Now is the time to fix capital accumulation plans
July 2, 2020
The collapse in the equity markets has damaged capital accumulation plan retirement accounts. Governments need to level the playing field between defined benefit plans and CAPs, which include defined contribution plans, registered retirement savings plans and pooled registered pension plans, to assist capital accumulation plan members in rebuilding their retirement accounts.
If investments are not sufficient to cover losses and result in solvency or going-concern liabilities in a defined benefit plan, additional contributions are required. These additional contributions are tax deductible. The ability to make additional tax-deductible contributions to offset investment losses is the most consequential difference between DB plans and CAPs.
Allowing CAP members to make additional contributions to offset losses would increase the likelihood of having sufficient pension assets and income at retirement. Additional contributions should be optional and based on the ‘loss’ at that time the additional contribution is made. This added flexibility would allow CAP members to top up their accounts if and when they have additional cash.
The additional contributions would reduce governments’ tax intake for the year but, the tax would be recovered in the future when money was withdrawn from an account. Sponsors would also benefit if this feature was part of their CAP programs because it would likely increase the likelihood employees would have adequate pensions.
Another item for improving member investment outcomes is addressing investment management fees. The fees paid by CAP members decrease total savings but, CAP members have no control over these costs.
CAP sponsors are responsible for negotiating fees: they have a fiduciary responsibility to always act in the members’ best interests. In my opinion, the fiduciary risk with respect to fees is high. More attention needs to be focused on fees as part of the pension governance process.
One simple option is having sponsors pay the management fees. This could also be presented as an additional benefit and part of employees’ remuneration packages. It would indirectly increase an employer’s pension contribution rate but it would ensure fees were closely monitored while eliminating a potential legal risk. Either way, plan sponsors should review fees frequently. Provincial legislation could be amended to require periodic formal fee reviews at least every three years.
As a plan member knowing what you are paying for a service is important and common sense. However, disclosure of the total annual fees deducted from a CAP account is not mandatory. Disclosure of the total fees (not just the rate) deducted from a CAP account should also be a requirement.
CAP sponsors are required to provide members with investment choices, education, information and investment performance information on an on-going basis. This is a time consuming and onerous task. Selection and monitoring investment options requires time and expertise particularly for small CAPs with only a few members.
In my opinion, the provinces should create a province-wide investment vehicle for CAP sponsors. This would benefit both the sponsor and members.
It could provide diversified and ‘best in class’ investment options to both small and large plans, which are selected and monitored by professionals with a wide variety of options to suit member demographics. Further, it would allow much lower fees because of the size and volume of the investment vehicle and could help minimize legal risks by standardizing investment information and communications. On the governance side, a single Statement of Investment Policies and Procedures would be available for all stakeholders and each participating plan could be represented on the CAP vehicle investment committee.
Overall, while sponsors and governments have promoted CAPs as retirement savings vehicles, they have not provided the same features and advantages available in DB plans. The current equity market collapse has damaged the retirement saving accounts of many CAP members. They need help rebuilding their retirement accounts. The governments should change legislation and regulations to assist in rebuilding retirement accounts and provide long-term solutions to level the DB vs. CAP playing field.
Gerry Wahl is the managing director of The PensionAdvisor. These views are those of the author and not necessarily those of the Canadian Investment Review.