By Michael K. Stanley
Canadian Defined Benefit (DB) plans
are beginning to show improved solvency while Canadian Defined Contribution (DC) plans are slower to rebound.
After years of increased deficit funding by plan sponsors of both DB and DC plans across the country, a recent index from Towers Watson highlights the disparity between the health of the two.
’s latest DC Retirement Index — a benchmark that shows the impact of changes in capital markets, returns and annuity purchase prices on the potential retirement income of a Canadian worker in a DC plan — found that although market gains and rising bond yields have benefited both DB and DC plans as of late, differences in funding design and the actions of plan sponsors resulted in the discrepancy between the two.
The index shows a slight increase in monthly pension, from a low of 13.4 percent of monthly wage in November of 2012 to 15. 2 percent in September of 2013 for Canadian DC plans. When compared to a high of 22.3 percent in December of 2007.
While DB plan data is not included within the index, Ian Markham, Canadian Retirement Innovation Leader at Towers Watson, indicated in a statement that DB plan sponsors are able to utilize their improving financials in order to consider de-risking strategies that allow them to lock in a portion of recent market gains. “DC plans do not have access to the same opportunities and will not benefit from the same market gains,” he said.
A difference in contributing behavior between plan sponsors is another factor to why DC plans
have been slower to rebound. It is a common practice for DB plans to make extra contributions in order to compensate for poor performance in years past. DC plans usually do not, which can leave them vulnerable to deficits.
“Given these fundamental design differences, the onus remains on DC plan members to increase their contributions in times of poor investment performance or accept a lower level of accumulated savings from which to draw retirement funding,” said Michelle Loder, Canadian DC Business Leader at Towers Watson.
Originally published on LifeHealthPro.com