Defined contribution (DC) plans continue to struggle despite market gains and rising long bond yields, according to data released by Towers Watson on Wednesday.
The DC Retirement Index, a benchmark by the professional services company showing the effects of changes in capital markets on the potential retirement income of a Canadian worker with a DC plan, reveals only a slight increase in monthly pension. The Index stands at 15.2% of monthly wage as of Sept. 1, 2013 up from November 2012’s low of 13.4%. The all-time high for DC plans was December 2007 when the Index hit 22.3% of monthly wages.
While DC plans struggle, Towers Watson finds defined benefit (DB) pensions plans have seen some improvement because of their use of different risk strategies. “One important distinction is the opportunity for de-risking,” said Ian Markham, Canadian retirement innovation leader, Towers Watson, in a release. “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.”
Furthermore, DC plan sponsors do not make additional contributions in lieu of poor performance like DB plans, said Michelle Loder, Canadian DC business leader, Towers Watson, also in a release.
Another issue for DC plans is that contributions have remained mostly stagnant over the past five years, according to Towers Watson’s Benefits Data Bank, with 75% of DC employer contributions remaining unchanged during that time frame. Only 17% of DC sponsors have increased their maximum employer contributions.
“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,” said Loder. “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.”
While more employees are concerned about their pension contributions and performance, Towers Watson finds that DC plans are becoming less of a priority for Canadian employers. Seventy-eight per cent of respondents to Towers Watson’s 2013 Pension Risk Survey who sponsor a DC plan say those plans became more important to mid-career employees over the past three years. However, only 23% of surveyed employers believe their pensions will play a bigger role in their company’s total compensation strategy over the next five years.