantly increase the overall value of their DC
plan through effective decumulation strategies, while doing so at
an acceptable cost and without taking on an unacceptable amount of
increased administration or fiduciary responsibilities as plan
administrator. In this regard, there may be a number of ways to
enhance DC plan value, and member appreciation of such value,
without any material increase in fiduciary liability.
Payment of Variable Pensions
In many Canadian pension jurisdictions, the payment of pensions
to members directly from their DC plans is either permitted, or
pending the proposed introduction of enabling legislation (e.g.,
the federal Pension Benefits Standards Act, 1985 and recent
proposals from Ontario allow (but do not require) variable payments
from a member's DC account similar to those allowed from life
income funds). Where permitted, many DC plan sponsors may still
think twice about adding this feature to their DC plan design,
despite the value add to members, because they are concerned about
prolonging pension management costs and fiduciary responsibility
for the administrator beyond member retirement. However, attitudes
to this may be changing along with the realization that it is
possible to enhance DC plan value by the adoption of a more
proactive approach to the decumulation phase of DC benefits which
could, but need not, require committing the plan to directly paying
pensions and which need not materially increase administration cost
or fiduciary liability.
Governance/Plan Administration Considerations
CAPSA best practice guidelines for DC plans (e.g., see, in
particular, Guideline No. 8 released March 28, 2014)
suggest that plan administrators have a proactive role to play in
assisting DC plan members to transition to the decumulation phase
(even where payment of variable DC pensions are not permitted by
the plan terms). While CAPSA guidelines do not have the force of
law, these guidelines may be used as a benchmark by the courts
and/or regulators to assess whether a DC plan administrator has met
its fiduciary obligations. As a result, it is arguable that
decumulation strategies deserve serious immediate consideration as
a matter of good DC governance.
CAPSA Guideline No. 8 includes discussion of the information
that should be provided to members approaching the payout phase,
options available to the member;
any actions the member must take;
any deadlines for member action;
any default options that may be applied if no action is taken;
the impact that the termination of membership will have on each
In addition, the Guideline indicates that "[i]t is expected
that the plan administration will provide information regarding all
of the retirement products available to members with respect to the
payout phase". This information should allow members to make
"informed decisions which strike a balance between protection
from the risks inherent in the various products and achieving
target replacement rates".
In our next post – Part III of this series – we will
consider decumulation strategies in more detail, and specific
considerations for plan administrators and plan sponsors.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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