Are CAP sponsors changing contribution rates amid coronavirus?

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Concept image of business partnership and agreement. © tadamichi/123RF Stock PhotosWith companies finding themselves strapped for cash in the wake of the coronavirus, are plan sponsors scaling back on the company match in capital accumulation plans?

Looking at the bigger picture in the U.S., companies are more focused on keeping their businesses running than on their defined contribution plans, says Peg Knox, chief operating officer of the Defined Contribution Institutional Investment Association.

That said, companies of all sizes are considering ceasing the company match or delaying contributions, she adds. “Anecdotally, we’ve heard more small plan sponsors are taking that step, but I think it’s a space to watch going forward because . . .  the longer this drags on, I think you’ll start seeing companies of all size taking that step.”

In Canada, DC plan sponsors aren’t allowed to completely suspend their contributions. However, some are taking their contribution levels to the lowest possible minimum compliance, even if that means amending their plan to do it, says Jillian Kennedy, leader of DC and financial wellness at Mercer Canada.

“A lot of the organizations that are reaching out are doing this on the basis, currently, of freeing up cash flow, wanting to make sure that they can deploy cash flow to other means and as a temporary measure during an uncertain time. We haven’t yet seen clients who have said, ‘I’m going to close down my plan’ or ‘I no longer have a business.’”

But most of the organizations reaching out to Mercer currently don’t have a traditional pension arrangement, she adds. “We tend to see that there is a correlation between small and mid-sized businesses not offering pension arrangements, and instead offering traditional savings arrangements like group [registered retirement savings plans] or deferred profit-sharing plans.”

The reason these employers provide these types of flexible arrangements is because they see variability in how they grow their businesses or want to tie success to profits they can share with employees. “It actually aligns quite nicely that, at a time that their business has slowed, or they aren’t anticipating being profitable, or they want to free up this cash flow, they would stop or cease temporarily because that’s what these savings arrangements were really created for,” says Kennedy.

On the flipside, Zaheed Jiwani, a principal at Eckler Ltd., says he isn’t seeing plan sponsor clients reducing contributions to DC plans, highlighting that employer in Canada aren’t allowed to completely suspend contributions. “Right now, I think the immediate focus for plan sponsors, as well as regulatory bodies, is focusing on benefits continuation and employment.”

However, he does note that group RRSP and DPSP sponsors are allowed to suspend employer contributions.

“But usually, you only see it as a punitive measure — when people are trying to withdraw money from a group RRSP, the employer may temporarily cease contributions . . . . I think it’s more rare that you’d see an employer actually ceasing payments due to financial difficulties, but that may be something that could follow. We have not yet seen our clients, or the organizations we’re talking to, go that route in terms of looking at any type of changes to the contributions to the retirement programs.”

Further, Jiwani notes plan sponsors that were looking at plan design changes have put these on hold because of how it may be perceived by plan members right now. People are very anxious, so any information a plan sponsor shares is going to be received by employees through a negative lens, he adds.

As such, he expects there will be a holding period for plan design changes, structural changes and investment changes. “And what that is doing is also reducing the amount of communication you have going out to members on other issues that they may perceive negatively where they actually could be positive.”

Plan sponsors’ movements are similar to what the industry saw in 2008, says Kennedy, though she notes a key difference is that today there’s an equal concern on the employee side. “During the global financial crisis, it was more about freeing up cash flow because of debt management or deploying that cash flow because of the way that corporate assets were hit. I think there’s a general recognition that this time is also affecting employees. So we’re also getting asked questions on how to ease up the benefit obligation from an employee perspective.”

For instance, larger plan sponsors may ask how they can continue to make employer contributions without forcing employees who are on leave due to coronavirus to make contributions.

Another key difference between 2008 and today is that the government is taking a different approach to business stimulus, including subsidizing wages. “I think that’s going to change the way that people may have reacted.”

During the global financial crisis, for example, this type of stimulus wasn’t available, so companies may have been more likely to halt contributions or lay everybody off. Today, they may be rethinking this strategy.

In Canada, after the market recovered following the 2008 crisis, there was a lot of talent looking for jobs and the retirement benefit became a key component of the total rewards package, says Kennedy. “We actually saw, over that period of time, that the median company contribution went up.”

However, she says this could be tied to more defined benefit plans converting to DC plans in addition to ensuring they were attracting and retaining talent. “We saw, to be competitive in your overall benefits package, you better not only restart those contributions, but you’re going to have to kick in more. So that’s what happened then.

“It will be interesting to see what happens here. It could be the same result. We could see a recovery that allows for more generous retirement packages. Or we could see situations where we’re going to really have to take a step back and think about what is the role of the plan sponsor?”

In particular, plan sponsors may change their perspective on how they support employees’ personal savings or pooling money to offer lower fees, notes Kennedy. “We absolutely think that this whole concept of financial wellness and voluntary benefits, and partnering up or leveraging that pooling effect on behalf of employees, might actually become the most important value to your package going forward versus how much is going into the pension.”

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