Sponsors of Defined Contribution (DC) pension plans in Canada believe that efforts to educate pension plan members are not working and could expose their organization to litigation, according to a joint study commissioned by SEI Investments Canada and Financial Executives International Canada.

The comprehensive study of 120 DC pension plan sponsors conducted in November 2003 indicates that 53% of sponsors believe that educating plan members is extremely important in protecting their organizations from potential litigation. However, only 11% of sponsors rated their own performance extremely well in this area.

With a DC pension plan, the level of contributions is fixed at a certain level and benefits vary depending on the return from investments. Unlike Defined Benefit (DB) pension plans, DC plans give the employee choice in where to put their savings, usually among stock, bond and money market investments. According to SEI, recent pension scandals in both Canada and the United States have put sponsors of both DC and DB pension plans on guard against the risk of potential litigation.

Litigation concerns were highest among DC plan sponsors with over $50 million in assets under management, and who spent the most amount of time managing their pension plans. Roughly one-quarter (24%) of total respondents felt that their organization would face litigation within the next two years.

In addition to the threat of litigation, DC pension plan sponsors do not believe the education that they are providing to members is helping them to make the right investment choices. In fact, sponsors believe that 32% of pension plan members are already seeking outside investment advice as a means to augment educational efforts provided by their employer.

“Sponsors are only beginning to realize the importance of tying their existing, in-house educational efforts with credible, third-party investment advice,” said Patrick Walsh, President and CEO of SEI Investments Canada, in a news release

According to the survey, 23% of DC pension plan sponsors already provide third-party advice to plan members, in addition to their existing educational programs.

The study also suggests that DC sponsors have low expectations on members’ ability to time their retirement, and of members’
knowledge and involvement in their retirement planning.

Among the reports key findings:

  • Sponsors believe that less than half (43%) of pension plan members will be able to retire when they wish;
  • Sponsors think that only 38% of pension plan members will have enough money on which to retire; and
  • Sponsors also believe that less than one-quarter (23%) of pension plan members are very knowledgeable about their retirement planning.

On a more optimistic note, DC pension plan sponsors are bullish on anticipated pension returns over the next decade. According to the survey, sponsors believe that members can expect an average annual return of 8.1% on their S&P/TSX composite pension investments over the next 10 years.